(Exact name of registrant as specified in its charter)
iWashington
i91-1141254
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i929 North Russell Street
iPortland,
iOregon
i97227-1733
(Address of principal executive offices)
(Zip
Code)
Registrant’s telephone number, including area code: (i503) i331-7270
Securities
Registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, $0.005 par value
iBREW
iThe
NASDAQ Stock Market LLC
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. iYes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ 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.
Large accelerated filer ☐
iAccelerated
filer ☒
Non-accelerated filer ☐
Smaller reporting company i☒
Emerging growth company i☐
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 i☐ No
☒
The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”). These consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements are unaudited but, in the opinion of management, reflect all material adjustments
necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. All such adjustments were of a normal, recurring nature. The results of operations for such interim periods are not necessarily indicative of the results of operations for the full year.
Reclassifications
Certain reclassifications have been made to the prior year's data to conform to the current year's presentation. None of the changes affect our previously reported consolidated Net sales, Gross profit, Operating income (loss), Net income (loss) or Basic and diluted net income (loss) per share.
Note 2. iiRecent
Accounting Pronouncements /
ASU 2019-12
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 eliminates certain exceptions to the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. We are still evaluating the effect of the adoption of ASU 2019-12.
ASU
2018-15
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-15 on January
1, 2020 did not have a material effect on our financial position, results of operations or cash flows.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 removes, modifies and adds certain disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-13 on January 1, 2020 did not have a material effect on our financial position, results of operations or cash flows.
ASU
2017-04
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective
for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. The adoption of ASU 2017-04 on January 1, 2020 did not have a material effect on our financial position, results of operations or cash flows.
We maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of June 30, 2020 and December 31, 2019, we did iino/t
have any cash equivalents.
As part of our cash management system, we use a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances for accounting purposes. As of June 30, 2020 and December 31, 2019, there were $i4.5 million and $i0.3
million, respectively, of bank overdrafts included in Accounts payable on our Consolidated Balance Sheets. Changes in bank overdrafts from period to period are reported in the Consolidated Statements of Cash Flows as a component of operating activities within Accounts payable and Other accrued expenses.
Note 4. iInventories
Inventories
are stated at the lower of standard cost or net realizable value.
We regularly review our inventories for the presence of obsolete product attributed to age, seasonality and quality. If our review indicates a reduction in utility below the product’s carrying value, we reduce the product to a new cost basis. We record the cost of inventory for which we estimate we have more than a twelve-month supply as a component of Intangible and other assets, net on our Consolidated Balance Sheets.
i
Inventories
consisted of the following (in thousands):
Work
in process is beer held in fermentation tanks prior to the filtration and packaging process.
Note 5. iiLeases/
We
lease office space, restaurant and production facilities, warehouse and storage space, land and equipment under operating leases that expire at various dates through the year ending December 31, 2064. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices or scheduled adjustments. We exercise judgment in determining the reasonably certain lease term based on the provisions of the underlying agreement, the economic value of leasehold improvements and other relevant factors. Certain leases require us to pay for insurance, taxes and maintenance applicable to the leased property. Under the terms of the land lease for our New Hampshire Brewery, we hold a first right of refusal to purchase the property should the lessor decide to sell the property.
We lease equipment under finance leases that expire at various
dates through the year ending December 31, 2024. Ownership of the leased equipment transfers to us at the end of each lease term.
Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
(1)
Includes short-term, month-to-month lease and variable lease costs, which were immaterial.
/
Note 6. iRelated Party Transactions
As of June 30,
2020 and December 31, 2019, