10-K 1 nbev_10k.htm ANNUAL REPORT Blueprint


  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2018
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from to
Commission File Number 001-38014
 
 
New Age Beverages Corporation
(Exact Name of Company as Specified in its Charter)
 
Washington
 
27-2432263
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1700 E. 68th Avenue
Denver, CO
 
 
80229
(Address of principal executive offices)
 
 
(Zip Code)
 
Registrant's telephone number, including area code:
 
(303) 289-8655
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
 
Name of each exchange on which registered:
Common Stock, par value $0.001 per share
 
The Nasdaq Capital Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☑
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☑ NO ☐
 
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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YES ☑ NO ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files). YES ☑ NO ☐
 
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☑
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, and an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer

Smaller reporting company
 
 
Emerging growth company
 
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.   ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑
 
As of June 29, 2018, the last business day of the second fiscal quarter, the aggregate market value of the Registrant’s voting stock held by non-affiliates, was approximately $58,271,000, based on the last reported sales price of $1.87 as quoted on the Nasdaq Capital Market on such date.
 
The registrant had 75,357,742 shares of its $0.001 par value common stock outstanding as of March 29, 2019.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders (the “2019 Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. The 2019 Proxy Statement, or an amendment to this Form 10-K, will be filed with the SEC within 120 days after December 31, 2018. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
 

 
 
 
TABLE OF CONTENTS
 
 
Page
Part I
 1
 
 
Item 1. Business
 1
 
 
Item 1 A. Risk Factors
 13
 
 
Item 1 B. Unresolved Staff Comments
 26
 
 
Item 2. Properties
 27
 
 
Item 3. Legal Proceedings
 27
 
 
Item 4. Mine Safety Disclosures
 27
 
 
Part II
 28
 
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 28
 
 
Item 6. Selected Financial Data
 28
 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations
 29
 
 
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
 43
 
 
Item 8. Financial Statements and Supplementary Data
 44
 
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 85
 
 
Item 9a. Controls and Procedures
 85
 
 
Item 9b. Other Information
 86
 
 
Part III
 87
 
 
Item 10. Directors, Executive Officers and Corporate Governance
 87
 
 
Item 11. Executive Compensation
 87
 
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 87
 
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 87
 
 
Item 14. Principal Accounting Fees and Services
 87
 
 
Part IV
 88
 
 
Item 15. Exhibits and Financial Statement Schedules
 88
 
 
Item 16. Form 10-K Summary
 90
 
 
Signatures
 91
 
 
 
i
 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K (this “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act. All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to, information concerning:
 
Anticipated operating results, including revenue and earnings.
Expected capital expenditure levels for 2019.
Volatility in credit and market conditions.
Our belief that we have sufficient liquidity to fund our business operations in 2019.
Ability to bring new products to market in an ever-changing and difficult regulatory environment.
Ability to re-patriate cash from certain foreign markets.
Anticipated efficiencies and cost savings to be derived from convergence with our new wholly owned subsidiary, Morinda Holdings, Inc.
Strategy for customer retention and growth.
Risk management strategy.
 
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A. “Risk Factors” of this Report. Moreover, we operate in very competitive and rapidly changing markets. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements in this Report are made as of the date of the filing, and except as required by law, we disclaim and do not undertake any obligation to update or revise publicly any forward-looking statements in this Report. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission (“SEC”) with the understanding that our actual future results, levels of activity and performance, as well as other events and circumstances, may be materially different from what we expect.
 
 
ii
 
 
PART I
 
As used in this Report and unless otherwise indicated, the terms “we,” “us,” “our,” “New Age,” or the “Company” refer to New Age Beverages Corporation and our subsidiaries. “Morinda” refers to our wholly-owned subsidiary, Morinda Holdings, Inc., and its subsidiaries in the U.S. and around the world. Unless otherwise specified, all dollar amounts are expressed in United States dollars.
 
New Age Beverages Corporation, the New Age logo, Morinda, Tahitian Noni, TeMana, and other trademarks or service marks of New Age appearing in this Report are the property of New Age Beverages Corporation or its subsidiaries. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of their respective holders.
 
Item 1.          Business
 
Business Overview
 
We are a Colorado and Utah-based healthy beverages and lifestyles company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you healthy beverages, liquid dietary supplements, and other healthy lifestyle products. We compete in the growth segments of the beverage industry as a leading one-stop shop supplier for major retailers and distributors. We also are one of few competitors that commercializes its business across multiple channels including traditional retail, e-commerce, direct to consumer, and the medical channel. We market a full portfolio of Ready-to-Drink (“RTD”) better-for-you beverages including competitive offerings in the kombucha, tea, coffee, functional waters, relaxation drinks, energy drinks, rehydrating beverages, and functional medical beverage segments. We also offer liquid dietary supplement products, including Tahitian Noni® Juice, through a direct-to-consumer model using independent distributors called independent product consultants (“IPCs”). We differentiate our brands through functional performance characteristics and ingredients and offer products that are 100% organic and natural, with no high-fructose corn syrup (“HFCS”), no genetically modified organisms (“GMOs”), no preservatives, and only natural flavors, fruits, and ingredients. We rank as one of largest healthy beverage companies in the world as well as one of the fastest growing beverage companies according to Beverage Industry Magazine annual rankings and Markets and Markets. Our goal is to become the world’s leading healthy beverage company, with leading brands for consumers, leading growth for retailers and distributors, and leading return on investment for shareholders. Our target market is health conscious consumers, who are becoming more interested and better educated on what is included in their diets, causing them to shift away from less healthy options such as carbonated soft drinks or other high caloric beverages and towards alternative beverage choices. We believe consumer awareness of the benefits of healthier lifestyles and the availability of heathier beverages is rapidly accelerating worldwide, and we are capitalizing on that shift.
 
Corporate History
 
New Age Beverages Corporation was formed under the laws of the State of Washington on April 26, 2010, under the name American Brewing Company, Inc. (“American Brewing”).
 
On April 1, 2015, American Brewing acquired the assets of B&R Liquid Adventure, which included the brand, Búcha® Live Kombucha. Prior to acquiring the Búcha® Live Kombucha brand and business, we were a craft brewery operation. In April 2016, new management assumed daily operation of the business, and began the implementation of a new vision for the Company. In May 2016 we changed our name to Búcha, Inc. (“Búcha”), and then on June 30, 2016, we acquired the combined assets of “Xing” including Xing Beverage, LLC, New Age Beverages, LLC, Aspen Pure, LLC, and New Age Properties. We then shut down all California operations where Búcha was based, relocated the Company’s operational headquarters to Denver, Colorado and changed our name to New Age Beverages Corporation.
 
In October 2015, we sold American Brewing, including their brewery and related assets, to focus exclusively on healthy beverages. In February 2017, we uplisted onto The NASDAQ Capital Market. In March 2017, we acquired the assets of Maverick Brands, including their brand Coco-Libre. In June 2017, we acquired the assets of Premier Micronutrient Corporation (“PMC”), and also completed the acquisition of Marley Beverage Company (“Marley”) including the brand licensing rights to all Marley brand ready to drink beverages.
 
 
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On December 21, 2018, we completed a business combination with Morinda, whereby Morinda became a wholly-owned subsidiary of the Company. Morinda is a Utah-based healthy lifestyles and beverage company founded in 1996 with operations in more than 60 countries around the world, and manufacturing operations in Tahiti, the U.S., China, Japan, and Germany. Morinda was the first company to produce and sell products derived from the noni plant, an antioxidant-rich, natural resource found in French Polynesia that we believe sustains the well-being of those who consume or use it. Morinda is primarily a direct-to-consumer and e-commerce business and works with over 300,000 independent contractor IPCs worldwide. More than 70% of its business is generated in the key Asia Pacific markets of Japan, China, Korea, Taiwan, and Indonesia. The combination with Morinda provides a portfolio of healthy beverages, with multi-channel penetration spanning traditional retail, e-commerce, and in-home, and hybrid route-to-market spanning direct-store-delivery (DSD), wholesale, and direct-to-consumer.
 
We currently have four wholly-owned subsidiaries: NABC, Inc., NABC Properties, LLC (NABC Properties”), New Age Health Sciences, and Morinda. NABC, Inc. is our Colorado-based operating company that consolidates performance and financial results of our divisions. NABC Properties administers the New Age buildings, physical properties, and warehouses. New Age Health Sciences includes all of our patents and the operating performance for the medical and hospital channels. Utah-based Morinda provides us an additional direct-to-consumer sales channel and access to key international markets.
 
Principal Products
 
Our core business is to develop, market, sell, and distribute healthy liquid dietary supplements and ready-to-drink beverages. The beverage industry comprises $1 trillion in annual revenue according to Euromonitor and Booz & Company and is highly competitive with three to four major multibillion-dollar multinationals that dominate the sector. We compete by differentiating our brands as healthier and better-for-you alternatives that are natural, organic, and/or have no artificial ingredients or sweeteners. Our brands include Tahitian Noni Juice, TruAge, Xing Tea, Aspen Pure®, Marley, Búcha® Live Kombucha, PediaAde, Coco Libre, BioShield, and ‘NHANCED Recovery, all competing in the existing growth and newly emerging dynamic growth segments of the beverage industry. Morinda also has several additional consumer product offerings, including a TeMana line of skin care and lip products, a Noni + Collagen ingestible skin care product, wellness supplements, and a line of essential oils.
 
Tahitian Noni Juice and MAX
 
Tahitian Noni Juice® (TNJ) is the original superfruit liquid dietary supplement. Sourced from the noni fruit grown in French Polynesia, we believe TNJ supports the immune system, delivers superior antioxidants, helps rid the body of harmful free radicals, increases energy, supports heart health, and allows for greater physical performance levels. Ancient tradition and modern research both support the benefits of noni.
 
With Tahitian Noni Juice, Morinda brought the attention of the world to Tahiti and French Polynesia. Within just a few years, Morinda made noni French Polynesia’s No. 1 agricultural export. Morinda oversees every step in the process, from tree to bottle, ensuring the highest quality.
 
TruAge® MAX is a powerful noni-based liquid dietary supplement, containing more than 350 essential nutrients and phytonutrients from the world’s premier health-promoting plants. Some ingredients in Max include noni, Cornelian cherry, grape, blueberry, red sour cherry, olive and cranberry. These ingredients work in harmony with the body’s natural chemistry, helping balance key chemicals that support the healthy functioning of the body's systems.
 
The Company is currently developing Noni + cannabinoids (“CBD”) products with the intent to launch domestically and internationally in 2019, consistent with evolving laws and regulations relating to CBD.  The Company’s vision is to be a global leader in high-quality, research-driven CBD products across all categories. New product lines will include CBD topicals, Noni + CBD single-use shots, TNJ + CBD, Max + CBD, and our TeMana skin care line infused with CBD.   
 
Búcha Live Kombucha
 
Búcha® Live Kombucha (“Búcha”) is a USDA-certified organic, natural, non-GMO, non-HFCS, fermented Kombucha tea with more than two billion colony forming units (“CFUs”) at batching. Búcha is produced with a unique and proprietary manufacturing process that eliminates the common vinegary aftertaste associated with many other Kombuchas and gives the product a 12-month shelf life as compared to the typical 90-day shelf life of our competitors’ products. The production process makes Búcha one of the world’s first shelf-stable (no refrigeration needed) kombuchas without compromising efficacy, and leads to consistency and stability with no risk of secondary fermentation, secondary alcohol production, incremental sugar production or over-carbonation.
 
 
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Marley
 
New Age owns the licensing rights in perpetuity to the Marley Brand of RTD beverages and provides an annual licensing fee as a percent of sales to the Marley estate. New Age’s Marley portfolio extends across the CBD, yerba mate, relaxation tea, and RTD coffee segments. The Bob Marley brand itself is a globally relevant healthy lifestyle brand with an elite social media presence, with more than 72 million Facebook followers and loyal Marley fans. In 2019, New Age announced its plans to commercialize a line of RTD CBD-infused beverages in the U.S and international markets, consistent with evolving legal and regulatory restrictions. We are poised, positioned, and determined to be the leader in the CBD-infused beverages market. New Age plans to create a full portfolio of CBD beverages under the Marley brand, beginning with the initial rollout of Mellow Mood + CBD and a Marley CBD Shot. In January 2019, New Age entered into license agreement with Docklight LLC to facilitate the U.S. distribution of these Marley CBD-infused beverages.
 
Marley Mate® is a caffeinated RTD tea, serving as a clean energy alternative to coffee or traditional energy drinks, with the same uplifting benefits, but without any crash or negative stigma associated with energy drinks. Marley Mate is USDA-certified organic, clean label, and is among the lowest sugar, calories, and carbohydrates of any RTD yerba mate in the market. Quickly becoming a national brand in the new and growing category, it has enjoyed excellent early success in its initial markets since launch, outselling major competitors in each of its initial launch markets.
 
Marley Cold Brew Coffee® is a healthier alternative to other cold brew brands, with 50% lower sugar than most brands in the segment, and fewer calories than other major Cold Brew. Brewed with authentic Jamaican Coffee, the Marley Cold Brew blend has a preferred flavor profile with low acidity and no bitterness. Created with an 18-month shelf life and requiring no refrigeration, Marley Cold Brew is developing a strong presence in ambient beverage sections, in dedicated off-the-shelf elegant wood displays, as well as in refrigerated sets. Marley also offers One Drop, an RTD Frappuccino made with Premium Jamaican Blue Mountain Coffee, and unlike competitive RTD coffees, contains no artificial ingredients, no HFCS, no preservatives, and no GMO’s.
 
Marley Mellow Mood® is a RTD relaxation drink, which, as aforementioned, will include a line extension of CBD-infused teas. Marley Mellow Mood is made with Valerian Root, Chamomile, and other natural herbs and ingredients and, unlike competitive RTD Teas, is all natural, has no HFCS, no preservatives, no GMO’s, and is kosher certified. The brand comes in 15.5 oz. cans in five flavors including Peach Raspberry, Bartlett Pear, Raspberry Lemonade, and Honey Green Tea. Marley is the leading relaxation drink, which is a developing sub-segment of the RTD category.
 
Xing
 
XingTea® is an all-natural, non-GMO, non-HFCS, and award winning, ready-to-drink tea. Xing is made with brewed green and black teas, and is further differentiated with unique natural fruit flavors, with no preservatives, GMOs or HFCS. The product is sweetened with only honey and pure cane sugar.
 
Xing Craft Brew Collection Tea® is an organic, premium-brewed line of artisanal teas sold in 16 oz. glass bottles with no added sugar and no artificial flavors. Unlike competitors that have more than 21 grams of added sugar, Xing Craft has no added sugar, and is an artisanal brewed tea made with single origin grown tea blends.
 
Coco Libre
 
Coco Libre® is a 100% pure coconut water (also available with watermelon juice infused), bottled at the source from young Vietnamese coastal coconuts. Historically a leading brand in the coconut water segment, Coco Libre is distributed in more than 15,000 outlets throughout the United States and Canada. Coco Libre® is offered in 1-liter and 330mL packages. Additionally, New Age launched Coco Libre Sparkling® in 2018, sparkling coconut water with 30-40 calories and zero added sugar. We believe that the differentiator of Coco Libre® is a light and crisp profile, infused with green tea extract and 100% pure exotic fruit juices.
 
TeMana Skin and Lip Care
 
Consistent with its line of healthy beverage products, and drawing on its vast noni expertise, Morinda developed and launched a line of high-end, noni-based skin and lip care products sold under the TeMana brand.
 
 
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TeMana Brightening skin care products capture the essence of Tahiti, taking advantage of what we believe are four unique and beneficial elements of the noni plant: noni seed oil, noni leaf extract, noni seed extract, and noni fruit juice. The Brightening line includes Brightening Serum, Toner, Facial Shield, Moisturizer, Cleanser, Facial Refiner, Body Refiner, Facial Mask, Night Cream, and Eye Cream.
 
RTD TeMana Noni + Collagen is an ingestible skincare product. Noni + Collagen promotes firmer, smoother, more radiant skin. It's the only collagen product featuring noni, and also features fish collagen instead of collagen derived from other animal sources.
 
Developed in concert with the Italian cosmetics experts at B.Kolor, TeMana's lip care products help skin feel healthy and full.
 
Each of our Tahitian Noni Essential Oil blends combines purposeful, natural, therapy-grade essential oils with pure noni seed oil. Blends include Peppermint, Embrace, Lavender, Relief, Trim, Fortify, Breathe, Repel, Energize, and Relax.
 
New Age Health Sciences Division
 
Our Health Sciences Division owns 11 patents, on which significant cooperative research studies with human and animal trials have been completed, making New Age a beverage company with substantive intellectual property. The patents and human need-states that are addressed by the patent portfolio were all developed in partnership with and funded by the U.S. government, who invested more than $30 million behind them. Our intention is to convert the patents into products, with direct functionality in protection, treatment, or improvement of different consumer need-states.
 
We will pursue four main areas of focus where we believe we have the most robust science and patent protection for the commercialization of products including Rehydration/Recovery, Radiation protection, Neural Protection/Improvement, and Cardiovascular health. We also intend to either license or outsource any patent we do not intend to commercialize. The Company believes that the intellectual property portfolio is of substantial value to either pharmaceutical or beverage companies, given the quality and uniqueness of the patents, and the science and evidence on the efficacy of the technologies.
 
