10-Q 1 nbev_10q.htm QUARTERLY REPORT Blueprint
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended March 31, 2019
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Transition Period from                             to                            
 
Commission File Number: 001-38014
 
 
New Age Beverages Corporation
 
 
(Exact Name of Small Business Issuer as Specified in its Charter)
 
 
Washington
 
27-2432263
(State or other jurisdiction of 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
 
 Not Applicable
(Former name or former address, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESNO
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESNO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
            Large accelerated filer
                      Accelerated filer
            Non-accelerated filer
                      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 ☑
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Ticker symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per share
NBEV
The Nasdaq Capital Market
 
The registrant had 75,392,742 shares of its $0.001 par value common stock outstanding as of May 6, 2019. 
 

 
 
NEW AGE BEVERAGES CORPORATION
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
PART I - FINANCIAL INFORMATION
 
ITEM 1. Financial Statements.
 
NEW AGE BEVERAGES CORPORATION
 
Unaudited Condensed Consolidated Balance Sheets
 (In thousands, except par value per share amounts)
 
  
 
 
March 31,
 
 
December 31,
 
ASSETS
 
2019
 
 
2018
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $109,956 
 $42,517 
Accounts receivable, net of allowance of $107 and $134, respectively
  9,450 
  9,837 
Inventories
  39,618 
  37,148 
Prepaid expenses and other
  6,607 
  6,473 
Total current assets
  165,631 
  95,975 
 
    
    
Long-term assets:
    
    
Identifiable intangible assets, net
  66,553 
  67,830 
Property and equipment, net
  27,159 
  57,281 
Goodwill
  31,514 
  31,514 
Right-of-use lease assets
  29,704 
  18,489 
Deferred income taxes
  20,534 
  8,908 
Restricted cash and other
  8,356 
  6,935 
 
    
    
Total assets
 $349,451 
 $286,932 
 
    
    
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $11,971
 
 $8,960 
Accrued liabilities
  45,386
 
  34,019 
Current portion of business combination liabilities
  33,608 
  8,718 
Current maturities of long-term debt
  10,790
 
  3,369 
Total current liabilities
  101,755
 
  55,066 
 
    
    
Long-term liabilities:
    
    
Business combination liabilities, net of current portion
  19,087 
  43,412 
Long-term debt, net of current maturities
  13,716
 
  1,325 
Right-of-use liabilities, net of current portion:
    
    
Lease liability
  25,005 
  13,686 
Deferred lease incentive obligation
  16,758 
  - 
Deferred income taxes
  7,457 
  9,747 
Other
  9,205
 
  9,160 
Total liabilities
  192,983
 
  132,396 
 
    
    
Commitments and contingencies (Note 11)
    
    
 
    
    
Stockholders’ equity:
    
    
Common Stock; $0.001 par value. Authorized 100,000 shares; issued and outstanding
    
    
75,393 and 75,067 shares as of March 31, 2019 and December 31, 2018, respectively
  75 
  75 
Additional paid-in capital
  179,592 
  176,471 
Accumulated other comprehensive loss
  1,053 
  626 
Accumulated deficit
  (24,252)
  (22,636)
Total stockholders' equity
  156,468
 
  154,536 
 
    
    
Total liabilities and stockholders' equity
 $349,451 
 $286,932 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
2
NEW AGE BEVERAGES CORPORATION
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
 Three Months Ended March 31, 2019 and 2018
(In thousands, except loss per share amounts)
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Net revenue
 $58,307 
 $11,558 
Cost of goods sold
  19,731 
  8,942 
 
    
    
Gross profit
  38,576 
  2,616 
 
    
    
Operating expenses:
    
    
Commissions
  18,038 
  327 
Selling, general and administrative
  26,842 
  4,256 
Change in fair value of Marley earnout obligation
  - 
  100 
Depreciation and amortization expense
  2,236 
  521 
 
    
    
Total operating expenses
  47,116 
  5,204 
 
    
    
Operating loss
  (8,540)
  (2,588)
 
    
    
Non-operating income (expenses):
    
    
Gain from sale of land and building
  6,442 
  - 
Interest expense
  (1,646)
  (56)
Other debt financing expenses
  (224)
  - 
Gain from change in fair value of embedded derivatives
  470 
  - 
Other income (expense), net
  182 
  (7)
 
    
    
Loss before income taxes
  (3,316)
  (2,651)
Income tax benefit
  1,700 
  - 
 
    
    
Net loss
  (1,616)
  (2,651)
Other comprehensive income:
    
    
Foreign currency translation adjustments, net of tax
  427 
  - 
 
    
    
Comprehensive loss
 $(1,189)
 $(2,651)
 
    
    
Net loss per share attributable to common stockholders (basic and diluted)
 $(0.02)
 $(0.07)
 
    
    
Weighted average number of shares of Common Stock outstanding (basic and diluted)
  75,226 
  36,197 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3
NEW AGE BEVERAGES CORPORATION
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
 Three Months Ended March 31, 2019 and 2018
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
 
 
 
 
     Preferred Stock  
 
 
Common Stock
 
 
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
 
 
 
 Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
 Deficit
 
 
Total
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2018
  - 
 $- 
  75,067 
 $75 
 $176,471 
 $626 
 $(22,636)
 $154,536 
Issuance of Common Stock for:
    
    
    
    
    
    
    
    
Exercise of stock options
  - 
  - 
  200 
  - 
  418 
  - 
  - 
  418 
Grant of restricted stock awards
  - 
  - 
  126 
  - 
  576 
  - 
  - 
  576 
Stock-based compensation expense
  - 
  - 
  - 
  - 
  2,127 
  - 
  - 
  2,127 
Net change in other comprehensive income
  - 
  - 
  - 
  - 
  - 
  427 
  - 
  427 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (1,616)
  (1,616)
 
    
    
    
    
    
    
    
    
Balances, March 31, 2019
  - 
 $- 
  75,393 
 $75 
 $179,592 
 $1,053 
 $(24,252)
 $156,468 
 
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
Three Months Ended March 31, 2018
    
    
    
    
    
    
    
    
Balances, December 31, 2017
  169 
 $- 
  35,172 
 $35 
 $63,204 
 $- 
 $(10,501)
 $52,738 
Issuance of Common Stock for:
    
    
    
    
    
    
    
    
Conversion of Series B Preferred Stock
  (169)
  - 
  1,354 
  1 
  (1)
  - 
  - 
  - 
Grant of restricted stock awards
  - 
  - 
  123 
  - 
  260 
  - 
  - 
  260 
Stock-based compensation related to stock options
 -
 -
  - 
  - 
  157 
  - 
  - 
  157 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (2,651)
  (2,651)
 
    
    
    
    
    
    
    
    
Balances, March 31, 2018
  - 
 $- 
  36,649 
 $36 
 $63,620 
 $- 
 $(13,152)
 $50,504 
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4
NEW AGE BEVERAGES CORPORATION
 
Unaudited Condensed Consolidated Statements of Cash Flows
 Three Months Ended March 31, 2019 and 2018
(In thousands)
 
 
 
2019
 
 
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(1,616)
 $(2,651)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
    
    
Stock-based compensation expense
  3,287 
  377 
Depreciation and amortization
  2,236 
  521 
Accretion and amortization of debt discount and issuance costs
  1,113 
  - 
Make-whole premium on early payment of Siena Revolver
  480 
  - 
Deferred income taxes
  (13,916)
  - 
Gain from sale of land and building
  (6,442)
  - 
Gain from change in fair value of embedded derivatives
  (470)
  - 
Change in fair value of contingent consideration payable in business combination
  - 
  100 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  387 
  746 
Inventories
  (2,470)
  (319)
Prepaid expenses, deposits and other
  122 
  (266)
Accounts payable
  2,231 
  (1,334)
Other accrued liabilities
  8,857 
  2,699 
Deferred lease incentive obligation
  17,640 
  - 
 
    
    
Net cash provided by (used in) operating activities
  11,439 
  (127)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Net proceeds from sale of land and building:
    
