UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
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☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2019
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Transition Period from
to
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Commission
File Number: 001-38014
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New Age Beverages Corporation
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(Exact
Name of Small Business Issuer as Specified in its
Charter)
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Washington
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27-2432263
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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1700 E. 68th Avenue
Denver, CO
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80229
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
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(303) 289-8655
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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. YES ☑ NO ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
YES ☑ NO
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer”, “accelerated
filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☑
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Smaller
reporting company ☑
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Emerging
growth company ☑
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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:
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Title
of each class
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Ticker
symbol(s)
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Name of
each exchange on which registered
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Common stock, par value $0.001 per share
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NBEV
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The Nasdaq Capital Market
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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
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)
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Current assets:
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Cash
and cash equivalents
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$109,956
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$42,517
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Accounts
receivable, net of allowance of $107 and $134,
respectively
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9,450
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9,837
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Inventories
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39,618
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37,148
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Prepaid
expenses and other
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6,607
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6,473
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Total
current assets
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165,631
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95,975
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Long-term assets:
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Identifiable
intangible assets, net
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66,553
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67,830
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Property
and equipment, net
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27,159
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57,281
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Goodwill
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31,514
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31,514
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Right-of-use
lease assets
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29,704
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18,489
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Deferred
income taxes
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20,534
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8,908
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Restricted
cash and other
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8,356
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6,935
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Total
assets
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$349,451
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$286,932
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts
payable
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$11,971
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$8,960
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Accrued
liabilities
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45,386
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34,019
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Current
portion of business combination liabilities
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33,608
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8,718
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Current
maturities of long-term debt
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10,790
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3,369
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Total
current liabilities
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101,755
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55,066
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Long-term liabilities:
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Business
combination liabilities, net of current portion
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19,087
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43,412
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Long-term
debt, net of current maturities
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13,716
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1,325
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Right-of-use
liabilities, net of current portion:
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Lease
liability
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25,005
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13,686
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Deferred
lease incentive obligation
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16,758
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-
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Deferred
income taxes
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7,457
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9,747
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Other
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9,205
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9,160
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Total
liabilities
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192,983
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132,396
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Commitments and
contingencies (Note
11)
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Stockholders’ equity:
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Common
Stock; $0.001 par value. Authorized 100,000 shares; issued and
outstanding
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75,393 and 75,067
shares as of March 31, 2019 and
December 31, 2018, respectively
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75
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75
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Additional
paid-in capital
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179,592
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176,471
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Accumulated
other comprehensive loss
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1,053
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626
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Accumulated
deficit
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(24,252)
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(22,636)
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Total
stockholders' equity
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156,468
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154,536
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Total
liabilities and stockholders' equity
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$349,451
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$286,932
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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)
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$58,307
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$11,558
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Cost
of goods sold
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19,731
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8,942
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Gross
profit
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38,576
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2,616
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Operating
expenses:
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Commissions
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18,038
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327
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Selling,
general and administrative
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26,842
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4,256
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Change
in fair value of Marley earnout obligation
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-
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100
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Depreciation
and amortization expense
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2,236
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521
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Total
operating expenses
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47,116
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5,204
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Operating
loss
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(8,540)
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(2,588)
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Non-operating
income (expenses):
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Gain
from sale of land and building
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6,442
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-
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Interest
expense
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(1,646)
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(56)
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Other
debt financing expenses
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(224)
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-
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Gain
from change in fair value of embedded derivatives
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470
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-
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Other income
(expense), net
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182
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(7)
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Loss
before income taxes
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(3,316)
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(2,651)
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Income
tax benefit
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1,700
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-
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Net loss
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(1,616)
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(2,651)
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Other comprehensive
income:
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Foreign
currency translation adjustments, net of tax
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427
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-
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Comprehensive
loss
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$(1,189)
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$(2,651)
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Net
loss per share attributable to common stockholders (basic and
diluted)
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$(0.02)
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$(0.07)
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Weighted
average number of shares of Common Stock outstanding (basic and
diluted)
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75,226
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36,197
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
NEW AGE BEVERAGES CORPORATION
Unaudited Condensed Consolidated Statements of Stockholders’
Equity
Three Months Ended March 31, 2019 and 2018
(In thousands)
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Three
Months Ended March 31, 2019
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Balances, December 31,
2018
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-
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$-
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75,067
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$75
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$176,471
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$626
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$(22,636)
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$154,536
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Issuance of Common
Stock for:
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Exercise of stock
options
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-
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-
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200
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-
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418
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-
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-
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418
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Grant of restricted
stock awards
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-
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-
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126
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-
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576
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-
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-
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576
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Stock-based
compensation expense
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-
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-
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-
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-
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2,127
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-
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-
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2,127
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Net change in other comprehensive
income
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-
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-
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-
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-
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-
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427
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-
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427
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Net
loss
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-
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-
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-
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-
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-
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-
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(1,616)
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(1,616)
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Balances, March 31,
2019
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-
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$-
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75,393
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$75
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$179,592
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$1,053
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$(24,252)
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$156,468
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Three Months Ended March 31, 2018
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Balances, December 31,
2017
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169
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$-
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35,172
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$35
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$63,204
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$-
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$(10,501)
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$52,738
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Issuance of Common
Stock for:
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Conversion of Series B
Preferred Stock
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(169)
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-
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1,354
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1
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(1)
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-
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-
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-
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Grant of restricted
stock awards
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-
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-
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123
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-
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260
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-
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-
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260
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Stock-based
compensation related to stock
options
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-
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-
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-
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-
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157
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-
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-
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157
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Net
loss
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-
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-
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-
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-
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-
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-
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(2,651)
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(2,651)
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Balances, March 31,
2018
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-
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$-
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36,649
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$36
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$63,620
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$-
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$(13,152)
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$50,504
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
NEW AGE BEVERAGES CORPORATION
Unaudited Condensed Consolidated Statements of Cash
Flows
Three Months Ended March 31, 2019 and 2018
(In thousands)
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CASH FLOWS FROM OPERATING
ACTIVITIES:
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Net
loss
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$(1,616)
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$(2,651)
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Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
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Stock-based
compensation expense
|
3,287
|
377
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Depreciation
and amortization
|
2,236
|
521
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Accretion
and amortization of debt discount and issuance costs
|
1,113
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-
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Make-whole
premium on early payment of Siena Revolver
|
480
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-
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Deferred
income taxes
|
(13,916)
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-
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Gain
from sale of land and building
|
(6,442)
|
-
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Gain
from change in fair value of embedded derivatives
|
(470)
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-
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Change
in fair value of contingent consideration payable in business
combination
|
-
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100
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Changes
in operating assets and liabilities:
|
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Accounts
receivable
|
387
|
746
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Inventories
|
(2,470)
|
(319)
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Prepaid
expenses, deposits and other
|
122
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(266)
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Accounts
payable
|
2,231
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(1,334)
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Other
accrued liabilities
|
8,857
|
2,699
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Deferred
lease incentive obligation
|
17,640
|
-
|
|
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Net
cash provided by (used in) operating activities
|
11,439
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(127)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Net
proceeds from sale of land and building:
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Related
to sale of the property
|
31,445
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-
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Repair
obligations
|
1,675
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Capital
expenditures for property and equipment
|
(283)
|
(64)
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Net
cash provided by (used in) investing activities
|
32,837
|
(64)
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CASH FLOWS FROM FINANCING ACTIVITIES:
|
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Proceeds
from borrowings
|
31,978
|
-
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Principal
payments on borrowings
|
(9,686)
|
-
|
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Proceeds
from exercise of stock options
|
418
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-
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Debt
issuance costs paid
|
(40)
|
-
|
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Net
cash provided by financing activities
|
22,670
|
-
|
|
|
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Effect
of foreign currency translation changes
|
566
|
-
|
|
|
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Net
change in cash, cash equivalents and restricted cash
|
67,512
|
(191)
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Cash,
cash equivalents and restricted cash at beginning of
period
|
45,856
|
285
|
|
|
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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)
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SUMMARY OF CASH, CASH EQUIVALENTS AND
RESTRICTED CASH:
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Cash
and cash equivalents at end of period
|
$109,956
|
$94
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Restricted
cash at end of period
|
3,412
|
-
|
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Total
at end of period
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$113,368
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$94
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
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Cash
paid for interest
|
$55
|
$57
|
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Cash
paid for income taxes
|
$1,200
|
$-
|
|
Cash
paid under right-of-use operating lease obligations
|
$1,874
|
$193
|
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
|
|
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FINANCING ACTIVITIES:
|
|
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|
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.
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.
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.
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):
|
|
|
|
|
|
|
|
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.
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):
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
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
|
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):
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
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
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Intangible Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
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):
|
|
|
|
|
|
|
|
|
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%.
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):
|
|
|
|
|
|
12 months ending March
31:
|
|
|
|
|
|
|
|
|
|
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.
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):
|
|
|
|
|
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.
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.
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):
|
|
|
|
|
|
|
|
|
|
|
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.
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
Liability Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
Stock
options
|
$1,315
|
$157
|
|
Restricted
stock awards
|
1,972
|
220
|
|
|
|
|
|
Total
|
$3,287
|
$377
|
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.
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.
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):
|
|
|
|
|
|
|
|
|
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.
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):
|
|
|
|
|
|
|
|
|
Morinda
|
$48,222
|
$-
|
|
New
Age
|
10,085
|
11,558
|
|
|
|
|
|
Total
revenue
|
$58,307
|
$11,558
|
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):
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
United
States of America
|
$16,455
|
$11,558
|
|
International
|
41,852
|
-
|
|
|
|
|
|
Total
revenue
|
$58,307
|
$11,558
|
As of
March 31, 2019, the net carrying value of the Company’s
property and equipment located outside of the United States
amounted to approximately $20.4 million. As of December 31, 2018,
the net carrying value of the Company’s property and
equipment located outside of the United States amounted to
approximately $50.6 million, including approximately $30.7 million
located in Japan.
NOTE 16 — SUBSEQUENT EVENTS
Prepayment of EWB Revolver
On
April 4, 2019, the Company elected to make a voluntary prepayment
of $10.0 million of principal to repay all outstanding borrowings
under the EWB Revolver discussed in Note 7. Subject to the terms of
the Credit Facility, the Company may reborrow up to $10.0 million
under the EWB Revolver through the Maturity Date.
2019 Equity Incentive Plan
On
April 5, 2019, the Company’s Board of Directors approved the
New Age Beverages Corporation 2019 Equity Incentive Plan (the
“2019 Plan”), subject to shareholder approval. The 2019
Plan will terminate on the tenth anniversary of the date of
approval by the Board. A total of up to 10.0 million shares of
Common Stock may be issued under the 2019 Plan. Participation in
the 2019 Plan is limited to employees, non-employee directors, and
consultants.
NEW AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial
Statements
The
2019 Plan provides for grants of both incentive stock options, or
“ISOs”, which are subject to special income tax
treatment, and non-statutory options, or “NSOs.”
Eligibility for ISOs is limited to employees of the Company and its
subsidiaries. The exercise price of an ISO cannot be less than the
fair market value of the common stock at the time of grant. In
addition, the expiration date of an ISO cannot be more than ten
years after the date of the original grant. In the case of NSOs,
the exercise price and the expiration date are determined in the
discretion of the administrator. The administrator also determines
all other terms and conditions related to the exercise of an
option, including the consideration to be paid, if any, for the
grant of the option, the time at which options may be exercised and
conditions related to the exercise of options.
The
2019 Plan also provides for awards of shares of restricted common
stock. Awards of restricted stock may be made in exchange for past
services or other lawful consideration. Generally, awards of
restricted stock are subject to the requirement that the shares be
forfeited or resold to the Company unless specified conditions are
met. Subject to these restrictions, conditions and forfeiture
provisions, any recipient of an award of restricted stock will have
all the rights of a stockholder of the Company, including the right
to vote the shares and to receive dividends. The 2019 Plan also
provides for deferred grants (“deferred stock”)
entitling the recipient to receive shares of common stock in the
future on such conditions as the administrator may
specify.
At the Market Offering Agreement
On
April 30, 2019, the Company entered into an At the Market Offering
Agreement (the “Offering Agreement”) with Roth
Capital Partners, LLC (the “Agent”), pursuant to which
the Company may offer and sell from time to time up to an aggregate
of $100 million in shares of the Company’s Common Stock (the
“Placement Shares”), through the Agent. The Agent will
act as sales agent and will use commercially reasonable efforts to
sell on the Company’s behalf all of the Placement Shares
requested to be sold by the Company, consistent with its normal
trading and sales practices, on mutually agreed terms between the
Agent and the Company.
The
Company has no obligation to sell any of the Placement Shares under
the Offering Agreement. The Offering Agreement terminates on April
30, 2020 and may be earlier terminated by the Company upon five
business days’ notice to the Agent and at any time by the
Agent or by the mutual agreement of the parties. The Company
intends to use the net proceeds from this offering
for general corporate purposes, including working capital.
Under the terms of the Offering Agreement, the Company will pay the
Agent a commission equal to 3% of the gross proceeds from the
gross sales price of the Placement Shares up to $30 million, and
2.5% of the gross proceeds from the gross sales price of the
Placement Shares in excess of $30 million. In addition, the Company
has agreed to pay certain expenses incurred by the Agent in
connection with the offering.
Amendment to Articles of Incorporation
In
April 2019, the Company’s Board of Directors approved,
subject to stockholder approval, an amendment to the
Company’s Articles of Incorporation increasing the authorized
shares of Common Stock from 100,000,000 shares to 200,000,000
shares. This amendment will be filed with the Secretary of
State of Washington if approved by the stockholders at the
Company’s annual meeting of stockholders to be held on May
30, 2019.
ITEM 2. 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 Part I, Item 1 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 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 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. 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.
Recent Developments
Reference
is made to Notes 6, 7 and 16 to our unaudited condensed
consolidated financial statements included in Part I, Item 1 of
this Report for a discussion of the Recent Developments during the
first quarter of 2019, including (i) a new Credit Facility for
$25.0 million of funding with East West Bank entered into on March
29, 2019, (ii) repayment and termination of the Siena Revolver on
March 29, 2019, (iii) a sale leaseback of real estate in
Tokyo, Japan entered into on March 22, 2019 that resulted a net
selling price of $53.5 million, and (iv) an At the Market Offering
agreement entered into on April 30, 2019. These Recent Developments are also discussed
below under the caption Liquidity
and Capital Resources.
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 and outdoor.
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.
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 consist 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 and amortization of debt discounts and issuance
costs, and the write-off of debt discounts and issuance costs if we
prepay the debt before the maturity date.
Other debt financing expenses. Other debt financing expenses
are incurred pursuant to our former Siena Revolver and our new EWB
Credit Facility. The components of other debt financing expenses
include collateral monitoring fees, unused line fees required to
ensure our availability to funding, and other fees charged by the
lenders.
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.
Gains from sale of property and equipment. Gains from the
sale of property and equipment are reflected in the period that the
sale transaction closes.
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.
Results of Operations
Our
consolidated statements of operations for the three months ended
March 31, 2019 and 2018, are presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$58,307
|
$11,558
|
$46,749
|
404%
|
|
Cost
of goods sold
|
19,731
|
8,942
|
10,789
|
121%
|
|
|
|
|
|
|
|
Gross
profit
|
38,576
|
2,616
|
35,960
|
1375%
|
|
|
66%
|
23%
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Commissions
|
18,038
|
327
|
17,711
|
5416%
|
|
General
and administrative
|
26,842
|
4,256
|
22,586
|
531%
|
|
Change
in fair value of Marley earnout
obligation
|
-
|
100
|
(100)
|
(1)
|
|
Depreciation
and amortization expense
|
2,236
|
521
|
1,715
|
329%
|
|
|
|
|
|
|
|
Total
operating expenses
|
47,116
|
5,204
|
41,912
|
805%
|
|
|
|
|
|
|
|
Operating
loss
|
(8,540)
|
(2,588)
|
(5,952)
|
230%
|
|
|
|
|
|
|
|
Non-operating
income (expenses):
|
|
|
|
|
|
Gain from sale of
land and building
|
6,442
|
-
|
6,442
|
(1)
|
|
Interest
expense
|
(1,646)
|
(56)
|
(1,590)
|
2839%
|
|
Other
debt financing expenses
|
(224)
|
-
|
(224)
|
(1)
|
|
Gain
from change in fair value of embedded derivatives
|
470
|
-
|
470
|
(1)
|
|
Other
income (expense), net
|
182
|
(7)
|
189
|
-2700%
|
|
|
|
|
|
|
|
Loss
before income taxes
|
(3,316)
|
(2,651)
|
(665)
|
-25%
|
|
Income
tax expense
|
1,700
|
-
|
1,700
|
(1)
|
|
|
|
|
|
|
|
Net loss
|
$(1,616)
|
$(2,651)
|
$1,035
|
39%
|
______________
(1)
Percentage is not
applicable since no amounts were incurred for the three months
ended March 31, 2018.
Revenue. Gross revenue increased from $12.8 million for the
three months ended March 31, 2018 to $60.5 million for the three
months ended March 31, 2019, an increase of $47.7 million. Net
revenue increased from $11.6 million for the three months ended
March 31, 2018 to $58.3 million for the three months ended March
31, 2019, an increase of $46.7 million. For the three months ended
March 31, 2019, the Morinda segment generated net revenue of $48.2
million. Since the Morinda acquisition closed on December 21, 2018,
no revenue was generated by this segment for the three months ended
March 31, 2018. The increase in net revenue from the Morinda
segment was partially offset by a reduction in net revenue for the
New Age segment of $1.5 million. Net revenue for the New Age
segment decreased by 13% from $11.6 million for the three months
ended March 31, 2018 to $10.1 million for the three months ended
March 31, 2019. The decrease in net revenue for the New Age segment
was primarily attributable to an increase in discounts and
allowances of $0.9 million which was driven by the increase in
billbacks and discounts from two 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 one of the products in the Coco-Libre
brand and one of the products in the Marley brand which we are
discontinuing to focus on products with higher future sales
potential.
Cost of goods sold. Cost of goods sold increased from $8.9
million for the three months ended March 31, 2018 to $19.7 million
for the three months ended March 31, 2019, an increase of $10.8
million. Cost of goods sold for the New Age segment increased from
$8.9 million for the three months ended March 31, 2018 to $9.2
million for the three months ended March 31, 2019, an increase of
$0.3 million or 3%. This increase in cost of goods sold for the New
Age segment was due to higher product costs incurred in the second
half of 2018 due to smaller production runs and buying raw
materials in smaller amounts on the spot market, so we were not
getting economies of scale with our purchasing which was related to
our working capital constraints in 2018. For the three months ended
March 31, 2019, we continued to cycle through these higher cost
inventories which increased our cost of goods sold.
For the
three months ended March 31, 2019, cost of goods sold for the
Morinda segment was $10.5 million. Since the Morinda acquisition
closed on December 21, 2018, no cost of goods sold was incurred by
this segment for the three months ended March 31,
2018.
Gross Profit. Gross profit increased from $2.6 million for
the three months ended March 31, 2018 to $38.5 million for the
three months ended March 31, 2019, an increase of $35.9 million.
Gross margin increased from 23% for the three months ended March
31, 2018 to 66% for the three months ended March 31, 2019. As
discussed below the increase in gross margin was primarily due the
Morinda segment which accounted for $37.6 million of gross profit
for the three months ended March 31, 2019. This increase in gross
profit was due to the business combination with Morinda on December
21, 2018, and was partially offset by a reduction in gross profit
for the New Age segment of $1.7 million for the three months ended
March 31, 2019, due to higher product costs on lower net revenues
for the New Age segment as discussed above.
Commissions. Commissions increased from $0.3 million for the
three months ended March 31, 2018 to $18.0 million for the three
months ended March 31, 2019, an increase of $17.7 million. This
increase was due to the Morinda business combination which resulted
in commissions of $17.8 million, or approximately 37% of the net
revenue generated by the Morinda segment. 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 $4.3 million for
the three months ended March 31, 2018 to $26.8 million for the
three months ended March 31, 2019, an increase of $22.5 million.
This increase was primarily attributable to (i) $20.3 million
related to the Morinda segment, (ii) an increase in compensation
and benefits for the New Age segment of $1.8 million, and (iii) an
increase in rent and occupancy costs for the New Age segment of
$0.3 million. The increase in compensation and benefits for the New
Age segment consisted of stock-based compensation expense of $1.4
million and other compensation and benefits of $0.4
million.
The key
components of selling, general and administrative expenses for the
Morinda segment consist of (i) compensation and benefit costs of
$12.4 million, including stock-based compensation expense of $1.6
million, (ii) business meetings, awards, promotions and travel of
$4.0 million, (iii) rent, repairs and other occupancy costs of $2.4
million, and (iv) professional fees of $0.8 million.
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. We
did not incur any acquisition-related transaction costs for the
three months ended March 31, 2019. Acquisition-related transaction
costs amounted to $0.1 million for the three months ended March 31,
2018, which consisted of the increase in the fair value of the
Marley earnout obligation discussed below.
Depreciation and amortization expense. Depreciation and
amortization expense increased from $0.5 million for the three
months ended March 31, 2018 to $2.2 million for the three months
ended March 31, 2019, an increase of $1.7 million. This increase
was due to approximately $0.8 million of depreciation and $0.9
million of amortization related to the Morinda acquisition that
closed on December 21, 2018. As of March 31, 2019, we have
approximately $45.9 million of identifiable intangible assets and
approximately $26.4 million of depreciable property and equipment
to the Morinda business combination. Accordingly, we expect to
continue to recognize a significant increase in depreciation and
amortization expense for the remainder of the year ending December
31, 2019.
Gain from sale of building. On
March 22, 2019, we entered into an agreement with a major Japanese
real estate company resulting in the sale for approximately $57.0
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 a term of 27 years.
The sale of this property resulted in a gain of $24.1 million and
we determined that $17.6 million of the gain was the result of
above-market rent inherent in the leaseback arrangement. 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 remainder of the gain of $6.4
million was attributable to the highly competitive process among
the entities that bid to purchase the property and, accordingly, is
recognized as a gain in our unaudited condensed consolidated
statement of operations for the three months ended March 31,
2019. For the three months ended March 31, 2018, no gain or
loss was recognized since we did not sell any of our property and
equipment.
Interest expense. Interest expense increased from $56,000
for the three months ended March 31, 2018 to $1.6 million for the
three months ended March 31, 2019, an increase of $1.6 million. The
increase in interest expense was primarily attributable to (i)
termination of the Siena Revolver which resulted a make-whole
prepayment penalty of $0.5 million, (ii) accretion of discount and
write-off of debt issuance costs of $0.5 million related to the
Siena Revolver, and (iii) accretion of discount of $0.6 million
related to the Morinda business combination liabilities. For the
three months ended March 31, 2018, we incurred interest expense of
$0.1 million which was primarily attributable to a revolving credit
agreement with U.S. Bank that was terminated in 2018.
Other debt financing expenses. For the three months ended
March 31, 2019, we incurred other debt financing expenses of $0.2
million as compared to the three months ended March 31, 2018 when
no other debt financing expenses were incurred. Other debt
financing expenses include collateral monitoring fees, unused line
fees, and other fees charged under the Siena Revolver.
Loss on change in fair value of embedded derivatives. In
August 2018, we entered into the Siena Revolver that provided for
borrowings up to $12.0 million. The
Siena Revolver included features that were determined to be
embedded derivatives requiring bifurcation and accounting as
separate financial instruments. We 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. An early termination premium
equal to 4.0% of the $12.0 million commitment was required to be
paid if the Siena Revolver was terminated during the first year
after the August 2018 closing date.
As of
December 31, 2018, the fair value of these embedded derivatives was
$0.5 million which resulted in the recognition of a liability of
$0.5 million. 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. We recognized a gain of $0.5 million for the three
months ended March 31, 2019 since we incurred a contractual
liability to pay the 4.0% prepayment fee on March 29, 2019 when we
terminated the Siena Revolver with the proceeds of the East West
Bank financing discussed below under Liquidity and Capital
Resources.
Other income (expense), net. For the three months ended
March 31, 2018, we had net other income of $0.2 million as compared
to the three months ended March 31, 2018, when we had net other
expense of $7,000. Other income for the three months ended March
31, 2019 consisted of interest income of $0.1 million and other
non-operating income of $0.1 million.
Income tax expense. Due to a valuation allowance for our
deferred income tax assets, we did not recognize an income tax
benefit for the three months ended March 31, 2018. For the three
months ended March 31, 2019, we recognized a net income tax benefit
of $1.7 million. This income tax benefit consisted of current
income tax expense of $12.2 million that was primarily attributable
to a taxable gain on the sale of our land and building in Tokyo,
Japan, offset by a deferred income tax benefit of $13.9 million
that was primarily related to Japan and other foreign
jurisdictions.
Liquidity and Capital Resources
Overview
As of
March 31, 2019, we had cash and cash equivalents of $110.0 million
and working capital of $63.9 million. For the three months ended
March 31, 2019, we incurred a net loss of $1.6 million and cash
provided by operating activities was $11.4 million.
We have
contractual obligations of approximately $53.2 million that are due
during the 12 months ending March 31, 2020. This amount includes
(i) payables to the former stockholders of Morinda for $34.0
million, (ii) operating lease payments of $8.4 million, and (iii)
estimated payments due under the EWB Credit Facility of $10.8
million. Of the $53.2 million of contractual obligations, we are
obligated to pay the former Morinda stockholders $26.0 million in
the second quarter of 2019, and $8.0 million in the third quarter
of 2019. In April 2019, we repaid $10.0 million under the EWB
Revolver but we may reborrow up to that amount subject to the terms
of the financing agreement as discussed below.
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 12-months ending March 31, 2020,
combined with our existing cash resources of $110.0 million, will
be sufficient to fund our working capital requirements and the
remainder of our net contractual obligations.
East West Bank Credit Facility
On March 29, 2019, we 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 agreement (the
“EWB Revolver”). 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 EWB Revolver. Our obligations under
the Credit Facility are secured by substantially all of our assets
and guaranteed by certain of our subsidiaries. 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 periods 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%.
We 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, 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 EWB Revolver are subject to
various customary conditions precedent, including satisfaction of a
borrowing base test as more fully described in the Credit
Facility. The EWB Revolver also
provides for an unused line fee equal to 0.5% per annum of the
undrawn portion. The Credit Facility 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 EWB
Revolver.
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 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, 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 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.
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 in August 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%. 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. 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.
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. 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. From January 1, 2019
through the termination date of March 29, 2019, we were in
compliance with the financial covenants. 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.
Cash Flows Summary
Presented
below is a summary of our operating, investing and financing cash
flows for the three months ended March 31, 2019 and 2018 (in
thousands):
|
|
|
|
|
|
Net cash provided
by (used in):
|
|
|
|
|
Operating
activities
|
$11,439
|
$(127)
|
$11,566
|
|
Investing
activities
|
32,837
|
(64)
|
32,901
|
|
Financing
activities
|
22,670
|
-
|
22,670
|
Cash Flows from Operating Activities
The key
components in the calculation of our cash flows from operating
activities for the three months ended March 31, 2019 and 2018, are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(1,616)
|
$(2,651)
|
$1,035
|
|
Deferred
income tax benefit
|
(13,916)
|
-
|
(13,916)
|
|
Gain
from sale of land and building
|
(6,442)
|
-
|
(6,442)
|
|
Non-cash
and non-operating expenses, net
|
6,646
|
998
|
5,648
|
|
Changes
in operating assets and liabilities, net
|
26,767
|
1,526
|
25,241
|
|
|
|
|
|
|
Total
|
$11,439
|
$(127)
|
$11,566
|
For the
three months ended March 31, 2019, our net loss was $1.6 million
compared to a net loss of $2.7 million for the three months ended
March 31, 2018. Please refer to the section above discussing our
Results of Operations for
the factors that resulted in our net losses. For the three months
ended March 31, 2019, we recognized a non-cash deferred income tax
benefit of $13.9 million that was primarily attributable to a gain
from sale of our land and building in Tokyo. This gain will be
taxable on our Japanese income tax return for 2019 so we recorded a
current income tax payable of $11.9 million for the three months
ended March 31, 2019. For financial reporting purposes, $17.6
million of the gain is being accounted for as a lease incentive
that will be recognized as a reduction of rent expense over the
lease term of 20 years. Similarly, the gain on sale was generated
by the receipt of investing cash flows rather than our operating
cash flows. Accordingly, the deferred income tax benefit and the
gain on sale favorably impacted our net loss but did not generate
any cash for the three months ended March 31, 2019.
Net
non-cash and non-operating expenses partially mitigated the impact
of our net loss by $6.6 million. For the three months ended March
31, 2019, net non-cash and non-operating expenses consisted of (i)
depreciation and amortization expense of $2.2 million, (ii)
stock-based compensation expense of $3.3 million, (iii) accretion
and amortization of debt discount and issuance costs of $1.1
million, and (iv) make-whole premium of $0.5 million. These
non-cash expenses total $7.1 million and were partially offset by a
gain from the change in fair value of embedded derivatives of $0.5
million.
For the
three months ended March 31, 2019, changes in operating assets and
liabilities provided $26.8 million of operating cash flows,
including (i) an increase due to a deferred lease incentive
obligation of $17.6 million, (ii) an increase in accounts payable
and accrued liabilities of $11.1 million that was driven by the
increase in Japanese income taxes payable as discussed above, and
(iii) a reduction in accounts receivable that resulted in an
increase in cash collections of $0.4 million. The $17.6 million
deferred lease incentive obligation represents the portion of the
proceeds from the sale leaseback of Morinda’s corporate
offices in Tokyo that is attributable to above-market rent that we
are obligated to pay over the first 20 years of the lease term. The
$11.1 million Japanese income tax obligation is expected to be paid
during 2019 and will result in negative operating cash flows in the
period in which we are required to make the payment. The deferred
lease incentive obligation is expected to result in negative
operating cash flows of approximately $73,000 per month as the
above-market portion of the lease payments are made over the first
20 years of the lease term. The aggregate operating cash flow
impact of the deferred lease incentive, the unpaid Japanese income
taxes, and the cash collections from the reduction in accounts
receivable amounted to $28.7 million and was partially offset by
operating cash outflows of $3.4 million due to an increase in
inventories.
For the
three months ended March 31, 2018, cash flows used in operating
activities amounted to $0.1 million. While we recognized a net loss
of $2.7 million for the three months ended March 31, 2018, net
non-cash expenses of $1.0 million mitigated the cash impact of our
net loss. For the three months ended March 31, 2018, non-cash
expenses consisted of depreciation and amortization expense of $0.5
million, stock-based compensation expense of $0.4 million, and $0.1
million for the change in fair value of our obligations under the
Marley earnout.
For the
three months ended March 31, 2018, changes in operating assets and
liabilities provided $1.5 million of operating cash flows including
an increase in accounts receivable of $0.7 million, and a net
increase in accounts payable and accrued liabilities of $1.4
million. These increases amount to a total of $2.1 million, and
were partially offset by cash outflows to fund an increase in
inventories of $0.3 million, and an increase in prepaid expenses
and other assets of $0.3 million.
Cash Flows from Investing Activities
For the
three months ended March 31, 2019, cash provided by investing
activities of $32.8 million was primarily driven by the sale
leaseback of our land and building in Tokyo whereby $31.4 million
of the proceeds were attributable to the sale of the property and
an additional $1.7 million of proceeds was provided subject to our
obligation to perform post-closing repairs and refurbishments to
the property. For the three months ended March 31, 2019, these
investing cash inflows totaled $33.1 million and were partially
offset by capital expenditures primarily for equipment of $0.3
million.
For the
three months ended March 31, 2018, our sole use of cash in
investing activities resulted from cash payments of $0.1 million
for equipment in our New Age segment.
Cash Flows from Financing Activities
Our
financing activities provided net cash proceeds of $32.8 million
for the three months ended March 31, 2019 whereas we did not have
any transactions that affected financing cash flows for the three
months ended March 31, 2018. For the three months ended March 31,
2019, the principal sources of cash from our financing activities
consisted of (i) $32.0 million of borrowings that consisted of
$22.4 million under our EWB Credit Facility and $9.6 million under
the Siena Revolver, and (ii) proceeds from the exercise of stock
option of $0.4 million. These financing cash proceeds totaled $32.4
million and were partially offset by cash payments for principal
under the Siena Revolver of $9.7 million. As discussed above the
Siena Revolver was terminated on March 29, 2019 and replaced with
the EWB Credit Facility.
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.
Foreign Currency Risks
We have
foreign currency risks related to our net revenue and operating
expenses denominated in currencies other than the U.S. Dollar,
primarily the Euro, Chinese Yaun and Japanese Yen. We generated
approximately 72% of our net revenue from our international
business for the three months ended March 31, 2019. Increases in
the relative value of the U.S. Dollar to other currencies may
negatively affect our net revenue, partially offset by a positive
impact to operating expenses in other currencies as expressed in
U.S. Dollars. We have experienced and will continue to experience
fluctuations in our net income (loss) as a result of transaction
gains or losses related to revaluing certain current asset and
current liability balances, including intercompany receivables and
payables, which are denominated in currencies other than the
functional currency of the entities in which they are recorded.
While we have not engaged in the hedging of our foreign currency
transactions to date, we are evaluating the costs and benefits of
initiating such a program and we may in the future hedge selected
significant transactions denominated in currencies other than the
U.S. Dollar.
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 Part I, Item 1 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.
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.
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 Part I, Item 1 of this Report.
Non-GAAP Financial Measures
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. We
disclose the following non-GAAP financial measures:
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 is net loss adjusted to exclude interest
expense, income tax expense, and depreciation and amortization
expense.
Adjusted EBITDA. For the calculation of Adjusted EBITDA, we
also exclude the following items for the periods
presented:
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.
Gain
from the Sale of Long-lived Assets: Gain from the sale of
land, buildings and other long-lived assets are excluded since they
do not relate to our core business activities.
Other Debt Financing Expenses: Other debt financing expenses
include collateral monitoring, unused line fees and other expenses
related to our credit agreements. Since these amounts related to
our debt financing structure, we have excluded them since they do
not relate to our core business activities.
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.
We
provide in the tables below a reconciliation from the most directly
comparable GAAP financial measure to each non-GAAP financial
measure presented. The calculation of our Non-GAAP gross revenue is
presented below for the three months ended March 31, 2019 and 2018
(in thousands):
|
|
|
|
|
|
|
|
|
Net
revenue
|
$58,307
|
$11,558
|
|
Non-GAAP
adjustment for discounts
and allowances
|
2,158
|
1,210
|
|
|
|
|
|
Non-GAAP gross revenue
|
$60,465
|
$12,768
|
The
calculation of our non-GAAP EBITDA and Adjusted EBITDA is presented
below for the three months ended March 31, 2019 and 2018 (in
thousands):
|
|
|
|
|
|
|
|
|
Net
loss
|
$(1,616)
|
$(2,651)
|
|
EBITDA
Non-GAAP adjustments:
|
|
|
|
Interest
expense
|
1,646
|
56
|
|
Income
tax benefit
|
(1,700)
|
-
|
|
Depreciation
and amortization expense
|
2,236
|
521
|
|
|
|
|
|
EBITDA
|
566
|
(2,074)
|
|
|
|
|
|
Adjusted
EBITDA Non-GAAP adjustments:
|
|
|
|
Stock-based
compensation expense
|
3,287
|
377
|
|
Other
debt financing expenses
|
224
|
-
|
|
Gain
from sale of land and building
|
(6,442)
|
-
|
Gain
from change in fair value of embedded derivatives
|
(470)
|
-
|
|
|
|
|
|
Adjusted EBITDA
|
$(2,835)
|
$(1,697)
|
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk.
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.
ITEM 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the
issuer in the reports that we file or submit under the Act is
recorded, processed, summarized, and reported within the time
periods specified in the Commission’s rules and forms, and to
reasonably ensure that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, or person performing
similar functions, as appropriate, to allow timely decisions
regarding required disclosure.
Our
management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) (“Disclosure Controls”) will prevent all
errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
We monitor our Disclosure Controls and make modifications as
necessary; our intent in this regard is that the Disclosure
Controls will be modified as systems change and conditions
warrant.
In
connection with the preparation of this Quarterly Report on Form
10-Q as of March 31, 2019, an evaluation of the effectiveness
of the design and operation of our Disclosure Controls was
performed. This evaluation was performed under the supervision and
with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based on this
evaluation, we concluded that our disclosure controls and
procedures were effective.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
during our first fiscal quarter of 2019 that materially affected,
or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. 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 judgment, defense and settlement costs, diversion of
management resources and other factors.
Factors
that could cause our actual results to differ materially from those
in this report are any of the risks described in Item 1.A.
Risk Factors of our 2018
Form 10-K. Any of these factors could result in a significant or
material adverse effect on our results of operations or financial
condition. Additional risk factors not presently known to us or
that we currently deem immaterial may also impair our business or
results of operations. As of the date of this Quarterly Report,
there have been no material changes to the risk factors disclosed
in our 2018 Form 10-K, except we may disclose changes to such risk
factors or disclose additional risk factors from time to time in
our future filings with the SEC.
ITEM 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
In
February 2019, two former employees exercised stock options for an
aggregate of 200,000 shares of the Company’s Common Stock. On
March 12, 2019, the Board of Directors approved the issuance of an
aggregate of 90,910 shares of the Company’s Common Stock to
the five non-employee members of the Board of Directors for a
portion of the compensation for serving in such capacity. These
shares issued to members of the Board of Directors are subject to
restrictions prohibiting the sale prior to March 12, 2020. All of
these shares were issued pursuant to an exemption from registration
under Section 4(a)(2) of the Securities Act. There were no other
unregistered sales of the Company's equity securities during the
three months ended March 31, 2019.