‘NHANCED
 
‘NHANCED is our first product that was developed by the medical and scientific team at New Age Health Sciences. ‘NHANCED delivers a first of its kind product, designed to be consumed the night before surgery to improve patient outcomes after surgery. It is a natural, clear complex carbohydrate beverage for patient use in accordance with hospital systems adopting enhanced recovery after surgery (“ERAS”) protocols. The product is coconut water based and includes key vitamins and mineral co-factors for immune support. It provides antioxidants, amino acids, and phytonutrients for improved metabolic function.
 
‘NHANCED was designed to facilitate recovery after surgery with less inflammatory response, less nausea, reduced gastric stress, increased GI motility, less insulin resistance, improved wound healing and immune function, and overall improved patient satisfaction. Initial patient testing has validated the benefits.
 
Bio-Shield
 
“Bio-Shield” is the current working brand name for our radiation and environmental protection product. We own the patents to what we believe is the only product in the world proven to protect the body from the effects of ionizing radiation and have the trials and research studies validating the efficacy of our product. Ionizing radiation, which comes from a number of sources, including near proximity to sun, nuclear facilities, medical X-rays or scans, affects the body by breaking the double-strands of DNA inside the body. New Age’s product has proven to protect double-strand DNA from breaking due to the impact of radiation. “Bio-Shield” will be launched in Asia Pacific during the first half of 2019, and thereafter we expect to launch the product into the U.S. and other markets and channels including both the travel and medical channels by the fourth quarter of 2019.
 
Sales and Marketing
 
We market our RTD beverage products using a range of marketing mediums, including in-store merchandising and promotions, experiential marketing, events, and sponsorships, digital marketing and social media, direct marketing, and traditional media including print, radio, outdoor, and TV.
 
 
4
 
 
We currently have an in-house sales and merchandising team consisting of approximately 75 individuals based in Colorado and throughout the United States, whose compensation is variable and performance-based. Each sales team member has individual targets for increasing “base” volume through distribution expansion, and “incremental” volume through promotions and other in-store merchandising and display activity. As distribution to new major customers, new major channels, or new major markets increases, we will expand the sales and marketing team on a variable basis.
 
We use a direct selling model to market our Tahitian Noni and TeMana products through 300,000 IPCs in over 60 countries around the world. Morinda associates in the United States and 25 other countries motivate, educate, and assist IPCs in their efforts.
 
Distribution 
 
Our products are currently distributed in over 60 countries internationally, and in 50 states domestically through a hybrid of four routes to market including our own DSD system that reaches more than 6,000 outlets, and to more than 35,000 outlets throughout the United States directly through customer’s warehouses, through our network of DSD partners and through our network of brokers and distributors. Our products are sold through multiple channels including major grocery retail, natural food retail, specialty outlets, hypermarkets, club stores, pharmacies, convenience stores and gas stations—and also direct to consumers through individual independent distributor IPCs and E-commerce.
 
Our sales strategy is to distribute our products worldwide to consumers in the most cost-effective manner possible. We sell our products direct to consumers through our own E-commerce system and other E-commerce systems, through retail customers across grocery, gas, convenience, pharmacy, mass, club and other channels, to major foodservice customers, to alternative channel customers including juice/smoothie shops, military, office, and health club, and through hospitals, outpatient doctor offices, and other channels.
 
The diversification of our channels and distributors, similar to the diversification of our retail customer base, is expected to minimize distributor and channel concentration and risk, but is also expected to have a very positive margin mix effect, and a very positive incremental volume impact.
 
Direct-to-Consumer Distribution of Tahitian Noni, TruAge, TeMana, and Other Products
 
Independent Product Consultants (“IPCs”)
 
Individuals who wish to sell Morinda’s Tahitian Noni, TruAge, and TeMana-branded products through our person-to-person sales model must enroll in our independent sales force as an IPC. New IPCs are sponsored by an existing IPC, and the new IPC becomes a member of the sponsoring IPC’s sales organization. The newly enrolled IPCs must sign a written agreement or accept the terms and conditions of the agreement online at the Company’s website. The agreement includes that IPCs will comply with the Company’s policies and procedures, which include that IPCs will (i) safeguard and protect the reputation of the Company and its products; (ii) refrain from any deceptive, false, unethical, or unlawful consumer or recruiting practices; (iii) refrain from any deceptive, false, unethical, or unlawful claims about the Company’s products or compensation plan; and (iv) refrain from promoting or selling products that are competitive to the Company’s flagship product, or promoting other network marketing opportunities to IPCs whom they did not personally sponsor with the Company. The Company may take disciplinary action, up to and including termination of the IPC’s purchase and sales organization rights, against any IPC who violates its policies and procedures. In most markets, IPCs are required to purchase a starter kit which includes sales and educational materials. No commissions are paid on the purchase of a starter kit. Our policies and procedures manual is available to IPCs in this kit or is available online at the Company’s website. We sell these kits at a nominal price averaging $35. No other investment is required to become an IPC.
 
After enrolling as an IPC, the IPC may purchase products directly from us at wholesale (member) pricing for personal use and for resale to customers. IPCs may build sales organizations by recruiting and enrolling new IPCs. As new IPCs sponsor new IPCs, levels are created in the IPC’s organizational structure called a down-line. As these new IPCs continue to sponsor, they create their own sales organization which also forms a part of the sales organization of the original sponsoring IPC. We have no requirements for IPCs to recruit or sponsor new IPCs, and IPCs are not compensated for recruiting or sponsoring IPCs. IPC compensation is based on product sales. Subject to payment of a nominal annual renewal fee (which can be substituted by the sale of Morinda product through the IPC’s account at the time of renewal), IPCs may continue to purchase our products at member pricing and recruit a sales organization provided they comply with our policies and procedures.
 
 
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The Company’s business and compensation plan for China is executed in a modified form due to Chinese law and regulations. Individuals who are residents of China and are eligible to work in China may enroll as IPCs or as Customers in China. The same policies and procedures described above, as modified for China, apply to IPCs in China. According to Chinese regulations, non-China resident IPCs are not permitted to sponsor in China or otherwise participate in the compensation plan for China.
 
IPC Training and Motivation
 
An IPC’s sponsor provides the initial training about our products and compensation plan. Other IPCs in the sponsor’s sales organization typically assist with this training. The Company’s policies require that a sponsor must maintain an ongoing professional leadership association with IPCs in their sales organization. We develop training materials and sales tools to assist IPCs with this training and in building their sales organizations. We also conduct online trainings and webinars, regional, national, and international IPC events, as well as intensive leadership training events. Attendance at these events is voluntary, and IPCs may attend the events that they feel will most benefit them and their sales organization. We have found that the most successful and productive IPCs tend to be those who take advantage of these events. While Morinda associates work to support the IPCs and to provide them with training materials and sales tools, we rely on our IPCs to operate as the sales force for Morinda, and to sell our products, recruit new IPCs and Customers to purchase our products, and to train new IPCs regarding our products and compensation plan.
 
IPC Compensation
 
Our compensation plan has several attractive features and provides several opportunities for IPCs to earn compensation. IPCs understand that success comes from the effort, dedication, resources, and time they commit to their business. The compensation opportunities require that IPCs consistently work at building, training, and retaining their sales organizations to sell Morinda products to consumers. Each compensation opportunity is designed to reward dedicated IPCs for directly and indirectly generating product sales through their sales organization and to consumers. All compensation is conditioned on the IPC’s good standing and compliance with the Company’s policies and procedures and the laws of the country where the IPC does business
 
IPCs may build their sales organization by sponsoring new IPCs and Customers in any market where the Company has registered and sells its products. Additionally, the integration of our compensation plan across all markets (except China) allows IPCs to earn commissions from global product sales along with local product sales. We believe our compensation plan is one of the most attractive and lucrative offered by any direct selling company—and is thus a significant aspect of our ability to expand internationally.
 
Customers
 
Morinda also has a Customer program. Individuals may enroll as Customers and purchase products for their personal use only. Customers are not permitted to resell or distribute our products. The Customer program allows us to include individuals who wish to use Morinda’s products but who do not wish to participate in the business. Customers are not eligible to earn commissions. Customers may upgrade their account at any time to become an IPC and may then participate in the business and compensation plan and be eligible to earn commissions.
 
Manufacturing and Distribution of Noni-Based Products
 
Our manufacturing and bottling facilities are in Rongchang, China; Tokyo, Japan; Bad Liebenwerda, Germany; Ho Chi Minh City, Vietnam; Alamosa, Colorado; American Fork, Utah and in 10 other contract manufacturing facilities throughout the US. Each of our products are produced to exacting specifications and standards, and subject to strict quality control procedures.
 
Our Coco-libre brand of coconut water is sourced from young coconuts on the southeastern coast of the country, which we believe produces the sweetest and most complex flavored coconut water of any major competitor. Xing, Búcha, and Marley products are produced using our proprietary blends and production processes.
 
Our noni fruit is harvested from noni trees on 18 islands of French Polynesia by approximately 2,000 harvesters, who are independent contractors, and who work with Company representatives on each island. All fruit is checked at the time of harvest for quality, maturity, and purity. To date, we have maintained good relations with our suppliers and have not experienced any significant difficulties in obtaining adequate supplies of the noni fruit.
 
 
 
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The noni fruit is then shipped to our   85,000 square foot processing plant in Mataiea, Tahiti, where the fruit is again checked before being processed. This facility, as well as all facilities that produce products for us, adheres to the Good Manufacturing Practices as established by the FDA. The Tahiti facility is well-maintained, and the buildings and equipment are kept clean and in good repair. Technology is up-to-date. The facility is regularly inspected by the French Polynesian authorities and by the United States FDA.
 
At this processing facility, the seeds are separated from the fruit. The seeds are later prepared for oil extraction. The fruit is extensively inspected, pasteurized, and turned into puree, which is the key component of our Tahitian Noni Juice. The pasteurized puree is checked for quality and placed into tote bins,  which are shipped by sea to a West Coast port of the United States, Japan, China or Germany for use in manufacturing our products. Each day the equipment used at this facility is automatically cleaned by a three step  Clean-in-Place (CIP) system. This system ensures the cleanliness of the equipment, tanks, and pipes used in the processing of the puree.
 
Reliance on Third-Party Suppliers and Distributors
 
Except as noted in the previous section, we rely on various suppliers for the raw and packaging materials, production, sale, and distribution of our products. Our third-party distribution providers are for certain areas of the country that are outside of our owned DSD distribution network. The material terms of these relationships are typically negotiated annually and include pricing, quality standards, delivery times and conditions, purchase orders, and payment terms. Payment terms are typically net 30, meaning that the total invoiced amount is expected to be paid in full within 30 days from the date the products or services are provided. We believe that we have sufficient options for each of our raw and packaging material needs, as well as our third-party distribution needs and also have long-term relationships with each of our suppliers and distributors, resulting in consistency in quality and supply. We also believe that we have sufficient breadth of retail relationships with distribution in both large and small retailers and independents and across multiple channels (mass, club, pharmacies, convenience, and small and large format retailers) throughout the United States.
 
The contractual arrangements with all third parties, including suppliers, manufacturers, distributors, and retailers are typical of the beverage industry with standard terms. We have no long-term obligations with any of the third parties nor do any of them have long-term obligations with us. The third-party supplier, manufacturing and distribution agreements were entered into in the normal course of business within the guidelines of industry practices and are not deemed material and definite.
 
Competition
 
The beverage industry, specifically the healthy beverage industry, and the direct selling industries are multi-billion dollar industries which are highly competitive. We face intense competition from very large, international corporations, as well as from local and national companies. In addition, we face competition from well-known companies that have large market share. We also face stiff competition for the services of our IPCs that sell our direct-to-consumer products.
 
The intensity of competition in the future is expected to increase, and no assurance can be provided that we can sustain our market position or expand our business.
 
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. However, we believe that, with our diverse product line, consisting of noni juice, kombucha tea, green tea, water, energy beverages, and new CBD-infused beverages, we will have the ability to obtain a large market share, and continue to generate sales and compete in the industry.
 
Competitive Strengths
 
New Age has five components of differentiation that distinguishes it from other companies:
 
1.
New Age has a full brand portfolio of healthy beverage and lifestyle products. The company’s beverages compete in only the growth segments of the industry, and as such is the only one-stop-shop supplier of healthy beverages for retailers and distributors. These entities are reticent to work with smaller, individual brand companies without the resources and infrastructure to support them.
 
 
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New Age’s portfolio of healthy brands fills a long-felt unmet need for consumers, retailers and distributors created by the legacy leaders in the industry. The Company enjoys the growth rate benefits of the segments in which it competes by focusing exclusively on healthy alternatives, and unlike major competitors, has limited distractions like those required investments to maintain businesses in declining segments like carbonated soft drinks for example.
 
2.
New Age has a unique, omni-channel distribution and sales model, with its own direct-to consumer selling system, its own direct-to-store distribution system, an e-commerce business and dedicated e-commerce fulfillment system, and a medical channel and other alternative channel distribution system as part of its go to market strategy. New Age’s, direct-to consumer system reaches over 300,000 independent distributors in more than 60 countries
 
New Age’s direct-to-store distribution platform includes almost 40 unique routes, with an almost 100-person strong sales and merchandising team, covering more than 6,000 outlets for more than 60 partner brands and more than 600 SKU’s. Beyond New Age own direct-to-store system, the company has strong distribution in major key accounts across the U.S covering more than 300,000 points of distribution. New Age has a robust national hybrid distribution network with other major DSD operators, natural channel distributors, and direct to store wholesale distribution. The Company’s national network represents a significant competitive advantage and barrier to entry vs. many other smaller beverage companies.
 
New Age’s e-commerce and pick-pack-ship fulfillment centers fulfills auto shipments monthly to more than 120,000 customers and exceeds $150 million in annual revenue. We believe it is one of the largest beverage e-commerce systems in existence and provides for a high-margin way to directly market to its consumers and build its database of insights and purchase behavior.
 
We believe that each of our distribution and channel execution models are highly leverageable and under-developed, with significant growth to be obtained utilizing our infrastructure across 60 international markets, significant growth to be gained from expanding our subscribers and breadth of portfolio in our e-commerce system, significant growth from expanding our core brands in traditional national retail within the US, and significant growth in expanding our Health Sciences and other products to the Medical and other alternative channels.
 
3.
New Age has a portfolio of patents and intellectual property that we believe will be the future of the beverage industry. Beyond the patent protection, the company also has the cooperative research studies and human trials on many of its unique products. The science and products, many of which were developed either by or in conduction with the US government and US military, cover many fundamental human need states including cardiovascular health, neural protection, and radiation and environmental protection. We believe that as we commercialize this portfolio and convert these patents into products, that the functional benefit and differentiation of these products will create a significant new market for the Company and bridge the gap between pharma-grade medicine, nutraceuticals, and the beverage industry.
 
As part of its Health Sciences Division, the company has developed a portfolio of cannabis-infused beverages. These cannabis-infused beverages have undergone significant consumer testing to optimize flavor, profile, dosage and efficacy. Through its strategic partnership with Privateer, we believe we have the regulatory, legal, and production insights together with the relationships and the Marley brand, that position the company to be the leader in this fast-emerging segment. New Age has been working closely with major retailers in the US and in key international markets to launch its portfolio as soon as the regulatory and legal landscape in respective geographies permit.
 
4.
We believe the Company has financial flexibility with a strong balance sheet and access to the capital markets unlike many other smaller beverage entities. The company’s low relative debt, profitability facilitated by its unique omni-channel structure, and positioning in the public markets enable the company to access growth capital at a lower relative cost, and access growth capital to take advantage of major opportunities it uncovers across its core businesses.
 
5.
We have the organizational capabilities and systems unlike many other beverage companies, with the people, processes, systems, information, and culture/environment to drive superior, sustainable, profitable growth.
 
 
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New Age’s senior leadership team and board of directors collectively have depth of industry experience and insight in leading highly successful. multi-billion-dollar multinational companies. The Company’s Board of Directors brings global strategic leadership experience gleaned from running highly successful major multinational companies in the beverage, retail, and other industries. From a process standpoint, New Age has dedicated daily, weekly, monthly and annual routines, by and through which it runs the operation.
 
The Company has an internal target setting system whereby associate in the firm have specific metrics cascaded from the Company’s annual business plan. New Age has also developed its own proprietary dashboards to augment its access to syndicated data and industry information, and has employed a culture of ownership and environment of accountability throughout the company.
 
As a result of the Company’s strengths, we believe these competitive advantages position New Age to drive superior growth and profitability versus other competitors in its industry. 
 
Our Growth Strategy
 
Our long-term objective is to become the leading healthy beverages and lifestyles company. We believe that we have all of the necessary components and capabilities to accomplish that mission. We intend to achieve our goal by driving organic growth behind our existing portfolio of healthy functional beverages and lifestyle products, in all relevant packages and product formats, across all major retail, direct-to-consumer, and other channels, in all major markets, through an aligned network of retailer and distributor partners.
 
Our key strategies include the following:
 
Expand core brands in focus markets of US, China, and Japan
Develop omni-channel distribution system (Retail, Direct, E-Commerce, Medical) worldwide
Gain-first mover advantage -globally with cannabinoid-infused products
Expand New Age brands and Health Sciences products in new markets globally
Drive brand awareness with expanded consumer marketing across all mediums
Deliver superior profitability and return on investment through capture of synergies and leverage of its global infrastructure and operating capabilities
 
Research and Development Activities
 
Our research and development efforts are focused on two primary paths. The first is to continually review our existing formulas and production processes and structure to evaluate opportunities for cost of goods sold improvements, without degrading the quality or fundamentally changing the consumer appeal taste profile of our existing products. The second major research and development effort is in the development of fundamentally new and differentiated products, based on consumer insights and trends and competitive intensity in those segments. The Company’s mission to only provide healthy functional beverages governs our development efforts.
 
The Company’s new products and R&D efforts in its Health Sciences Division are science-backed by the patents, cooperative research studies, and human and animal trials acquired from the Premier Micronutrient Corporation. They are targeted toward fundamental human needs-states, segments that do not yet exist in beverages, but do exist in the pharmaceutical arena, and opportunities where New Age can gain first mover advantage. The Company’s mission is to only provide healthy functional beverages with real efficacy for consumers. That guiding principle of “no compromise” governs all our development efforts.
 
Morinda has an R&D group that is closely aligned with and seamlessly supports the goals and plans of the Company. In addition to developing new healthy and scientifically sound products and reviewing and improving existing formulas and processes for cost reductions, Morinda R&D continues to conduct and publish new, cutting edge benefits research on noni and other new products in order to maintain a distinct advantage in the healthy beverage and skin care categories. Morinda R&D is an integral part of the global corporate structure providing timely technical, regulatory, quality, processing and scientific standards, data, and expertise as needed and requested. Morinda R&D, in partnership with many of its departments, maintains an extensive intellectual property database of patents, publications, formulations and ideas that help protect and keep the Company in the forefront of healthy beverage offerings and product development. Morinda R&D administers laboratories that provide analytical, chemical, microbiological, nutritional, and biochemical capabilities that are both standardized, as well as, on the cutting edge of knowledge. We own the only lab in the world dedicated to the study of the noni plant and pioneering new innovative applications for noni.
 
Working Capital Practices
 
We maintain sufficient amounts of inventory in stock to provide a high level of service to our customers with our key products. Substantial inventories are required to fulfill our dual role as manufacturer and distributor of some of our products. We also watch seasonal markets and may purchase ahead of normal demand to hedge against cost increases and supply risks.
 
 
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Employees
 
As of December 31, 2018, we had 889 employees globally. We also engage temporary employees and consultants as needed. We have not experienced any work stoppages, and we consider our relations with our employees to be very good.
 
Patents and Trademarks
 
We hold United States trademarks, serial numbers 86694956 and 85087186 for Búcha®. We also hold United States trademarks, serial number 77312629 for Xing Energy®, serial number 77050595 for Xing Tea®, and serial numbers 85025636 and 76438612 for Aspen Pure®, all of which were acquired in our acquisition of Xing. We hold the United States trademarks, serial numbers 85243126 for Coco Libre®. We hold licensed rights to use the United States trademarks, serial numbers 85066981, 85767476, 86709724, and 86681878 for Marley branded beverages.
 
Our subsidiary, Morinda, Inc. holds United States trademarks for: Tahitian Noni® (serial numbers 78660251, 78187079, 77941736, 77371485, 77371452,75592299, 75591862, 75591861, 75677091, 75191183, and 75191181); TruAge® (serial number 85818673); Morinda (serial numbers 78659927, 78659678, 75591637, 75591636, 75591632, and 75256512); a figurative mark of a Man with a Conch Shell (serial numbers 75592298, 75591863, 74839276, and 75355866); our bottle design (serial numbers 76094888 and 76046309); and Te Mana (serial number 87318478). These same trademarks are registered in numerous countries around the world where Morinda sells the brands, including Japan, China, Indonesia, Taiwan, Korea, Vietnam, Canada, Mexico, Chile, Peru, Colombia, the European Union, Russia, Australia, Thailand, and Hong Kong.
 
We hold the United States patents, patent numbers 6,849,613 for Multiple Antioxidant Micronutrients, 7,399,755 for Formulations Comprising Multiple Dietary and Endogenously Made Antioxidants and B-Vitamins, and 7,449,451 for Use of Multiple Antioxidant Micronutrients as Systemic Biological Radioprotective Agents Against Potential Ionizing Radiation Risks. We hold the United States patents, patent numbers 7,605,145 for Micronutrient Formulations for Treatment of Diabetes Mellitus, 7,628,984 for Micronutrient Formulations for Pulmonary and Heart Health, and 7,635,469 for Micronutrient Formulations for Hearing Health. We hold the United States patents, patent numbers 8,221,799 for Multiple Antioxidants for Optimal Health, 8,592,392 for Multiple antioxidant micronutrients, 9,655,966 for Micronutrient Formulations for Radiation Applications, and patents pending and continuations in progress for Antioxidant Micronutrients used in Electronic Cigarettes, and BioShield for Protection Against Environmental Exposures.
 
Our subsidiary Morinda, Inc. holds United States patents, patent numbers: 6,214,351 (Morinda citrifolia Oil); 6,254,913 (Morinda citrifolia Dietary Fiber); 6,417,157 (Morinda citrifolia Oil); 6,589,514 (Cosmetic Intensive Care Serum); 8,535,741 (Palliative Effects of Morinda citrifolia Oil and Juice); 8,652,546 (Morinda citrifolia Formulations for Regulating T-cell Immunomodulation in Neonatal Stock Animals; 8,025,910 (Method and Composition for Administering Bioactive Compounds Derived from Morinda citrifolia); 8,679,550 (Morinda citrifolia Juice Formulations Comprising Iridoids); 8,790,727 (Morinda citrifolia and Iridoid based Formulations).
 
Any encroachment upon our proprietary information, including the unauthorized use of our brand name, the use of similar products, the use of a similar name by a competing company or a lawsuit initiated either by us or against us for infringement upon proprietary information or improper use of a trademark or patent, may affect our ability to create brand name recognition, cause customer confusion and/or have a detrimental effect on our business due to the cost of defending any potential litigation related to infringement. Litigation or proceedings before the U.S. or International Patent and Trademark Offices may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and/or to determine the validity and scope of the proprietary rights of others. Any such litigation or adverse proceeding could result in substantial costs and diversion of resources and could seriously harm our business operations and/or results of operations.
 
 
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Government and Industry Regulation
 
We are subject to a variety of federal, state and local laws and regulations in the U.S. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. The U.S. FDA and FTC regulate the advertising and sale of our healthy beverage products and skin care products. Violations of these laws or regulations in the manufacture, safety, labeling, transportation, and advertising of our products could damage our reputation and/or result in regulatory actions with substantial penalties. For example, changes in recycling and bottle deposit laws or special taxes on our beverages and our ingredients could increase our costs. Regulatory focus on the health, safety and marketing of beverage products is increasing. Certain federal or state regulations or laws affecting the labeling of our products, such as California’s “Prop 65,” which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, are or could become applicable to our products. At this time, our products do not require government approval, but as federal or state laws change, the manufacture or quality of our products may become subject to additional regulation. CBD products will require registration in certain states. Additionally, existing and new functional health products sold by Morinda can require registration in some foreign markets.
 
We are also subject to the Securities Act, the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and Washington, Nevada, Colorado, and Utah Corporation Law. We will also be subject to common business and tax rules and regulations pertaining to the operation of our business, such as the United States Internal Revenue Tax Code and the Washington, Colorado, and Utah State Tax Codes, as well as international tax codes and shipping tariffs. We will also be subject to proprietary regulations such as United States Trademark and Patent Law as it applies to the intellectual property of third parties. We believe that the effects of existing or probable governmental regulations will be additional responsibilities of management to ensure that we are in compliance with securities regulations as they apply to our products as well as ensuring that we do not infringe on any proprietary rights of others with respect to our products. We will also need to maintain accurate financial records in order to remain compliant with securities regulations as well as any corporate tax liability we incur.
 
Seasonality
 
We experience some seasonality whereby the peak summer months show a higher level of sales and consumption. However, we believe that the structure of our business and range of products in our portfolio mitigate any major fluctuations. Our revenue during the second and third quarters of the year have historically been approximately 60% of annual revenue, and this seasonality is expected to continue for the foreseeable future.
 
Asia represents 70% of our Morinda sales, and Asia tends to generate lower sales during the following periods as a result of the following seasonality factors:
 
January                        New Year holidays
February                      Fewer business days
May                             Golden Week holidays
August                         Bon Festivities and vacation season
December                    The end of the year holidays
 
Executive Officers.
 
The following table sets forth the names, ages and positions of our executive officers as of March 29, 2019:
 
Name
 
Age
 
Position
 
 
 
 
 
Brent Willis
 
59
 
Chief Executive Officer
Gregory Gould
Kelly Olsen
Richard Rife
Randy Smith
 
53
64
65
64
 
Chief Financial Officer
Chief Commercial Officer
Chief Legal & Administrative Officer and Secretary
President of Morinda
 
 
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Brent Willis was appointed as Chief Executive Officer, and as a member of the board of directors, on March 24, 2016. During the previous five years, Mr. Willis has been a director or officer, serving as Chairman and Chief Executive Officer, of a number of majority or minority-owned private-equity backed companies from November 2009 until present. Prior to these companies, from 1987 through 2008, Mr. Willis was a C-Level and Senior Executive for Cott Corporation, AB InBev, The Coca-Cola Company, and Kraft Heinz. Mr. Willis obtained a Bachelor of Science in Engineering from the United States Military Academy at West Point in 1982 and obtained a Master’s in Business Administration from the University of Chicago in 1991.
 
Gregory A. Gould has served as our Chief Financial Officer since October 2018. Prior to joining the Company, Mr. Gould served as Chief Financial Officer of Therapure—Products (Evolve Biologics), a subsidiary of Therapure BioPharma, Inc., from November 2017 until October 2018. Mr. Gould also served as Chief Financial Officer, Treasurer and Secretary of Aytu BioScience, Inc., or Aytu (NASDAQ: AYTU), from April 2015 until November 2017, and he was the Chief Financial Officer, Secretary and Treasurer of Ampio Pharmaceuticals, Inc., or Ampio (NASDAQ: AMPE), from June 2014 until June 2017. He has held CFO and Principal Accounting Officer roles at several publicly traded corporations and has served as an independent board member and accounting expert. He is a highly accomplished financial executive with expertise in the life sciences industry. Mr. Gould is a CPA in the state of Colorado. He holds a Bachelor of Science in Business Administration from the University of Colorado, Boulder.
 
Kelly Olsen has served as the Chief Commercial Officer of New Age Beverages Corporation since December 2018. Mr. Olsen has over 30 years’ experience in the direct-to-consumer industry, working as a distributor, consultant, vendor, and part of the corporate staff. Mr. Olsen was a founder and a former president of Morinda and also held senior management positions for Montreal-based Matol Botanical (during its greatest growth period) and Enrich International. He received a Bachelor’s degree in Marketing and a Master’s in Business Administration from Brigham Young University.
 
Richard Rife has served as Chief Legal & Administrative Officer and corporate secretary of the Company since December 21, 2018. He also served as chief legal officer for Morinda from 2005. Prior to that, Mr. Rife was vice president & deputy general counsel for Novell, Inc. He has a 35-year background in international corporate law and also served as chief privacy officer for an organization with operations in 170 countries. He received his Bachelor of Arts degree in English and Juris Doctor degree from Brigham Young University.
 
Randy Smith has served as President of Morinda since December 2018. Prior to serving as president, he was Morinda’s CFO, treasurer, and vice president of finance for 14 years. He was a principal in a major international accounting firm, where he specialized in international operations and expansion and had over 20 years of experience consulting with large public and private companies in Chicago, Detroit, and Salt Lake City. Mr. Smith received a Bachelor of Science degree in Accounting and Business Administration from Southern Utah University and his Juris Doctor degree from the University of Utah.
 
 
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Item 1A - Risk Factors
 
Our business, financial condition, results of operations and cash flows are subject to a number of risk factors that may adversely affect our business, financial condition, results of operations or cash flows. If any significant adverse developments resulting from these risk factors should occur, the trading price of our securities could decline, and moreover, investors in our securities could lose all or part of their investment in our securities.
 
You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Note Regarding Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.
 
Risks Related to our Business, Operations, and Industry 
 
We have incurred losses to date and may continue to incur losses.
 
We have incurred net losses since we commenced operations. For the years ended December 31, 2018 and 2017, our net losses were $12.1 million and $3.5 million, respectively. 
 
We had an accumulated deficit of $22.6 million as of December 31, 2018. These losses have had, and likely will continue to have, an adverse effect on our working capital, assets, and stockholders’ equity. In order to achieve and sustain such revenue growth in the future, we must significantly expand our market presence and revenues from existing and new customers. We may continue to incur losses in the future and may never generate revenues sufficient to become profitable or to sustain profitability. Continuing losses may impair our ability to raise the additional capital required to continue and expand our operations.
 
In connection with our combination with Morinda, we potentially owe the former Morinda shareholders up to $15 million in cash or registered stock (plus interest) based on Morinda standalone 2019 results.
 
In connection with the Morinda combination, the Company issued 43,804 shares of Series D Preferred Stock providing for the potential payment of up to $15 million to the former Morinda shareholders contingent upon Morinda achieving certain post-closing milestones. The holders of the preferred stock will be entitled to receive a dividend of up to an aggregate of $15 million (the “Milestone Dividend”) if the Adjusted EBITDA of Morinda standalone is at least $20 million for the year ended December 31, 2019. The Milestone Dividend is payable on April 15, 2020 (the “Dividend Payment Date”). If the Adjusted EBITDA of Morinda standalone is less than $20 million, the Milestone Dividend will be adjusted downward based on applying a five-times multiple to the difference between the Adjusted EBITDA of $20 million and actual Adjusted EBITDA for the year ended December 31, 2019. Additionally, the Company is required to pay an annual dividend to the holders of the Preferred Stock equal to an aggregate of 1.5% of the Milestone Dividend amount, payable on a pro rata basis. The Company may pay the Milestone Dividend and/or the annual dividend in cash or in kind, provided that if the Company chooses to pay in kind, the shares of common stock issued as payment therefore must be registered under the Securities Act of 1933, as amended (the “Securities Act”). The Preferred Stock will terminate on the Dividend Payment Date.
 
We are an “emerging growth company,” and the reduced disclosure requirements applicable to “emerging growth companies” could make our common stock less attractive to investors.
 
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we are an emerging growth company, we 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(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.
 
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
 
 
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We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1,000,000,000 or more; (ii) the last date of the fiscal year following the fifth anniversary of the date of the first sale of common stock under this registration statement; (iii) the date on which we have, during the previous three-year period, issued more than $1,000,000,000 in non-convertible debt; and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We will be deemed a large accelerated filer on the first day of the fiscal year after the market value of our common equity held by non-affiliates exceeds $700,000,000, measured on January 1.
 
We cannot predict if investors will find our common stock less attractive to the extent we rely on the exemptions available to emerging growth companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. 
 
Growth of operations will depend on the acceptance of our products and consumer discretionary spending.
 
The acceptance of our healthy beverage products by both retailers to gain distribution and by consumers to include in the beverage consumption repertoire is critically important to our success. Shifts in retailer priorities and shifts in user preferences away from our products, our inability to develop effective healthy beverage products that appeal to both retailers and consumers, or changes in our products that eliminate items popular with some consumers could harm our business. Also, our success depends toa significant extent on discretionary user spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience an inability to generate revenue during economic downturns or during periods of uncertainty, where users may decide to purchase beverage products that are cheaper or to forego purchasing any type of healthy beverage products, due to a lack of available capital. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, business and financial condition.
 
We cannot be certain that the products that we offer will become, or continue to be, appealing and as a result there may not be any demand for these products and our sales could decrease, which would result in a loss of revenue. Additionally, there is no guarantee that interest in our products will continue, which could adversely affect our business and revenues.
 
Demand for products which we sell depends on many factors, including the number of customers we are able to attract and retain over time, the competitive environment in the healthy beverage industry, as well as the beverage industry as a whole, may force us to reduce prices below our desired pricing level or increase promotional spending, and ability to anticipate changes in user preferences and to meet consumer’s needs in a timely cost effective manner all could result in immediate and longer term declines in the demand for the products we plan to offer, which could adversely affect our sales, cash flows and overall financial condition. An investor could lose his or her entire investment as a result.
 
We have limited management resources and are dependent on key executives.
 
We are currently relying on key individuals to continue our business and operations and, in particular, the professional expertise and services of Mr. Brent Willis, Chief Executive Officer, as well as key members of our executive management team and others in key management positions. In addition, our future success depends in large part on the continued service of Mr. Willis. We have entered into an employment agreement with Mr. Willis, but the existence of an employment agreement does not guarantee retention ofMr. Willis and we may not be able to retain Mr. Willis for the duration of or beyond the end of his term. If our officers and directors chose not to serve or if they are unable to perform their duties, and we are unable to retain a replacement qualified individual or individuals, this could have an adverse effect on our business operations, financial condition and operating results if we are unable to replace the current officers and directors with other qualified individuals.
 
The healthy beverage and lifestyle industry requires the attraction and retention of talented employees.
 
Success in the beverage industry, specifically as it relates to our healthy functional beverage products, does and will continue to require the acquisition and retention of highly talented and experienced individuals. Due to the growth in the market segment targeted, such individuals and the talent and experience they possess is in high demand. There is no guarantee that we will be able to attract and maintain access to such individuals. If we fail to attract, train, motivate, and retain talented personnel, our business, financial condition, and operating results may be materially and adversely impacted, which could result in the loss of your entire investment.
 
 
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Failure to achieve and maintain effective internal controls could have a material adverse effect on our business.
 
If we cannot provide reliable financial reports, our operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on our evaluations, our management concluded that there were no material weaknesses in our internal control over financial reporting for the years ended December 31, 2018 and 2017, respectively. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Failure to comply with Section 404(a) could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.
 
Competition that we face is varied and strong.
 
Our products and industry as a whole are subject to competition. There is no guarantee that we can develop or sustain a market position or expand our business. We anticipate that the intensity of competition in the future will increase.
 
We compete with a number of entities in providing products to our customers. Such competitor entities include: (1) a variety of large multinational corporations engaged in the beverage and healthy beverage industries, including but not limited to companies that have established loyal customer bases over several decades; (2) healthy beverage companies that have an established customer base, and have the same or a similar business plan as we do and may be looking to expand nationwide; (3) a variety of other local and national healthy beverage companies with which we either currently or may, in the future, compete; and (4) multinational corporations in the direct selling business that have a large, loyal independent distributor bases.
 
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and greater name and brand recognition than we have. As a result, these competitors may have greater credibility with both existing and potential customers. They also may be able to offer more products and more aggressively promote and sell their products. Our competitors may also be able to support more aggressive pricing than we will be able to, which could adversely affect sales, cause us to decrease our prices to remain competitive, or otherwise reduce the overall gross profit earned on our products.
 
In our direct-to-consumer business, we sell our products to a network of active IPCs and Customers. If we are unable to attract and retain active IPCs and Customers, our business may be harmed.
 
We distribute our Tahitian Noni,TruAge, and TeMana products through approximately 300,000 independent contractor IPCs, and we depend upon them directly for a substantial amount of our sales. To increase our revenue, we must increase the number of, and the productivity of, our IPCs. Thus, our success in this segment depends in part upon our ability to attract, retain, and motivate a large base of IPCs. We cannot accurately predict how the number and productivity of our IPCs may fluctuate, because we are relying primarily on our IPC leaders to recruit, train, and motivate new IPCs. Several related factors affect retention and motivation, including general business and economic conditions, adverse publicity, investigations or legal proceedings, government regulations or actions, public perceptions about dietary supplement products, and other competing direct-to-consumer companies that are larger than us and compete fiercely for a limited number of persons who desire to become independent distributors.
 
In our direct-to-consumer business, Tahitian Noni Juice and MAX constitute a significant portion of our sales.
 
Tahitian Noni Juice and MAX constitute a significant portion of our Morinda business unit sales, accounting for 85%, 85%, and 87% in 2018, 2017, and 2016, respectively. We face a high degree of competition from other companies producing noni and other superfruit products. If consumer demand for these products declines significantly or our competition is more successful in the markets in which we do business, then our financial condition and operating results would be harmed.
 
 
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We depend on a limited number of suppliers of raw and packaging materials.
 
We rely upon a limited number of suppliers for raw and packaging materials used to make and package our products. Our success will depend in part upon our ability to successfully secure such materials from suppliers that are delivered with consistency and at a quality that meets our requirements. The price and availability of these materials are subject to market conditions. Increases in the price of our products due to the increase in the cost of raw materials could have a negative effect on our business.
 
If we are unable to obtain sufficient quantities of raw and packaging materials, delays or reductions in product shipments could occur which would have a material adverse effect on our business, financial condition, and results of operations. The supply and price of raw materials used to produce our products can be affected by a number of factors beyond our control, such as frosts, droughts, other weather conditions, economic factors affecting growing decisions, various plant diseases and pests, transportation interruption and foreign imposed restrictions. If any of the foregoing were to occur, no assurance can be given that such condition would not have a material adverse effect on our business, financial condition, and results of operations. In addition, our results of operations are dependent upon our ability to accurately forecast our requirements of raw materials. Any failure by us to accurately forecast our demand for raw materials could result in an inability to meet higher than anticipated demand for products or producing excess inventory, either of which may adversely affect our results of operations.
 
In our direct-to-consumer business, all the noni we use is grown and harvested exclusively in French Polynesia. Noni fruit is the most important raw material used in our Tahitian Noni and TeMana products, and it is important to the success of our Company. If the government of French Polynesia were to prohibit the exportation or use of noni, or, if we were unable to source noni fruit in French Polynesia in sufficient quantities to meet demand for our products due to adverse weather, natural disasters, soil overuse, labor shortages, or any other reason, our financial condition and results would be harmed. Any adverse publicity regarding the quality of noni grown in French Polynesia would also have an adverse impact on our results and financial condition.
 
We depend heavily on our processing plant in Mataiea, Tahiti.
 
Our processing plant in Mataiea, Tahiti produces all the noni puree used in our Tahitian Noni Juice, MAX, and many other noni-based products. Noni puree is sent to our Company-owned and contracted manufacturing facilities in American Fork, Utah, Japan, Germany, and China. As a result, we are dependent upon the uninterrupted and efficient operation of our processing plant in Mataiea, Tahiti. The Tahiti operation is subject to power failures, the breakdown, failure,  or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, labor strikes, and the need to comply with the requirements or directives of government agencies, including the FDA. The occurrence of these or any other operational problems at our facility may have a material adverse effect on our business, financial condition,  and results of operations.
 
We depend on a small number of large retailers for a significant portion of our sales.
 
Food and beverage retailers across all channels in the U.S. and other markets have been consolidating, increasing margin demands of brand suppliers, and increasing their own private brand offerings, resulting in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we and our distributor partners do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer. Certain retailers make up an important percentage of our products’ retail volume, including volume sold by our distributor partners. Some retailers also offer their own private label products that compete with some of our brands. The loss of sales of any of our products by a major retailer could have a material adverse effect on our business and financial performance.
 
We depend on third party manufacturers for a portion of our business.
 
While we own or control manufacturing facilities in French Polynesia, Utah, and China, a portion of our sales revenue is dependent on third party manufacturers that we do not control. The majority of these manufacturers’ business comes from producing and/or selling either their own products or our competitors’ products. As independent companies, these manufacturers make their own business decisions. They may have the right to determine whether, and to what extent, they manufacture our products, our competitors’ products and their own products. They may devote more resources to other products or take other actions detrimental to our brands. In most cases, they are able to terminate their manufacturing arrangements with us without cause. We may need to increase support for our brands in their territories and may not be able to pass on price increases to them. Their financial condition could also be adversely affected by conditions beyond our control, and our business could suffer as a result. Deteriorating economic conditions could negatively impact the financial viability of third-party manufacturers. Any of these factors could negatively affect our business and financial performance.
 
 
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Failure of third-party distributors upon which we rely could adversely affect our business.
 
We rely heavily on third party distributors for the sale of our RTD products to retailers. The loss of a significant distributor could have a material adverse effect on our business, financial condition, and results of operations. Our distributors may also provide distribution services to competing brands, as well as larger, national or international brands, and may be to varying degrees influenced by their continued business relationships with other larger beverage, and specifically, healthy beverage companies. Our independent distributors may be influenced by a large competitor if they rely on that competitor for a significant portion of their sales. There can be no assurance that our distributors will continue to effectively market and distribute our products. The loss of any distributor or the inability to replace a poorly performing distributor in a timely fashion could have a material adverse effect on our business, financial condition and results of operations. Furthermore, no assurance can be given that we will successfully attract new distributors as they increase their presence in their existing markets or expand into new markets.
 
We may fail to comply with applicable government laws and regulations.
 
We are subject to a variety of federal, state, and local laws and regulations in the U.S. and foreign countries, some of which are rapidly changing or at times conflicting. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. Violations of these laws or regulations in the manufacture, safety, labeling, transportation and advertising of our products could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, could result in increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on our beverages and our ingredients could increase our costs. Regulatory focus on the health, safety and marketing of beverage products is increasing. Certain federal or state regulations or laws affecting the labeling of our products, such as California’s “Prop 65,” which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, are or could become applicable to our products.
 
Our IPCs could violate marketing or advertising laws or regulations.
 
In our direct-to-consumer business, we sell through IPCs. Each IPC signs an agreement with Morinda, agreeing to comply with all our policies and procedures, including without limitation our Policy Manual. Our policies prohibit false and misleading advertising and the making of improper health and income claims. We require IPCs to clear all promotional materials in advance with our Compliance Department. However, despite our efforts, from time to time, IPCs violate our policies and publish inappropriate marketing materials describing our products or programs. It is impossible to monitor all social media outlets and all IPC communications. Our Compliance Department takes commercially reasonable means, including a computer program that actively searches for improper advertising, to find improper IPC advertising—and when we find such advertising, we require the IPC to correct it. Some such promotional communications have lingered for years in obscure places on the internet and, by the time we find them, the IPC is no longer affiliated with us and is not cooperative in removing the offending advertising. These violations by IPCs could lead to actions against us by regulatory agencies, states’ attorney generals, and private parties and could have an adverse impact on our business, financial condition, and operational results.
 
Our proposed Cannabidiol (CBD) product line is subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.
 
We have announced the launch of a new product line consisting of CBD-infused beverages. Our intention is to commercialize the new line as soon as regulations and laws permit in different jurisdictions in markets worldwide. The cannabis industry is evolving and subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. For example, the Agriculture Improvement Act of 2018 removes hemp from the Controlled Substances Act and permits the production and marketing of hemp and derivatives of cannabis with less than 0.3 percent concentrations of THC. However, in  a statement from Scott Gottlieb, FDA Commissioner, the Commissioner reemphasized its agency 's authority to regulate products containing cannabis or cannabis derived compounds under the  Federal Food, Drug and Cosmetic Act and Section 351 of the Public Health Service Act.
 
 
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The Company does not intend to distribute and commercialize its CBD product line in the U.S. until it believes it can do so in conformity with applicable laws. Although the demand for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop,  we cannot reasonably predict the nature of such developments or the effect, if any, that such developments could have on our business.
 
There is no guarantee that we will be able to commercialize our CBD Infused beverages.
 
If our CBD-infused beverages are to be subject to an extended approval process to comply with the FD&C Act, we may not be able to commercialize our CBD-infused beverages or may have to delay commercialization for an extended period of time. CBD products will also be subject to registration and/or approval in foreign jurisdictions in which the Company does business. It is uncertain how a delay in commercializing our CBD products would impact our Company.
 
Our ongoing investment in new product lines and products and technologies is inherently risky and could disrupt our ongoing businesses.
 
We have invested and expect to continue to invest in new product lines, products, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results.
 
We face various operating hazards that could result in the reduction of our operations.
 
Our operations are subject to certain hazards and liability risks faced by beverage companies that manufacture and distribute water, tea, energy drink, and dietary supplement products, such as defective products, contaminated products, and damaged products. The occurrence of such a problem could result in a costly product recall and serious damage to our reputation for product quality, as well as potential lawsuits. Although we maintain insurance against certain risks under various general liability and product liability insurance policies, no assurance can be given that our insurance will be adequate to fully cover any incidents of product contamination or injuries resulting from our operations and our products. We cannot assure you that we will be able to continue to maintain insurance with adequate coverage for liabilities or risks arising from our business operations on acceptable terms. Even if the insurance is adequate, insurance premiums could increase significantly which could result in higher costs to us.
 
Substantial disruption to production at our manufacturing and distribution facilities could occur.
 
A disruption in production at our beverage manufacturing facilities could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers, or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, water scarcity, manufacturing problems, disease, strikes, transportation or supply interruption, government regulation, cybersecurity attacks or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more, or may take a significant time to start production, each of which could negatively affect our business and financial performance.
 
We are subject to seasonality related to sales of our products.
 
Our business is subject to substantial seasonal fluctuations. Historically, a significant portion of our net sales and net earnings has been realized during the period from May through September. Accordingly, our operating results may vary significantly from quarter to quarter. Our operating results for any particular quarter are not necessarily indicative of any other results. If for any reason our sales were to be substantially below seasonal norms, our annual revenues and earnings could be materially and adversely affected.
 
Litigation and publicity concerning product quality, health, and other issues could adversely affect our results of operations, business and financial condition.
 
Our business could be adversely affected by litigation and complaints from customers or government authorities resulting from product defects or product contamination. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities, if a lawsuit or claim results in a decision against us, or litigation costs, regardless of the result. Further, any litigation may distract our key employees of cause them to expend resources and time normally devoted to the operations of our business.
 
 
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We have experienced significant growth resulting in changes to our organization and structure, which if not effectively managed, could have a negative impact on our business.
 
Our headcount and operations have grown substantially in recent years. We increased the number of full-time employees from 172 as of December 31, 2017 to 889 as of December 31, 2018. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee growth. Any failure to manage our anticipated growth and related organizational changes in a manner that preserves our culture could negatively impact future growth and achievement of our business objectives.
 
In addition, our organizational structure has become more complex as a result of our significant growth. We have added employees and may need to continue to scale and adapt our operational, financial, and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure may require us to commit additional financial, operational, and management resources before our revenue increases and without any assurances that our revenue will increase. If we fail to successfully manage our growth, we likely will be unable to successfully execute our business strategy, which could have a negative impact on our business, financial condition, and results of operations.
 
Our ability to use our net operating loss carryforwards may be limited
 
We have incurred net operating losses for US income tax purposes during our history.  To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire.  Under Internal Revenue Code (“IRC”) Section 382, if a corporation undergoes an “ownership change, “ generally defined as a greater than 50 percent change (by value) in its equity ownership by certain stockholders over a three year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, (and other pre-change tax attributes as applicable) to offset its post change income may be limited.  We may have experienced ownership changes in the past and may experience ownership changes in the future and/or subsequent shifts in our stock ownership (some of which shifts are outside our control).  As a result, if we generate net taxable income, our ability to use our pre-change NOLs to offset such taxable income could be subject to limitations.  Similar provisions of state tax law may also apply.  As a result, even if we attain profitability, we may be unable to use a material portion of our NOL’s and other tax attributes.  We plan to perform an IRC Section 382 analysis to determine if there are currently any limitations on the future use of our net operating loss carryforwards.
 
Because of our combination with Morinda and because our long-term growth strategy involves further expansion of our sales to consumers outside the United States, our business is susceptible to risks associated with global operations.
 
With the Morinda combination, we now have subsidiaries in 25 countries and sales in 60 countries. This provides access to international markets for our traditional New Age product line. Still, our current global operations and future initiatives involve a variety of risks, including:
 
changes in a specific country’s or region’s political or economic conditions;
 
changes in regulatory requirements, taxes, currency control laws, or trade laws;
 
more stringent regulations relating to data security (e.g., the GDPR in Europe), such as where and how data can be housed, accessed, and used, and the unauthorized use of, or access to, commercial and personal information;
 
differing labor regulations, especially in countries and geographies where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;
 
challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits, and compliance programs;
 
increased travel, real estate, infrastructure, and legal compliance costs associated with global operations;
 
currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;
 
limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;
 
laws and business practices favoring local competitors or general preferences for local vendors;
 
limited or insufficient intellectual property protection;
 
 
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political instability or terrorist activities;
 
exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and
 
adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.
 
If we are not able to successfully address the above risks that may arise in connection with a global business, our financial condition and business result will be adversely affected.
 
Economic uncertainties or downturns in the general economy could disproportionately affect the demand for our products and services and negatively impact our results of operations.
 
General worldwide economic conditions have experienced significant fluctuations in recent years, and market volatility and uncertainty remain widespread. Furthermore, during challenging economic times, our distribution customers may face issues with their cash flows and in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If such conditions occur, we may be required to increase our allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed. An economic turndown could, also, decrease demand for our nutritional supplement products that are on the higher end of the price range. The economic conditions in the U.S. and the various countries in which we do business also impact foreign exchange rates. We cannot predict the timing, strength, or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy improves, the market for our products and services may not experience growth.
 
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.
 
We believe that the development of our trade names and various brands are critical to achieving widespread awareness of our products, and as a result, is important to attracting new customers and maintaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable products at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, our business could be adversely impacted. 
 
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.
 
As a multinational organization, we may be subject to taxation in several jurisdictions worldwide with increasingly complex tax laws, the application of which can be uncertain. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, compliance with the 2017 United States Tax Cut and Jobs Act (“Tax Act”) may require the collection of information not regularly produced within our company and the exercise of significant judgment in accounting for its provisions. Many aspects of the Tax Act are unclear and may not be clarified for some time. As regulations and guidance evolve with respect to the Tax Act, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affect our financial position.
 
The amount of taxes we pay in jurisdictions in which we operate could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws, or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest, and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.
 
 
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Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect our financial condition and results of operations. 
 