    
Related to sale of the property
  31,445 
  - 
Repair obligations
  1,675 
    
Capital expenditures for property and equipment
  (283)
  (64)
 
    
    
Net cash provided by (used in) investing activities
  32,837 
  (64)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Proceeds from borrowings
  31,978 
  - 
Principal payments on borrowings
  (9,686)
  - 
Proceeds from exercise of stock options
  418 
  - 
Debt issuance costs paid
  (40)
  - 
 
    
    
Net cash provided by financing activities
  22,670 
  - 
 
    
    
Effect of foreign currency translation changes
  566 
  - 
 
    
    
Net change in cash, cash equivalents and restricted cash
  67,512 
  (191)
Cash, cash equivalents and restricted cash at beginning of period
  45,856 
  285 
 
    
    
Cash, cash equivalents and restricted cash at end of period
 $113,368 
 $94 

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

 
5
NEW AGE BEVERAGES CORPORATION
 
Unaudited Condensed Consolidated Statements of Cash Flows, Continued
 Three Months Ended March 31, 2019 and 2018
(In thousands)
 
 
 
2019
 
 
2018
 
SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
 
 
 
 
 
 
Cash and cash equivalents at end of period
 $109,956 
 $94 
Restricted cash at end of period
  3,412 
  - 
 
    
    
Total at end of period
 $113,368 
 $94 
 
    
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    
    
Cash paid for interest
 $55 
 $57 
Cash paid for income taxes
 $1,200 
 $- 
Cash paid under right-of-use operating lease obligations
 $1,874 
 $193 
 
    
    
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
    
    
FINANCING ACTIVITIES:
    
    
Siena Revolver payments from borrowings under EWB Credit Facility:
    
    
Principal payment
 $1,944 
 $- 
Make-whole premium
  480 
  - 
Total
 $2,424 
 $- 
 
    
    
Repayment of mortgage from proceeds from sale of land and building
 $2,628 
 $- 
Restricted stock granted for prepaid compensation
 $576 
 $353 
Debt issuance costs paid from proceeds of borrowings
 $210 
 $170 
Increase in payables for capital expenditures
 $128 
 $- 
Increase in payables for debt discount and issuance costs
 $654 
 $- 
Right-of-use lease assets acquired in exchange for operating lease obligations
 $11,411 
 $214 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
6
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Nature of Operations and Segments
 
New Age Beverages Corporation (the “Company”) was formed under the laws of the State of Washington on April 26, 2010. On December 21, 2018, the Company completed a business combination with Morinda Holdings, Inc., a Utah corporation (“Morinda”), whereby Morinda became a wholly-owned subsidiary of the Company. For further information about the Morinda business combination, please refer to Note 3.
 
The Company’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reporting segment for purposes of making operating decisions and assessing financial performance. As a result of the business combination with Morinda, the Company changed its operating segments to consist of the Morinda segment and the New Age segment beginning in December 2018. After the Morinda business combination, the Company’s CODM began assessing performance and allocating resources based on the financial information of these two reporting segments. The New Age segment was previously comprised of the Brands segment and the DSD segment which are now combined as a single segment as they are operating with a single management team. Accordingly, the Company’s previous segment disclosures have been restated for the three months ended March 31, 2018.
 
The Morinda segment is engaged in the development, manufacturing, and marketing of Tahitian Noni® Juice, MAX and other noni beverages as well as other nutritional, cosmetic and personal care products. The majority of Morinda’s products have a component of the Noni plant, Morinda Citrifolia (“Noni”) as a common element. The Morinda products are sold and distributed in more than 60 countries throughout the world using independent product distributors through a direct to consumer selling network. The New Age segment manufactures, markets and sells a portfolio of healthy beverage brands including XingTea, Marley, Aspen Pure®, Búcha® Live Kombucha, and Coco-Libre. The portfolio is distributed through the Company’s own Direct Store Distribution (“DSD”) network and a hybrid of other routes to market throughout the United States and in 15 countries around the world. The New Age brands are sold in all channels of distribution including Hypermarkets, Supermarkets, Pharmacies, Convenience, Gas and other outlets.
 
Legal Structure and Consolidation
 
The Company has four wholly-owned subsidiaries, NABC, Inc., NABC Properties, LLC (“NABC Properties”), New Age Health Sciences Holdings, Inc., and Morinda. NABC, Inc. is a Colorado-based operating company that consolidates performance and financial results of the Company’s subsidiaries and divisions. NABC Properties manages leasing and ownership issues for the Company’s buildings and warehouses (except for those owned or leased by Morinda), and New Age Health Sciences owns the Company’s intellectual property, and manages operating performance in the medical and hospital channels.
 
Basis of Presentation 
 
The unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All significant intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial statements for the three months ended March 31, 2019 should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended December 31, 2018, included in the Company’s 2018 Annual Report on Form 10-K as filed with the SEC on April 1, 2019 (the “2018 Form 10-K”).
 
The accompanying condensed consolidated balance sheet and related disclosures as of December 31, 2018 have been derived from the Company’s audited financial statements. The Company’s financial condition as of March 31, 2019, and operating results for the three months ended March 31, 2019 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2019.
 
 
7
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
Emerging Growth Company
 
The accompanying unaudited condensed consolidated financial statements and related footnotes have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”). The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. The Company previously elected to opt out of the extended transition period to adopt new or revised accounting standards. Therefore, the Company is required to adopt such standards at the same time as other public companies that are not emerging growth companies. The Company currently expects to retain its status as an emerging growth company until the year ending December 31, 2021, but this status could end sooner under certain circumstances.
 
Reclassifications
 
Certain amounts in the 2018 financial statements have been reclassified to conform to the current period financial statement presentation. These reclassifications had no effect on the previously reported net loss, working capital, cash flows and stockholders’ equity.
 
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of financial statements and related disclosures in conformity with GAAP requires the Company to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, estimated useful lives for identifiable intangible assets and property and equipment, impairment of goodwill and long-lived assets, valuation assumptions for stock options, warrants and equity instruments issued for goods or services, the allowance for doubtful accounts receivable, inventory obsolescence, the allowance for sales returns and chargebacks, deferred income taxes and the related valuation allowances, and the evaluation and measurement of contingencies. To the extent there are material differences between the Company’s estimates and the actual results, the Company’s future consolidated results of operation will be affected.
 
Risks and Uncertainties
 
Inherent in the Company’s business are various risks and uncertainties, including its limited operating history in a rapidly changing industry. These risks include the Company’s ability to manage its rapid growth and its ability to attract new customers and expand sales to existing customers, risks related to litigation, as well as other risks and uncertainties. In the event that the Company does not successfully execute its business plan, certain assets may not be recoverable, certain liabilities may not be paid and investments in its capital stock may not be recoverable. The Company’s success depends upon the acceptance of its expertise in creating products and brands which consumers like and want to buy, development of sales and distribution channels, and its ability to generate significant net revenue and cash flows from the use of this expertise.
 
Recent Accounting Pronouncements
 
Standards Required to be Adopted in Future Years. The following accounting standards are not yet effective; management has not completed its evaluation to determine the impact that adoption of these standards will have on the Company’s consolidated financial statements.
 
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  ASU 2016-13 amends the guidance on the impairment of financial instruments.  This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses.  Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses.  In November 2018, ASU 2016-13 was amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. ASU 2018-19 changes the effective date of the credit loss standards (ASU 2016-13) to fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC 326-20 and should instead be accounted for under the new leasing standard, ASC 842.   The Company has not yet determined the effect that ASU 2018-19 will have on its results operations, balance sheets or financial statement disclosures.
 
 
8
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this ASU, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
 
NOTE 3 —MORINDA BUSINESS COMBINATION
 
On December 2, 2018, the Company entered into a Plan of Merger (the “Merger Agreement”) with Morinda and New Age Health Sciences Holdings, Inc., a newly formed Utah corporation and wholly-owned subsidiary of the Company (“Merger Sub”). On December 21, 2018 (the “Closing Date”), the transactions contemplated by the Merger Agreement were completed. Merger Sub was merged with and into Morinda and Morinda became a wholly-owned subsidiary of the Company. This transaction is referred to herein as the “Merger”.
 
Pursuant to the Merger Agreement, Morinda’s equity holders received (i) $75.0 million in cash; (ii) 2,016,480 shares of the Company’s Common Stock with an estimated fair value on the closing Date of approximately $11.0 million, (iii) 43,804 shares of Series D Preferred Stock (the “Preferred Stock”) providing for the potential payment of up to $15.0 million contingent upon Morinda achieving certain post-closing milestones, as discussed below. 
 
Pursuant to the Certificate of Designations of Series D Preferred Stock (the “CoD”), the holders of the Preferred Stock are entitled to receive a dividend of up to an aggregate of $15.0 million (the “Milestone Dividend”) if the Adjusted EBITDA (as defined in the CoD) of Morinda is at least $20.0 million for the year ending December 31, 2019. The Milestone Dividend is payable on April 15, 2020. If the Adjusted EBITDA of Morinda is less than $20.0 million, the Milestone Dividend shall be reduced by applying a five-times multiple to the difference between the Adjusted EBITDA target of $20.0 million and actual Adjusted EBITDA for the year ending December 31, 2019. Accordingly, no Milestone Dividend is payable if actual Adjusted EBITDA is $17.0 million or lower. As of March 31, 2019 and December 31, 2018, the estimated fair value of the Milestone Dividend earnout was approximately $13.1 million and is included in long-term business combination liabilities in the accompanying unaudited condensed consolidated balance sheets.
 
The Series D Preferred Stock provides for quarterly dividends to the holders of the Preferred Stock at a rate of 1.5% per annum of the Milestone Dividend amount, payable on a pro rata basis. The Company may pay the Milestone Dividend and /or the annual dividend in cash or in kind, provided that if the Company chooses to pay in kind, the shares of Common Stock issued as payment therefore must be registered under the Securities Act of 1933, as amended (the “Securities Act”). The Preferred Stock shall terminate on April 15, 2020. These quarterly dividends will be reflected as an adjustment to the fair value of the Milestone Dividend earnout liability as the quarterly dividends are settled in future periods.
 
Prior to the Merger, Morinda was an S corporation for U.S. federal and state income tax purposes. Accordingly, Morinda’s taxable earnings were reported on the individual income tax returns of the stockholders who were responsible for payment of the related income tax liabilities. In December 2018, Morinda agreed to distribute to its stockholders approximately $39.6 million of its previously-taxed S corporation earnings whereby distributions are payable (i) up to $25.0 million for which the timing and amount are subject to a future financing event, and (ii) approximately $14.6 million based on the calculation of excess working capital (“EWC”) as of the Closing Date. EWC is the amount by which Morinda’s actual working capital (as defined in the Merger Agreement) on the Closing Date exceeds $25.0 million. The Closing Date balance sheet of Morinda indicated that EWC was approximately $14.6 million as of the Closing Date.
 
 
 
9
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Business Combination Liabilities
 
Presented below is a summary of the earnout obligations related to the Morinda and Marley business combinations and payables to the former Morinda stockholders as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Marley earnout obligation
 $900(1)
 $900(1)
Payables to former Morinda stockholders:
    
    
EWC payable in April 2019
  1,000(2)(5)
  986(2)(5)
EWC payable in July 2019
  7,847(2)(5)
  7,732(2)(5)
EWC payable in July 2020
  5,053(2)(5)
  4,976(2)(5)
Earnout under Series D preferred stock
  13,134(3)
  13,134(3)
Contingent on financing event
  24,761(4)(5)
  24,402(4)(5)
Total
  52,695 
  52,130 
Less current portion
  33,608(4)
  8,718 
 
    
    
Long-term portion
 $19,087 
 $43,412 
_____________
 
(1) 
The Company is obligated to make a one-time earnout payment of $1.25 million over a period of two years beginning at such time that revenue for the Marley reporting unit is equal to or greater than $15.0 million during any trailing twelve calendar month period after the closing. Revenue for the Marley brand is not expected to exceed the $15.0 million earnout threshold during 2019. The fair value of the earnout was valued using the weighted average return on assets whereby the fair value increased from $0.8 million to $0.9 million during the first quarter of 2018. The increase in the fair value of the earnout of $0.1 million was recognized as an expense in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2018.
(2) 
Pursuant to a separate agreement between the parties, EWC is payable to Morinda’s stockholders for $1.0 million in April 2019, $8.0 million in July 2019, and the remainder of $5.5 million is payable in July 2020.
(3) 
The fair value of earnout consideration under the Series D Preferred Stock is based on the probability of achieving the Milestone Dividend, whereby the maximum Milestone Dividend is $15.0 million if the Adjusted EBITDA of Morinda is $20.0 million or more for the year ending December 31, 2019. The fair value of the earnout of $13.1 million was determined using an option pricing model and will be adjusted as additional information becomes available about the progress toward achievement of the Milestone Dividend earnout.
(4) 
Pursuant to a separate agreement between the parties, prior to the consummation of the Merger, Morinda agreed to pay its former stockholders up to $25.0 million from the net proceeds of a sale leaseback to be completed after the Closing Date. As discussed in Note 6, the closing for this transaction occurred on March 22, 2019. Since this payment was to be made from the proceeds of a long-term financing, the net carrying value was classified in long-term liabilities in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2018. Due to completion of the sale leaseback in March 2019, the obligation to pay $25.0 million is included in current liabilities in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019.
(5) 
Interest was imputed on these obligations based on a credit and tax adjusted interest rate of 6.1% for the period from the Closing Date until the respective contractual or estimated payment dates. Accretion of discount related to these obligations amounted to an aggregate of $0.6 million for the three months ended March 31, 2019, which is included in interest expense in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss.
 
 
10
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Pro Forma Disclosures
 
The following unaudited pro forma financial results reflects the historical operating results of the Company, including the unaudited pro forma results of Morinda for the three months ended March 31, 2018, as if this business combination had occurred as of January 1, 2018. The pro forma financial information set forth below reflects adjustments to the historical data of the Company to give effect to the Morinda acquisition and the related equity issuances as if each had occurred on January 1, 2018. The pro forma information presented below does not purport to represent what the actual results of operations would have been for the period indicated, nor does it purport to represent the Company’s future results of operations. The following table summarizes on an unaudited pro forma basis the Company’s results of operations for the three months ended March 31, 2018 (in thousands, except per share amounts):
 
Net revenue
 $66,781 
Net loss
 $(1,645)
Net loss per share- basic and diluted
 $(0.04)
Weighted average number of shares of common stock outstanding- basic and diluted
  38,427 
 
The calculations of pro forma net revenue and pro forma net loss give effect to the Morinda business combination for the three months ended March 31, 2018 based on (i) the historical net revenue and net income (loss), as applicable, of Morinda, (ii) incremental depreciation and amortization for Morinda based on the fair value of property, equipment and identifiable intangible assets acquired and the related estimated useful lives, and (iii) recognition of accretion of discounts on obligations with extended payment terms that were assumed in the Morinda business combination.
 
NOTE 4 — OTHER INFORMATION 
 
Inventories
 
Inventories consist of the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Raw materials
 $14,302 
 $12,538 
Work-in-process
  871 
  907 
Finished goods
  24,445 
  23,703 
 
    
    
Total inventories
 $39,618 
 $37,148 
 
In connection with the Morinda business combination discussed in Note 3, the fair value of work-in-process and finished goods inventories on the Closing Date exceeded the historical carrying value by approximately $2.2 million. This amount represented an element of built-in profit on the Closing Date that is being charged to cost of goods sold as the related inventories are sold. For the three months ended March 31, 2019, a portion of the Closing Date inventories were sold which resulted in a charge to cost of goods sold of approximately $0.8 million. The remaining Closing Date built-in profit of $1.4 million is expected to be charged to cost of goods sold by the third quarter of 2019.
 