ITEM 3. Defaults Upon Senior
Securities.
None.
ITEM 4. Mine Safety
Disclosures.
Not
applicable.
ITEM 5. Other Information.
None.
The
following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
|
ExhibitNumber
|
|
Description
|
|
|
|
Fixed
Term Building Lease Agreement between Hulic Co., Ltd. and Morinda
Japan GK
|
|
|
|
Lease of
Space Agreement entered into as of April 3, 2019 between
40th
Street Partners, LLC and New Age Beverages
Corporation
|
|
|
|
Certification
of the Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
|
Certification
of the Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
|
|
Certification
of the Chief Executive Officer required by Rule 13a-14(b) or Rule
15d-14(b) and 18 U.S.C. 1350.
|
|
|
|
Certification
of the Chief Financial Officer required by Rule 13a-14(b) or Rule
15d-14(b) and 18 U.S.C. 1350.
|
|
101.INS
|
|
XBRL
Instance Document
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
Pursuant
to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
NEW AGE BEVERAGES CORPORATION
|
|
|
|
|
Date:
May 9, 2019
|
/s/ Brent
Willis
|
|
|
Name:
Brent Willis
|
|
|
Title:
Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
Date:
May 9, 2019
|
/s/ Gregory A.
Gould
|
|
|
Name:
Gregory A. Gould
|
|
|
Title:
Chief Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
Exhibit 10.2
LEASE OF SPACE
OFFICE/WAREHOUSE
SUMMARY OF BASIC LEASE TERMS
1.
Tenant: NEW AGE
BEVERAGES CORPORATION, a Washington corporation
(a)
Building:
approximately 155,775 rentable square feet
(b)
Land: approximately
9.3 acres
(c)
Physical Address:
18245 East 40th Avenue, Aurora,
Colorado 80011
(b)
Commencement Date:
March 21, 2019
|
Months
|
Amount PSF
|
Annually
|
Monthly
|
|
3/21/2019-2/29/2020
|
$4.50
|
$700,987.50
|
$58,415.63*
|
|
3/1/2020-2/28/2021
|
$4.64
|
$722,796.00
|
$60,233.00
|
|
3/1/2021-2/28/2022
|
$4.78
|
$744,604.50
|
$62,050.38*
|
|
3/1/2022-2/28/2023
|
$4.92
|
$766,413.00
|
$63,867.75
|
|
3/1/2023-2/29/2024
|
$5.07
|
$789,779.25
|
$65,814.94
|
|
3/1/2024-2/28/2025
|
$5.22
|
$813,145.50
|
$67,762.13
|
|
3/1/2025-2/28/2026
|
$5.38
|
$838,069.50
|
$69,839.13
|
|
3/1/2026-2/28/2027
|
$5.54
|
$862,993.50
|
$71,916.13
|
|
3/1/2027-2/29/2028
|
$5.71
|
$889,475.25
|
$74,122.94
|
|
3/1/2028-2/28/2029
|
$5.88
|
$915,957.00
|
$76,329.75
|
|
3/1/2029-4/30/2029
|
$6.06
|
$943,996.50
|
$78,666.38
|
*To be
prorated for a partial month
For avoidance of doubt, concurrent with Tenant's execution and
delivery of this Lease, Tenant shall pay Landlord the following
amounts:
(a)
$21,419.06 as
prorated monthly Basic Rent allocable to March
2019;
(b)
$10,281.15
as prorated monthly Additional Rent allocable to March
2019.
(c)
$58,415.63 as the amount of the Security
Deposit.
(a)
Initial Monthly
Deposit for Taxes and Landlord's Insurance: $28,039.50
(b)
All cost and
expenses incurred by Tenant to maintain and repair the Premises, to
the extent the Lease requires Tenant to make such
payment.
6.
Initial full
Monthly Payment Due (for April 2019 Basic Rent and Additional
Rent): $86,455.13
7.
Security Deposit
Amount: $58,415.63, payable
upon Tenant's execution and delivery of this Lease to
Landlord
8.
Address for Notices
to Landlord: 45 South Clermont Street, Denver, Colorado
80246
9.
Address for
Payments to Landlord:
Account
Name: 40th Street Partners LLC
Bank
Name and Account Number: Collegiate Peaks Bank, 105 Centennial
Plaza, Buena Vista, Colorado 81211; ABA Routing No. 102105997;
Account No. 410020482
10.
Address for Notices
to Tenant:
New Age
Beverages Corporation, 2420 17th Street, Denver,
Colorado 80202
11.
Address for
Billings to Tenant:
New Age
Beverages Corporation, 2420 17th Street, Denver,
Colorado 80202
12.
Permitted Use:
Storage, distribution and sales of food and beverages and other
consumer goods, all subject to and in compliance with applicable
laws, as well as related general office purposes.
(a)
Landlord is
represented by Unique Properties, Inc., which is acting as
Landlord's Broker
(b)
Tenant is
represented by Newmark Knight Frank, which is acting as Tenant's
Broker
16.
Renewal Option:
Tenant will have the option (the
"Renewal Option") to renew and extend the Term of the Lease for one
additional term of five (5) years (the "Renewal Term") to commence
at the conclusion of the Lease Term as provided in the
Addendum.
LEASE OF SPACE
(Office/Warehouse)
This
Lease ("Lease") is made effective the 31st day of January, 2019,
between 40TH STREET PARTNERS,
LLC, a Colorado limited liability company ("Landlord"), and NEW AGE
BEVERAGES CORPORATION, a Washington corporation
("Tenant").
1.1 Consideration.
Landlord enters into this Lease in consideration of the payment by
Tenant of the rents herein reserved and the keeping, observance and
performance by Tenant of the covenants and agreements of Tenant
herein contained.
1.2 Exhibits
and Attachments. The
Summary of Basic Lease Terms ("Summary"), Attachments, Exhibits and
Addenda listed below shall be attached to this Lease and be deemed
incorporated in this Lease by this reference. In the event of any
inconsistency between such Summary, Attachments, Exhibits and
Addenda and the terms and provisions of this Lease, the terms and
provisions of the Summary, Attachments, Exhibits and Addenda shall
control. The Summary, Attachments, Exhibits and Addenda to this
Lease are:
Summary
of Basic Lease Terms
Addendum
Exhibit
A — Legal Description of Land
Exhibit
B —Premises
Exhibit
C — Work Letter
II.
DEFINITIONS; DEMISE
OF PREMISES.
2.1 Demise.
Subject to the provisions, covenants and agreements herein
contained, Landlord hereby leases and demises to Tenant, and Tenant
hereby leases from Landlord, the Premises as hereinafter defined,
for the Lease Term as hereinafter defined, subject to existing
covenants, conditions, restrictions, easements and encumbrances
affecting the same.
2.2 Premises.
The "Premises" shall mean the space to be occupied by Tenant as
depicted in Exhibit B
attached hereto. The depiction of the Premises on Exhibit B contains approximately
the number of square feet of rentable floor area ("Floor Area") set
forth in the Summary, which depiction is herein referred to as the
"Space Plan." The Premises include the Building which is located on
the Land, as such terms are hereinafter defined.
2.3 Area
and Address. The Building on the Premises contains
approximately the Floor Area set forth in the Summary. The address
of the Premises is the address set forth in the
Summary.
2.4 Land.
"Land" shall mean the parcel of real property more particularly
described as the Land in Exhibit A attached
hereto.
2.5 Building.
"Building" shall mean the building or buildings, which is
constructed on the Land and contains approximately the Floor Area
set forth on the Summary. If there is more than one building
constructed on the Land, the term "Building" shall mean
collectively all buildings constructed upon the Land.
2.6 Improvements.
"Improvements" shall mean the Building, the Parking Area as
hereinafter defined, and all other fixtures and improvements on the
Land, including landscaping thereon.
2.7 Property.
"Property" shall mean the Land, the Building and the Improvements
and any fixtures and personal property used in operation and
maintenance of the Land, Building and Improvements other than
fixtures and personal property of Tenant and other users of space
in the Building.
2.8 Parking
Area. "Parking Area" shall mean that portion of the Property
which is paved and otherwise improved for the parking of motor
vehicles.
2.9 Covenant
of Quiet Enjoyment. Landlord covenants and agrees that,
provided a Default by Tenant has not occurred, and provided that
Tenant keeps, observes and performs its covenants and agreements
contained in this Lease, Tenant shall have quiet possession of the
Premises and such possession shall not be disturbed or interfered
with by Landlord. Landlord shall under no circumstances be held
responsible for restriction or disruption of use, enjoyment or
access to the Property from public streets caused by construction
work or other actions taken by governmental authorities or other
tenants (their employees, agents, visitors, contractors or
invitees), or any entry or work by Landlord in the Premises
authorized under this Lease, or any other cause not entirely within
Landlord's reasonable control, and such circumstances shall not
constitute a constructive eviction of Tenant nor give rise to any
right of Tenant against Landlord.
2.10 Condition
of Demised Premises. Tenant covenants and agrees that, upon
taking possession of the Premises, Tenant shall be deemed to have
accepted the Premises "as is" and Tenant shall be deemed to have
waived any warranty of condition or habitability, suitability for
occupancy, use or habitation, fitness for a particular purpose or
merchantability, express or implied, relating to the Premises.
Tenant's acceptance of the Premises shall constitute its
acknowledgment that the Premises was in good condition, order and
repair at the time of such acceptance including, without
limitation, all doors, loading dock doors, dock levelers, related
dock systems and areas, and all other mechanical and electrical
systems. Notwithstanding the foregoing, if Tenant shall notify
Landlord of any failures in the operation of the electrical,
plumbing, lighting, overhead doors or HVAC systems within ten (10)
days after the date Landlord tenders possession of the Premises to
Tenant (the "Delivery Date"), and such failures were not due to the
negligence or willful misconduct of Tenant, then Landlord shall
repair (or replace if necessary) such inoperable
systems.
3.1 Lease
Term. "Initial Lease Term" shall mean the period of time
specified in the Summary commencing at noon on the commencement
date specified in the Summary ("Commencement Date") and expiring at
noon on the last day of the calendar month falling on or after the
time period described in the Summary (the Initial Lease Term
together with any extensions thereof is herein referred to as the
"Lease Term"). If for any reason Landlord has been unable to
deliver possession of the Premises to Tenant on or before the
Commencement Date of the Lease Term, then the Lease Term and all
other applicable deadlines shall be delayed in their entirety until
Landlord has delivered possession of the Premises to Tenant, which
shall be the sole and exclusive remedy of Tenant for any such delay
and in lieu of any damages or awards. In no event shall Landlord be
liable to Tenant for any loss or damage and in no event shall this
Lease be void or voidable as a result of any such
delay.
3.2 Tenant
Entry. Landlord agrees to permit Tenant access to the
Premises prior to the Commencement Date of the Lease Term for the
sole purpose of racking set up, data cabling and equipment set up
("Early Access"). Such Early Access shall be subject to all terms
and conditions of this Lease, except that Tenant shall not be
obligated to pay Basic Rent until the Commencement Date of this
Lease Term but Tenant shall be obligated to pay Taxes, Landlord's
Insurance, all costs of utilities and all such Additional Rent due
and payable hereunder.
IV.
BASIC RENT AND
ADDITIONAL RENT.
4.1 Basic
Rent. Tenant covenants and agrees to pay to Landlord,
without offset, reduction, deduction, counterclaim or abatement,
basic rent for the Lease Term in the amount specified as basic rent
in the Summary ("Basic Rent"). The term "Year 1" and subsequent
Years as described in the Summary shall mean: (a) as to Year
1, the period of time beginning on the Commencement Date of the
Lease Term and ending upon the last day of the calendar month
falling on or after the first anniversary of the Lease Term; and
(b) for subsequent Years, the corresponding period of time
commencing upon the expiration of the previous Year and ending one
(1) year thereafter.
4.2 Monthly
Payments. Basic Rent shall be payable monthly in advance,
without notice, in equal installments in the amount of monthly rent
specified in the Summary. The first such monthly installment shall
be due and payable upon execution hereof and a like monthly
installment shall be due and payable on or before the first day of
each calendar month succeeding the Commencement Date recited in the
Summary during the Lease Term, except that the rental payment for
any fractional calendar month at the commencement or end of the
Lease Term shall be prorated based on a thirty (30) day
month.
4.3 Place
of Payments. Basic Rent and all other sums payable by Tenant
to Landlord under this Lease shall be paid to Landlord at the place
for payments specified in the Summary, or such other place as
Landlord may, from time to time, designate in writing. All payments
made to Landlord by Tenant by check or draft shall be payable to
the name set forth in the Summary, until such time as Landlord may
notify Tenant otherwise. Unless otherwise
directed by Landlord, Tenant shall pay all Basic Rent, Taxes (as
defined in Section 5.1) and Landlord's Insurance (as defined
in Section 4.7) by electronic payment as directed in the
Summary of Basic Lease Provisions, using the automated
clearinghouse payment system ("ACH").
4.4 Net
Lease. It is the intent of the parties that the Basic Rent
provided in this Lease shall be a net payment to Landlord; that
this Lease shall continue for the full Lease Term notwithstanding
any occurrence preventing or restricting use and occupancy of the
Premises, including any damage or destruction affecting the
Premises, and any action by governmental authority relating to or
affecting the Premises, except as otherwise specifically provided
in this Lease; that the Basic Rent and Additional Rent shall be
absolutely payable without offset, reduction, deduction,
counterclaim, or abatement for any cause except as otherwise
specifically provided in this Lease or allowed by statute or law;
that Landlord shall not bear any costs or expenses relating to the
Premises or provide any services or do any act in connection with
the Premises except as otherwise specifically provided in this
Lease; and that Tenant shall pay, in addition to Basic Rent,
Additional Rent to cover costs and expenses relating to the
Premises and the Property, all as hereinafter
provided.
4.5 Additional
Rent. Tenant covenants and agrees to pay, as additional rent
under this Lease ("Additional Rent"), without offset, reduction,
deduction, counterclaim or abatement, all costs and expenses
relating to the use, operation, maintenance and repair of the
Premises by Tenant, Taxes and Landlord's Insurance; and all other
costs and expenses which Tenant is obligated to pay to Landlord or
any other person or entity as specifically provided in this Lease,
whether or not stated or characterized as Additional
Rent.
4.6 Monthly
Deposits. Tenant shall pay to Landlord, as a monthly deposit
("Monthly Deposit"), in advance, without notice, on each day that
payment of Basic Rent is due, an amount equal to 1/12th of Landlord's
estimate of Taxes, Property Insurance and Liability Insurance (such
Property Insurance and Liability Insurance are collectively
referred to herein as "Landlord's Insurance"). Landlord shall be
entitled to adjust the amount of the Monthly Deposit from time to
time if Landlord anticipates any increase or decrease in Taxes or
Landlord's Insurance, including the right to make annual adjustment
thereof each calendar year; provided, however, Landlord shall be
entitled to make such adjustments to the amount of the Monthly
Deposit no more than 1 time in any calendar year during the Lease
Term.
4.7 Security
Deposit. Upon execution of this Lease by Tenant, Tenant
shall deposit with Landlord the amount specified as a security
deposit in the Summary ("Security Deposit"). The Security Deposit
shall be retained by Landlord and may be applied by Landlord, to
the extent necessary, to pay and cover any loss, cost, damage or
expense, including attorneys' fees sustained by Landlord by reason
of the failure of Tenant to comply with any provision, covenant or
agreement of Tenant contained in this Lease. To the extent not
necessary to cover such loss, cost, damage or expense, the Security
Deposit, without any interest thereon, shall be returned to Tenant
within sixty (60) days after the expiration of the Lease Term or as
may be otherwise provided by law; provided, however, Landlord may
withhold a portion of the Security Deposit as may be reasonably
required, in Landlord's determination, to be paid by Tenant
following completion of the annual adjustment provided in Section
4.09 below. The Security Deposit shall not be considered as an
advance payment of rent or as a measure of the loss, cost, damage
or expense which is or may be sustained by Landlord. If all or any
portion of the Security Deposit is applied by Landlord to pay any
such loss, cost damage or expense, Tenant shall, from time to time,
promptly upon demand, deposit with Landlord such amounts as may be
necessary to replenish the Security Deposit to its original
amount.
4.8 General
Provisions as to Monthly Deposits and Security Deposit.
Landlord may commingle the Security Deposit or Monthly Deposits
with Landlord's own funds and use such funds as Landlord
determines. In no event shall Landlord be required to hold such
funds in escrow or trust for Tenant. Landlord shall not be
obligated to pay interest to Tenant on account of the Monthly
Deposits and Security Deposit. In the event of a transfer by
Landlord of Landlord's interest in the Premises, Landlord or the
property manager of Landlord may deliver the remaining balance of
any Monthly Deposits and Security Deposit to the transferee of
Landlord's interest and Landlord and such property manager shall
thereupon be discharged from any further liability to Tenant with
respect to such Monthly Deposits and Security Deposit. In the event
of a Transfer (as defined in Section 8.16) by Tenant of
Tenant's interest in this Lease, Landlord shall be entitled to
return the Monthly Deposits and Security Deposit to Tenant's
successor in interest and Landlord shall thereupon be discharged
from any further liability with respect to the Monthly Deposits and
Security Deposit.
4.9 Annual
Adjustment. Following
the end of each calendar year of the Lease Term, Landlord shall
submit to Tenant a statement (with reasonable supporting
documentation delivered if requested by Tenant following receipt of
the statement) setting forth the exact amount of Taxes and
Landlord's Insurance for the previous calendar year ("Statement").
If Landlord determines that the actual amount of Taxes and
Landlord's Insurance for the previous calendar year exceeds the
Monthly Deposits for such previous calendar year, Tenant shall pay
to Landlord, within thirty (30) days after receipt of the
Statement, such deficiency in the amount reflected in the
Statement. If Landlord determines that the Monthly Deposits
exceeded the actual amount of Taxes and Landlord's Insurance for
the previous calendar year, the excess amount shall be paid to
Tenant. The amounts of Taxes and Landlord's Insurance payable by
Tenant for the calendar years in which the Lease Term commences and
expires shall be subject to the provisions hereinafter contained in
this Lease for proration of such amounts in such years. Prior to
the dates on which payment is due for Taxes and Landlord's
Insurance, Landlord shall make payment of Taxes and Landlord's
Insurance. The obligations of the parties under this Section shall
survive the termination or expiration of this Lease.
5.1 Covenant
to Pay Taxes. Tenant covenants and agrees to pay, as part of
the Monthly Deposits, Taxes, as hereinafter defined, which accrue
during or are attributable to the Lease Term. "Taxes" shall mean
all taxes, assessments or other impositions, general or special,
ordinary or extraordinary, of every kind or nature, which may be
levied, assessed or imposed upon or with respect to the Property,
or any part thereof, or upon any building, improvements or personal
property at any time situated thereon.