In December 2018, we completed a business combination with Morinda, an entity much larger than our business before this acquisition. We previously acquired other businesses and product lines. We believe convergence with Morinda and these other businesses have been and continue to be successful. We may in the future seek to acquire or invest in businesses and product lines that we believe could complement or expand our product offerings, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not the acquisitions are completed. If we acquire businesses, we may not be able to integrate successfully the acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain adequate financing to complete such acquisitions. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be adversely affected.
 
If our security measures are compromised or unauthorized access to customer data is otherwise obtained, our services may be perceived as not being secure, customers may curtail or cease their use of our services, our reputation may be harmed, and we may incur significant liabilities. Further, we are subject to governmental and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
 
Our business sometimes involve access to, processing, sharing, using, storage, and the transmission of proprietary information and protected data of our customers. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for accessing, processing, sharing, using, storage, and transmission of such information. If our security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials, or otherwise, our reputation could be damaged, our business and our customers may be harmed, and we could incur significant liabilities. In particular, cyberattacks, phishing attacks, and other internet-based activity continue to increase in frequency and in magnitude generally, and these threats are being driven by a variety of sources, including nation-state sponsored espionage and hacking activities, industrial espionage, organized crime, sophisticated organizations, and hacking groups and individuals. In addition, if the security measures of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if our customers or anyone else incorrectly attributes the blame for such security breaches on us, our products and services, or our systems. We may also be responsible for repairing any damage caused to our customers’ systems that we support, and we may not be able to make such repairs in a timely manner or at all. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brands become more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ proprietary and protected data.
 
Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. Security compromises experienced by our customers, by our competitors, or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, or subject us to third party lawsuits, government investigations, regulatory fines, or other action or liability, all or any of which could materially and adversely affect our business, financial condition, and results of operations.
 
We cannot assure you that any limitations of liability provisions in our contracts for a security breach would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure which, if any, cyber related claims made against us would be covered by our existing general liability insurance coverage and coverage for errors or omissions, whether this coverage or any additional coverage the Company seeks will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more claims, or that the insurer will not deny coverage as to any particular or future claim. The successful assertion of one or more claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of substantial deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition, and results of operations.
 
 
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As a global company, we are subject to numerous jurisdictions worldwide regarding the accessing, processing, sharing, using, storing, transmitting, disclosure and protection of personal data, the scope of which are constantly changing, subject to differing interpretation, and may be inconsistent between countries or in conflict with other laws, legal obligations or industry standards. For example, the EU General Data Protection Regulation (GDPR), which greatly increases the jurisdictional reach of European Union law and became effective in May 2018, adds a broad array of requirements for handling personal data including the public disclosure of significant data breaches, and imposes substantial penalties for non-compliance. We have made a concerted effort to comply with the GDPR and also generally comply with industry standards and strive to comply with all applicable laws and other legal obligations relating to privacy and data protection, but it is possible that these laws and legal obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with industry standards or our practices. Compliance with such laws and other legal obligations may be costly and may require us to modify our business practices, which could adversely affect our business and profitability. Any failure or perceived failure by us to comply with these laws, policies or other obligations may result in governmental enforcement actions or litigation against us, potential fines, and other expenses related to such governmental actions, and could cause our customers to lose trust in us, any of which could have an adverse effect on our business.
 
Failure to comply with global laws and regulations could harm our business.
 
Our business is subject to regulation by various global governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations.
 
In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions, and may result in our inability to provide certain products and services to prospective clients or clients. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, or if clients made claims against us for compensation, our business, financial condition, and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees and costs. Enforcement actions and sanctions could further harm our business, financial condition and results of operations. 
 
Our China business accounts for a significant part of our revenue and anticipated growth. Any decline in sales in China would harm our business results, as would any adverse regulatory action. Repatriation of profits from China may not be ensured.
 
Our operations in China are conducted by Morinda’s wholly owned subsidiary, Tahitian Noni Beverages (China) Company Limited (“TNI China”). TNI China received a coveted direct selling license from the Chinese Ministry of Commerce in 2015. Our China sales have been growing at a robust, double-digit rate for the past several years, making China Morinda’s second largest market. If we are not able to continue to grow sales through our TNI China business, it will have an adverse impact on our global results.
 
China is a large and vibrant market but doing business in China requires navigation of a difficult regulatory environment. China has published regulations governing direct selling—and a number of administrative methods and proclamations have been issued. These regulations require TNI China to use a business model different from the one Morinda offers in other markets. For TNI China to operate under these regulations, we have created and implemented a model specifically for China. However, it cannot be ensured that interpretations of direct selling laws will not adversely affect our business in China or lead to fines against us or our IPCs.
 
It can take one to three years to obtain product registrations in China. The lengthy process for obtaining product registrations often prevents us from launching new product initiatives in China on the same timelines as other markets around the world.
 
Chinese regulations prevent persons who are not Chinese nationals from engaging in direct selling in China. We cannot guarantee that any of our IPCs that do not have a China presence or any of IPCs or wholesalers in China have not engaged or will not engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.
 
 
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Our operations in China are subject to risks and uncertainties related to general economic, political, and legal developments in China. For example, as a result of negative media coverage about the healthcare-related product claims made by a competitor in the direct selling industry in China, the government has recently increased its scrutiny of activities within the healthcare market, including direct selling. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling foreign exchange and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies, and issuing necessary licenses to conduct business. Accordingly, any adverse change in the Chinese economy, the Chinese legal system, or Chinese governmental, economic, or other policies could have a material adverse effect on our business in China and our prospects generally.
 
Over the past several years, the Company has been able to receive periodic license fees and annual dividends from TNI China. However, there is no guarantee this will continue, and any change in government policy affecting payment of license fees or repatriation of profits could harm the results and financial performance of the Company and reduce the Company’s access to cash resources.
 
Limits on the amount of sales compensation we can pay to our IPCs in certain countries could harm our business and cause regulatory risks.
 
               Certain markets, including China, Korea, Indonesia, and Vietnam, impose limits on the amount of sales compensation we can pay our IPCs. For example, in Korea, local regulations limit sales compensation to 35% of our total revenue in Korea. These regulations may inhibit persons from becoming IPCs or cause interested persons to join competitors that are not focused on compliance. We have had to modify our compensation plan in certain markets to be in compliance. It is difficult to keep compensation within limits and we may, therefore, be at risk of violating limits even as we are trying to act in accordance with the regulations. It is not always clear which revenues and expenses are within the scope of regulations. Any failure to keep sales compensation within legal limits in the above and other markets could result in fines or other sanctions, including suspensions.
 
Catastrophic events may disrupt our business.
 
We rely heavily on our network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of online attack, earthquake, fire, terrorist attack, power loss, telecommunications failure or other catastrophic event could cause system interruptions, delays in accessing our service, reputational harm, loss of critical data or could prevent us from providing our products and services to our clients. In addition, some of our employee groups reside in areas particularly susceptible to earthquakes, such as Utah and Japan, and a major earthquake or other catastrophic event could affect our employees, who may not be able to access our systems or otherwise continue to provide our services to our customers. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or information technology systems, or access to our systems, could affect our ability to conduct normal business operations and adversely affect our business, financial condition, and results of operations.
 
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
 
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (the “SEC”) and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
 
We may be unable to meet the obligations of various financial covenants that are contained in our loan agreement with our senior lender, East West Bank.
 
Our loan agreement with East West Bank impose various obligations and financial covenants on the Company. The loan facility has a variable interest rate and is collateralized by substantially all of the assets of the Company and its subsidiaries. In addition, the loan agreement imposes various financial covenants on the Company including maintaining a prescribed fixed charge coverage ratio, minimum adjusted EBITDA, minimum net cash and total leverage ratio. In addition the loan agreement limits the Company’s ability to dispose of all or any part of its business or property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; declare or pay any dividend or make a distribution on any class of our stock; or enter into specified material transactions with its affiliates. Accordingly, an adverse change in our financial performance would make it more difficult to meet our financial covenants.
 
 
23
 
 
It is difficult and costly to protect and enforce our proprietary rights.
 
Our commercial success will depend in part on obtaining and maintaining trademark protection, patent protection, and trade secret protection of our products and brands, as well as successfully defending that intellectual property against third-party challenges. We will only be able to protect our intellectual property related to our trademarks, patents, and brands to the extent that we have obtained rights under valid and enforceable trademarks, patents, or trade secrets that cover our products and brands. Changes in either the trademark and patent laws or in interpretations of trademark and patent laws in the U.S. and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our issued trademarks or our issued patents. The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
 
We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of significant rights and the assessment of treble damages.
 
From time to time we may face intellectual property infringement, misappropriation, or invalidity/non-infringement claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example, werea third party to succeed on an infringement claim against us, we may be required to pay substantial damages (including up to treble damages if such infringement were found to be willful). In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of the litigation could require us to enter into a license agreement which may not be under acceptable, commercially reasonable, or practical terms or we may be precluded from obtaining a license at all. It is also possible that an adverse finding of infringement against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. In the case of diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate our tests. Any such re-validation, in addition to being costly and time consuming, may be unsuccessful.
 
Finally, we may initiate claims to assert or defend our own intellectual property against third parties. Any intellectual property litigation, irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our management’s attention from our business and negatively affect our operating results or financial condition.
 
We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
 
Although we try to ensure that we, our employees, and independent contractors (including IPCs) do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we, our employees, or independent contractors have used or disclosed intellectual property in violation of others’ rights. These claims may cover a range of matters, such as challenges to our trademarks, as well as claims that our employees or independent contractors are using trade secrets or other proprietary information of any such employee’s former employer or independent contractors. As a result, we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.
 
Risks Related to our Common Stock and Corporate Governance
 
The price of our common stock may be volatile and adversely affected by several factors.
 
The market price of our common stock could fluctuate significantly in response to various factors and events, including:
our ability to integrate operations, products, and services;
our ability to execute our business plan;
operating results below expectations;
litigation regarding product contamination;
our issuance of additional securities, including debt or equity or a combination thereof, which will be necessary to fund our operating expenses;
announcements of new or similar products by us or our competitors;
 
 
24
 
 
loss of any strategic relationship, including raw material provider or distributor relationships;
period-to-period fluctuations in our financial results;
changes in foreign exchange rates;
developments concerning intellectual property rights;
changes in legal, regulatory, and enforcement frameworks impacting our products;
 
the addition or departure of key personnel;
announcements by us or our competitors of acquisitions, investments, or strategic alliances;
actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;
the level and changes in our year-over-year revenue growth rate;
the failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts;
any delisting of our common stock from Nasdaq due to any failure to meet listing requirements;
economic and other external factors; and
the general state of the securities market.
 
These market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. Securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the performance of particular companies.
 
Our stock price has in the past and may in the future fluctuate based on developments in the cannabis industry.
 
The market price of our common stock has in the past fluctuated in response to developments in the cannabis industry and has experienced price swings in tandem with industry leaders in the cannabis market. As such, we have experienced fluctuations in the market price of our stock unrelated to the financial performance of our core business. The trading price of our common stock is likely to continue to be volatile and subject to wide price fluctuations based on developments and changes in the cannabis industry. Such fluctuations may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.
 
You may experience future dilution as a result of future equity offerings.
 
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. We cannot assure you that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the most recently publicly-traded price or the price per share paid by existing investors, and investors purchasing our shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock in future transactions may be higher or lower than the price per share at this time.
 
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our common shares.
 
Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. If no analysts commence coverage of us, the market price and volume for our common shares could be adversely affected. 
 
 
25
 
 
We have not and may never pay dividends to shareholders.
 
We have not declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion, and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
The declaration, payment, and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.
 
Our failure to meet the continued listing requirements of The NASDAQ Capital Market could result in a delisting of our common stock.
 
If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market, such as the corporate governance requirements or the minimum closing bid price requirement, NASDAQ may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our commonstock when you wish to do so. In the event of a delisting, we would take actions to restore our compliance with The NASDAQ Capital Market listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below The NASDAQ Capital Market minimum bid price requirement, or prevent future non-compliance with The NASDAQ Capital Market listing requirements.
 
Item 1B.          Unresolved Staff Comments.
 
None. 
 
 
 
26
 
 
Item 2.          Properties.
 
Our operations, packaging, and distribution are currently being conducted from a building located at 1700 E. 68th Avenue in Denver, Colorado. The lease for this building provides for monthly rent of $53,040 through the expiration date in March 2027. We intend to sublease for a portion of this space after our planned relocation of our corporate offices to downtown Denver in the second quarter of 2019.
 
In January 2019, we entered into a lease for approximately 79,600 square feet of office space in the downtown area of Denver, Colorado at 2420 17th Street. Our monthly obligation for base rent will average approximately $33,000 per month over the lease term which expires in December 2029. We intend to sublet a portion of this space while preserving this space for future expansion as we grow our business. We also lease space in three warehouses and we operates multiple satellite warehouses in Colorado and other strategic locations around the U.S. that are either short term leases or we are charged on a per case storage basis. We also own a manufacturing facility in Alamosa, Colorado that is used for our Aspen Pure product.
 
As of December 31, 2018, Morinda and its subsidiaries lease most of their physical properties, except for properties in French Polynesia and Asia. Morinda’s headquarters is in American Fork, Utah, in a 140,000 square foot office, manufacturing, warehouse, and shipping facility custom built on a 12-acre parcel for our exclusive use.
 
Morinda has a manufacturing, office and warehouse facility in Chongquing, China, consisting of three buildings totaling approximately 64,500 square feet which are located on about three acres of land leased from the government through July 2060. Additional store and office facilities are leased in many cities in China, including Shanghai, Beijing, Taiyuan, Fuzhou, Hangzhou, Guangzhou, Weihai, Nanjing, and Shenyang.
 
Morinda has a warehouse and noni-processing facility in Mataiea, Tahiti, consisting of a building approximately 82,250 square feet located on about 13.5 acres of land leased from the government through May 2030 (renewable for another thirty-year term).
 
Morinda has an entire large office building in the Shinjuku area of Tokyo, Japan consisting of approximately 47,200 square feet of gross building space. We lease office space in Okinawa, Kogoshima, Osaka, Sapporo, and Nagoya, Japan; Moscow, Russia; Bogota, Colombia; Santiago, Chile; Surabaya, Yogyakarta, Makassar, Jakarta, and Medan, Indonesia, Thalwil, Switzerland; Munich and Mainz, Germany; Kuala Lumpur, Malaysia; Poznan, Poland; Hanoi and Tai Phong City, Vietnam; Bangkok, Thailand; Seoul, Korea; Budapest, Hungary; Vienna, Austria; Sandvika, Norway; Taipei, Kaohsiung, and Taichung, Taiwan; Solna, Sweden; Brampton, Canada; Brisbane, Australia; Hong Kong; Mexico City, Mexico; and Lima, Peru.
 
We believe our current physical properties are sufficient and adequate to meet our current and projected requirements, and that our leases are competitive and comparable to facilities available in the respective areas.
 
Item 3.           Legal Proceedings. 
 
From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. We are not aware of any material proceedings in which our company or any of our directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to our company, or has a material interest adverse to our company.
  
Item 4.           Mine Safety Disclosures
 
Not applicable.
 
 
27
 
 
PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
 
Our common stock began trading on the NASDAQ Capital Market on February 17, 2017, under the symbol “NBEV.” The following tables set forth the high and low closing prices for our common stock as reported on the Nasdaq Capital Market for the quarterly periods indicated. These prices do not include retail markups, markdowns, or commissions.
 
 
 
2018
 
 
2017
 
Year ended December 31,
 
High
 
 
Low
 
 
High
 
 
Low
 
First Quarter
 $3.92 
 $2.12 
 $5.55 
 $3.51 
Second Quarter
  2.50 
  1.70 
  6.72 
  3.71 
Third Quarter
  7.85 
  1.32 
  5.09 
  3.41 
Fourth Quarter
  8.95 
  3.13 
  3.35 
  1.99 
 
Holders
 
On March 29, 2019, there were approximately 115 stockholders of record of our common stock. We believe the number of beneficial owners of our common stock are substantially greater than the number of record holders because a large portion of our outstanding common stock are held of record in broker “street names” for the benefit of individual investors.
 
Dividends
 
We have not paid any cash dividends on our common stock to date. The payment of any cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. The payment of any dividends will be within the discretion of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our board of directors will declare any dividends in the foreseeable future.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
Reference is made to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” which is incorporated by reference to the 2019 Proxy Statement to be filed with the SEC within 120 days after December 31, 2018.
 
Recent Sales of Unregistered Securities
 
In October 2018, we issued an aggregate of 417,822 shares of our common stock upon exercise of previously granted options to purchase shares of our common stock.
 
The shares were issued in reliance upon an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve public offerings of securities.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
None.
 
Item 6.          Selected Financial Data.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
 
 
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Item 7.          Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
       You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in Item 8 of this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those described below. You should read the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
 
        Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
 
Overview
 
        We are a Colorado-based healthy beverage company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you healthy beverages. We market a full portfolio of Ready-to-Drink (“RTD”) better-for-you beverages including competitive offerings in the kombucha, tea, coffee, functional waters, relaxation drinks, energy drinks, rehydrating beverages, and functional medical beverage segments. We also offer liquid dietary supplement products, including Tahitian Noni® Juice, through a direct-to-consumer model using independent distributors called independent product consultants (“IPCs”). We differentiate our brands through superior functional performance characteristics and ingredients and offer products that are 100% organic and natural, with no high-fructose corn syrup (“HFCS”), no genetically modified organisms (“GMOs”), no preservatives, and only natural flavors, fruits, and ingredients. We rank as one of largest healthy beverage companies in the world as well as one of the fastest growing beverage companies according to Beverage Industry Magazine annual rankings and Markets and Markets. Our goal is to become the world’s leading healthy beverage company, with leading brands for consumers, leading growth for retailers and distributors, and leading return on investment for shareholders. Our target market is health conscious consumers, who are becoming more interested and better educated on what is included in their diets, causing them to shift away from less healthy options such as carbonated soft drinks or other high caloric beverages and towards alternative beverage choices. Consumer awareness of the benefits of healthier lifestyles and the availability of heathier beverages is rapidly accelerating worldwide, and we are capitalizing on that shift.
 
Recent Developments
 
East West Bank Loan Agreement
 
        On March 29, 2019, we entered into a Loan and Security Agreement (the “Loan Agreement”) with East West Bank (“EWB”).  The Loan Agreement matures on March 29, 2023 and provides for (i) a term loan in the aggregate principal amount of $15.0 million, which may be increased to $25.0 subject to the satisfaction of certain conditions (the “Term Loan”) and (ii) a $10.0 million revolving loan facility (the “Revolving Loan Facility”). At the closing, EWB funded $25.0 million to us consisting of the $15.0 million Term Loan and $10.0 as an advance under the Revolving Loan Facility. Our obligations under the Loan Agreement are secured by substantially all of our assets and guaranteed by certain of our subsidiaries. The Loan Agreement 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 Loan Agreement). During any periods when an event of default occurs, the Loan Agreement provides for interest at a rate that is 3.0% above the rate otherwise applicable to such obligations.
 
        Borrowings outstanding under the Loan Agreement will bear interest at the Prime Rate plus 0.25%. However, if the Total Leverage Ratio (as defined in the Loan Agreement) is equal to or greater than 1.50 to 1.00, borrowings will bear interest at the Prime Rate plus 0.50%. We may voluntarily prepay amounts outstanding under the Revolving Loan Facility on ten business days’ prior notice to EWB without prepayment charges. In the event the Revolving Loan Facility is terminated prior to its maturity, we would be required to pay an early termination fee in the amount of 0.50% of the revolving line. Additional borrowing requests under the Revolving Loan Facility are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the Loan Agreement. The Revolving Loan Facility also provides for an unused line fee equal to 0.5% per annum of the undrawn portion. The Loan Agreement includes a lockbox arrangement that requires that we direct our customers to remit payments to a restricted bank account, whereby all available funds are used to pay down the outstanding principal balance under the Revolving Loan Facility.
 
 
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Payments under the Term Loan are interest-only for the first six months and are followed by principal and interest payments amortized over the remaining term of the Term Loan. We may elect to prepay the Term Loan before its maturity on 10 business days’ notice to EWB subject to a prepayment fee of 2% for the first year of the Term Loan and 1% for the second year of the Term Loan.  No later than 120 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2019, we are required to make a payment towards the outstanding principal amount of the Term Loan in an amount equal to 35% of the Excess Cash Flow (as defined in the Loan Agreement), 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  Reference is made to Note 3 to our consolidated financial statements included in Item 8 of this Report for a discussion of the Merger with Morinda entered into in December 2018, and Note 8 for a discussion about the public offering completed in November 2018. Additionally, reference is made to Note 16 to our consolidated financial statements included in Item 8 of this Report for a discussion of (i) a new Loan Agreement for $25.0 million of funding with East West Bank entered into on March 29, 2019, (ii) a sale leaseback entered into on March 22, 2019 that is expected to result in net proceeds between $9.0 million and $12.0 million.
 
Siena Revolver
 
                On March 29, 2019, simultaneously with our entry into the new loan facility with East West Bank discussed below, we repaid all outstanding amounts under the Siena Revolver, including a prepayment fee of $0.5 million.
 
Sale Leaseback
 
                On March 22, 2019, we entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $55 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary. Concurrently with the sale, we entered into a lease of this property for an initial noncancelable term of seven years, with an option at our discretion to extend the lease term for 20 additional years. The monthly lease cost is ¥20 million (approximately $181,000 as of March 22, 2019) for the initial seven-year term.
 
                 In connection with this transaction, we repaid the $2.9 million mortgage on the building, cancelled the related interest rate swap agreement, and we are obligated to pay $25.0 million to the former stockholders of Morinda to eliminate the contingent financing liability incurred under the business combination. After these payments, income taxes, post-closing repair obligations, and transaction costs, the net proceeds from the sale leaseback are expected to be between $9.0 million and $12.0 million.
 
Our Business Model
 
We market our RTD beverage products using a range of marketing mediums, including in-store merchandising and promotions, experiential marketing, events, and sponsorships, digital marketing and social media, direct marketing, and traditional media including print, radio, outdoor, and TV.
 
               Our core business is to develop, market, sell, and distribute healthy liquid dietary supplements and ready-to-drink beverages. The beverage industry comprises $870 billion in annual revenue according to Euromonitor and Booz & Company and is highly competitive with three to four major multibillion-dollar multinationals that dominate the sector. We compete by differentiating our brands as healthier and better-for-you alternatives that are natural, organic, and/or have no artificial ingredients or sweeteners. Our brands include Tahitian Noni Juice, TruAge, Xing Tea, Aspen Pure®, Marley, Búcha® Live Kombucha, PediaAde, Coco Libre, BioShield, and ‘NHANCED Recovery, all competing in the existing growth and newly emerging dynamic growth segments of the beverage industry. Morinda also has several additional consumer product offerings, including a TeMana line of skin care and lip products, a Noni + Collagen ingestible skin care product, wellness supplements, and a line of essential oils.
 
Key Components of Consolidated Statements of Operations
 
 Net Revenue. We recognize revenue when products are delivered and when title and the risk of ownership passes to our customers. Revenue consists of the gross sales price, net of estimated returns and allowances, discounts, and personal rebates that are accounted for as a reduction from the gross sale price. Shipping and handling charges that are billed to customers are included as a component of revenue.
 
Cost of goods sold. Cost of goods sold primarily consists of product costs and freight. Since we use third-party suppliers to manufacture our products, we don’t capitalize overhead as part of our inventories.
 
 
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Commissions. Commissions earned by our sales and marketing personnel are charged to expense in the same period that the related sales transactions are recognized.
 
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of personnel costs for our administrative, human resources, finance and accounting employees and executives. General and administrative expenses also include contract labor and consulting costs, travel-related expenses, legal, auditing and other professional fees, rent and facilities costs, repairs and maintenance, advertising and marketing costs, and general corporate expenses.
 
Business combination expenses. When we enter into business combinations, the acquisition-related transaction costs are accounted for as expenses in the periods in which such costs are incurred. When we enter business combinations, a portion of the consideration may be contingent on future operating performance of the acquired business. In these circumstances, we determine the fair value of the contingent consideration as a component of the purchase price, and all future changes in the fair value of our obligations is reflected as an adjustment to our operating expenses in the period that the change is determined.
 
Depreciation and amortization expense. Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment, amortization expense related to leasehold improvements, and amortization expense related to identifiable intangible assets.
  
Interest expense. Interest expense is incurred under our revolving credit facilities and other debt obligations. The components of interest expense include the amount of interest payable in cash at the stated interest rate, make-whole applicable premium, accretion of debt discounts and issuance costs using the effective interest method, and the write-off of debt discounts and issuance costs if we prepay the debt before the maturity date.
 
Loss on change in fair value of embedded derivatives. The Siena Revolver contains features referred to as embedded derivatives that are required to be bifurcated and recorded at fair value. Embedded derivatives include requirements to pay default interest upon the existence of an event of default and to pay “make-whole” interest for certain mandatory and voluntary prepayments of the outstanding principal balance under the Siena Revolver. We perform valuations of the embedded derivatives on a quarterly basis. Changes in the fair value of embedded derivatives are reflected as a non-operating gain or loss in our consolidated statements of operations.
 
Other income (expense), net. Other income (expense), net consists primarily of interest income and non-operating expenses.
 
Gain from sale of property and equipment. Gains from the sale of property and equipment are reflected in the period that the sale transaction closes. Impairment losses related long-lived assets are generally reflected as operating expenses in the period that an asset is determined to be impaired.
 
Income tax expense. The provision for income taxes is based on the amount of our taxable income and enacted federal, state and foreign tax rates, as adjusted for allowable credits and deductions. Our provision for income taxes consists only of foreign taxes for the periods presented as we had no taxable income for U.S. federal or state purposes. In addition, because of our lack of domestic earnings history, the domestic net deferred tax assets have been fully offset by a valuation allowance and no tax benefit has been recognized.
 
 
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Results of Operations
 
Our consolidated statements of operations for the years ended December 31, 2018 and 2017, are presented below (in thousands):
 
 
 
 
 
 
 
 
 
Change
 
 
 
2018
 
 
2017
 
 
Amount
 
 
Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 $52,160 
 $52,188 
 $(28)
  0%
Cost of goods sold
  42,865 
  39,788 
  3,077 
  8%
 
    
    
    
    
Gross profit
  9,295 
  12,400 
  (3,105)
  -25%
 
    
    
    
    
Operating expenses:
    
    
    
    
Commissions
  2,781 
  1,456 
  1,325 
  91%
General and administrative
  20,288 
  15,387 
  4,901 
  32%
Business combination expenses:
    
    
    
    
Financial advisor and other transaction costs
  3,189 
  232 
  2,957 
  (1)
Change in fair value of earnout obligations
  100 
  - 
  100 
  (1)
Depreciation and amortization expense
  2,310 
  1,606 
  704 
  44%
 
    
    
    
    
Total operating expenses
  28,668 
  18,681 
  9,987 
  53%
 
    
    
    
    
Operating loss
  (19,373)
  (6,281)
  (13,092)
  208%
 
    
    
    
    
Non-operating income (expenses):
    
    
    
    
Interest expense
  (1,068)
  (228)
  (840)
  368%
Loss from change in fair value of embedded derivatives
  (470)
  - 
  (470)
  (1)
Other income (expense), net
  (151)
  (300)
  149 
  -50%
Gain from sale of building
  - 
  3,273 
  (3,273)
  -100%
 
    
    
    
    
Loss before income taxes
  (21,062)
  (3,536)
  (17,526)
  496%
Income tax expense
  8,927 
  - 
  8,927 
  (1)
 
    
    
    
    
Net loss
 $(12,135)
 $(3,536)
 $(8,599)
  243%
 
(1)
Percentage is not applicable since no amounts were incurred for the year ended December 31, 2017.
 
Comparison of Years ended December 31, 2018 and 2017
 
Net revenue. Net revenue was unchanged at $52.2 million for the years ended December 31, 2018 and 2017. Net revenue for the New Age segment decreased from $52.2 million for the year ended December 31, 2017 to $48.3 million for the year ended December 31, 2018, a decrease of $3.8 million or 7%. The decrease in net revenue for the New Age segment was primarily attributable to an increase in discounts and allowances of $2.5 million which was driven by the negative impact related to working capital constraints during 2018, which severely constricted inventory levels and the Company’s ability to meet the demands of major distributors and retailers. The other major impact between gross and net revenue level was an increase in billbacks and discounts from one of our major distributors where we were impacted by significant charges on shipments we shorted because of our inventory challenges, and we faced a high level of changeover charges related to the Coco-Libre brand. For the year ended December 31, 2018, the Morinda acquisition contributed net revenue of $3.8 million for the post acquisition period from December 21, 2018 through December 31, 2018.
 
 
32
 
 
Cost of goods sold. Cost of goods sold increased from $39.8 million for the year ended December 31, 2017 to $42.9 million for the year ended December 31, 2018, an increase of $3.1 million or 8%. Cost of goods sold for the New Age segment increased from $39.8 million for the year ended December 31, 2017 to $42.0 million for the year ended December 31, 2018, an increase of $2.2 million or 5%. This increase in cost of goods sold was due to higher product costs since we were making smaller production runs and buying raw materials in smaller amounts on the spot market, so we were not getting economies of scale with our product which was related to our working capital constraints during 2018.
 
For the year ended December 31, 2018, cost of goods sold for the Morinda acquisition was $0.9 million for the post acquisition period from December 21, 2018 through December 31, 2018.
 
Gross Profit. Gross profit decreased from $12.4 million for the year ended December 31, 2017 to $9.3 million for the year ended December 31, 2018, a decrease of $3.1 million or 25%. Gross margin decreased from 24% for the year ended December 31, 2017 to 18% for the year ended December 31, 2018. As discussed below the decrease in gross margin was primarily due to higher product costs on lower net revenues for the New Age segment.
 
Gross profit for the New Age segment decreased by $6.0 million for the year ended December 31, 2018, primarily due to a decrease in net revenue of $3.8 million and an increase in cost of goods sold of $2.2 million as discussed above. As a result, gross margin for the New Age segment decreased from 24% for the year ended December 31, 2017 to 13% for the year ended December 31, 2018. The lower gross margins for the New Age segment in 2018 are not indicative of our expectations for the year ending December 31, 2019, due to the working capital constraints that negatively impacted our net revenue and our production costs in 2018. As discussed under Liquidity and Capital Resources below, the conditions that constrained the availability of funding for working capital requirements have been resolved by our debt and equity financing activities over the past five months. Therefore, we expect improved margins for the New Age segment beginning in the second quarter of 2019.
 
For the period from December 21, 2018 through December 31, 2018, gross profit for the Morinda acquisition was $0.9 million and gross margin was 76%. For pre-acquisition periods in 2018 and 2017, Morinda’s gross margin was approximately 80%. We don’t believe the lower gross margin for the post-acquisition period is indicative of a trend, but rather is a factor of the short period of time and holidays during which Morinda’s results are consolidated with ours.
 
Commissions. Commissions increased from $1.5 million for the year ended December 31, 2017 to $2.8 million for the year ended December 31, 2018, an increase of $1.3 million. This increase was due to the Morinda acquisition which resulted in commissions of $1.5 million for the post acquisition period from December 21, 2018 through December 31, 2018. Under Morinda’s business model, commissions typically range between 38% and 40% of net revenue whereas commissions for the New Age segment are typically about 3% of net revenue.
 
Selling, general and administrative expenses. Selling, general and administrative expenses increased from $15.4 million for the year ended December 31, 2017 to $20.3 million for the year ended December 31, 2018, an increase of $4.9 million or 32%. This increase was primarily attributable to (i) $1.5 million related to Morinda for the post acquisition period from December 21, 2018 through December 31, 2018, (ii) an increase in other compensation and benefits of $1.4 million, (iii) an increase in stock-based compensation of $0.8 million, (iv) an increase in rent and occupancy costs of $0.5 million, and an increase in professional fees of $0.4 million.
 
Our compensation and benefit costs and professional fees have increased in 2018 due to the significant growth that resulted from three acquisitions in 2017 and one acquisition in 2018. Due to the growth of our business and our status as a public company, we expect these costs will continue to increase as we address the accounting and financial reporting requirements of a significantly more complex business structure.
 
Business combination expenses. Acquisition-related transaction costs for financial advisory services and professional fees associated with the business combination are not included as a component of the consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Acquisition-related transaction costs related to business combinations increased from $0.2 million for the year ended December 31, 2017 to $3.2 million for the year ended December 31, 2018, an increase of $3.0 million. In connection with the acquisition of Morinda, we incurred transaction costs of $3.2 million, including (i) payment of cash of $1.1 million and issuance of 214,250 shares of Common Stock with a fair value of $1.2 million to a financial advisor that assisted with the consummation of the Merger, and (ii) professional fees and other incremental and direct costs associated with the Merger of $0.9 million. For the year ended December 31, 2017, we incurred transaction costs of $0.2 million in connection with the Maverick business combination.
 
 
33
 
 
In addition, as part of the Marley transaction in 2017, we agreed to make a one-time earnout payment of $1.25 million if 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 fair value of the earnout was valued using the weighted average return on assets and amounted to $0.8 million on the closing date. During 2018, we determined that the fair value of this earnout obligation had increase to $0.9 million. Accordingly, we recognized an expense of $0.1 million for the year ended December 31, 2018.
 
Depreciation and amortization expense. Depreciation and amortization expense increased from $1.6 million for the year ended December 31, 2017 to $2.3 million for the year ended December 31, 2018, an increase of $0.7 million. This increase was due to (i) an increase of $0.5 million due to full year of amortization expense in 2018 related to approximately $20.0 million of identifiable intangible assets associated with the Maverick, PMC and Marley acquisitions that closed in the first half of 2017, and (ii) approximately $0.2 million of depreciation and amortization related to the Morinda acquisition for the post acquisition period from December 21, 2018 through December 31, 2018. Due to the Morinda acquisition, we expect a significant increase in depreciation and amortization expense for the year ending December 31, 2019.
 