Prepaid Expenses and Other Current Assets
 
As of March 31, 2019 and December 31, 2018, prepaid expenses and other current assets consist of the following (in thousands):
  
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Prepaid expenses and deposits
 $5,747 
 $4,982 
Prepaid stock-based compensation
  543 
  347 
Supplier and other receivables
  317 
  1,144 
 
    
    
Total
 $6,607 
 $6,473 
 
 
11
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Property and Equipment
 
As of March 31, 2019 and December 31, 2018, property and equipment consisted of the following (in thousands):
  
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Land
 $37 
 $25,726 
Buildings and improvements
  16,865 
  19,822 
Leasehold improvements
  3,189 
  4,398 
Machinery and equipment
  5,311 
  5,208 
Office furniture and equipment
  2,161 
  2,087 
Transportation equipment
  1,820 
  1,727 
Total property and equipment
  29,383 
  58,968 
Less accumulated depreciation
  (2,224)
  (1,687)
 
    
    
Property and equipment, net
 $27,159 
 $57,281 
 
Depreciation and amortization expense related to property and equipment amounted to $0.9 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively. Repairs and maintenance costs amounted to $0.6 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively.
 
Restricted Cash and Other
 
As of March 31, 2019 and December 31, 2018, restricted cash and other long-term assets consist of the following (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Restricted cash
 $3,412(1)
 $3,339(1)
Debt issuance costs, net
  362 
  548 
Prepaid stock-based compensation
  - 
  210 
Deposits and other
  4,582 
  2,838 
 
    
    
Total
 $8,356 
 $6,935 
______________
 
(1) 
Restricted cash primarily represents long-term cash deposits held in a bank for a foreign governmental agency. This deposit is required to maintain the Company’s direct selling license to do business in China.
 
Other Accrued Liabilities
 
As of March 31, 2019 and December 31, 2018, other accrued liabilities consist of the following (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Accrued commissions
 $7,223 
 $9,731 
Accrued compensation and benefits
  3,942
  4,715 
Accrued marketing events
  5,318(1)
  3,757(1)
Deferred revenue
  2,469 
  2,701 
Income taxes payable
  12,956(2)
  1,670 
Current portion of right of use liabilities:
    
    
Lease liability
  4,783 
  4,798 
Deferred lease incentive obligation
  882 
  - 
Restricted stock obligations
  570(3)
  - 
Embedded derivative liability
  - 
  470 
Other accrued liabilities
  7,243
  6,177 
 
    
    
Total other accrued liabilities
 $45,386
 $34,019 
 
 
 
12
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
_________________
 
(1) 
Represents accruals for incentive trips associated with Morinda’s direct sales marketing program, which rewards certain IPCs with paid attendance at future conventions, meetings, and retreats. Expenses associated with incentive trips are accrued over qualification periods as they are earned. Incentive trip accruals are based on historical experience in relation to current sales trends in order to determine the related contractual obligations.
(2) 
Includes approximately $11.9 million of income taxes payable in Japan related to the gain on sale of the land and building in Tokyo as discussed further in Note 6.
(3) 
Represents the fair value of restricted stock awards required to be settled in cash as discussed in Note 9.
 
NOTE 5 — GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
 
Goodwill
 
Goodwill consists of the following by reporting unit as of March 31, 2019 and December 31, 2018 (in thousands):
 
Reporting Unit
 

 
 
 
 
 
Morinda
 $10,284 
Maverick
  5,149 
PMC
  1,768 
Marley
  9,418 
Xing
  4,506 
B&R
  389 
 
    
Total Goodwill
 $31,514 
 
Identifiable Intangible Assets
 
As of March 31, 2019 and December 31, 2018, identifiable intangible assets consist of the following (in thousands):
 
 
 
March 31, 2019
 
 
December 31, 2018
 
 
 
 
 
 
Accumulated
 
 
Net Book
 
 
 
 
 
Accumulated
 
 
Net Book
 
Identifiable Intangible Asset
 
Cost
 
 
Amortization
 
 
Value
 
 
Cost
 
 
Amortization
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
License agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
China direct selling license
 $20,420 
 $380 
 $20,040 
 $20,420 
 $40 
 $20,380 
Other
  5,989 
  417 
  5,572 
  5,989 
  318 
  5,671 
Manufacturing processes and recipes
  11,610 
  577 
  11,033 
  11,610 
  380 
  11,230 
Trade names
  12,301 
  796 
  11,505 
  12,301 
  584 
  11,717 
IPC distributor sales force
  9,760 
  273 
  9,487 
  9,760 
  29 
  9,731 
Customer relationships
  6,444 
  1,296 
  5,148 
  6,444 
  1,194 
  5,250 
Patents
  4,100 
  501 
  3,599 
  4,100 
  433 
  3,667 
Former Morinda shareholder non-compete agreements
  186 
  17 
  169 
  186 
  2 
  184 
 
    
    
    
    
    
    
Total identifiable intangible assets
 $70,810 
 $4,257 
 $66,553 
 $70,810 
 $2,980 
 $67,830 
 
Amortization expense related to identifiable intangible assets was $1.3 million and $0.4 million for the three months ended March 31, 2019 and 2018, respectively. In order to more closely reflect the estimated economic life of the license agreement acquired in the June 2017 acquisition of Marley, the Company revised the estimated useful life from 42 years to 15 years during the fourth quarter of 2018. For the three months ended March 31, 2019 and 2018, total amortization expense related to this license agreement was approximately $0.1 million and $36,000, respectively.
 
 
13
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Estimated amortization expense for the Company’s identifiable intangible assets for the next five years is set forth below (in thousands):
  
12 months ending March 31:
 
 
 
 
 
 
 
2020
 $4,778 
2021
  4,778 
2022
  4,761 
2023
  4,716 
2024
  4,716 
Thereafter
  42,804 
 
    
Total
 $66,553 
 
Docklight Agreement
 
On January 14, 2019, the Company entered into an agreement with Docklight LLC for the exclusive licensing rights in the United States for the manufacturing, sale, distribution, marketing and advertising of certain products which include shelf-stable, ready to drink, non-alcoholic, consumer beverages infused with Cannabidiol derived from hemp-based or synthetic sources. The licensed property includes the name, image, likeness, caricature, signature and biography of Bob Marley, the trademarks MARLEY and BOB MARLEY for use in connection with the Company’s existing licensed marks. The initial term of the Agreement expires in January 2024, unless extended or earlier terminated as provided in the agreement. As consideration for the license, the Company agreed to pay a fee equal to fifty percent of the gross margin, as defined in the Agreement, on future sales of approved licensed products, which fee shall be reviewed annually by the parties.
 
NOTE 6 — LEASES
 
The Company leases various office and warehouse facilities, vehicles and equipment under non-cancellable operating lease agreements that expire between January 2019 and May 2030. For the three months ended March 31, 2019 and 2018, the Company had operating lease expense of $2.3 million and $0.3 million respectively.
 
On January 21, 2019, the Company entered into a lease for approximately 11,200 square feet of office space in the downtown area of Denver, Colorado. The monthly obligation for base rent will average approximately $33,000 per month over the lease term which expires in December 2029. The Company has options to terminate the lease after 90 months as well as the option to extend the lease for an additional period of five years. The Company determined the right-of-use ("ROU") lease liability based upon a discount rate of 6.1% and assuming that the Company will not exercise its option to terminate the lease after 90 months.
 
During the first quarter of 2019, the Company entered into operating lease obligations for transportation equipment. These leases provide for fixed minimum payments of approximately $17,000 per month over the eight-year lease term for an aggregate commitment of $1.7 million. The present value of these obligations of $1.3 million was recorded as ROU lease assets and ROU lease liabilities during the three months ended March 31, 2019. The Company determined the ROU lease liabilities based upon a discount rate of 6.1%.
 
Sale Leaseback
 
On March 22, 2019, the Company entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.1 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary. Concurrently with the sale, the Company entered into a lease of this property for a term of 27 years. The monthly lease cost is ¥20.0 million (approximately $181,000 as of March 31, 2019) for the initial seven-year term, and thereafter either party may elect to adjust the monthly lease payment to the then current market rate for similar buildings in Tokyo. In order to secure its obligations under the lease, the Company provided a refundable security deposit of approximately $1.8 million. At any time after the initial seven-year term, the Company may elect to terminate the lease. However, if the lease is terminated before the 20th anniversary of the date the lease was entered into, then the Company will be obligated to perform certain restoration obligations that are currently estimated to cost between $1.6 million and $2.2 million. The Company determined that the restoration obligation is a significant penalty whereby there is reasonable certainty that the Company will not elect to terminate the lease prior to the 20-year anniversary. Therefore, the lease term was determined to be 20 years.
 