5.2 Proration
of Taxes. Taxes shall be prorated between Landlord and
Tenant for the year in which the Lease Term commences and for the
year in which the Lease Term expires as of, respectively, the
Commencement Date of the Lease Term and the date of expiration of
the Lease Term, except as hereinafter provided. Additionally, for
the year in which the Lease Term expires, Tenant shall be liable
without proration for the full amount of Taxes relating to any
improvements, fixtures, equipment or personal property which Tenant
is required to remove or in fact removes as of the expiration of
the Lease Term. Proration of Taxes shall be made on the basis of
actual Taxes. Taxes for the years in which the Lease Term commences
and expires shall be paid and deposited with Landlord through
Monthly Deposits as hereinabove provided.
5.3 Special
Assessments. If any Taxes are payable in installments over a
period of years, Tenant shall be responsible only for installments
for periods during the Lease Term with proration, as above
provided, of any installment payable prior to the Commencement Date
or after the expiration date of the Lease Term.
5.4 New
Taxes. Tenant's obligation to pay Taxes shall include any
Taxes of a nature not presently in effect but which may hereafter
be levied, assessed or imposed upon Landlord or upon the Property,
if such tax shall be based upon or arise out of the ownership, use
or operation of the Property or the rents received therefrom, other
than income taxes or estate taxes of Landlord. For the purposes of
computing Tenant's liability for such new type of tax or
assessment, the Property shall be deemed the only property of
Landlord.
5.5 Right
to Contest Taxes. Landlord shall have the sole right to
contest any Taxes. Landlord shall credit Tenant with any abatement,
reduction or recovery of any Taxes attributable to the Lease Term
less all costs and expenses incurred by Landlord, including
attorney's fees, in connection with such abatement, reduction or
recovery.
6.1 Property
Insurance. Landlord
covenants and agrees to maintain property insurance ("Property
Insurance") for the Property, including but not limited to, the
shell and core of the Building, in such amounts, from such company,
with such deductible and on such terms and conditions as Landlord
deems commercially reasonable. Further, in its sole and absolute
discretion, Landlord may obtain extended insurance coverage for
Machinery & Equipment Breakdown and Loss of Rents to the
benefit of the Landlord. Extended insurance coverage for Machinery
& Equipment Breakdown is specific to the equipment as it
relates to the operation of the Building and is not intended
coverage for the machinery or equipment of the Tenant. Property
Insurance obtained by Landlord need not name Tenant as an
additional insured or loss payee, but at Landlord's directive may
name any Mortgagee (as herein defined) as an additional insured
and/or loss payee as their interests may appear. Tenant covenants
and agrees to pay the cost of the Property Insurance obtained by
Landlord for the Property and the cost of any deductible under such
Property Insurance to the extent a claim is made by Landlord under
such Property Insurance. Landlord shall use commercially reasonable
efforts to consult with Tenant in connection with the terms and
conditions of the Liability Insurance contemplated
hereby.
6.2 General
Liability Insurance.
Landlord covenants and agrees to maintain a Commercial General
Liability Policy ("Liability Insurance") covering the Property in
such amounts, from such company, with such deductible and on such
terms and conditions as Landlord deems commercially reasonable.
Liability Insurance obtained by Landlord need not name Tenant as an
additional insured or loss payee, but at Landlord's directive may
name any Mortgagee as an additional insured as their interests may
appear. Tenant covenants and agrees to pay the cost of the
Liability Insurance obtained by the Landlord and the cost of any
deductible under Liability Insurance to the extent a claim is made
by Landlord under such Liability Insurance. Landlord shall use
commercially reasonable efforts to consult with Tenant in
connection with the terms and conditions of the Liability Insurance
contemplated hereby.
6.3 Tenant's
Property Insurance.
Tenant covenants and agrees to obtain and maintain throughout the
Lease Term, Property Insurance. Such insurance coverage must be as
broad as ISO Causes of Loss – Special Form Coverage and
Equipment Breakdown Protection Coverage against risks of direct
physical loss or damage (commonly known as "all risk") for the full
replacement cost of Tenant's personal property located at the
Premises, with a deductible amount not to exceed $25,000.00.
Coverage should also be extended to include Business Income and
Extra Expense to the benefit of Tenant. Landlord and its property
manager assume and have no responsibility to determine adequate
Property values for Tenant. Concurrently with the execution and
delivery of this Lease by Tenant, Tenant shall deliver evidence of
said insurance to Landlord via a certificate of
insurance.
6.4 Waiver.
Landlord and Tenant waive all rights of recovery against the other
and its respective officers, partners, members, agents,
representatives, and employees for loss or damage to its real and
personal property kept in the Building which is capable of being
insured against under ISO Causes of Loss - Special Form Coverage
and Equipment Breakdown Protection Coverage and to the extent of
damages and coverage under worker's compensation and employers
liability insurance required under this Lease, or for loss of
business revenue or extra expense arising out of or related to the
use and occupancy of the Premises. Each party shall, upon obtaining
the property damage insurance required by this Lease, notify the
insurance carrier that the foregoing waiver is contained in this
Lease and obtain an appropriate waiver of subrogation provision in
the policies. Notwithstanding anything
in this Lease to the contrary, Tenant agrees Landlord is not liable
for any injury or damage, either proximate or remote, occurring
through or caused by fire, water, steam, or any repairs,
alterations, injury, accident, or any other cause to the Leased
Premises, to Tenant's property kept or stored in the Premises,
whether by reason of the negligence or default of Landlord, other
occupants, any other person, or otherwise, and the keeping or
storing of all property of Tenant in the Premises or the Property
is at the sole risk of Tenant.
6.5 Tenant's
General Liability Insurance. Tenant covenants and agrees to
maintain throughout the Lease Term, a Commercial General Liability
Insurance policy. Coverage must include protection against bodily
injury, property damage, personal injury, fire legal liability, and
medical payment coverage issued by a licensed insurance company
meeting an AM Best qualification of A/X. Coverage shall be written
on an occurrence basis. The limit of liability shall be no less
than $3,000,000 per occurrence, $3,000,000 in the aggregate.
Concurrently with the execution and delivery of this Lease by
Tenant, Tenant shall deliver evidence of said insurance to Landlord
via a certificate of insurance. Such limit may be derived either by
a Combined Single Limit (CSL) on the General Liability policy, or a
$2,000,000 (Two Million) General Liability CSL supported by a
$1,000,000 (One Million) or greater Umbrella Policy.
The
above General Liability policy shall:
(a) Name
the Landlord and its property manager as additional insureds as
regards this location.
(b) Be
endorsed to be Primary and Non-Contributory to any other similar
insurance of said additional insureds.
(c) Be
endorsed to include a Waiver of Subrogation in favor of additional
insureds.
(d) Provide
at least thirty (30) days prior written notice be given to
additional insureds of any cancellation, non-renewal or material
change as respects the coverages required by this
Lease.
(e) Not
contain any deductible, retention or self-insured provisions,
unless otherwise approved in writing by the Landlord.
(f) Provide
that the General Liability aggregate limits apply per
location.
The
limits of insurance required in this Lease do not limit or restrict
the limit of liability of Tenant hereunder. Prior to the occupancy
of the Premises and prior to the expiration of the then-current
policy, Tenant shall cause to be delivered to the Landlord
certificates of insurance evidencing that the insurance required
under this Lease are so in effect. Tenant covenants and agrees to
obtain other insurance, coverages and endorsements customarily
maintained by similar companies as Tenant as so requested from time
to time by Landlord.
6.6 Commercial
Automobile Insurance. Tenant agrees to acquire and maintain
Commercial Automobile Insurance as is required by law. The
Commercial Auto Insurance shall represent that coverage for
Tenant's auto to include "Any Auto" or "All Owned Auto" including
"Hired and Non-Owned Auto." Limits of coverage shall be $2,000,000
(Two Million) for Liability. Such limit may be derived either by a
Combined Single Limit (CSL) on the Auto policy, or a $1,000,000
(One Million) Auto CSL supported by a $1,000,000 (One Million) or
greater Umbrella Policy. Concurrently with the execution and
delivery of this Lease by Tenant, Tenant shall deliver evidence of said insurance to Landlord via
certificate of insurance.
6.7 Worker's
Compensation. Tenant
covenants and agrees to maintain Worker's Compensation Insurance
coverage as required by statutory law and Employer's Liability
coverage with limits of no less than $500,000 (Five Hundred
Thousand) per occurrence. Such policy shall afford a waiver of
subrogation on behalf of the Landlord and its property manager.
Concurrently with the execution and delivery of this Lease by
Tenant, Tenant shall deliver evidence
of said insurance to Landlord via certificate of
insurance.
6.8 Cooperation.
Landlord and Tenant shall cooperate with each other in the
collection of any insurance proceeds which may be payable in the
event of any loss, including execution and delivery of any proof of
loss or other action required to such recovery.
6.9 Plate
Glass. Tenant acknowledges that Landlord is not obligated to
maintain any insurance or extended coverage insurance with respect
to damage to any plate glass or other glass located in the
Premises. Tenant shall be entitled to obtain any such insurance for
plate glass or other glass located in the Premises; provided,
however, that Tenant shall be obligated to replace any damaged or
broken or plate glass or other glass located in the Premises,
whether or not Tenant has obtained such insurance
coverage.
VII.
OPERATING,
MAINTENANCE AND REPAIR EXPENSES.
7.1 Utility
Charges. From and after the Delivery Date, Tenant covenants
and agrees to pay all charges for gas, electricity, light, heat,
power, telephone, telecommunication, internet, or other data
transmission or utility services used, rendered or supplied to or
for the Premises. From and after the Delivery Date, Tenant will be
responsible for contacting the utility companies and transferring
all utilities for the Premises to its name, and thereafter Tenant
shall contract directly with the utility companies for all utility
services for the Premises.
7.2 Tenant's
Maintenance Obligation. Tenant, at its sole cost and
expense, shall maintain, repair, replace and keep the Premises and
all improvements, fixtures and personal property thereon in good,
safe and sanitary condition, order and repair and in accordance
with all applicable laws, ordinances, orders, rules and regulations
of governmental authorities having jurisdiction. Tenant shall
perform or contract for and promptly pay for trash and garbage
disposal, janitorial and cleaning services, security systems and
services, interior window washing services, interior painting,
repair and replacement of all interior and exterior doors
(including, without limitation, all loading dock doors, dock
levelers and related dock systems and areas), repair, maintenance
and replacement of damaged or broken interior and exterior glass,
windows, plate glass and other breakable materials, and replacement
of interior light bulbs, light fixtures and ballasts in or serving
the Premises. Tenant shall not dispose of light bulbs, ballasts or
any fixtures or equipment containing Hazardous Substances (as
herein defined) in any trash dumpster, rather Tenant shall dispose
of all such materials in accordance with Applicable Laws (as herein
defined) and in accordance with the requirements of this Lease.
Tenant shall operate, maintain, repair and replace the pipes, lines
and other equipment and facilities for water, sewage and other
utility services serving the Premises from the point exclusively
serving the Premises, even if outside of the Premises. All costs of
maintenance and repairs by Tenant shall be considered Additional
Rent hereunder. All maintenance and repairs to be performed by
Tenant shall be done promptly, in a good and workmanlike fashion,
and without diminishing the original quality of the Premises or the
Property. Tenant shall contract and keep in force with a licensed
service company approved by Landlord a service contract for the
quarterly maintenance of the heating, ventilating and air
conditioning equipment. Following written request from Landlord, a
copy of the service contract shall be furnished to Landlord no
earlier than ten (10) days after the Commencement Date and a copy
of any subsequent contract(s) shall be furnished from time to time
during the Lease Term. If Tenant fails to provide copies of such
contracts to Landlord or fails to maintain such contracts, then
Landlord may cause such maintenance to be performed at Tenant's
cost plus an administrative fee equal to 10% of the cost
thereof.
7.3 Structural
Maintenance Obligation. Tenant, at its sole cost and
expense, shall maintain and repair the roof, exterior walls and
structural elements of the Building and the Improvements, including
any replacements required thereto; provided, however, in the event
the roof requires replacement as reasonably determined by both of
the parties hereto, Landlord shall replace the roof at its sole
cost and expense.
7.5 Exterior
Maintenance. Tenant, at its sole cost and expense, shall
maintain and repair all exterior portions of the Premises,
including without limitation, the Parking Area and all sidewalks
and yard areas, and shall keep such areas in a neat and clean
condition and shall keep the Parking Area in good condition and
repair, properly and regularly seal coated, cracks filled, pot
holes repaired and striping as necessary, and shall provide snow
removal as reasonably required. Landlord shall not be liable for
and Tenant hereby releases and covenants not to bring any action
against Landlord for any loss, damage or theft to or from any motor
vehicle or other property of Tenant or Tenant's Agents which occurs
in or about the Parking Area. Tenant, at its sole cost and expense,
and Tenant's subject to receipt of all required Gateway Park and
governmental approvals and permits, shall be permitted to fence a
portion of the loading court and Parking Area.
VIII.
ADDITIONAL
COVENANTS.
8.1 Use
by Tenant. Tenant covenants and agrees in good faith to use
the Premises within the commercially reasonable scope of the use or
uses set forth as Permitted Uses by Tenant in the Summary, except
with the prior written consent of Landlord who shall exercise
reasonable good faith discretion in considering Tenant’s
requests for additional commercially reasonable uses. Such consent
shall not be unreasonably withheld. Tenant shall have access to the
Premises twenty-four (24) hours per day, seven (7) days per week,
and shall comply with all of Landlord's security
requirements.
8.2 Compliance
with Laws. Tenant covenants and agrees that nothing shall be
done or kept on the Premises in violation of any law, ordinance,
order, rule or regulation of any governmental authority having
jurisdiction and that the Premises shall be used, kept and
maintained in compliance with any such law, ordinance, order, rule
or regulation and with the certificate of occupancy issued for the
Building and the Premises. Tenant shall provide written notice to
Landlord within three (3) days after Tenant receives any notice of
a violation or other requirement to comply with any such law,
ordinance, rule or regulation with respect to the Premises or
Tenant's operation at the Premises, together with a copy of such
notice of such violation or non-compliance.
8.3 Compliance
with Insurance Requirements. Tenant covenants and agrees
that nothing shall be done or kept on the Premises which might
impair or increase the cost of insurance maintained with respect to
the Premises or the Property, which might increase the insured
risks or which might result in cancellation of any such
insurance.
8.4 No
Impairment of Value. Tenant covenants and agrees that
nothing shall be done or kept on the Premises or the Property which
might impair the value of the Premises or the Property, or which
would constitute waste.
8.5 No
Overloading. Tenant covenants and agrees that nothing shall
be done or kept on the Premises or the Building and that no
improvements, changes, alterations, additions, maintenance or
repairs shall be made to the Premises which might impair the
structural soundness of the Building, which might result in an
overload of electrical lines serving the Building or which might
interfere with electric or electronic equipment in the Building or
on any adjacent or nearby property. In the event of violations
hereof, Tenant covenants and agrees to immediately remedy the
violation at Tenant's expense and in compliance with all
requirements of governmental authorities and insurance
underwriters.
8.6 No
Nuisance. Tenant covenants and agrees that no noxious or
offensive activity shall be carried on upon the Premises or the
Property nor shall anything be done or kept on the Premises or the
Property which may be or become a public or private nuisance or
which may cause embarrassment, disturbance, or annoyance to others
in the Building or on adjacent or nearby property.
8.7 No
Annoying Lights, Sounds or Odors. Tenant covenants and
agrees to perform business operations in a commercially reasonable
manner so that lights emitted from the Premises will not be
unreasonably bright or cause unreasonable glare; sound emitted from
the Premises will not be unreasonably loud or annoying (it being
acknowledged and agreed that refrigeration equipment on
Tenant’s trailers located at the Building and the Property is
deemed acceptable); and no odor shall be emitted from the Premises
which is or might be noxious or offensive to others in the Building
or on adjacent or nearby property. Tenant, at its sole cost and expense, shall be
responsible for providing and maintaining a mechanical exhaust
ventilation system required by and in compliance with all
applicable laws, codes, rules, ordinances and regulations necessary
for effectively removing cooking odors, smoke, steam, grease, and
vapors. Such a ventilation system shall be provided at or above
cooking equipment located at the Premises including, but not
limited to, ranges, griddles, ovens, deep fat fryers, barbecues and
rotisseries. All hoods, ducts, fans and other devices provided to
ventilate the cooking areas shall be installed and maintained as
required by and in compliance with all applicable laws, codes,
rules, ordinances and regulations. In addition, Tenant, at its sole
cost and expense, shall be responsible for providing make-up air in
all areas where a mechanical exhaust ventilation system is used by
Tenant. Such make-up air shall be provided in accordance with all
applicable laws, codes, rules, ordinances and regulations. Tenant,
upon taking possession of the Premises for completion of the Finish
Work (as defined in the Work Letter), shall use its reasonable
efforts to seal the Premises so that the fumes do not migrate into
adjoining suites and to provide additional ventilation to vent the
fumes out of the Premises. Such work shall be performed at Tenant's
sole cost and expense. In addition, if Landlord receives any
complaints about fumes or odors from other tenants or occupants of
the Building, Landlord shall provide notice thereof to Tenant and
Tenant, at Tenant's sole cost and expense, shall immediately take
such reasonable corrective actions as are necessary to remedy the
odor and fume problems and resolve such complaints. Such corrective
actions shall include, but not be limited to, adding additional
ventilation and filter systems to prevent such odors and fumes from
migrating into adjoining suites.
8.8 No
Unsightliness. Tenant covenants and agrees that no
unsightliness shall be permitted on the Premises or the Property
which is visible from any adjacent or nearby property. Without
limiting the generality of the foregoing, all unsightly conditions,
equipment, objects and conditions shall be kept enclosed within the
Premises; no refuse, scrap, debris, garbage, trash, bulk materials
or waste shall be kept, stored or allowed to accumulate on the
Premises or the Property except as may be enclosed within the
Premises; all pipes, wires, poles, antennas and other facilities
for utilities or the transmission or reception of audio or visual
signals or electricity shall be kept and maintained underground or
enclosed within the Premises or appropriately screened from view;
and no temporary structure shall be placed or permitted on the
Premises or the Property without the prior written consent of
Landlord, in its sole and absolute discretion.