Interest expense. Interest expense increased from $0.2 million for the year ended December 31, 2017 to $1.1 million for the year ended December 31, 2018, an increase of $0.9 million. The entire increase in interest expense was attributable to a Senior Secured Convertible Promissory Note with a principal balance of $4.75 million that was borrowed in June 2018 and provided for a maturity date in June 2019. Due to the early extinguishment of in August 2018, we recognized accretion for all of the debt discount and issuance costs of $0.6 million for the year ended December 31, 2018. In addition, we incurred interest expense of $0.1 million and a make-whole prepayment fee of $0.2 million for the year ended December 31, 2018.
 
Loss on change in fair value of embedded derivatives. In August 2018, we entered into the Siena Revolver that provides for borrowings up to $12.0 million. The Siena Revolver includes features that were determined to be embedded derivatives requiring bifurcation and accounting as separate financial instruments. We determined that embedded derivatives include the requirement to pay (i) an early termination premium if the Siena Revolver is terminated before the Maturity Date, and (ii) default interest at a 5.0% premium if events of default exist. An early termination premium is required to be paid if Siena’s commitment to make revolving loans is terminated prior to the Maturity Date in August 2021. The fee is equal to 4.00%, 2.25% and 1.25% of the $12.0 million commitment if termination occurs during the first, second and third years after August 2018 closing date, respectively.
 
As of December 31, 2018, the fair value of these embedded derivatives was $0.5 million which resulted in the recognition of a loss of $0.5 million for the year ended December 31, 2018. Increases in the fair value of embedded derivatives result in losses that are recognized when the likelihood increases that a future cash payment will be required to settle an embedded derivative, whereas gains are recognized when the fair value decreases. Decreases in fair value occur when we become contractually obligated to pay an embedded derivative (whereby the embedded derivative liability is transferred to a contractual liability), or as the likelihood of a future cash settlement decreases. The loss of $0.5 million for the year ended December 31, 2018 was due to our assessment that the probability of a prepayment event was likely before the first anniversary of the Siena Revolver. On March 29, 2019, we terminated the Siena Revolver with the proceeds of the East West Bank financing discussed below under Liquidity and Capital Resources. As a result, we incurred a prepayment fee of $480,000 that will be recognized as an expense for the first quarter of 2019 and this expense will be offset by a gain of $470,000 due to elimination of the derivative.
 
Other income (expense), net. For the year ended December 31, 2017, we had net other expense of $0.3 million as compared to the year ended December 31, 2018, when we had net other expense of $0.2 million.
 
Gain from sale of building. On January 10, 2017, we entered into an agreement with an unaffiliated third party resulting in the sale for $8.9 million of the land and building that serves as our corporate headquarters in Denver, Colorado. Concurrently with the sale, we entered into a lease of this property for an initial term of ten years, with two options to extend for successive five-year periods. This transaction qualified as a sale under ASU 2016-02 (“Leases”), whereby a gain of approximately $3.3 million was recognized for the year ended December 31, 2017. For the year ended December 31, 2018, we did not sell any of our property and equipment.
 
Income tax expense. Due to a valuation allowance for our deferred income tax assets, we did not recognize an income tax benefit for the year ended December 31, 2017. For the year ended December 31, 2018, we recognized an income tax benefit of $8.9 million as a result of deferred income tax liabilities of $9.9 million recorded in connection with the Morinda business combination. We determined that our net operating loss carryforwards will offset any income tax expense related the deferred income tax liabilities for Morinda. Accordingly, we recognized an $8.9 million deferred income tax benefit for the year ended December 31, 2018.
 
 
34
 
 
Liquidity and Capital Resources
 
Overview
 
As of December 31, 2018, we had cash and cash equivalents of $42.5 million and working capital of $40.9 million. For the year ended December 31, 2018, we incurred a net loss of $12.1 million and cash used in operating activities was $22.0 million.
 
We have contractual obligations of approximately $50.8 million that are due during the 12 months ending December 31, 2019. This amount includes (i) payables to the former stockholders of Morinda for $34.0 million, (ii) operating lease payments of $6.3 million, (iii) open purchase orders of $4.8 million, (iv) estimated payments due under the Siena Revolver of $2.7 million, and (v) principal due under a foreign mortgage for $1.3 million. Of the $50.8 million of contractual obligations, $25.0 million is payable to the extent that proceeds up to this amount are received in a sale leaseback financing that closed on March 22, 2019, and that will be paid in the second quarter of 2019. Accordingly, we will only be required to satisfy $25.8 million of these contractual obligations from our existing capital resources as the $25.0 million payable is netted from the sales proceeds from the sale leaseback of our Japanese building that is discussed in Note 16 to our consolidated financial statements included in Item 8 of this Report. We expect the net proceeds from the sale leaseback will range between $9.0 million and $12.0 million.
 
Based on our expectations for future growth in net revenue for the Morinda and New Age segments, we believe our cash flow from operating activities for the year ending December 31, 2019, combined with (i) our existing cash resources of $42.5 million, (ii) up to $12.0 million of net proceeds from the Japanese sale leaseback, and (iii) net proceeds of approximately $22.4 million from the East West Bank loan (net of payoff of the Siena Revolver) as discussed below, will be sufficient to fund our working capital requirements and the remainder of our net contractual obligations of $19.1 million.
  
Siena Revolver
 
In August 2018, we entered into a loan and security agreement with Siena Lending Group LLC (“Siena”) that provided for a $12.0 million revolving credit facility (the “Siena Revolver”) with a scheduled maturity date of August 10, 2021 (the “Maturity Date”). Outstanding borrowings provided for interest at the greater of (i) 7.5% or (ii) the prime rate plus 2.75%. As of December 31, 2018, the effective interest rate was 8.25%. Beginning in November 2018, we were required to pay interest on a minimum of $2.0 million of borrowings, regardless of whether such funds had been borrowed. The Siena Revolver also provided for an unused line fee equal to 0.5% per annum of the undrawn portion of the $12.0 million commitment. The Siena Revolver was subject to availability based on eligible accounts receivables and eligible inventory of the Company. As of December 31, 2018, the borrowing base calculation permitted total borrowings of approximately $2.5 million. After deducting the outstanding principal balance of $2.0 million, we had excess borrowing availability of $0.5 million as of December 31, 2018. Pursuant to the Siena Revolver, we granted a security interest in substantially all assets and intellectual property of the Company and its subsidiaries, except for such assets owned by Morinda.
 
The Siena Revolver contained standard and customary events of default including, but not limited to, maintaining compliance with the financial and non-financial covenants set forth in the Siena Revolver. The financial covenants required maintenance of a fixed charge coverage ratio of less than 1.1 if excess borrowing availability was less than $1.0 million, and to maintain minimum liquidity of $2.0 million. The fixed charge coverage ratio compares EBITDA, net of unfinanced capital expenditures, to fixed charges for the latest quarterly reporting period. As of December 31, 2018, we were in compliance with the financial covenants. The Siena Revolver also limited or prohibited us from paying dividends, incurring additional debt, selling significant assets, or merging with other entities without the consent of the lenders. The Siena Revolver included a lockbox arrangement that required that we direct our customers to remit payments to a restricted bank account, whereby all available funds were used to pay down the outstanding principal balance under the Siena Revolver.
 
On March 29, 2019, simultaneously with our entry into the new loan facility with East West Bank discussed below, we repaid all outstanding amounts under the Siena Revolver, including a prepayment fee of $0.5 million.
 
 
35
 
 
East West Bank Loan Agreement
 
On March 29, 2019, we entered into a Loan and Security Agreement (the “Loan Agreement”) with East West Bank (“EWB”).  The Loan Agreement matures on March 29, 2023 and provides for (i) a term loan in the aggregate principal amount of $15.0 million, which may be increase to $25.0 subject to the satisfaction of certain conditions (the “Term Loan”) and (ii) a $10.0 million revolving loan facility (the “Revolving Loan Facility”). At the closing, EWB funded $25.0 million to us consisting of the $15.0 million Term Loan and $10.0 as an advance under the Revolving Loan Facility. Our obligations under the Loan Agreement are secured by substantially all of our assets and guaranteed by certain of our subsidiaries. The Loan Agreement 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 Loan Agreement). During any periods when an event of default occurs, the Loan Agreement provides for interest at a rate that is 3.0% above the rate otherwise applicable to such obligations.
 
Borrowings outstanding under the Loan Agreement will bear interest at the Prime Rate plus 0.25%. However, if the Total Leverage Ratio (as defined in the Loan Agreement) is equal to or greater than 1.50 to 1.00, borrowings will bear interest at the Prime Rate plus 0.50%. We may voluntarily prepay amounts outstanding under the Revolving Loan Facility on ten business days’ prior notice to EWB without prepayment charges. In the event the Revolving Loan Facility is terminated prior to its maturity, we would be required to pay an early termination fee in the amount of 0.50% of the revolving line. Additional borrowing requests under the Revolving Loan Facility are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the Loan Agreement. The Revolving Loan Facility also provides for an unused line fee equal to 0.5% per annum of the undrawn portion. The Loan Agreement includes a lockbox arrangement that requires that we direct our customers to remit payments to a restricted bank account, whereby all available funds are used to pay down the outstanding principal balance under the Revolving Loan Facility.
 
Payments under the Term Loan are interest-only for the first six months and are followed by principal and interest payments amortized over the remaining term of the Term Loan. We may elect to prepay the Term Loan before its maturity on 10 business days’ notice to EWB subject to a prepayment fee of 2% for the first year of the Term Loan and 1% for the second year of the Term Loan.  No later than 120 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2019, we are required to make a payment towards the outstanding principal amount of the Term Loan in an amount equal to 35% of the Excess Cash Flow (as defined in the Loan Agreement), 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 
 
Cash Flows Summary
 
Presented below is a summary of our operating, investing and financing cash flows (in thousands):
 
 
 
2018
 
 
2017
 
 
Change
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
 $(21,831)
 $(8,411)
 $(13,420)
Investing activities
  (29,438)
  6,227 
  (35,665)
Financing activities
  96,401 
  1,940 
  94,461 
 
 
 
36
 
 
Cash Flows Provided by Operating Activities
 
For the years ended December 31, 2018 and 2017, net cash flows used in operating activities amounted to $21.8 million and $8.4 million, respectively. The key components in the calculation of our cash used in operating activities for the years ended December 31, 2018 and 2017, are as follows (in thousands):
 
 
 
2018
 
 
2017
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
Net loss
 $(12,135)
 $(3,536)
 $(8,599)
Deferred income tax benefit
  (8,927)
  - 
  (8,927)
Non-cash and non-operating expenses, net
  7,596 
  163 
  7,433 
Changes in operating assets and liabilities, net
  (8,365)
  (5,038)
  (3,327)
            Total
 $(21,831)
 $(8,411)
 $(13,420)
 
For the year ended December 31, 2018, our net loss of $12.1 million and a non-cash deferred income tax benefit of $8.9 million resulted in combined negative operating cash flow of $21.1 million. However, non-cash expenses partially mitigated this impact by $7.6 million. For the year ended December 31, 2018, non-cash expenses of $7.6 million included depreciation and amortization expense of $2.3 million, stock-based compensation expense of $2.5 million, acquisition costs settled in shares of Common Stock for $1.2 million, accretion and amortization of debt discount and issuance costs of $0.8 million, and a loss from change in fair value of embedded derivatives of $0.5 million. Additionally, a cash expense for make-whole applicable premium of $0.2 million was classified as a financing cash outflow since it related to the prepayment of debt.
 
For the year ended December 31, 2018, changes in operating assets and liabilities used $8.4 million of operating cash flows including (i) an increase in inventories of $3.4 million, (ii) an increase in prepaid expenses and other assets of $1.8 million, and (iii) an increase in accounts payable and accrued liabilities of $4.4 million. These uses of cash total $9.6 million and were partially offset by cash collections that resulted in a decrease in accounts receivable of $1.3 million.
 
For the year ended December 31, 2017, cash flows used in operating activities amounted to $8.4 million. While we recognized a net loss of $3.5 million for the year ended December 31, 2017, net non-cash expenses of $0.2 million mitigated the cash impact of our net loss. For the year ended December 31, 2017, non-cash expenses amounted to $3.4 million including depreciation and amortization expense of $1.6 million, stock-based compensation expense of $1.7 million, and accretion and amortization of debt discount and issuance costs of $0.1 million. These non-cash expenses of approximately $3.4 million were partially offset by a $3.3 million gain from sale of our building in Denver, Colorado.
 
For the year ended December 31, 2017, changes in operating assets and liabilities used $5.0 million of operating cash flows including (i) an increase in accounts receivable of $2.3 million, (ii) an increase in inventories of $0.3 million, (iii) an increase in prepaid expenses and other assets of $0.5 million, and (iii) an increase in accounts payable and accrued liabilities of $2.0 million.
 
Cash Flows Used in Investing Activities
 
Cash used in investing activities was primarily driven by three business combinations in our New Age segment that were completed in 2017 and the Morinda segment business combination in 2018. For the year ended December 31, 2018, our principal use of cash in investing activities resulted from a cash payment of $75.0 million to purchase the Morinda segment in December 2018. This cash payment was offset by the cash, cash equivalents and restricted cash that we acquired from Morinda for a total of $46.3 million. The net amount of cash paid to acquire the Morinda segment of $28.7 million is reflected as an investing cash outflow for the year ended December 31, 2018. For the year ended December 31, 2018, we also made capital expenditures primarily for machinery and equipment for $0.7 million. Of the $0.7 million of capital expenditures, approximately $0.6 million related to our Morinda segment.
 
For the year ended December 31, 2017, our principal use of cash in investing activities resulted from a cash payment of $2.0 million to acquire the Maverick reporting unit in March 2017. For the year ended December 31, 2017, we also made capital expenditures primarily for machinery and equipment in our New Age segment for $0.7 million. 
 
 
37
 
 
Cash Flows from Financing Activities
 
Our financing activities provided net cash proceeds of $1.9 million for the year ended December 31, 2017 as compared to $96.4 million for the year ended December 31, 2018. For the year ended December 31, 2018, the principal sources of cash from our financing activities consisted of (i) $99.9 million from four public offerings that resulted in the issuance of an aggregate of 34.7 million shares of our Common Stock, (ii) $5.0 million for borrowings under the Siena Revolver, and (iii) $4.6 million from a convertible debt financing in June 2018. These financing cash proceeds totaled $109.5 million and were partially offset by cash payments for (i) principal paid under the Siena Revolver of $3.0 million, (ii) principal and make-whole premium in August 2018 to repay the convertible debt financing for $4.9 million, (iii) payment to terminate our previous revolver with U.S. Bank for $2.0 million in June 2018, (iv) payment of $2.2 million for incremental and direct offering costs associated with the public offerings, and (v) payment of debt issuance costs associated with the Siena Revolver for $0.6 million.
 
For the year ended December 31, 2017, net cash provided by financing activities was primarily attributable to a public offering in February 2017 that resulted net proceeds of $15.4 million for the issuance of an aggregate of 4.9 million shares of our Common Stock. The other sources of cash from our financing activities in 2017 resulted in cash proceeds of $2.0 million from the U.S. Bank Revolver that was entered into in July 2017, and proceeds from the exercise of warrants for $0.1 million. These sources of cash from financing activities total $17.5 million and were partially offset by (i) principal payments to repay a previous revolving line of credit for $5.7 million, (ii) principal payments of $4.8 million under a mortgage that was repaid upon the sale of our building in Denver, Colorado, (iii) principal payments of $4.5 million under a note payable to the former owners of Xing Beverage LLC that was acquired in 2016, and (iv) principal payments on other installment notes payable of $0.6 million.
 
Contractual Obligations
 
The following table summarizes our contractual obligations on an undiscounted basis as of December 31, 2018, and the period in which each contractual obligation is due:
 
 
 
Year Ending December 31:
 
 
 
 
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
 
2023
 
 
Thereafter
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating lease obligations
 $6,328 
 $4,480 
 $3,040 
 $2,672 
 $2,261 
 $5,611 
 $24,392 
Earn-outs in business combinations:
    
    
    
    
    
    
    
Morinda (1)
  - 
  13,134 
  - 
  - 
  - 
  - 
  13,134 
Marley (2)
  - 
  - 
  625 
  313 
  312 
  - 
  1,250 
Payables to former Morinda stockholders:
    
    
    
    
    
    
    
Excess working capital (EWC) (3)
  9,000 
  5,463 
  - 
  - 
  - 
  - 
  14,463 
Contingent on financing event (4)
  25,000 
  - 
  - 
  - 
  - 
  - 
  25,000 
Siena Revolver (5):
    
    
    
    
    
    
    
Principal balance
  2,000 
  - 
  - 
  - 
  - 
  - 
  2,000 
Interest expense
  41 
  - 
  - 
  - 
  - 
  - 
  41 
Collateral monitoring fees
  93 
  - 
  - 
  - 
  - 
  - 
  93 
Early termination penalty
  480 
  - 
  - 
  - 
  - 
  - 
  480 
Mortgage payable to foreign bank
  1,275 
  1,353 
  - 
  - 
  - 
  - 
  2,628 
Installment notes payable
  54 
  12 
  - 
  - 
  - 
  - 
  66 
Employment agreements (6)
  1,650 
  - 
  - 
  - 
  - 
  - 
  1,650 
Open purchase orders
  4,796 
  - 
  - 
  - 
  - 
  - 
  4,796 
 
    
    
    
    
    
    
    
Total
 $50,717 
 $24,442 
 $3,665 
 $2,985 
 $2,573 
 $5,611 
 $89,993 
__________________
 
(1)
Represents the fair value of earnout consideration under the Series D Preferred Stock as discussed further in Note 3 to the consolidated financial statements included in Item 8 of this Report. The cash payment is due in the second quarter of 2020.
 