In connection with this transaction, the Company repaid the $2.6 million mortgage on the building and cancelled the related interest rate swap agreement discussed in Note 7, paid the refundable security deposit of $1.8 million, and the Company is obligated to pay $25.0 million to the former stockholders of Morinda to settle the full amount of the contingent financing liability discussed in Note 3. Other cash payments that have been or will be made include transaction costs of $1.9 million, post-closing repair obligations of $1.7 million, and Japanese income taxes of $11.9 million.
 
 
14
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Presented below is a summary of the selling price and resulting gain on sale calculation (in thousands):
 
Gross selling price
 $57,129 
Less commissions and other expenses
  (1,941)
Less repair obligations
  (1,675)
Net selling price
  53,513 
Cost of land and building sold
  (29,431)
Total gain on sale
  24,082 
Portion of gain related to above-market rent concession
  (17,640)
 
    
Recognized gain on sale
 $6,442 
 
As shown above, the sale of this property resulted in a gain of $24.1 million and the Company determined that $17.6 million of the gain was the result of above-market rent inherent in the leaseback arrangement. The remainder of the gain of $6.4 million was attributable to the highly competitive process among the entities that bid to purchase the property. The $17.6 million portion of the gain related to above market rent is being accounted for as a lease concession whereby the gain will result in a reduction of rent expense of approximately $0.9 million per year over the 20-year lease term. The present value of the lease payments amounted to $25.0 million. After deducting the $17.6 million lease incentive concession, the Company recognized an initial ROU lease asset and ROU lease liability of approximately $7.4 million.
 
Balance Sheet Presentation
 
As of March 31, 2019 and December 31, 2018, the carrying value of ROU lease assets, ROU lease obligations, and deferred lease incentive obligations are as follows (in thousands):
 
 
 
March 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Right-of-Use Assets:
 
 
 
 
 
 
Cost basis
 $31,825 
 $19,221 
Accumulated amortization
  (2,121)
  (732)
 
    
    
Net
 $29,704 
 $18,489 
 
    
    
Right-of-Use Liabilities:
    
    
Current
 $4,783 
 $4,798 
Long-term
  25,005 
  13,686 
 
    
    
Total
 $29,788 
 $18,484 
 
    
    
Deferred Lease Incentive Obligation:
    
    
Current
 $882 
 $- 
Long-term
  16,758 
  - 
 
    
    
Total
 $17,640 
 $- 
 
As of March 31, 2019 and December 31, 2018, the weighted average remaining lease term under ROU leases was 14.7 and 5.9 years, respectively. As of March 31, 2019 and December 31, 2018, the weighted average discount rate for ROU lease liabilities was approximately 7%.
 
 
15
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Lease Commitments
 
Future minimum lease payments and amortization of the related lease incentive obligation related to non-cancellable ROU operating lease agreements are as follows (in thousands):
 
 
 
Gross
 
 
Lease
 
 
 
 
12 months ending March 31:
 
Payments
 
 
Incentive
 
 
Net
 
 
 
 
 
 
 
 
 
 
 
2020
 $8,435 
 $(1,470)
 $6,965 
2021
  6,749 
  (1,470)
  5,279 
2022
  5,608 
  (1,470)
  4,138 
2023
  5,379 
  (1,470)
  3,909 
2024
  4,931 
  (1,470)
  3,461 
Thereafter
  40,425 
  (10,290)
  30,135 
Total minimum lease payments
  71,527 
  (17,640)
  53,887 
Less imputed interest
  (24,099)
  - 
  (24,099)
 
    
    
    
Present value of minimum lease payments
 $47,428 
 $(17,640)
 $29,788 
 
NOTE 7 — DEBT
 
Credit Facility
 
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Credit Facility”) with East West Bank (“EWB”).  The Credit Facility matures on March 29, 2023 (the “Maturity Date”) and provides for (i) a term loan in the aggregate principal amount of $15.0 million, which may be increased to $25.0 subject to the satisfaction of certain conditions (the “Term Loan”) and (ii) a $10.0 million revolving loan facility (the “EWB Revolver”). At the closing, EWB funded $25.0 million to the Company consisting of the $15.0 million Term Loan and $10.0 million as an advance under the EWB Revolver. The Company utilized a portion of the proceeds from the Credit Facility to repay all outstanding amounts and terminate the Siena Revolver discussed below.
 
The obligations of the Company under the Credit Facility are secured by substantially all assets of the Company and guaranteed by certain subsidiaries of the Company. The Credit Facility requires compliance with certain financial and restrictive covenants and includes customary events of default. Key financial covenants include maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio (all as defined and set forth in the Credit Facility). During any period when an event of default occurs, the Credit Facility provides for interest at a rate that is 3.0% above the rate otherwise applicable to such obligations.
 
Borrowings outstanding under the Credit Facility bear interest at the Prime Rate plus 0.25%. However, if the Total Leverage Ratio (as defined in the Credit Facility) is equal to or greater than 1.50 to 1.00, borrowings will bear interest at the Prime Rate plus 0.50%. The Company may voluntarily prepay amounts outstanding under the EWB Revolver on ten business days’ prior notice to EWB without prepayment charges. In the event the EWB Revolver is terminated prior to the Maturity Date, the Company would be required to pay an early termination fee in the amount of 0.50% of the revolving line. Additional borrowing requests under the EWB Revolver are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the Credit Facility. The EWB Revolver also provides for an unused line fee equal to 0.50% per annum of the undrawn portion. The EWB Revolver includes a lockbox arrangement where the Company is required to direct its customers to remit payments to a restricted bank account, whereby all available funds are used to pay down the outstanding principal balance under the EWB Revolver.
 
Payments under the Term Loan are interest-only for the first six months and are followed by principal payments of $125,000 per month plus interest over the remaining term of the Term Loan. The Company may elect to prepay the Term Loan before the Maturity Date on 10 business days’ notice to EWB subject to a prepayment fee of 2% for the first year of the Term Loan and 1% for the second year of the Term Loan.  No later than 120 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2019, the Company is required to make a payment towards the outstanding principal amount of the Term Loan in an amount equal to 35% of the Excess Cash Flow (as defined in the Credit Facility), if the Total Leverage Ratio is less than 1.50 to 1.00 or (i) 50% of the Excess Cash Flow if the Total Leverage Ratio is greater than or equal to 1.50 to 1.00
 
 
16
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Siena Revolver
 
On August 10, 2018 (the “Siena Closing Date”), the Company entered into a loan and security agreement with Siena Lending Group LLC (“Siena”) that provided for a $12.0 million revolving credit facility (the “Siena Revolver”) with a scheduled maturity date of August 10, 2021. Outstanding borrowings provided for interest at the greater of (i) 7.5% or (ii) the prime rate plus 2.75%. As of December 31, 2018, the effective interest rate was 8.25%. The Siena Revolver also provided for an unused line fee equal to 0.5% per annum of the undrawn portion of the $12.0 million commitment. The Siena Revolver was subject to availability based on eligible accounts receivables and eligible inventory of the Company. As of December 31, 2018, the borrowing base calculation permitted total borrowings of approximately $2.5 million. Pursuant to the Siena Revolver, the Company granted a security interest in substantially all assets and intellectual property of the Company and its subsidiaries, except for such assets owned by Morinda.
 
In connection with the Siena Revolver the Company incurred debt issuance costs of $0.6 million. This amount was accounted for as debt issuance costs that was amortized using the straight-line method over the three-year term of the Siena Revolver. The Siena Revolver was paid off and terminated on March 29, 2019 and the unamortized debt issuance costs of $0.5 million were written off as additional interest expense for the three months ended March 31, 2019. Additionally, the Company incurred a make-whole premium payment of $0.5 million that was also charged to interest expense for the three months ended March 31, 2019.
 