8.9 No
Animals. Notwithstanding anything to the contrary in the rules and regulations attached
hereto, Tenant covenants and agrees that no animals shall be
permitted or kept on the Premises or the Property; provided,
however, that nothing herein shall be construed as prohibiting
qualified service animals that may not be legally excluded from the
Premises or Property pursuant to the Americans with Disabilities
Act or any similar law, rule or regulation applicable to the
Property. In addition, other domesticated dogs (but no other live
animals) shall be permitted on the Premises and the Property
provided that such dogs are friendly, do not disturb other tenants
of or visitors to the Building, and are kept on a leash when
outside of the Premises. Tenant shall immediately remove from the
Premises and the Property any dog that is not in compliance with
the foregoing. Tenant agrees to indemnify and hold Landlord
harmless from all claims (including costs and expenses of defending
against such claims) arising or alleged to arise from any act or
omission of Tenant or Tenant’s agents, employees, materialmen
or invitees or arising from any bodily injury or property
damage occurring or alleged to have occurred as a result of
any animals kept on the Premises with the consent of Landlord,
unless caused by the gross negligence or willful misconduct of
Landlord or Landlord’s employees.
8.10 Restriction
on Signs and Exterior Lighting. Tenant covenants and agrees
that no signs or advertising devices of any nature shall be erected
or maintained by Tenant on the Building or the Property, except for
signs approved by Landlord in writing, in its reasonable
discretion. Tenant may install an exterior sign on the Building
provided such sign is in compliance with all applicable laws,
covenants and other restrictions affecting the Premises, and
Landlord has reasonably approved the size, design and location of
such sign.
8.11 Restriction
on Changes and Alterations. Tenant covenants and agrees not
to improve, change, alter, add to, remove or demolish any
improvements on the Premises ("Changes"), without the prior written
consent of Landlord which consent shall not be unreasonably
withheld, and unless Tenant complies with all conditions which may
be imposed by Landlord, in its sole and absolute discretion, in
connection with such consent; and unless Tenant pays to Landlord
the reasonable costs and expenses of Landlord for architectural,
engineering or other consultants which may be reasonably incurred
by Landlord in determining whether to approve any such Changes.
Landlord's consent to any Changes and the conditions imposed in
connection therewith shall be subject to all requirements and
restrictions of any Mortgagee. If such consent is given, no such
Changes shall be permitted unless (a) Tenant shall have
procured and paid for all necessary permits and authorizations from
any governmental authorities having jurisdiction; (b) such
Changes shall not reduce the value of the Property; (c) such
Changes are located wholly within the Premises, shall not adversely
affect the structural integrity of the Building or the operation of
the HVAC, plumbing, electrical, water, or sewer systems servicing
the Building or the Property; (d) such Changes shall not
affect or impair existing insurance on the Property; and
(e) Tenant, at Tenant's sole cost and expense, shall maintain
or cause to be maintained workmen's compensation insurance covering
all persons employed in connection with the work and obtains
liability insurance covering any loss or damage to persons or
property arising in connection with any such Changes and such other
insurance or bonds as Landlord may reasonably require. Tenant
covenants and agrees that any Changes approved by Landlord shall be
completed with due diligence and in a good and workmanlike fashion
and in compliance with all conditions imposed by Landlord and all
applicable permits, authorizations, laws, ordinances, orders, rules
and regulations of governmental authorities having jurisdiction and
all covenants and other restrictions affecting the Premises, and
that the costs and expenses with respect to such Changes shall be
paid promptly when due and that the Changes shall be accomplished
free of mechanics' and materialmen's liens. Tenant covenants and
agrees that all Changes shall become the property of Landlord at
the expiration or earlier termination of the Lease Term or, if
Landlord so requests, Tenant shall, at or prior to expiration of
the Lease Term and at its sole cost and expense, remove such
Changes and restore the Premises to their condition prior to such
Changes. Notwithstanding the foregoing, promptly following receipt
of the consent of Landlord, which consent shall not be unreasonably
withheld, conditioned or delayed, Tenant shall be permitted to
install Wi-Fi throughout the Premises to accommodate its warehouse
management system.
8.12 No
Mechanic's Liens. Tenant covenants and agrees not to permit
or suffer, and to cause to be removed and released, any mechanic's,
materialmen's or other lien on account of supplies, machinery,
tools, equipment, labor or material furnished or used in connection
with the construction, alteration, improvement, addition to or
repair of the Premises by, through or under Tenant. At least twenty
(20) days prior to any Changes, Tenant shall provide written notice
to Landlord of the date of commencement of any Changes. Landlord
shall have the right, at any time and from time to time, to post
and maintain on the Premises and Building such notices as Landlord
deems necessary to protect the Premises against such liens. Tenant
shall have the right to contest, in good faith and with reasonable
diligence, the validity of any such lien or claimed lien, provided
that Tenant shall give to Landlord such security as may be
reasonably requested by Landlord to insure the payment of any
amounts claimed, including interest and costs, and to prevent any
sale, foreclosure or forfeiture of any interest in the Property on
account of any such lien, including, without limitation, bonding,
escrow or endorsement of the title insurance policy of Landlord and
any Mortgagee. If Tenant so contests, then on final determination
of the lien or claim for lien, Tenant shall immediately pay any
judgment rendered, with interest and costs, and shall cause the
lien to be released and any judgment satisfied.
8.13 No
Other Encumbrances. Tenant covenants and agrees not to
obtain any financing secured by Tenant's interest in the Premises
and not to encumber the Premises or Landlord's or Tenant's interest
therein, without the prior written consent of Landlord, in its sole
and absolute discretion, and to keep the Premises free from all
liens and encumbrances except liens and encumbrances existing upon
the Commencement Date of the Lease Term or liens and encumbrances
created by Landlord. Anything herein
to the contrary notwithstanding, financing of Tenant's removable
trade fixtures, equipment and other personal property shall not be
a default under this Section 8.13, and Landlord shall agree to
subordinate any interest it may have in such removable trade
fixtures, equipment and other personal property to the interest of
Tenant’s third party lender pursuant to a subordination
agreement reasonably acceptable to Landlord.
8.14 Subordination
to Landlord Mortgages. Tenant covenants and agrees that this
Lease and Tenant's interest in the Premises shall be junior and
subordinate to any mortgage or deed of trust ("Mortgage") now or
hereafter encumbering the Property. If Tenant notifies Landlord in
writing that it desires any mortgagee or holder of a Mortgage now
or hereafter encumbering the Property ("Mortgagee") to covenant not
to disturb Tenant and this Lease, Landlord shall make such request
to any mortgagee or holder and Tenant shall pay all costs charged
by any Mortgagee for such non-disturbance covenant. In the event of
a foreclosure of any Mortgage, Tenant shall attorn to the party
acquiring title to the Property as the result of such foreclosure.
No act or further agreement by Tenant shall be necessary to
establish the subordination of this Lease to any such Mortgage,
which subordination is self-executing, but Tenant covenants and
agrees, upon request of Landlord, to execute such documents as may
be necessary or appropriate to confirm and establish this Lease as
subordinate to any Mortgage in accordance with the foregoing
provisions (including, without limitation, such Mortgagee's form of
subordination, non-disturbance and attornment agreement).
Alternatively, Tenant covenants and agrees that, at the option of
any Mortgagee, Tenant shall execute documents as may be necessary
to establish this Lease and Tenant's interest in the Premises as
superior to any such Mortgage within ten (10) days after Tenant's
receipt thereof. If Tenant fails to execute any documents required
to be executed by Tenant under the provisions hereof, Tenant shall
be deemed to have agreed to and be bound by the covenants, terms
and conditions provided in such documents. If any Mortgagee or
purchaser at foreclosure thereof, succeeds to the interest of
Landlord in the Land or the Building, such person shall not be
(i) liable for any act or omission of Landlord under this
Lease; (ii) liable for the performance of Landlord's covenants
hereunder which arise prior to such person succeeding to the
interest of Landlord hereunder; (iii) bound by the payment of
any rent which Tenant may have paid more than one month in advance;
(iv) liable for any security deposit which was not delivered
to such person; or (v) bound by any modifications to this
Lease to which such Mortgagee has not consented in
writing.
8.15 No
Assignment or Subletting.
(a) Tenant
covenants and agrees not to make or permit a Transfer by Tenant, as
hereinafter defined, without Landlord's prior written consent,
which consent shall not be unreasonably withheld. A "Transfer" by
Tenant shall include an assignment of this Lease, a sublease of all
or any part of the Premises or any assignment, sublease, transfer,
mortgage, pledge or encumbrance of all or any part of the Premises
or of Tenant's interest under this Lease or in the Premises, by
operation of law or otherwise, or the use or occupancy of all or
any part of the Premises by anyone other than Tenant. The storage
of food products of Tenant’s customers in accordance with the
Permitted Use shall not be deemed to be a sublease or pledge of the
Premises by Tenant. Any such Transfer by Tenant without Landlord's
written consent shall be void and shall constitute a Default by
Tenant under this Lease. Notwithstanding any Transfer by Tenant,
Tenant shall not be relieved of its obligations under this Lease
and Tenant shall remain liable, jointly and severally, and as a
principal, not as a guarantor or surety, under this Lease, to the
same extent as though no Transfer by Tenant had been made, unless
specifically provided to the contrary in Landlord's prior written
consent. The acceptance of Rent by Landlord from any person other
than Tenant shall not be deemed to be a waiver by Landlord of the
provisions of this Section or of any other provision of this Lease
and any consent by Landlord to a Transfer by Tenant shall not be
deemed a consent to any subsequent Transfer by Tenant.
(b) If
Tenant requests Landlord's consent to a Transfer, Tenant shall
submit to Landlord in writing the name of the proposed transferee,
the effective date of the Transfer, the terms of the proposed
Transfer, a copy of the proposed form of sublease or assignment,
and such information as to the business, reputation,
responsibility, and financial capacity of the transferee as
Landlord shall reasonably require to evaluate the request. It shall
be reasonable for Landlord to withhold its consent to any Transfer
where: (i) in the case of a sublease, the subtenant has not
acknowledged that the provisions of this Lease control over any
inconsistent provision in the sublease; or (ii) in Landlord's
opinion, the proposed transferee does not have the ability to
perform its obligations under the assignment or sublease; or
(iii) the intended use by the transferee would damage the
goodwill or reputation of the Building; or (iv) the intended
use is not compatible with other uses of the Building, conflicts
with another tenant's right to exclusive use, or is not permitted
by applicable law or covenant. The foregoing criteria are not
exhaustive, and Landlord may withhold consent to a Transfer on any
other reasonable grounds. Tenant shall reimburse Landlord for all
of Landlord's costs incurred in connection with any request for
consent to a Transfer, including, without limitation, a reasonable
sum for attorneys' fees, not to exceed $2,500.00.
(c) In
the case of a proposed Transfer by Tenant, at the request of
Landlord, Tenant shall pay over to Landlord 50% of all sums (after
deduction of Tenant’s out of pocket costs for tenant
allowances, brokerage commissions, attorneys’ fees and
advertising costs related to the assignment or subletting) received
by Tenant in excess of the Rent payable by Tenant hereunder that is
attributable on an equally allocable square foot basis, to the
subletting or all or any portion of the Premises so
subleased.
(d) Tenant
covenants and agrees to pay to Landlord the amount of $250.00 as an
administrative charge to compensate Landlord for processing such
request and any other reasonable costs and expenses incurred by
Landlord in connection with such request (including, without
limitation, reasonable attorneys' fees), whether or not the consent
of Landlord is given to the Transfer requested by Tenant. Tenant
shall pay such $250.00 administrative charge and an estimated
amount of the other costs and expenses, including attorney's fees,
as determined by Landlord, which shall be due and payable to
Landlord at the time that Tenant submits such request for consent
to the Transfer to Landlord; provided, however, that upon request
from Tenant, Landlord shall provide Tenant with the estimated
amount of such other costs and expenses. When the actual amount of
such costs and expenses are known by Landlord, then if such
estimated amount paid by Tenant is greater than the actual amount
of such costs and expenses, Landlord shall refund any such excess
to Tenant. If such estimated amount paid by Tenant is less than the
actual amount of such costs and expenses, Tenant shall pay to
Landlord, within ten (10) days after demand by Landlord, any such
additional actual costs and expenses. The payment of such
administrative charge and other costs and expenses by Tenant shall
be a condition precedent to the effectiveness of any consent by
Landlord to such Transfer.
(e) Notwithstanding
anything to the contrary, Tenant shall not be entitled to make a
Transfer to an existing tenant of Landlord or its Related Parties
(as herein defined), or any subtenant or assignee thereof, or any
person or entity with whom Landlord or its Related Parties
negotiated or had contact or to whom Landlord has given, or
received therefrom, any written or oral proposal regarding a lease
of space in the Building within the six (6) month period preceding
Tenant's request for such Transfer. Tenant shall not publicly
advertise the rate or other terms upon which Tenant is willing to
Transfer the Premises, and all other public advertisements of a
Transfer shall be subject to the prior written approval of
Landlord, which approval shall not be unreasonably withheld. Public
advertisement shall include, without limitation, the placement or
displays of any signs or lettering on or above the Premises. If at
the time of the proposed Transfer there is any vacant or unoccupied
space in the Building, Tenant shall not be entitled to Transfer or
offer to Transfer the Premises at a rental rate less than the
prevailing fair market rental then offered by Landlord, in its sole
and absolute discretion, for such other space.
(f) For
the purposes of this Lease, the term "Transfer" shall also include:
the transfer or change, whether voluntary, involuntary or by
operation of law, of fifty percent (50%) or more of the control or
ownership, whether legal or beneficial, in Tenant within a twelve
(12) month period; the dissolution, merger, consolidation or other
reorganization of Tenant; or the withdrawal, resignation or
termination of the majority of the shareholders of Tenant.
Notwithstanding anything to the contrary in this Section 8.15,
Tenant may, without obtaining Landlord's consent, complete a
Transfer to a Permitted Transferee subject to the following
conditions: (a) the proposed use of the Premises shall be the same
as Tenant's use and Landlord shall not be required, as a result of
applicable laws, to make any renovations to the Property or provide
special services as a result of such Transfer, and (b) not less
than 30 days following the effective date of the Transfer, Tenant
provides Landlord with documentation evidencing the Transfer and
such other evidence as Landlord may reasonably require to establish
that the Transfer complies with the provisions of this Section.
"Permitted Transferee" means: (1) any subsidiary or affiliate in
which Tenant owns at least a 25% interest; (2) any parent of
Tenant; (3) any subsidiary or affiliate in which Tenant's parent
owns at least a 25% interest; or (4) any entity into which Tenant
may be merged or consolidated or which purchases all or
substantially all of the assets or beneficial ownership interests
of Tenant; provided that the Permitted Transferee has a net worth
at least equal to Tenant's net worth (as defined in accordance with
generally accepted accounting principles consistently applied) as
of the date of this Lease.
(g) As
a condition to any Transfer by Tenant, Tenant shall acknowledge in
writing to Landlord that Tenant shall remain obligated and liable
under this Lease, any assignee or other transferee (other than a
subtenant) shall expressly assume all the obligations of Tenant
under this Lease, and any subtenant shall covenant to Landlord to
comply with all obligations of Tenant under this Lease as applied
to the portion of the Premises so sublet and to attorn to Landlord,
at Landlord's written election, in the event of any termination of
this Lease prior to the expiration date of the Lease Term; all of
which shall be in a written instrument satisfactory to Landlord and
furnished to Landlord not later than fifteen (15) days prior to the
effective date of such Transfer.
8.16 Annual
Financial Statements. Tenant covenants and agrees to furnish
to Landlord, within one hundred twenty (120) days after the end of
each calendar year upon written request thereof from Landlord,
copies of annual audited financial statements of Tenant. In
addition, no more than 1 time in any calendar year during the Lease
Term, Tenant covenants and agrees to furnish to Landlord, within
forty-five (45) days after written request thereof from Landlord
copies of any unaudited financial statements of Tenant which
financial statements shall include a balance sheet as of the end
of, and a statement of profit and loss for, the preceding fiscal
year of Tenant and, if regularly prepared by Tenant, a statement of
sources and use of funds for the preceding fiscal year. Landlord
may deliver any such financial statements to any existing or
prospective Mortgagee or purchaser of the Property. All information
provided by Tenant under this Section shall be treated by Landlord
as confidential non-publicly available information, and Landlord
shall use reasonable efforts to maintain the confidentiality of
such information, but Landlord shall not be prohibited from
disclosing such information to its attorneys, accountants,
Mortgagees, or proposed lenders on a similarly confidential basis
or otherwise as reasonably required in enforcing this Lease. In the
event of a sale or refinancing of the Building, Landlord shall use
reasonable efforts to maintain the confidentiality of such
information, but Landlord shall not be prohibited from disclosing
Tenant's audited financials directly to the purchaser or proposed
lender on a similarly confidential basis but the accuracy of the
information set forth in the unaudited financials may not be relied
upon by any such purchaser or proposed lender. Tenant shall not be
required to provide financial information pursuant to this Section
8.16 in the event Tenant is a publicly traded company and its
financial statements are available to the public.
8.17 Payment
of Taxes. Tenant covenants and agrees to pay promptly when
due all personal property taxes on personal property of Tenant on
the Premises and all federal, state and local income taxes, sales
taxes, use taxes, Social Security taxes, unemployment taxes and
taxes withheld from wages or salaries paid to Tenant's employees,
the nonpayment of which might give rise to a lien on the Premises
or Tenant's interest therein, and to furnish, if requested by
Landlord, evidence of such payments.
8.18 Estoppel
Certificates. Tenant covenants and agrees to execute,
acknowledge and deliver to Landlord, upon Landlord's written
request, a written statement certifying that this Lease is
unmodified (or, if modified, stating the modifications) and in full
force and effect; stating the dates to which Basic Rent has been
paid; stating the amount of the Security Deposit held by Landlord;
stating the amount of the Monthly Deposits held by Landlord for the
then tax and insurance year; stating that there have been no
defaults by Landlord or Tenant and no event which with the giving
of notice or the passage of time, or both, would constitute such a
default (or, if there have been defaults, setting forth the nature
thereof); and stating such other matters concerning this Lease as
Landlord may reasonably request. Tenant agrees that such statement
may be delivered to and relied upon by any existing or prospective
Mortgagee or purchaser of the Property. Tenant agrees that a
failure to deliver such a statement within ten (10) days after
written request from Landlord shall be conclusive upon Tenant that
this Lease is in full force and effect without modification except
as may be represented by Landlord; that there are no uncured
defaults by Landlord or Tenant under this Lease except as may be
represented by Landlord; and that any representation by Landlord
with respect to Basic Rent, the Security Deposit, the Monthly
Deposits and any other permitted matter are true.
8.19 Landlord's
Access to Demised Premises. Tenant covenants and agrees that
Landlord and the authorized representatives of Landlord shall have
the right to enter the Premises at any reasonable time during
ordinary business hours (or at any time in the event of an
emergency) for the purposes of inspecting, repairing or maintaining
the Premises or the Building, performing any alterations or
improvements to the Premises or the Building as Landlord may
determine from time to time, performing any obligations of Tenant
which Tenant has failed to perform hereunder, or for the purposes
of showing the Premises to any existing or prospective Mortgagee,
purchaser or tenant of the Property or the Premises. Tenant
covenants and agrees that Landlord may at any time and from time to
time place on the Property or the Premises one or more signs
advertising the Property or the Premises for sale or for
lease.