 
38
 
 
(2)
Represents the fair value of earnout consideration related to the Marley acquisition as discussed further in Note 3 to the consolidated financial statements included in Item 8 of this Report. The one-time cash payment of $1.25 million is required at such time as 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. 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 timing of payment is based on our current expectations that the net revenue threshold will be triggered during the year ending December 31, 2021.
 
(3)
Represents Excess Working Capital payments to Morinda’s stockholders as discussed further in Note 3 to the consolidated financial statements included in Item 8 of this Report. The cash payment is due for $1.0 million in April 2019, $8.0 million in July 2019, and the remainder of $5.5 million is payable in July 2020.
 
(4)
As discussed further in Note 3 to the consolidated financial statements included in Item 8 of this Report, Morinda agreed to pay its former stockholders up to $25.0 million from the net proceeds of a sale leaseback financing event to be completed after the Closing Date. The closing for this financing occurred on March 22, 2019, whereby the entire $25.0 million will be payable to Morinda’s former stockholders during the second quarter of 2019.
(5)
While the Siena Revolver was not scheduled to mature until August 2021, we terminated the facility on March 29, 2019. Accordingly, all amounts due are shown in 2019 and for purposes of the calculation of interest expense and the early termination penalty, the payments shown give effect to the termination on March 29, 2019. As discussed in Note 16 to our consolidated financial statements included in Item 8 of this Report the Siena Revolver was replaced with a new Loan Agreement for $25.0 million with East West Bank which is excluded from this table since it was entered into on March 29, 2019.
 
(6)
Consists of base salary payable to five individuals under employment agreements that renew annually for successive one-year terms, unless terminated by either party.
 
Off-Balance Sheet Arrangements
 
During the periods presented, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.
 
Critical Accounting Policies and Significant Judgments and Estimates
 
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported net revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe that of our significant accounting policies that are described in Note 2 to our consolidated financial statements included in Item 8 of this Report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. 
  
Goodwill and Intangible Assets
 
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable net assets acquired. Goodwill and other intangibles with indefinite useful lives are not amortized but tested for impairment annually or more frequently when events or circumstances indicates that the carrying value of a reporting unit more likely than not exceeds its fair value. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered more likely than not that the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill for impairment is not required. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
 
 
39
 
 
Identifiable intangible assets acquired in business combinations are recorded at the estimated acquisition date fair value. Finite lived intangible assets are amortized over the shorter of the contractual life or their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.
 
Impairment of Long-lived Assets
 
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists for property and equipment and identifiable intangible assets if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. An impairment charge is recognized for the amount by which the carrying amount of the asset, or asset group, exceeds its fair value.
 
Revenue Recognition
 
We recognize revenue when our performance obligations are satisfied. Our primary performance obligation (the distribution and sale of beverage products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. Merchandising activities that are performed after a customer obtains control of the product, are accounted for as fulfillment of our performance obligation to ship or deliver product to our customers and are recorded in selling, general and administrative expenses. Merchandising activities are immaterial in the context of our contracts.
 
The transfer of control of products to our customers is typically based on written sales terms that do not allow for a right of return. However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date products. As a result, we record reserves, based on estimates, for anticipated damaged and out-of-date products.
 
Payments received for undelivered or back-ordered products are recorded as deferred revenue. Our policy is to defer revenue related to distributor convention fees, payments received on products ordered in the current period but not delivered until the subsequent period, initial independent product consultants (“IPCs”) fees, IPC renewal fees and internet subscription fees until the products or services have been provided.
 
Stock-Based Compensation
 
We measure the cost of employee and director services received in exchange for all equity awards granted, including stock options, based on the fair market value of the award as of the grant date. We compute the fair value of options using the Black-Scholes-Merton (“BSM”) option pricing model. We recognize the cost of the equity awards over the period that services are provided to earn the award, usually the vesting period. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation.
 
 Income Taxes
 
We account for income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred income tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred income tax asset will not be realized based on the weight of available evidence, including expected future earnings.
 
We recognize an uncertain tax position in our financial statements when we conclude that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. Interest and penalties related to income taxes are recognized in the provision for income taxes.
 
 
40
 
 
Recent Accounting Pronouncements
 
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. 
 
For additional information on recently issued accounting standards and our plans for adoption of those standards, please refer to the section titled Recent Accounting Pronouncements under Note 2 to our consolidated financial statements included in Item 8 of this Report.
 
Non-GAAP Financial Measures
 
To provide investors and others with additional information regarding our results, we have disclosed certain non-GAAP financial measures as follows:
 
Gross Revenue is net revenue plus deductions for discounts and allowances (net of recoveries). Gross revenue is a key operational metric for our business because this is how we believe investors and competitors measure us and other beverage companies as with additional scale distributors and retails will have less ability to force discounts and allowances on smaller companies in the market which will help identify our full value to an investor, competitor or potential acquire.
 
EBITDA is net loss adjusted to exclude interest expense, income tax expense, and depreciation and amortization expense.
 
Adjusted EBITDA is EBITDA adjusted to exclude business combination expenses, stock-based compensation expense, losses on changes in the fair value of embedded derivatives, other non-operating income and expenses, and gains and losses from the sale of long-lived assets.
 
The primary purpose of using non-GAAP financial measures is to provide supplemental information that we believe may prove useful to investors and to enable investors to evaluate our results in the same way we do. We also present the non-GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis, as well as comparing our results against the results of other companies, by excluding items that we do not believe are indicative of our core operating performance. Specifically, we use these non-GAAP measures as measures of operating performance; to prepare our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and comparability with past financial performance; to facilitate a comparison of our results with those of other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and in communications with our board of directors concerning our financial performance. Investors should be aware however, that not all companies define these non-GAAP measures consistently.
 
 
41
 
 
We provide in the tables below a reconciliation from the most directly comparable GAAP financial measure to each non-GAAP financial measure presented. Due to a valuation allowance for our deferred tax assets, there were no income tax effects associated with any of our non-GAAP adjustments. The calculation of our Non-GAAP Financial Measures is presented below for the years ended December 31, 2018 and 2017:
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
Gross Revenue:
 
 
 
 
 
 
Net revenue
 $52,160 
 $52,188 
Non-GAAP adjustment:
    
    
Discounts and allowances, net of recoveries
  6,959 
  4,448 
 
    
    
Non-GAAP gross revenue
 $59,119 
 $56,636 
 
    
    
 
    
    
Non-GAAP EBITDA and Adjusted EBITDA reconciliation:
    
    
Net loss
 $(12,135)
 $(3,536)
Non-GAAP adjustments:
    
    
Interest expense
  1,068 
  228 
Income tax benefit
  (8,927)
  - 
Depreciation and amortization expense
  2,310 
  1,606 
 
    
    
EBITDA
  (17,684)
  (1,702)
Non-GAAP adjustments:
    
    
Business combination financial advisor and other transaction costs
  3,189 
  232 
Stock-based compensation expense
  2,533 
  1,731 
Loss from change in fair value of embedded derivatives
  470 
  - 
Other expense, net
  151 
  300 
Gain from sale of building
  - 
  (3,273)
 
    
    
Adjusted EBITDA
 $(11,341)
 $(2,712)
 
Non-GAAP Gross Revenue. For the calculation of Non-GAAP gross revenue, we exclude selling discounts and allowances when evaluating the gross amount of our revenue. Our gross revenue is an important metric because this is how we believe investors and competitors measure us and other beverage companies since with additional scale distributors and retailers will have less ability to force discounts and allowances on smaller companies in the market, which will help identify our full value to an investor, competitor or potential acquirer.
 
EBITDA and Adjusted EBITDA. EBITDA is defined as net income (loss) adjusted to exclude GAAP amounts for interest expense, income tax expense, and depreciation and amortization expense. For the calculation of Adjusted EBITDA, we also exclude the following items for the periods presented:
 
Business Combination Expenses: Financial advisory fees, due diligence costs and other professional fees incurred in connection with business combinations are excluded, them since they do not relate to our core business activities.
 
 
42
 
 
Stock-Based Compensation Expense: Our compensation strategy includes the use of stock-based compensation to attract and retain employees, directors and consultants. This strategy is principally aimed at aligning the employee interests with those of our stockholders and to achieve long-term employee retention, rather than to motivate or reward operational performance for any particular period. As a result, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.
 
Loss on Change in Fair Value of Embedded Derivatives: Our Siena Revolver credit facility includes features that were determined to be embedded derivatives requiring bifurcation and accounting as separate financial instruments. We have excluded this loss related to the changes in fair value of embedded derivatives given the nature of the fair value requirements. We are not able to manage these amounts as part of our business operations nor are the losses part of our core business activities, so we have excluded them.
 
Other Non-operating Income and Expense: Other non-operating income and expenses are excluded since they typically do not relate to our core business activities.
 
Gain from the Sale of Long-lived Assets: Gain from the sale of buildings and other long-lived assets are excluded since they do not relate to our core business activities.
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
  
 
43
 

Item 8.   Financial Statements and Supplementary Data.
 
TABLE OF CONTENTS
 
      
 Page
Report of Independent Registered Public Accounting Firm 
 45
Financial Statements:
 
            Consolidated balance sheets as of December 31, 2018 and 2017
 46
            Consolidated statements of operations and comprehensive loss for the years ended December 31, 2018 and 2017
 47
            Consolidated statements of stockholders’ equity for the years ended December 31, 2018 and 2017
 48
            Consolidated statements of cash flows for the years ended December 31, 2018 and 2017
 49
            Notes to consolidated financial statements
 51
 
 
 
 
 
 
 
 
 
 
 
 
 
 
44
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders
New Age Beverages Corporation
 
Opinion on the Consolidated Financial Statements
 
We have audited the accompanying consolidated balance sheets of New Age Beverages Corporation (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ Accell Audit & Compliance, P.A.
 
 
We have served as the Company’s auditor since 2016.
 
 
Tampa, Florida
 
April 1, 2019
 
 
45
NEW AGE BEVERAGES CORPORATION  
 
Consolidated Balance Sheets
December 31, 2018 and 2017
(In thousands, except par value per share amounts)
 
ASSETS
 
2018
 
 
2017
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $42,517 
 $285 
Accounts receivable, net of allowance of $134 and $52, respectively
  9,837 
  7,462 
Inventories
  37,148 
  7,042 
Prepaid expenses and other
  6,473 
  1,435 
Total current assets
  95,975 
  16,224 
 
    
    
Long-term assets:
    
    
Identifiable intangible assets, net
  67,830
 
  23,556 
Property and equipment, net
  57,281 
  1,895 
Goodwill
  31,514
 
  21,230 
Right-of-use lease assets
  18,489
 
  4,065
 
Deferred income taxes 
   8,908
 
  -
 
Restricted cash and other
  6,935
 
  702
 
Total assets
 $286,932
 
 $67,672 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $8,960
 
 $4,370
 
Accrued liabilities
  34,019
 
  2,394
 
Current portion of business combination liabilities
  8,718
 
  -
 
Current maturities of long-term debt 
  3,369
 
  3,549
 
Total current liabilities
  55,066
 
  10,313 
 
    
    
Long-term liabilities:
    
    
Business combination liabilities, net of current portion
  43,412 
  800 
Long-term debt, net of current maturities
  1,325 
  - 
Right-of-use lease liability, net of current portion
  13,686
 
  3,821 
Deferred income taxes
  9,747
 
  - 
Other
  9,160
 
  - 
Total liabilities
  132,396
 
  14,934 
 
    
    
Commitments and contingencies (Note 11)
    
    
 
    
    
Stockholders’ equity:
    
    
Series B Preferred stock, $0.001 par value per share. Authorized 300 shares;
    
    
169 shares issued and outstanding in 2017 (none in 2018)
  - 
  - 
Common Stock; $0.001 par value. Authorized 100,000 shares; issued and outstanding
    
    
75,067 and 35,172 shares as of December 31, 2018 and 2017, respectively
  75 
  35 
Additional paid-in capital
  176,471 
  63,204 
Accumulated other comprehensive income
  626 
  - 
Accumulated deficit
  (22,636)
  (10,501)
Total stockholders’ equity
  154,536 
  52,738 
Total liabilities and stockholders’ equity
 $286,932
 
 $67,672 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
46
NEW AGE BEVERAGES CORPORATION  
 
Consolidated Statements of Operations and Comprehensive Loss
 Years Ended December 31, 2018 and 2017
(In thousands, except loss per share amounts)
 
 
 
2018
 
 
2017
 
Net revenue
 $52,160 
 $52,188 
Cost of goods sold
  42,865 
  39,788 
Gross profit
  9,295 
  12,400 
 
    
    
Operating expenses:
    
    
Commissions
  2,781 
  1,456 
Selling, general and administrative
 20,288
  15,387 
Business combination expenses:
    
    
Financial advisor and other transaction costs
  3,189 
  232 
Change in fair value of earnout obligations
  100 
  - 
Depreciation and amortization expense
 2,310
  1,606 
Total operating expenses
  28,668
  18,681 
Operating loss
  (19,373)
  (6,281)
 
    
    
Non-operating income (expenses):
    
    
Interest expense
  (1,068)
  (228)
Loss from change in fair value of embedded derivatives
  (470)
  - 
Other expense, net
  (151)
  (300)
Gain from sale of building
  - 
  3,273 
Loss before income taxes
  (21,062)
  (3,536)
Income tax benefit
 8,927
  - 
Net loss
  (12,135)
  (3,536)
Other comprehensive income:
    
    
Foreign currency translation adjustments, net of tax
  626 
  - 
Comprehensive loss
 $(11,509)
 $(3,536)
 
    
    
Net loss per share attributable to common stockholders (basic and diluted)
 $(0.26)
 $(0.12)
Weighted average number of shares of Common Stock outstanding (basic and diluted)
  46,448 
  30,617 
  
The accompanying notes are an integral part of these consolidated financial statements.
 
 
47
NEW AGE BEVERAGES CORPORATION  
 
Consolidated Statements of Stockholders’ Equity
 Years Ended December 31, 2018 and 2017
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
 
 
 
 
 Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
 Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2016
  535 
 $1 
  21,900 
 $22 
 $11,821 
 $- 
 $(6,965)
 $4,879 
    Issuance of Common Stock in:
    
    
    
    
    
    
    
    
        Public offering
  - 
  - 
  4,929 
  5 
  15,394 
  - 
  - 
  15,399 
        Business combinations:
    
    
    
    
    
    
    
    
            Maverick Brands, LLC
  - 
  - 
  2,200 
  2 
  9,084 
  - 
  - 
  9,086 
            Marley Beverage Company, LLC
  - 
  - 
  3,000 
  3 
  18,597 
  - 
  - 
  18,600 
            PMC Holdings, Inc.
  - 
  - 
  1,200 
  1 
  5,495 
  - 
  - 
  5,496 
    Restricted stock awards and other services
  - 
  - 
  645 
  1 
  2,501 
  - 
  - 
  2,502 
    Stock-based compensation
  - 
  - 
  - 
  - 
  162 
  - 
  - 
  162 
    Issuance of shares upon exercise of warrants
  - 
  - 
  373 
  - 
  150 
  - 
  - 
  150 
    Conversion of Series B Preferred Stock
  (116)
  (1)
  925 
  1 
  - 
  - 
  - 
  - 
    Recission of Series A Preferred Stock
  (250)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (3,536)
  (3,536)
 
    
    
    
    
    
    
    
    
Balances, December 31, 2017
  169 
  - 
  35,172 
  35 
  63,204 
  - 
  (10,501)
  52,738 
    Issuance of Common Stock for:
    
    
    
    
    
    
    
    
        Conversion of Series B Preferred Stock
  (169)
  - 
  1,354 
  1 
  (1)
  - 
  - 
  - 
        Conversion of Series B promissory notes
  - 
  - 
  794 
  1 
  1,487 
  - 
  - 
  1,488 
        Public offerings, net of offering costs
  - 
  - 
  34,684 
  35 
  97,606 
  - 
  - 
  97,641 
        Debt issuance costs
  - 
  - 
  226 
  - 
  470 
  - 
  - 
  470 
        Transaction costs in business combination
  - 
  - 
  214 
  - 
  1,166 
  - 
  - 
  1,166 
        Cashless exercise of stock options and warrants
  - 
  - 
  449 
  1 
  (1)
  - 
  - 
  - 
        Grant of restricted stock awards, net of forfeitures
  - 
  - 
  158 
  - 
  353 
  - 
  - 
  353 
Common Stock exchanged for Series C Preferred Stock
  7 
  - 
  (6,900)
  (7)
  - 
  - 
  - 
  (7)
Series C Preferred Stock converted to Common Stock
  (7)
  - 
  6,900 
  7 
  - 
  -