Summary of Debt
 
As of March 31, 2019 and December 31, 2018, debt consists of the following (in thousands):
  
 
 
2019
 
 
2018
 
EWB Credit Facility:
 
 
 
 
 
 
Term loan, net of discount of $542
 $14,458 
 $- 
Revolver
  10,000 
  - 
Installment notes payable
  48(1)
  66(1)
Siena Revolver
  - 
  2,000 
Mortgage payable to a foreign bank
  - 
  2,628(2)
Total
  24,506 
  4,694 
Less current maturities
  (10,790)
  (3,369)
 
    
    
Long-term debt, less current maturities
 $13,716
 $1,325 
_________________
 
(1) 
Consists of various installment notes payable that are collateralized by equipment and that bear interest at 12.4% to 22.1%.
(2) 
This mortgage note payable was collateralized by land and a building in Tokyo, Japan. Quarterly principal payments of $0.3 million plus interest were payable in Japanese Yen at TIBOR plus 0.7% (0.76% as of December 31, 2018) through the maturity date in December 2020. This debt was repaid, and the interest rate swap agreement discussed below was terminated upon sale of the property on March 22, 2019 as discussed in Note 6.
 
Embedded Derivatives
 
The Siena Revolver included features that were determined to be embedded derivatives requiring bifurcation and accounting as separate financial instruments. The Company determined that embedded derivatives included the requirement to pay (i) an early termination premium if the Siena Revolver was terminated before the maturity date in August 2021, and (ii) default interest at a 5.0% premium if events of default existed. The early termination premium was 4.0% of the $12.0 million commitment if termination occurred during the first year after the Siena Closing Date. As of December 31, 2018, the embedded derivatives for the Siena Revolver had an aggregate fair value of approximately $0.5 million, which was included in accrued liabilities as of December 31, 2018. As a result of the termination of the Siena Revolver as discussed above, a make-whole premium of $0.5 million was incurred on March 29, 2019, and the Company recognized a gain on change in fair value of embedded derivatives of $0.5 million which is included in non-operating income (expenses) for the three months ended March 31, 2019.
 
 
17
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Interest Rate Swap Agreement
 
At December 31, 2018, the Company had one contract for an interest rate swap with a total notional amount of approximately $2.6 million. At December 31, 2018, the Company had an unrealized loss from this interest rate swap agreement of approximately $36,000 that is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet. As discussed in Note 6, this swap agreement was terminated upon sale of the property in Tokyo and repayment of the related mortgage.
 
Future Debt Maturities
 
As of March 31, 2019, the scheduled future maturities of long-term debt, exclusive of unaccreted discount of $0.5 million related to the EWC Term Loan, are as follows (in thousands):
 
12 Months Ending March 31,
 
 
 
 
 
 
 
2020
 $10,790(1)
2021
 1,505
2022
 1,503
2023
 11,250
 
    
Total
 $25,048
______________
 
(1) 
Includes $10.0 million outstanding under the EWB Revolver discussed above. Since EWB Revolver includes a lockbox arrangement where the Company is required to direct its customers to remit payments to a restricted bank account, the entire outstanding balance of the EWB Revolver is classified as a current liability. However, subject to the terms of the EWB Revolver, the Company is permitted to reborrow amounts that are repaid through the Maturity Date.
 
NOTE 8 — STOCKHOLDERS’ EQUITY
 
Series D Preferred 
 
In December 2018, the Board of Directors designated 44,000 shares as Series D Preferred Stock. As discussed in Note 3, the Series D Preferred provides for the potential payment of up to $15.0 million contingent upon Morinda achieving certain post-closing milestones. As of March 31, 2019 and December 31, 2018, the Series D Preferred Stock is classified as a liability since it provides for the issuance of a variable number of shares of Common Stock if the Company elects to settle in shares rather than pay the cash redemption value. Please refer to Note 3 for additional information on the consideration issued in the Morinda business combination and the valuation and carrying value of the Series D Preferred. 
 
NOTE 9 — STOCK-BASED COMPENSATION
 
Stock Options
 
On August 3, 2016, the Company’s approved and implemented the New Age Beverages Corporation 2016-2017 Long Term Incentive Plan (the “LTI Plan”). The LTI Plan provides for stock options to be granted to employees, directors and consultants at an exercise price not less than 100% of the fair value of the Company’s Common Stock on the grant date. The options granted generally have a maximum term of 10 years from the grant date and are exercisable upon vesting. Option grants generally vest over a period between one and three years after the grant date of such award. The number of shares reserved for grants is adjusted annually on the first day of January whereby a maximum of 10% of the Company’s outstanding shares of Common Stock are available for grant under the LTI Plan. Accordingly, as of January 1, 2019, a maximum of approximately 7.5 million shares of Common Stock are available for grants under the LTI Plan. As of March 31, 2019, after deducting stock options and restricted stock grants to date, there were approximately 2.1 million shares available for future grants of stock options, restricted stock and similar instruments under the LTI Plan.
 
 
 
18
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
The following table sets forth the summary of stock option activity under the LTI Plan for the three months ended March 31, 2019 (shares in thousands):
 
 
 
Shares
 
 
Price (1)
 
 
Term (2)
 
 
 
 
 
 
 
 
 
 
 
Outstanding, beginning of period
  2,786 
 $2.84 
  9.0 
Granted
  214 
 $5.17 
    
Forfeited
  (41)
 $3.87 
    
Exercised
  (200)
 $2.09 
    
 
    
    
    
Outstanding, end of period (3)
  2,759 
 $3.06 
  8.8 
 
    
    
    
Vested, end of period (4)
  935 
 $2.59 
  8.4 
 ______________
 
(1) 
Represents the weighted average exercise price. 
(2) 
Represents the weighted average remaining contractual term until the stock options expire.
(3) 
As of March 31, 2019 and December 31, 2018, the aggregate intrinsic value of stock options outstanding was $6.1 million and $6.6 million, respectively.
(4) 
As of March 31, 2019 and December 31, 2018, the aggregate intrinsic value of vested stock options was $2.5 million and $3.1 million, respectively.
 
As of March 31, 2019, unrecognized compensation expense related to unvested stock options amounts to $4.3 million. This amount is expected to be recognized on a straight-line basis over the weighted-average vesting period of 2.5 years.
 
The fair value of stock options granted under the LTI Plan was estimated on the date of grant using the BSM option-pricing model, with the following weighted-average assumptions for the three months ended March 31, 2019:
 
Grant date fair value of common stock (exercise price)
 $5.17 
Expected life (in years)
  5.1 
Volatility
  116%
Dividend yield
  0%
Risk-free interest rate
  2.2%
 
Based on the assumptions set forth above, the weighted-average grant date fair value of employee options granted during the three months ended March 31, 2019 was $4.24 per share. The BSM model requires various highly subjective assumptions that represent management’s best estimates of the fair value of the Company’s Common Stock, volatility, risk-free interest rates, expected term, and dividend yield. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. The Company has never declared or paid cash dividends and does not plan to pay cash dividends in the foreseeable future; therefore, the Company used an expected dividend yield of zero. The risk-free interest rate is based on U.S. Treasury rates in effect during the expected term of the grant. The expected volatility is based on the historical volatility of the Company’s Common Stock for the period beginning in August 2016 when its shares were first publicly traded through the grant date of the respective stock options. 
 