8.20 Fixtures,
Improvements and Equipment. Tenant covenants and agrees that
all fixtures and improvements on the Premises and all equipment
relating to the use and operation of the Premises (as distinguished
from operations incident to the business of Tenant), including all
plumbing, heating, lighting, electrical and air conditioning
fixtures and equipment, whether or not attached to or affixed to
the Premises, and whether now or hereafter located upon the
Premises, shall be and remain the property of Landlord upon
expiration of the Lease Term. Tenant
shall have the right to use the furniture, furnishings and
equipment (collectively, "FF&E") located in the Premises as of
the Delivery Date at no additional charge for the remainder of the
Term. The parties shall prepare an inventory list of the FF&E
on or before the Delivery Date. The FF&E shall be delivered to
Tenant on the Delivery Date in their current "as is" condition,
normal wear and tear excepted. In addition to the provisions
hereinabove, the following terms and conditions shall govern
Tenant's use of the FF&E under the Lease:
A. Tenant
agrees to pay all sales (except sales tax applicable to acquisition
of the FF&E), use, excise, and personal property taxes,
assessments, and all other governmental charges, fines or penalties
whatsoever by whomsoever and whenever payable, on or relating to
the FF&E and such other taxes, fees, assessments, and charges
levied upon Landlord after the Commencement Date, other than
federal or state income assessed upon the FF&E by state or
local laws or taxes, fees, assessments and charges which were
delinquent prior to the Commencement Date or otherwise delinquent
due to the fault of Landlord, and Tenant shall file all returns
required therefor.
B. Title
to each item of FF&E shall remain in Landlord at all times.
Tenant shall keep the FF&E free from any and all liens and
claims, and shall do or permit no act or thing whereby Landlord's
title or rights may be encumbered or impaired.
C. Tenant
agrees that Landlord may assign all right, title, and interest of
Landlord in and to each item of FF&E and all monies due or to
become due to Landlord hereunder.
D. From
and after the Delivery Date through the remaining Lease Term,
Tenant shall maintain, service, and keep in good repair each item
of FF&E at its own expense. Tenant shall comply with all laws
and regulations applicable to said items of FF&E and shall keep
them free and clear of any claims, liens or encumbrances. All risks
of loss or damage to each item of FF&E shall be borne by
Tenant, subject to reimbursement under insurance carried on the
Premises. Tenant shall at its own expense keep each item of
FF&E insured, at the full value thereof, against all risks of
loss or damage and shall likewise insure all FF&E adequately
against property damage and public liability in accordance with the
provisions of the Lease. All attachments, accessories, and repairs,
at any time made to or placed upon the FF&E, or any replacement
thereof, shall become part of the FF&E and shall become the
property of Landlord. If any item of FF&E is damaged beyond
repair, Tenant shall replace such item of FF&E kind for kind,
provided such replacements are of the same value and it being
agreed that such replacement chattels shall be free and clear of
any and all security agreements, security interests, financing
statements, chattel mortgages, conditional bills of sale, liens,
indebtedness, encumbrances, and title retention agreements of every
nature and kind whatsoever.
E. Landlord,
not being the manufacturer of the FF&E nor manufacturer's
agent, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO, AMONG OTHER THINGS, FITNESS, QUALITY,
DESIGN, CONDITION, CAPACITY, SUITABILITY, MERCHANTABILITY, OR
PERFORMANCE OF THE FF&E OR OF THE MATERIAL OR WORKMANSHIP
THEREOF, IT BEING AGREED THAT THE FF&E IS PROVIDED "AS IS" AND
THAT ALL SUCH RISKS, AS BETWEEN LANDLORD AND TENANT, ARE TO BE
BORNE BY TENANT AT ITS SOLE RISK. Landlord shall not be liable to
Tenant for any liability, loss, or damage caused or alleged to be
caused directly or indirectly by the FF&E, by any inadequacy
of, or defect therein, or by any incident in connection therewith.
Tenant, accordingly, agrees not to assert any claim whatsoever
against Landlord based thereon. Tenant further agrees, regardless
of cause, not to assert any claim whatsoever against Landlord for
loss of anticipatory profits or consequential damages. No oral
agreement, guarantee, promise, condition, representation or
warranty shall be binding. Any warranties provided by the
manufacturer or entity supplying the FF&E to Landlord, shall be
assigned by Landlord to Tenant, if assignable in accordance with
their terms. Landlord shall reasonably cooperate with Tenant to
enforce any warranties of any manufacturer or
supplier.
F. Tenant
shall keep the FF&E at the Premises and the FF&E shall be
used in the conduct of Tenant's business solely. Tenant shall cause
the FF&E to be operated by competent and qualified employees
only. Tenant shall use the FF&E in a careful and proper manner
and shall insure that the FF&E is not subjected to careless or
needless rough usage. Tenant shall comply with all national, state
and municipal, and other laws, ordinances, and regulations in any
way relating to the possession and use of the
FF&E.
8.21 Removal
of Tenant's Equipment. Tenant covenants and agrees to
remove, at or prior to the expiration or earlier termination of the
Lease Term, all of Tenant's Equipment, as hereinafter defined.
"Tenant's Equipment" shall mean all equipment, apparatus,
machinery, signs, furniture, furnishings, wires, cables or other
telecommunications, data or utility equipment or facilities, and
other personal property used in the operation of the business of
Tenant (as distinguished from the use and operation of the
Premises). Tenant's Equipment does not include the FF&E. If
such removal shall injure or damage the Premises Tenant covenants
and agrees, at its sole cost and expense, at or prior to the
expiration of the Lease Term, to repair such injury and damage in
good and workmanlike fashion and to place the Premises in the same
condition as the Premises would have been in if such Tenant's
Equipment had not been installed. If Tenant fails to remove any of
Tenant's Equipment by the expiration of the Lease Term, Landlord
may, at its option, keep and retain any such Tenant's Equipment or
dispose of the same and retain any proceeds therefrom, and Landlord
shall be entitled to recover from Tenant, any costs or expenses of
Landlord in removing the same and in restoring the Premises, in
excess of the actual proceeds, if any, received by Landlord from
disposition thereof. Tenant releases and discharges Landlord from
any and all claims and liabilities of any kind arising out of
Landlord's disposition of Tenant's Equipment.
8.22 Tenant
Indemnification of Landlord. Tenant covenants and agrees to
protect, indemnify, defend and save Landlord and Landlord's
managers, employees, agents, beneficiaries, successors, assigns and
other affiliated or related parties ("Related Parties") harmless
from and against all liability, obligations, claims, damages,
penalties, causes of action, costs and expenses, including
attorneys' fees, imposed upon, incurred by or asserted against
Landlord or its Related Parties by reason of (a) any accident,
injury to or death of any person or loss of or damage to any
property occurring on or about the Premises; (b) any act or
omission of Tenant or Tenant's agents, officers or employees or any
other person entering upon the Premises under express or implied
invitation of Tenant (collectively, "Tenant's Agents");
(c) any use which may be made of, or condition existing upon,
the Premises; (d) any improvements, fixtures or equipment upon
the Premises; (e) any failure on the part of Tenant or
Tenant's Agents to perform or comply with any of the provisions,
covenants or agreements of Tenant contained in this Lease;
(f) any violation of any law, ordinance, order, rule or
regulation of governmental authorities having jurisdiction over
Tenant or Tenant's Agents; or (g) any repairs, maintenance or
Changes to the Premises made by, through or under Tenant. Tenant
further covenants and agrees that, in case any action, suit or
proceeding is brought against Landlord or its Related Parties by
reason of any of the foregoing, Tenant shall, at Tenant's sole cost
and expense, defend Landlord and its Related Parties in any such
action, suit or proceeding.
8.23 Landlord
Indemnification of Tenant. Landlord covenants and agrees to
protect, indemnify, defend and save Tenant harmless from and
against all liability, obligations, claims, damages, penalties,
causes of action, costs and expenses, including attorneys' fees,
imposed upon, incurred by, or asserted against Tenant by a third
party (excluding Tenant and Tenant's Related Parties) by reason of
(a) Landlord's gross negligence or willful misconduct; or
(b) a default by Landlord under this Lease, after the lapse of
all applicable notice, grace and cure periods. Tenant waives and
releases any claims Tenant may have against Landlord or its Related
Parties for loss, damage or injury to person or property sustained
by Tenant or Tenant's Agents resulting from any cause whatsoever
other than as expressly provided in this Lease. Notwithstanding
anything to the contrary, the indemnification of Tenant by Landlord
provided in this Section 8.24 shall be subject to all waivers,
limitations and restrictions otherwise provided in this Lease.
Notwithstanding anything to the contrary, Landlord and its Related
Parties shall not be personally liable with respect to any of the
terms, covenants and conditions of this Lease, and Tenant shall
look solely to the equity of Landlord in the Property in the event
of any default or liability of Landlord under this Lease, such
exculpation of liability to be absolute and without any exception
whatsoever.
8.24 Release
upon Transfer by Landlord. In the event of a transfer by
Landlord of the Property or of Landlord's interest as Landlord
under this Lease, Landlord's successor or assign shall take subject
to and be bound by this Lease and in such event, Tenant covenants
and agrees that Landlord and its Related Parties shall be released
from all obligations of Landlord under this Lease, except
obligations which arose and matured prior to such transfer by
Landlord; that Tenant shall thereafter look solely to Landlord's
successor or assign for satisfaction of the obligations of Landlord
under this Lease; and that, upon demand by Landlord or Landlord's
successor or assign, Tenant shall attorn to such successor or
assign.
8.25 Hazardous
Substances.
(a) Tenant
shall, at its sole cost and expense, keep and maintain the Premises
in good condition, ordinary wear and tear and damage by fire or
other casualty excepted and promptly respond to and clean up any
release or threatened release of any Hazardous Substance into the
drainage systems, soil, surface water, groundwater, or atmosphere,
in a safe manner, in strict accordance with Applicable Law, and as
authorized or approved by all federal, state, and/or local agencies
having authority to regulate the permitting, handling, and cleanup
of Hazardous Substances; provided, however, Tenant's obligations
under this sentence shall not include any Hazardous Substances
which Tenant proves existed on the Property on the Commencement
Date of the Lease Term unless caused by any act or omission of
Tenant or Tenant's Agents. Tenant and Tenant's Agents shall not
use, store, generate, treat, transport, or dispose of any Hazardous
Substance at the Premises without first obtaining Landlord's
written approval, which consent shall be in Landlord's sole and
absolute discretion. Tenant shall notify Landlord and seek such
approval in writing at least thirty (30) days prior to bringing any
Hazardous Substance onto the Property. Landlord may withdraw
approval of any such Hazardous Substance at any time, for
reasonable cause related to the threat of site contamination, or
damage or injury to persons, property or resources on or near the
Property. Upon withdrawal of such approval, Tenant shall
immediately remove the Hazardous Substance from the site.
Landlord's failure to approve the use of a Hazardous Substance
under this Section shall not limit or affect Tenant's obligations
under this Lease, including Tenant's duty to remedy or remove
releases or threatened releases; to comply with Applicable Law
relating to the use, storage, generation, treatment,
transportation, and/or disposal of any such Hazardous Substances;
or to indemnify Landlord against any harm or damage caused
thereby.
(b) For
any month in which any Hazardous Substances have been used,
generated, treated, stored, transported or otherwise been present
on or in the Premises pursuant to the provisions of this Section,
Tenant shall provide Landlord with a written report listing the
Hazardous Substances which were present on the Property; all
releases of Hazardous Substances that occurred or were discovered
on the Premises; all compliance activities related to such
Hazardous Substances, including all contacts with government
agencies or private parties of any kind concerning Hazardous
Substances; and all manifests, business plans, consent agreements
or other documents relating to Hazardous Substances executed or
requested during that time period. The report shall include copies
of all documents and correspondence related to such activities and
written reports of all oral contacts relating thereto. Tenant shall
permit Landlord and its Related Parties to enter into and upon the
Premises, without notice, at all reasonable times (or at any time
in the event of an emergency) for the purpose of inspecting the
Premises and all activities thereon, including activities involving
Hazardous Substances, or for purposes of maintaining any buildings
on the Premises. Such right of entry and inspection shall not
constitute managerial or operational control by Landlord over any
activities or operations conducted on the Property by
Tenant.
(c) Tenant
hereby indemnifies, defends and holds harmless Landlord from and
against any suits, actions, legal or administrative proceedings,
demands, claims, liabilities, fines, penalties, losses, injuries,
damages, expenses or costs, including interest and attorneys' fees,
incurred by, claimed or assessed against Landlord or its Related
Parties (i) under any laws, rules, regulations including,
without limitation, Applicable Laws, (ii) in any way connected
with any injury to any person or damage to any property, or
(iii) any loss to Landlord or its Related Parties occasioned
in any way by Hazardous Substances on the Property and resulting
from the acts of Tenant and Tenant's Agents; provided, however,
Tenant's obligations under this sentence shall not include any
Hazardous Substances which existed on the Property on the
Commencement Date of the Lease Term unless caused by any act or
omission of Tenant or Tenant's Agents. This indemnity specifically
includes the direct obligation of Tenant to perform any remedial or
other activities required, ordered, recommended or requested by any
agency, government official or third party, or otherwise necessary
to avoid or minimize injury or liability to any person, or to
prevent the spread of pollution ("Remedial Work"), however it came
to be located thereon. Tenant shall perform all Remedial Work in
its own name in accordance with Applicable Laws. Without waiving
its rights hereunder, Landlord may, at its option, perform the
Remedial Work and thereafter seek reimbursement for the costs
thereof. Tenant shall permit Landlord access to the Premises to
perform any Remedial Work. Whenever Landlord has incurred costs
described in this Section, Tenant shall, within ten (10) days of
receipt of written notice thereof, reimburse Landlord for all such
expenses together with interest from the date of expenditure at the
rate provided in Section 12.9 hereof.
(d) Without
limiting its obligations under any other Section of this Lease,
Tenant shall be solely and completely responsible for responding to
and complying with any administrative notice, order, request or
demand, or any third party claim or demand relating to potential or
actual contamination on the Property and resulting from the acts of
Tenant and Tenant's Agents. The responsibility conferred under this
Section includes but is not limited to responding to such orders on
behalf of Landlord and defending against any assertion of
Landlord's financial responsibility or individual duty to perform
under such orders. Tenant assumes all liabilities or
responsibilities which are assessed against Landlord in any action
described under this Section. Tenant hereby waives, releases and
discharges forever Landlord from all present and future claims,
demands, suits, legal and administrative proceedings and from all
liability for damages, losses, costs, liabilities, fees and
expenses, present and future, arising out of or in any way
connected with Landlord's use, maintenance, ownership or operation
of the Property, any condition of environmental contamination of
the Property, or the existence of Hazardous Substances in any state
on the Property, however they came to be placed there.
(e) Landlord
consents to Tenant's use of ordinary office, warehouse and
janitorial products in customary quantities within the Premises, in
accordance with Applicable Laws and the terms and conditions of
this Lease.
(f) "Hazardous
Substance(s)" shall mean any hazardous substance, pollutant,
contaminant, waste, by-product or constituent regulated under any
of the Applicable Laws (as hereinafter defined); oil and petroleum
products, natural gas, natural gas liquids, liquefied natural gas,
and synthetic gas usable for fuel; pesticides regulated under any
of the Applicable Laws; asbestos and asbestos containing materials,
PCBs and other substances regulated under any of the Applicable
Laws; raw materials, building components and the product of any
manufacturing or other activities on the Property; source material,
special nuclear material, by-product material and any other
radioactive materials or radioactive wastes, however produced,
regulated under the Atomic Energy Act or the Nuclear Waste Policy
Act; chemicals subject to the OSHA Hazard Communications Standard,
29 C.F.R. § 19.10.1200 et seq.; radon; industrial process
and pollution control wastes, whether or not defined as hazardous
within the meaning of any Applicable Law; and any substance which
at any time shall be listed as "hazardous" or "toxic" or regulated
under any of the Applicable Laws.
(g) "Applicable
Law(s)" shall include, but shall not be limited to, all federal,
state, and local statutes, ordinances, regulations and rules
regulating the environmental quality, health, safety, contamination
and cleanup including, without limitation, the Clean Air Act, as
amended, 42 U.S.C. § 7401 et seq., the Federal Water
Pollution Control Act, as amended, 33 U.S.C. § 1251
et seq.; the Water
Quality Act of 1987, as amended; the Federal Insecticide, Fungicide
and Rodenticide Act, as amended, 7 U.S.C. § 136
et seq.; the Marine
Protection, Research and Sanctuaries Act, as amended,
33 U.S.C. § 1401 et seq.; the National
Environmental Policy Act, as amended, 42 U.S.C.
§ 4321 et seq.; the Noise Control Act, as
amended, 42 U.S.C. § 4901 et seq.; the Occupational Safety
and Health Act, as amended, 29 U.S.C. § 651
et seq.; the Resource
Conservation and Recovery Act, as amended, 42 U.S.C.
§ 609 et seq.; the Safe Drinking Water
Act, as amended, 42 U.S.C. § 300(f) et seq.; the Comprehensive
Environmental Response, Compensation and Liability Act, as amended,
42 U.S.C. § 9601 et seq.; the Toxic Substances
Control Act, as amended, 15 U.S.C. § 2601
et seq.; the Atomic
Energy Act, as amended, 42 U.S.C. § 2011
et seq.; the Nuclear
Waste Policy Act of 1982, as amended, 42 U.S.C.
§ 10101 et seq.; and state superlien and
environmental cleanup statutes, with implementing regulations and
guidelines. Applicable Laws shall also include all federal, state,
regional, county, municipal, agency, judicial and other local laws,
statutes, ordinances, regulations, rules and rulings, whether
currently in existence or hereinafter enacted or promulgated, that
govern or relate to: (i) the existence, cleanup and/or remedy
of contamination of property; (ii) the protection of the
environment from spilled, deposited or otherwise emplaced
contamination; (iii) the control of Hazardous Substances; or
(iv) the use, generation, discharge, transportation,
treatment, removal or recovery of Hazardous
Substances.
IX.
DAMAGE OR
DESTRUCTION.
9.1 Tenant's
Notice of Damage. If any portion of the Premises shall be
damaged or destroyed by fire or other casualty, Tenant shall give
prompt written notice thereof to Landlord ("Tenant's Notice of
Damage") and cause the insurance company to commit to make all
proceeds of the insurance available to Landlord as the primary
insured or loss payee.
9.2 Substantial
Damage. Upon receipt of Tenant's Notice of Damage, Landlord
shall promptly proceed to determine the nature and extent of the
damage or destruction and to estimate the time necessary to repair
or restore the Premises. As soon as reasonably possible, Landlord
shall give written notice to Tenant stating Landlord's estimate of
the time necessary to repair or restore the Premises ("Landlord's
Notice of Repair Time"). If Landlord reasonably estimates that
repair or restoration of the Premises cannot be completed within
one hundred eighty (180) days from the time of Tenant's Notice of
Damage, Landlord and Tenant shall each have the option to terminate
this Lease. If, however, the damage or destruction was caused by
the act or omission of Tenant or Tenant's Agents, Landlord shall
have the option to terminate this Lease if Landlord reasonably
estimates that the repair or restoration cannot reasonably be
completed within one hundred eighty (180) days from the time of
Tenant's Notice of Damage, but Tenant shall not have the option to
terminate this Lease. Any option granted hereunder shall be
exercised by written notice to the other party given within ten
(10) days after Landlord's Notice of Repair Time. If either
Landlord or Tenant exercises its option to terminate this Lease,
the Lease Term shall expire ten (10) days after written notice by
either Landlord or Tenant exercising such party's option to
terminate this Lease. Following termination of this Lease under the
provisions hereof, Landlord shall refund to Tenant such amounts of
Basic Rent and Additional Rent theretofore paid by Tenant as may be
applicable to the period subsequent to the time of Tenant's Notice
of Damage less the reasonable value of any use or occupation of the
Premises by Tenant subsequent to the time of Tenant's Notice of
Damage.
9.3 Building
Damage. If the Building shall be damaged or destroyed by
fire or other casualty to the extent of thirty-three and one-third
percent (33⅓%) or more of the replacement value of the
Building, Landlord may elect not to reconstruct or rebuild such
Building. Upon written notice to Tenant given within twenty (20)
days after Landlord's Notice of Repair Time, this Lease shall
terminate and Landlord shall refund to Tenant such amounts of Basic
Rent and Additional Rent paid by Tenant for the period after such
damage less the reasonable value of any use or occupation of the
Premises by Tenant during such period.
9.4 Damage
During Final Two Years. Notwithstanding anything to the
contrary set forth herein, if the Premises or the Building shall be
damaged during the last two (2) years of the Lease Term to the
extent of twenty percent (20%) or more of the then cost of
replacement, Landlord may elect, within sixty (60) days after the
occurrence of such event, either to repair or rebuild the Premises,
to the extent Landlord is obligated to repair the Premises or the
Building pursuant to this Lease, or to terminate this Lease, which
termination shall be effective upon giving notice of termination to
Tenant in writing within sixty (60) days after the happening of the
event causing the damage. If Landlord fails to timely give such
notice of termination, this Lease shall, except as may be otherwise
herein provided, remain in full force and effect, and Landlord
shall proceed to commence repair or rebuilding in accordance with
this Lease.
9.5 Repair
and Abatement. If repair and restoration of the Premises can
be completed within the period specified in Section 9.2, in
Landlord's reasonable estimation, or if neither Landlord nor Tenant
terminate this Lease as provided in Sections 9.2 or 9.3, then
this Lease shall continue in full force and effect and Landlord
shall proceed forthwith to cause the Premises (including any
improvements constructed by Landlord but excluding any alterations,
improvements, Changes, fixtures and personal property constructed
or owned by Tenant) to be repaired and restored with reasonable
diligence and there shall be abatement of Basic Rent and Additional
Rent proportionate to the extent of the space and period of time
that Tenant is unable to use and enjoy the Premises.
9.6 Insurance
Proceeds. The proceeds of any Property Insurance maintained
on the Premises, other than property insurance maintained by Tenant
on fixtures and personal property of Tenant, shall be paid to and
become the property of Landlord, subject to any obligation of
Landlord to cause the Premises to be repaired and restored and
further subject to any rights under any Mortgage encumbering the
Property to such proceeds. Landlord's obligation to repair and
restore the Premises provided in this Section 9 is limited to the
repair and restoration that can be accomplished with the proceeds
of any Property Insurance maintained on the Premises. The amount of
any such insurance proceeds is subject to any right of any
Mortgagee to apply such proceeds to its secured debt under its
Mortgage.
10.1 Taking.
A "Taking" shall mean the taking of all or any portion of the
Premises or the Building as a result of the exercise of the power
of eminent domain or condemnation for public or quasi-public use or
the sale of all or part of the Premises or the Building under the
threat of condemnation. A "Substantial Taking" shall mean a Taking
of twenty-five percent (25%) or more of the Premises. An
"Insubstantial Taking" shall mean a Taking which does not
constitute a Substantial Taking.
10.2 Substantial
Taking. If there is a Substantial Taking with respect to the
Premises, the Lease Term shall expire on the date of vesting of
title pursuant to such Taking. In the event of termination of this
Lease under the provisions hereof, Landlord shall refund to Tenant
such amounts of Basic Rent and Additional Rent theretofore paid by
Tenant as may be applicable to the period subsequent to the time of
termination of this Lease.
10.3 Insubstantial
Taking. In the event of an Insubstantial Taking with respect
to the Premises, this Lease shall continue in full force and
effect, Landlord shall proceed forthwith to cause the Premises (but
excluding any alterations, improvements, Changes, fixtures and
personal property constructed or owned by Tenant), less such
Taking, to be restored as near as may be to the original condition
thereof and there shall be abatement of Basic Rent and Additional
Rent proportionate to the extent of the space so
taken.
10.4 Award.
The total award, compensation, damages or consideration received or
receivable as a result of a Taking ("Award") shall be paid to and
be the property of Landlord, including, without limitation, any
part of the Award made as compensation for diminution of the value
of this leasehold or the fee of the Premises. Tenant hereby assigns
to Landlord, all of Tenant's right, title and interest in and to
any such Award. Tenant covenants and agrees to execute, immediately
upon demand by Landlord, such documents as may be necessary to
facilitate collection by Landlord of any such Award.
Notwithstanding Landlord's right to the entire Award, Tenant shall
be entitled to a separate award, if any, for the loss of Tenant's
personal property, the loss of Tenant's business and profits, and
Tenant's moving expenses.
11.1 Defaults.
In the event that any of the following events shall occur, Tenant
shall be deemed to be in default of Tenant's obligations under this
Lease (each of the following shall be referred to as a "Default by
Tenant").
11.2 Failure
to Pay. A Default by Tenant shall exist if Tenant fails to
pay Basic Rent, Additional Rent, Monthly Deposits or any other
amounts payable by Tenant when such amount is due under the terms
of this Lease (provided, however, that Tenant shall have a right to
cure such Default by Tenant not later than three (3) days after
receipt of written notice of such non-payment by Landlord but
Tenant is not entitled to such notice and cure period more than one
(1) time during any calendar year nor more than two (2) times
during the Lease Term hereof).
11.3 Violation
of Lease Terms. A Default by Tenant shall exist if Tenant
breaches or fails to comply with any non-monetary agreement, term,
covenant or condition in this Lease applicable to Tenant, and
Tenant does not cure such breach or failure within twenty (20) days
after written notice thereof by Landlord to Tenant, or, if such
breach or failure to comply cannot be reasonably cured within such
20-day period, if Tenant shall not in good faith commence to cure
such breach or failure to comply within such 20-day period or shall
not diligently proceed therewith to completion within sixty (60)
days following such notice. Landlord shall not be required to give
written notice of a non-monetary Default by Tenant more than three
(3) times in any twelve month period during the Lease Term, and
thereafter Tenant's failure to perform any non-monetary agreement,
term, covenant, or condition as and when required to be performed
by Tenant under the terms of this Lease shall be a Default by
Tenant without notice or demand.
11.4 Transfer
of Interest Without Consent. A Default by Tenant shall exist
if Tenant's interest under this Lease or in the Premises shall be
transferred to or pass to or devolve upon any other party without
Landlord's prior written consent.
11.5 Execution
and Attachment. A Default by Tenant shall exist if Tenant's
interest under this Lease or in the Premises shall be taken upon
execution or by other process of law directed against Tenant, or
shall be subject to any attachment at the instance of any creditor
or claimant against Tenant and said attachment shall not be
discharged or disposed of within fifteen (15) days after the levy
thereof.
11.6 Bankruptcy.
A Default by Tenant shall exist if Tenant shall file a petition in
bankruptcy or insolvency or for reorganization or arrangement under
the bankruptcy laws of the United States or under any similar act
of any state, or shall voluntarily take advantage of any such law
or act by answer or otherwise, or shall be dissolved or shall make
an assignment for the benefit of creditors or if involuntary
proceedings under any such bankruptcy or insolvency law or for the
dissolution of Tenant shall be instituted against Tenant or a
receiver or trustee shall be appointed for the Premises or for all
or substantially all of the property of Tenant, and such
proceedings shall not be dismissed or such receivership or
trusteeship vacated within sixty (60) days after such institution
or appointment.
XII.
LANDLORD'S
REMEDIES.
12.1 Remedies.
Upon the occurrence of any Default by Tenant, Landlord shall have
the right, at Landlord's election, then or any time thereafter, to
exercise any one or more of the following remedies.
12.2 Cure.
In the event of a Default by Tenant, Landlord may, at Landlord's
option, but without obligation to do so, and without releasing
Tenant from any obligations under this Lease, make any payment or
take any action as Landlord may deem necessary or desirable to cure
any such Default by Tenant in such manner and to such extent as
Landlord may deem necessary or desirable. Landlord may do so
without additional demand on, or written notice to, Tenant and
without giving Tenant an opportunity to cure such Default by Tenant
beyond any applicable notice and cure period otherwise set forth in
this Lease. Tenant covenants and agrees to pay to Landlord, within
ten (10) days after demand, all advances, costs and expenses of
Landlord in connection with the making of any such payment or the
taking of any such action including, without limitation, (a) a
charge in the amount of fifteen percent (15%) of such advances,
costs and expenses payable to Landlord to compensate for the
administrative overhead attributable to such action,
(b) reasonable attorneys' fees, and (c) interest as
hereinafter provided from the date of payment of any such advances,
costs and expenses by Landlord. Action taken by Landlord may
include commencing, appearing in, defending or otherwise
participating in any action or proceeding and paying, purchasing,
contesting or compromising any claim, right, encumbrance, charge or
lien, with respect to the Premises which Landlord, in its sole and
absolute discretion, may deem necessary or desirable to protect its
interest in the Premises and under this Lease. In the event that
the Lease Term has expired or Tenant is no longer occupying the
Premises, Landlord shall be entitled to take such actions as
provided under this Section 12.2 without Landlord being
required to provide the notice to Tenant under
Section 11.3.
12.3 Termination
and Damages. In the event of a Default by Tenant, Landlord
may terminate this Lease, effective at such time as may be
specified by written notice to Tenant, and demand (and, if such
demand is refused, recover) possession of the Premises from Tenant.
Tenant shall remain liable to Landlord for damages in an amount
equal to the Basic Rent, Additional Rent and other sums which would
have been owing by Tenant hereunder for the balance of the Lease
Term, had this Lease not been terminated, less the net proceeds, if
any, of any reletting of the Premises by Landlord subsequent to
such termination, after deducting all Landlord's expenses in
connection with such recovery of possession or reletting. Landlord
shall be entitled to collect and receive such damages from Tenant
on the days on which the Basic Rent, Additional Rent and other
amounts would have been payable if this Lease had not been
terminated. Alternatively, at the option of Landlord, Landlord
shall be entitled to recover forthwith from Tenant, as damages for
loss of the bargain and not as a penalty, an aggregate sum which,
at the time of such termination of this Lease, represents the
excess, if any, of (a) the aggregate of the Basic Rent,
Additional Rent and all other sums payable by Tenant hereunder that
would have accrued for the balance of the Lease Term, over
(b) the aggregate rental value of the Premises for the balance
of the Lease Term, both discounted to present worth at the discount
rate of the Federal Reserve Bank of San Francisco at the time of
such award plus one percent (1%) per annum. Landlord agrees to use
commercially reasonable efforts in order to mitigate its damages
following any default by Tenant under this Lease; provided,
however, nothing shall require Landlord to (i) attempt to re-lease
the Premises unless and until Landlord obtains possession of the
Premises, or (ii) lease less than all of the Premises or lease the
Premises in smaller increments than the entire Demised
Premises.
12.4 Repossession
and Reletting. In the event of a Default by Tenant, Landlord
may reenter and take possession of the Premises or any part
thereof, without demand or notice, and repossess the same and expel
Tenant and any party claiming by, under or through Tenant, and
remove the effects of both using such force for such purposes as
may be necessary, without being liable for prosecution on account
thereof or being deemed guilty of any manner of trespass, and
without prejudice to any remedies for arrears of rent or right to
bring any proceeding for breach of covenants or conditions. No such
reentry or taking possession of the Premises by Landlord shall be
construed as an election by Landlord to terminate this Lease unless
a written notice of such intention is given to Tenant. No notice
from Landlord hereunder or under a forcible entry and detainer
statute or similar law shall constitute an election by Landlord to
terminate this Lease unless such notice specifically so states.
Landlord reserves the right, following any reentry or reletting, to
exercise its right to terminate this Lease by giving Tenant such
written notice, in which event this Lease shall terminate as
specified in said notice. After recovering possession of the
Premises, Landlord may, from time to time, but shall not be
obligated to, relet the Premises, or any part thereof, for the
account of Tenant, for such term or terms and on such conditions
and upon such other terms as Landlord, in its sole and absolute
discretion, may determine. Landlord may make such repairs,
alterations or improvements as Landlord may consider appropriate to
accomplish such reletting, and Tenant shall reimburse Landlord upon
demand for all costs and expenses, including attorneys' fees, which
Landlord may incur in connection with such reletting. Landlord may
collect and receive the rents for such reletting but Landlord shall
in no way be responsible for or liable for any failure to relet the
Premises, or any part thereof, or for any failure to collect any
rent due upon such reletting. Notwithstanding Landlord's recovery
of possession of the Premises, Tenant shall continue to pay on the
dates herein specified, the Basic Rent, Additional Rent and other
amounts which would be payable hereunder if such repossession had
not occurred. Upon the expiration or earlier termination of this
Lease, Landlord shall refund to Tenant any amount, without
interest, by which the amounts paid by Tenant, when added to the
net amount, if any, recovered by Landlord through any reletting of
the Premises, exceeds the amounts payable by Tenant under this
Lease. If, in connection with any reletting, the new lease term
extends beyond the existing Lease Term, or the Premises covered
thereby include other premises not part of the Premises, a fair
apportionment of the rent received from such reletting and the
expenses incurred in connection therewith shall be made in
determining the net amount recovered from such
reletting.
12.5 Intentionally
Omitted.
12.6 Suits
by Landlord. Actions or suits for the recovery of amounts
and damages payable under this Lease as a result of a default by
Tenant may be brought by Landlord from time to time, at Landlord's
election, and Landlord shall not be required to await the date upon
which the Lease Term would have expired to bring any such action or
suit.
12.7 Landlord
Enforcement Costs. All reasonable costs and expenses
incurred by Landlord in connection with collecting any amounts and
damages owing by Tenant pursuant to the provisions of this Lease or
to enforce any provision of this Lease, including reasonable
attorneys' fees whether or not any action is commenced by Landlord,
shall be paid by Tenant to Landlord upon demand.
12.8 Administrative
Late Charge. Notwithstanding any other remedies for
nonpayment of rent, if the monthly payment of Basic Rent and
Additional Rent are not received by Landlord on or before the fifth
(5th) day
of the month for which such rental is due, or if any other payment
due Landlord by Tenant is not received by Landlord on or before the
fifth (5th) day of the month
next following the month in which Tenant was invoiced, an
administrative late charge of six percent (6%) of such past due
amount shall become due and payable, in addition to such amounts
owed under this Lease, to help defray the additional cost to
Landlord for processing such late payments. Notwithstanding the
foregoing, the administrative late charge of six percent (6%) of
such past due amount is hereby waived in the first instance where
Landlord gives Tenant written notice of Tenant's failure to pay
such amount due and Tenant cures such failure within five (5) days
after the date of such written notice from Landlord to Tenant;
provided, however, Landlord shall not be obligated to deliver such
notice more than one (1) time in any 12-month period during the
Term and such late charge shall be due and payable with respect to
any future instances of Tenant's failure to make the appropriate
payment.
12.9 Interest
on Past-Due Payments and Advances. Tenant covenants and
agrees to pay Landlord interest on demand at the rate of fifteen
percent (15%) per annum, compounded on a monthly basis, on the
amount of any Basic Rent, Additional Rent or other charges not paid
when due, from the date due and payable (after allowing for any
applicable grace period), and on the amount of any payment made by
Landlord required to have been made by Tenant under this Lease and
on the amount of any costs and expenses, including reasonable
attorneys' fees, paid by Landlord in connection with the taking of
any action to cure any Default by Tenant, from the date of making
any such payment or the advancement of such costs and expenses by
Landlord. Notwithstanding the foregoing, the interest of fifteen
percent (15%) of such amount of any Basic Rent, Additional Rent or
other charges not paid when due is hereby waived in the first
instance where Landlord gives Tenant written notice of Tenant's
failure to pay such amount due and Tenant cures such failure within
five (5) days after the date of such written notice from Landlord
to Tenant; provided, however, Landlord shall not be obligated to
deliver such notice more than one (1) time in any 12-month period
during the Term and such interest charge shall be due and payable
with respect to any future instances of Tenant's failure to make
the appropriate payment.
12.10
Consequential
Damages. Neither Tenant nor Landlord shall be liable to the
other for any consequential or punitive damages (except that this
provision shall not limit the liability to Landlord for damages
arising from Tenant’s failure to timely surrender the
Premises as required by the provisions of this Lease).
12.11
Bankruptcy
Remedies. Nothing contained in this Lease shall limit or
prejudice the right of Landlord to prove and obtain as liquidated
damages in any bankruptcy, insolvency, receivership, reorganization
or dissolution proceeding, an amount equal to the maximum allowable
by any statute or rule of law governing such proceeding in effect
at the time when such damages are to be proved, whether or not such
amount be greater, equal or less than the amounts recoverable,
either as damages or rent, under this Lease.
12.12
Remedies
Cumulative. Exercise of any of the remedies of Landlord
under this Lease shall not prevent the concurrent or subsequent
exercise of any other remedy provided for in this Lease or
otherwise available to Landlord at law or in equity.
XIII.
SURRENDER AND
HOLDING OVER.