 
19
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Restricted Stock
 
In connection with the business combination with Morinda in December 2018, the Company made restricted stock award grants for an aggregate of 1.2 million shares of the Company’s Common Stock. None of these shares will be issued until a vesting event occurs. Upon vesting of the Morinda awards, settlement will occur in (i) cash where foreign regulatory requirements prohibit settlement in shares, (ii) shares of Common Stock, or (iii) a combination of shares and cash at the Company’s election for certain awards. The following table sets forth a summary of restricted stock award activity for the three months ended March 31, 2019 (in thousands):
 
 
 
LTI Plan Equity Awards
 
 
LTI Plan Liability Awards
 
 
Non-Plan Awards
 
 
 
Number of
 
 
Unvested
 
 
Number of
 
 
Unvested
 
 
Number of
 
 
Unvested
 
 
 
Shares
 
 
Compensation
 
 
Shares
 
 
Compensation
 
 
Shares
 
 
Compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, beginning of period
  1,151 
 $3,988 
  474 
 $2,490 
  629 
 $64 
Restricted shares issued
  91(1)
  500(1)
  - 
  - 
  - 
  - 
Other
  35 
  76 
  -
  -
  -
  -
Forfeited
  (1)
  (4)
  (1)
  - 
  - 
  - 
Vested shares and expense
  (383)
  (1,347)
  - 
  (570)
  (262)
  (54)
Outstanding, end of period
  893(2)
 $3,213(2)
  473(3)
 $1,920(3)
  367(4)
 $10(4)
 
    
    
    
    
    
    
Intrinsic value, end of period
 $4,699(5)
    
 $2,490(5)
    
 $1,929(5)
    
Weighted average remaining term
    
    
    
    
    
    
   for recognition of unvested expense
    
  1.0 
    
  1.0 
    
  0.1 
_________________
 
(1) 
The weighted average fair value was $5.50 per share based on the closing price of the Company’s Common Stock on the grant date.
(2) 
As of March 31, 2019, unvested shares of restricted stock consist of approximately 0.8 million shares that will be issued upon vesting and 0.1 million shares that were issued in prior years. For unvested shares that have been issued, approximately $0.5 million of unvested compensation is included in prepaid expenses as of March 31, 2019. Outstanding unvested shares include awards for 216,000 shares that vest if Morinda achieves EBITDA of $20.0 million for the year ending December 31, 2019. The Company assesses the probability of achievement of such performance conditions in the recognition of compensation expense related to these awards.
(3) 
Due to Morinda’s foreign operations, these awards will be settled in cash upon vesting since regulatory requirements prohibit settlement in shares. These awards vest between one and three years after the grant date and are classified as liabilities in the Company’s consolidated balance sheets based on the fair value of the Company’s Common Stock at the end of each reporting period. The liability is being recorded with a corresponding charge to stock-based compensation expense over the vesting period. As of March 31, 2019, approximately $0.6 million is included in current liabilities.
(4) 
Consists of restricted stock issued to the Company’s Chief Executive Officer in 2016 that vested over three years. The remaining shares became fully vested in April 2019.
(5) 
The intrinsic value was based on the closing price of the Company’s common stock of $5.26 per share on March 31, 2019.
 
Stock-based Compensation Expense
 
Stock-based compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations. The table below summarizes stock-based compensation expense related to stock options and restricted stock awards for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Stock options
 $1,315 
 $157 
Restricted stock awards
  1,972 
  220 
 
    
    
Total
 $3,287 
 $377 
 
 
20
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
NOTE 10 — INCOME TAXES
 
For the three months ended March 31, 2018, the Company did not recognize an income tax benefit due to a valuation allowance on its net deferred income tax assets. The Company’s provision for income taxes for the three months ended March 31, 2019 resulted in a net benefit of $1.7 million. The effective tax rate as a percentage of pre-tax earnings for the three months ended March 31, 2019 was 52%. The increase in the effective tax rate for the three months ended March 31, 2019 was due to the impact of the merger with Morinda in the fourth quarter of 2018. The difference in the effective tax rate for the first quarter of 2019 and the U.S. federal statutory rate is primarily attributable to current year losses of foreign subsidiaries.
 
The Company’s U.S. federal income tax returns for 2015 through 2017 are open to examination for federal tax purposes. In major foreign jurisdictions, the Company is generally no longer subject to income tax examinations for years before 2012. However, statutes in certain countries may be as long as ten years.
 
The total outstanding balance for liabilities related to unrecognized tax benefits as of March 31, 2019 was $0.4 million, which would favorably impact the effective tax rate if recognized. There were no unrecognized tax benefits as of March 31, 2018. The increase in 2019 relates to tax audits in foreign jurisdictions, transfer pricing adjustments, and state tax expense. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within the next twelve months.
 
Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred income tax assets and evaluating the Company’s uncertain tax positions. In evaluating the ability to recover its deferred income tax assets, in full or in part, the Company considers all available positive and negative evidence, including past operating results, forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies.
 
Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.
 
At December 31, 2018, the Company has federal NOL carryforwards of approximately $36.3 million, of which $24.9 million does not expire and $11.4 million will begin to expire in 2023. Additionally, the Company has varying amounts of NOL carryforwards in the U.S. states in which it does business that start to expire in 2023. Federal and state laws impose substantial restrictions on the utilization of NOL and tax credit carryforwards in the event of an ownership change for income tax purposes, as defined in Section 382 of the Internal Revenue Code.
 
NOTE 11 — COMMITMENTS AND CONTINGENCIES
 
Executive Deferred Compensation Plan
 
Morinda’s Board of Directors implemented an unfunded executive deferred compensation plan in 2009 for certain executives of Morinda. All financial performance targets under the plan were achieved as of December 31, 2018, and a long-term liability of $4.1 million is included in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018. After the executives retire, the deferred compensation obligation is payable over a period up to 20 years.
 
401(k) Plan
 
The Company has a defined contribution employee benefit plan under section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all eligible U.S. employees who are entitled to participate at the beginning of the first full quarter following commencement of employment. The Company matches contributions up to 3% of the participating employee’s compensation, and these matching contributions vest over four years with 0% vested through the end of the first year of service and 33% vesting upon completion of each of the next three years of service. Total contributions to the 401(k) Plan amounted to $0.1 million for the three months ended March 31, 2019. The Company did not have a 401(k) Plan for the three months ended March 31, 2018.
 
 
21
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Foreign Benefit Plans
 
Morinda has an unfunded retirement benefit plan for the Company’s Japanese branch that entitles substantially all employees in Japan, other than directors, to retirement payments. Morinda also has an unfunded retirement benefit plan in Indonesia that entitles all permanent employees to retirement payments.
 
Upon termination of employment, the Morinda employees of the Japanese branch are generally entitled to retirement benefits determined by reference to basic rates of pay at the time of termination, years of service, and conditions under which the termination occurs. If the termination is involuntary or caused by retirement at the mandatory retirement age of 65, the employee is entitled to a greater payment than in the case of voluntary termination. Morinda employees in Indonesia whose service is terminated are generally entitled to retirement benefits determined by reference to basic rates of pay at the time of termination, years of service and conditions under which the termination occurs. The unfunded benefit obligation for these defined benefit pension plans was approximately $3.1 and $3.0 million as of March 31, 2019 and December 31, 2018, respectively. Of this amount, approximately $3.0 and $2.9 million is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, respectively.
 
Contingencies
 
The Company’s operations are subject to numerous governmental rules and regulations in each of the countries it does business. These rules and regulations include a complex array of tax and customs regulations as well as restrictions on product ingredients and claims, the commissions paid to the Company’s IPCs, labeling and packaging of products, conducting business as a direct-selling business, and other facets of manufacturing and selling products. In some instances, the rules and regulations may not be fully defined under the law or are otherwise unclear in their application. Additionally, laws and regulations can change from time to time, as can their interpretation by the courts, administrative bodies, and the tax and customs authorities in each country. The Company actively seeks to be in compliance, in all material respects, with the laws of each of the countries in which it does business and expects its IPCs to do the same. The Company’s operations are often subject to review by local country tax and customs authorities and inquiries from other governmental agencies. No assurance can be given that the Company’s compliance with governmental rules and regulations will not be challenged by the authorities or that such challenges will not result in assessments or required changes in the Company’s business that could have a material impact on its business, consolidated financial statements and cash flow.
 
The Company has various non-income tax contingencies in several countries. Such exposure could be material depending upon the ultimate resolution of each situation. As of March 31, 2019 and December 31, 2018, the Company has recorded a current liability under Accounting Standards Codification (ASC) 450, Contingencies, of approximately $0.8 million.
 
From time to time, the Company may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
 
Guarantee Deposits
 
Morinda has deposits in Korea for collateral on IPC returns dictated by law, and collateral to credit card companies for guarantee of IPC payments. As of March 31, 2019 and December 31, 2018, guarantee deposits of approximately $0.8 million are included in other long-term assets in the accompanying unaudited condensed consolidated balance sheets.
 
NOTE 12 — RELATED PARTY TRANSACTIONS
 
For the three months ended March 31, 2019 and 2018, the Company granted restricted stock awards to five non-employee members of the Board of Directors for an aggregate of 90,910 and 153,000 shares of Common Stock. The fair value of these shares was based on the closing price of the Company’s Common Stock on the grant date and amounted to an aggregate of $0.5 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively. Compensation expense is recognized over the 12-month vesting period after the respective grant dates for these restricted stock awards. Please refer to Note 9 for additional information about restricted stock awards.
 
22
 
 
  NEW AGE BEVERAGES CORPORATION
 
  Notes to Unaudited Condensed Consolidated Financial Statements
   
NOTE 13 —NET LOSS PER SHARE
 
Net loss per share is computed by dividing loss attributable to common stockholders by the weighted average number of common shares outstanding during the year. The calculation of diluted net loss per share includes dilutive stock options, unvested restricted stock awards, and other Common Stock equivalents computed using the treasury stock method, in order to compute the weighted average number of shares outstanding. For the three months ended March 31, 2019 and 2018, basic and diluted net loss per share were the same since all Common Stock equivalents were anti-dilutive. As of March 31, 2019 and 2018, the following potential Common Stock equivalents were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands): 
  
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Stock options
  2,759 
  1,257 
Restricted stock awards under LTI Plan:
    
    
Unvested shares of Common Stock issued
  139 
  1,027 
Unissued and unvested awards to Morinda employees
  1,227 
  - 
Non-plan restricted stock awards
  367 
  982 
 
    
    
Total
  4,492 
  3,266 
 
NOTE 14 — FINANCIAL INSTRUMENTS AND SIGNFICANT CONCENTRATIONS
 
Fair Value Measurements
 
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair measurement:
 
Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date
 
Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market collaboration, for substantially the full term of the asset or liability
 
Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at measurement date
 
The fair value of the Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, payables to former Morinda shareholders, and notes payable approximate their carrying values as of March 31, 2019 and December 31, 2018. The contingent consideration obligations incurred in the business combinations with Marley and Morinda are recorded at estimated fair value as of March 31, 2019 and December 31, 2018. In addition, the net assets acquired in the business combinations discussed in Note 3 were generally recorded at fair market value on the date of closing. The Company did not have any other nonrecurring assets and liabilities measured at fair value as of March 31, 2019 and December 31, 2018.
 
The Company’s interest rate swap and embedded derivative liability are the only liabilities that have been carried at fair value on a recurring basis. The Company’s interest rate swap is recorded at fair market value and has been classified within Level 2 of the fair value hierarchy. The Company’s embedded derivative liability is recorded at fair market value and has been classified within Level 3 of the fair value hierarchy. Details of the interest rate swap and the embedded derivative liabilities, including valuation methodology and key assumptions and estimates used, are disclosed in Note 7. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the three months ended March 31, 2019 and 2018, the Company had no transfers of its assets or liabilities between levels of the fair value hierarchy.
 
 23
 
 
NEW AGE BEVERAGES CORPORATION
 
  Notes to Unaudited Condensed Consolidated Financial Statements
 
Significant Concentrations
 
For the three months ended March 31, 2019, no single customer comprised more than 10% of the Company’s consolidated net revenue. For the three months ended March 31, 2018, one customer comprised approximately 11% of the Company’s consolidated net revenue. A substantial portion of the Morinda segment is conducted in foreign markets, exposing the Company to the risks of trade or foreign exchange restrictions, increased tariffs, foreign currency fluctuations and similar risks associated with foreign operations. Approximately 70% of the Company’s consolidated net revenue and 90% of Morinda’s net revenue for 2019 is expected to be generated outside the United States, primarily in the Asia Pacific market. Morinda’s Tahitian Noni® Juice, MAX and other noni-based beverage products are expected to comprise over 85% of Morinda’s net revenue for 2019. However, if consumer demand for these products decreases significantly or if the Company ceases to offer these products without a suitable replacement, the Company’s consolidated financial condition and operating results would be adversely affected. The Company purchases fruit and other Noni-based raw materials from French Polynesia, but these purchases of materials are from a wide variety of individual suppliers with no single supplier accounting for more than 10% of its raw material purchases during 2018. However, as the majority of the raw materials are consolidated and processed at the Company’s plant in Tahiti, the Company could be negatively affected by certain governmental actions or natural disasters if they occurred in that region of the world.
 
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash at high-quality financial institutions. Cash deposits, including those held in foreign branches of global banks often exceed the amount of insurance, if any, provided on such deposits. As of March 31, 2019, the Company had cash and cash equivalents with a single financial institution in the United States with a balance of $22.6 million, three financial institutions in China with balances of $7.5 million, $4.7 million and $6.9 million, and two financial institutions in Japan with balances of $51.5 million and $4.5 million. As of December 31, 2018, the Company had cash and cash equivalents with a single financial institution in the United States with a balance of $6.5 million, and two financial institutions in China with balances of $14.5 million and $8.0 million. The Company has never experienced any losses related to its investments in cash, cash equivalents and restricted cash.
 
Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s customer base and their dispersion across different geographies and industries. The Company performs ongoing credit evaluations on certain customers and generally does not require collateral on accounts receivable. The Company maintains reserves for potential bad debts and historically such losses have been insignificant. As of March 31, 2019, the Company did not have any customers with an accounts receivable balance in excess of 10% of consolidated accounts receivable. As of March 31, 2018, the Company had two customers that comprised 14% and 12% of accounts receivable, net. 
 
NOTE 15 — SEGMENTS AND GEOGRAPHIC CONCENTRATIONS
 
Reportable Segments
 
The Company follows segment reporting in accordance with ASC Topic 280, Segment Reporting. As a result of the business combination with Morinda in December 2018 as discussed in Note 3, the Company has changed its operating segments to consist of the Morinda segment and the New Age segment. The New Age segment was previously comprised of the Brands segment and the DSD segment which are now combined as a single segment as they are operating with a single management team. After the Morinda business combination, the Company’s CODM began assessing performance and allocating resources based on the financial information of these two reporting segments. Accordingly, the Company’s previous segment disclosures have been restated for the for the three months ended March 31, 2018.
 
The New Age segment distributes beverages to retail customers throughout Colorado and surrounding states, and sells beverages to wholesale distributors, broad-liners, key account owned warehouses and international accounts using several distribution channels. Morinda is a healthy lifestyles and beverage company with operations in more than 60 countries around the world, and manufacturing operations in Tahiti, Germany, Japan, the United States, and China. Morinda is primarily a direct-to-consumer and e-commerce business with over 70% of its business generated in the key Asia Pacific markets of Japan, China, Korea, Taiwan, and Indonesia.
 
Net revenue by reporting segment for the three months ended March 31, 2019 and 2018, is as follows (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Morinda
 $48,222 
 $- 
New Age
  10,085 
  11,558 
 
    
    
Total revenue
 $58,307 
 $11,558 
 
 
24
 
 
NEW AGE BEVERAGES CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Gross profit by reporting segment for the three months ended March 31, 2019 and 2018, is as follows (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Morinda
 $37,705 
 $- 
New Age
  871 
  2,616 
 
    
    
Total gross profit
 $38,576 
 $2,616 
 
Assets by reporting segment as of March 31, 2019 and December 31, 2018, are as follows (in thousands):
  
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Morinda
 $243,809 
 $206,222 
New Age
  105,642 
  80,710 
 
    
    
Total assets
 $349,451 
 $286,932 
 
Capital expenditures incurred by reporting segment for the three months ended March 31, 2019 and 2018, are as follows (in thousands):
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Morinda
 $116 
 $- 
New Age
  295 
  64 
 
    
    
Total capital expenditures
 $411 
 $64 
 
Geographic Concentrations
 
The following table presents net revenue by geographic region for the three months ended March 31, 2019 and 2018 (in thousands):