13.1 Surrender.
Upon the expiration or earlier termination of this Lease, or on the
date specified in any demand for possession by Landlord after any
Default by Tenant, Tenant covenants and agrees to surrender
possession of the Premises to Landlord broom clean, ordinary wear
and tear excepted, with all lighting, doors (including, without
limitation, all loading dock doors, dock levelers, and related dock
systems and areas) electrical and mechanical systems in good
working order and condition, all walls in clean condition and holes
or punctures in the walls repaired, and otherwise in the same
condition as when Tenant first occupied the Premises and all
telecommunications, data, utility or other wires, cables or other
equipment or facilities in the Premises or Reserved Area installed
by Tenant or for use by Tenant shall be removed by Tenant. Tenant,
at Landlord's option, shall transfer the telephone services to
Landlord instead of terminating such service account, provided that
Landlord bears any costs of such transfer. If, within the last
ninety (90) days of the Lease Term, Tenant has vacated the
Premises, Landlord shall have the right to decorate, remodel,
repair, or otherwise prepare the Premises for reletting and
re-occupancy.
13.2 Holding
Over. If Tenant shall hold over after the expiration of the
Lease Term, without the written agreement of Landlord providing
otherwise, Tenant shall be deemed to be a trespasser upon the
Premises, without permission from Landlord. If Landlord consents in
writing to such holdover, then Tenant shall be deemed to be a
tenant from month to month. In either such event, such holdover by
Tenant shall be at a rental, payable in advance, equal to one
hundred fifty percent (150%) of the Basic Rent payable under this
Lease immediately prior to such holdover, and Tenant shall be bound
by all of the other terms, covenants and agreements of this Lease.
Nothing contained herein shall be construed to give Tenant the
right to hold over at any time, and Landlord may exercise any and
all remedies at law or in equity to recover possession of the
Premises, as well as any damages incurred by Landlord, due to
Tenant's failure to vacate the Premises and deliver possession to
Landlord as herein provided.
14.1 No
Implied Waiver. No failure by Landlord to insist upon the
strict performance of any term, covenant or agreement contained in
this Lease, no failure by Landlord to exercise any right or remedy
under this Lease, and no acceptance of full or partial payment
during the continuance of any Default by Tenant, shall constitute a
waiver of any such term, covenant or agreement, or a waiver of any
such right or remedy, or a waiver of any such Default by
Tenant.
14.2 Survival.
The covenants, agreements and obligations of the parties hereto
shall continue in force and effect and survive any expiration of
the Lease Term or termination of this Lease.
14.3 Covenants
Independent. This Lease shall be construed as if the
covenants herein between Landlord and Tenant are independent, and
not dependent, and Tenant shall not be entitled to any offset
against Landlord if Landlord fails to perform its obligations under
this Lease.
14.4 Covenants
as Conditions. Each provision of this Lease performable by
Tenant shall be deemed both a covenant and a
condition.
14.5 Tenant's
Remedies. Tenant may bring a separate action against
Landlord for any claim Tenant may have against Landlord under this
Lease, provided Tenant shall first give written notice thereof to
Landlord and shall afford Landlord a reasonable opportunity to cure
any such default but in no event less than thirty (30) days
following such notice or such longer period reasonably required to
cure such default as long as Landlord diligently proceeds
therewith. In addition, Tenant shall send written notice of such
default by certified or registered mail, postage prepaid, to any
Mortgagee of whose address Tenant has been notified in writing, and
shall afford such Mortgagee a reasonable opportunity to cure any
default on Landlord's behalf but in no event less than thirty (30)
days following such notice or such longer period reasonably
required to cure such default as long as Mortgagee diligently
proceeds therewith. In no event shall Landlord be responsible for
any consequential damages incurred by Tenant including, but not
limited to, loss of profits or interruption of business as a result
of any default by Landlord hereunder. If any suit is brought because of an alleged
breach of this Lease, the prevailing party is also entitled to
recover from the other party all reasonable attorneys' fees and
costs incurred in connection therewith.
14.6 Binding
Effect. This Lease shall extend to and be binding upon the
heirs, executors, legal representatives, successors and assigns of
the respective parties hereto. The terms, covenants, agreements and
conditions in this Lease shall be construed as covenants running
with the Land. If there is more than one party constituting Tenant
or liable for the obligations of Tenant under this Lease, such
parties shall be jointly and severally liable for the obligations
of Tenant under this Lease.
14.7 No
Recording. Neither this Lease nor any memorandum or other
memorialization of this Lease shall be recorded in the records of
any County Clerk and Recorder of the State of Colorado or any other
public records without Landlord's prior consent.
14.8 Notices.
All billings under this Lease shall be provided by Landlord to
Tenant at the address for billings set forth in the Summary by
regular mail or personal delivery. All other notices and demands
under this Lease shall be in writing, signed by the party giving
the same and shall be deemed properly given and received when
personally delivered or three (3) business days after mailing
through the United States mail, postage prepaid, certified or
registered, return receipt requested, addressed to the party to
receive the notice at the address set forth for such party in the
Summary or at such other address as either party may notify the
other of in writing.
14.9 Time
of the Essence. Time is of the essence under this Lease, and
all provisions herein relating thereto shall be strictly
construed.
14.10
Captions.
The headings and captions hereof are for convenience only and shall
not be considered in interpreting the provisions
hereof.
14.11
Severability.
If any provision of this Lease shall be held invalid or
unenforceable, the remainder of this Lease shall not be affected
thereby, and there shall be deemed substituted for the affected
provision a valid and enforceable provision as similar as possible
to the affected provision.
14.12
Governing
Law. This Lease shall be interpreted and enforced according
to the laws of the State of Colorado.
14.13
Entire
Agreement. This Lease, the Summary, Attachments, Exhibits
and Addenda referred to herein, constitute the final and complete
expression of the parties' agreements with respect to the Premises
and Tenant's occupancy thereof. Each party agrees that it has not
relied upon or regarded as binding any prior agreements,
negotiations, representations, or understandings, whether oral or
written, except as expressly set forth herein.
14.14
No Oral
Modifications. No amendment or modification of this Lease,
and no approvals, consents or waivers by Landlord under this Lease,
shall be valid or binding unless in writing and executed by the
party to be bound.
14.15
Format. This
Lease has been prepared to reflect all additions and deletions
negotiated between Landlord and Tenant from the initial form of
this Lease submitted by Landlord to Tenant. All provisions and
terms that are stricken are deletions and shall not be a part of
this Lease; provided, however, a deletion from this Lease shall not
be construed to create the opposite intent of the deleted
provision. All provisions and terms which are underlined (other
than headings, titles and captions) are additions and shall be part
of this Lease. Tenant acknowledges that it has had the opportunity
to thoroughly review and negotiate this Lease and that the rule of
construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the
interpretation of this Lease.
14.16
Real
Estate Brokers. Tenant covenants to pay, hold harmless and
indemnify Landlord from and against any and all cost, expense or
liability for any compensation, commissions, charges or claims by
any broker or other agent with respect to this Lease or the
negotiation thereof, whether or not meritorious, other than the
brokers listed as the Brokers on the Summary. Tenant acknowledges
Landlord is not liable for any representations by Tenant's Broker
(as set forth in Section 13 of the Summary) or by Landlord's
Broker regarding the Premises, the Building, the Property or this
Lease. Landlord shall pay the commissions owed to Brokers in
connection with this Lease pursuant to a separate agreement between
Landlord and Brokers.
14.17
Patriot
Act Compliance.
(a) No
action, proceeding, investigation, charge, claim, report or notice
has been filed, commenced, or threatened against Tenant or any of
its Affiliates (as herein defined) alleging any violation of any
laws relating to terrorism or money laundering including, without
limitation, Executive Order No. 13224 on Terrorist Financing
(effective September 24, 2001) ("Executive Order") and the
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (Public
Law 107-56) ("Patriot Act"). To Tenant's knowledge, neither Tenant
nor any of its Affiliates is in violation of taking any action
which could reasonably be expected to result in any action,
proceeding, investigation, charge, claim, report or notice being
filed, commenced, or threatened against Tenant or any of its
Affiliates alleging any violation of, or failure to comply with,
the Executive Order or the Patriot Act. For the purposes of this
Section 14.19, the term "Affiliates" shall mean all affiliated
and related entities of Tenant, as well as all officers, directors,
managers, shareholders, partners, members or other parties having
an interest in Tenant or its affiliated or related entities (except
that if the company is publicly traded on a nationally recognized
stock exchange, then shareholders, partners and lenders with less
than a twenty-five percent (25%) ownership interest shall be
excluded).
(b) Neither
Tenant nor its Affiliates is a "Prohibited Person," which is
defined as follows: (i) a person or entity that is listed in
the Annex to, or is otherwise subject to the provisions of the
Executive Order and relating to blocking property and prohibiting
transactions with persons who commit, threaten to commit, or
support terrorism; (ii) a person or entity owned or controlled
by, or acting for or on behalf of, any person or entity that is
listed in the Annex to, or is otherwise subject to the provisions
of, the Executive Order; (iii) a person or entity with whom
Landlord is prohibited from dealing or otherwise engaging in any
transaction by any terrorism or money laundering law, including the
Executive Order and the Patriot Act; (iv) a person or entity
who commits, threatens, or conspires to commit or supports
"terrorism" as defined in the Executive Order; (v) a person or
entity that is named as a "specially designated national and
blocked person" on the most current list published by the U.S.
Treasury Department Office of Foreign Assets Control at its
official website, http://www.treas.gov/ofac/t11sdn.pdf, or at
any replacement website or other replacement official publication
of such list; and (vi) a person or entity who is affiliated
with a person or entity listed above.
(c) Neither
Tenant nor any of its Affiliates is or will, knowingly
(i) conduct any business or engage in any transaction or
dealing with any Prohibited Person, including the making or
receiving any contribution of funds, goods, or services to or for
the benefit of any Prohibited Person; (ii) deal in, or
otherwise engage in any transaction relating to, any property or
interests in property blocked pursuant to any terrorism or money
laundering law, including the Executive Order and the Patriot Act;
or (iii) engage in or conspire to engage in any transaction
that evades or avoids, or has the purpose of evading or avoiding,
or attempts to violate, any of the prohibitions set forth in any
terrorism or money laundering law, including the Executive Order
and the Patriot Act.
(d) In
connection with any changes of direct or indirect ownership of
Tenant or any of its Affiliates requiring notice to Landlord or
requiring Landlord's consent under Section 8.16, Tenant shall
give written notice to Landlord (i) advising Landlord, in
reasonable detail, as to the proposed ownership change, and
(ii) reaffirming that the representations and warranties set
forth in this Section will remain true and correct. Tenant agrees
to promptly deliver to Landlord (but in any event within ten (10)
days following Landlord's written request) any certification or
other evidence requested from time to time by Landlord in its
reasonable discretion, confirming Tenant's and any of its
Affiliates' compliance with the foregoing terms and
conditions.
14.18
Relationship.
Nothing contained herein shall be deemed or construed as creating
the relationship of principal and agent or of partnership, or of
joint venture by the parties hereto, it being understood and agreed
that no provision contained in this Lease nor any acts of the
parties hereto shall be deemed to create any relationship other
than the relationship of landlord and tenant.
14.19
Authority of
Tenant. Each individual executing this Lease on behalf of
Tenant represents and warrants that he or she is duly authorized to
deliver this Lease on behalf of Tenant and that this Lease is
binding upon Tenant in accordance with its terms.
[Remainder of Page Intentionally Left Blank for
Signatures]
IN
WITNESS WHEREOF the parties hereto have caused this Lease to be
executed effective the day and year first above
written.
TENANT:
NEW AGE
BEVERAGES CORPORATION, a Washington corporation
By:
/s/ Gregory A.
Gould
Name:
Gregory A.
Gould
Title:
CFO
LANDLORD:
40TH STREET PARTNERS,
LLC, a Colorado limited liability company
By:
/s/ Will
Gold
Name:
Will
Gold
Title:
Partner
ADDENDUM
THIS
ADDENDUM (“Addendum”) is to that certain lease (the
“Lease”) by and between 40TH STREET PARTNERS,
LLC, a Colorado limited liability company (“Landlord”),
and NEW AGE BEVERAGES CORPORATION, a Washington corporation
(“Tenant”), with respect to the Premises in the
Building. Terms not otherwise defined herein shall have the
respective meaning set forth in the Lease. In the event of any
conflict between the terms and provisions of the Lease and the
terms and provisions of this Addendum, the terms and provisions of
this Addendum shall control.
1.
Renewal Option: Tenant will have the option (the "Renewal Option")
to renew and extend the Term of the Lease for one additional term
of five (5) years (the "Renewal Term") to commence at the
conclusion of the Lease Term as provided in the Addendum. The
Renewal Term will be on the same terms, provisions, and conditions
contained in the Lease, except that as may be otherwise provided
herein, the Premises will be taken in its as-is condition, and the
Basic Rent will be modified for the Renewal Term in accordance with
the terms and conditions set forth herein. Tenant must give
Landlord written notice of its interest in exercising the Renewal
Option for the Renewal Term ("Tenant's Renewal Notice") not less
than nine (9) months and no earlier than twelve (12) months prior
to the expiration of the Lease Term. Failure to notify Landlord
within such time period will void the Renewal Option, and the Lease
shall terminate at the conclusion of the Lease Term. Provided that
Tenant timely delivers to Landlord Tenant's Renewal Notice in
accordance with the foregoing, then on or prior to the date that is
five (5) months prior to the expiration of the Lease Term, Landlord
will notify Tenant of the Basic Rent applicable during the Renewal
Term ("Landlord's Notice"), which shall be established at 95% of
the then Prevailing Market Rental Rate (as hereafter defined), but
in no event less than 3% higher than the then current Basic Rent
rate. If Tenant exercises the Renewal Option described herein,
Tenant will accept the Premises in its "as is" condition without
any remodeling or fix-up work performed or paid for by Landlord. If
Landlord fails to deliver the Landlord's Notice in accordance with
the provisions above, Tenant shall give Landlord a reminder notice
of such failure and Landlord shall have 15 days after receipt of
such reminder notice in which to deliver the Landlord's
Notice.Tenant has 15 days after having been given Landlord's Notice
to exercise the Renewal Option or dispute the rental rate quoted by
Landlord by delivering notice of exercise or dispute to Landlord.
If Tenant exercises the Renewal Option, the Lease Term will be
deemed extended for the Renewal Term on the provisions of the Lease
as amended by the terms of Landlord's Notice and the parties will
execute an amendment evidencing the Renewal Option. If Tenant
disputes Landlord's determination of the Basic Rent rate, Tenant
shall give notice of such dispute ("Dispute Notice") within the
15-day period and the Basic Rent rate shall thereafter be
determined in accordance with Subparagraph F below. If Tenant fails
to timely give Landlord a Dispute Notice, then Tenant shall be
deemed to have exercised and accepted the applicable Renewal Term
upon the terms as set forth in Landlord's Notice. Unless Landlord
timely receives Tenant's Renewal Notice for the Renewal Term in
accordance with paragraph, it will be conclusively deemed that
Tenant has not exercised the Renewal Option and the Lease will
expire in accordance with its terms on the last day of the Lease
Term. Unless expressly waived by Landlord, Tenant's right to
exercise the Renewal Option is conditioned on: (i) no Default by
Tenant existing at the time of exercise or at the time of
commencement of the Renewal Term; (ii) there having been no Default
by Tenant during the Lease Term; (iii) Tenant not having vacated
the Premises or subleased the Premises or assigned its interest
under the Lease as of the commencement of the Renewal Term; and
(iv) Tenant's financial condition not having materially adversely
changed since the Commencement Date. In the event of an assignment
of the Lease or a subletting or vacation of the Premises, or if
there has been a Default by Tenant, as described above, during the
Lease Term, this Renewal Option shall be deemed null and void and
of no further force or effect. The Renewal Option granted hereunder
will be upon the terms of the Lease, except that the Basic Rent
during the Renewal Term will be at the rate as set forth in
Landlord's Notice, unless required to be determined in accordance
with Subparagraph F below.
Following
giving of Tenant's Dispute Notice, Landlord and Tenant shall
promptly negotiate to determine a mutually acceptable Basic Rent.
If the parties mutually agree upon a new Basic Rent, such agreed
rental rate shall be the Basic Rent applicable during the
particular Renewal Term. If the parties have not agreed within 30
days after the giving of Tenant's Dispute Notice, then within a
20-day period Landlord and Tenant shall each select, at their own
cost, within the foregoing 20-day period, a Qualified Broker and
together such brokers will then select a third Qualified Broker who
shall act as an arbitrator ("Arbitrator"). Such cost of the
Arbitrator shall be split equally between Landlord and Tenant.
Within 10 days after designation of the Arbitrator, Landlord and
Tenant each shall give notice of its determination of the
Prevailing Market Rental Rate (as hereafter defined) supported by
the reasons therefor by delivering copies to each other and the
Arbitrator, under an arrangement for simultaneous exchange of such
determinations. The Arbitrator will review each party's
determination and select the one which most accurately reflects
such Arbitrator's determination of the Prevailing Market Rental
Rate. Such selection shall be final and binding on both parties and
the Basic Rent for the Renewal Term shall be 95% of such
determination. The Arbitrator shall have no right to propose a
middle ground or any modifications of either party's determination.
The Arbitrator's costs incurred in this procedure shall be shared
equally by Landlord and Tenant and shall be fixed when the
Arbitrator is selected. For purposes of this paragraph, "Prevailing
Market Rental Rate" means the annual amount per square foot that a
willing tenant would pay and a willing landlord would accept for
the rental rate following arms-length negotiations with respect to
an Assumed Lease (defined below) under the circumstances then
obtaining. "Assumed Lease" means (i) a renewal lease amendment
having a commencement date within 6 months of Tenant's Notice for
space of approximately the same size, age, condition and utility as
the Premises, for a term equal in length to the Renewal Term; (ii)
a real estate commission is payable with respect to such extension
to the extent a third-party commission with respect to extension is
agreed or obligated to be paid by Landlord; and (iii) taking into
consideration and making adjustments to reflect allowances, if any,
as provided in Landlord's Notice. "Comparable Property" means any
then-existing property in the Aurora, Colorado market area occupied
for industrial purposes with a building that is of a size,
location, quality, age condition, utility and class comparable to,
and with a size and efficiency of floor plate, amenities, and with
tenants of a stature reasonably comparable with the Building,
provided that appropriate adjustments shall be made to adjust for
differences in the size, location, age, efficiency of floorplate,
and quality any Comparable Property and the Property. "Qualified
Broker" means a commercial real estate broker of good reputation
who has at least 10 years in commercial leasing in the Aurora,
Colorado market area. After exercise of the Renewal Option for the
Renewal Term, or Tenant's failure to timely exercise the Renewal
Option for the Renewal Term, Tenant shall have no further rights to
extend the Term.
IN
WITNESS WHEREOF the parties hereto have caused this Addendum to be
executed effective the day and year first above
written.
TENANT:
NEW AGE
BEVERAGES CORPORATION, a Washington corporation
By:
/s/ Gregory A.
Gould
Name:
Gregory A.
Gould
Title:
CFO
LANDLORD:
40TH STREET PARTNERS,
LLC, a Colorado limited liability company
By:
/s/ Will
Gold
Name:
Will
Gold
Title:
Partner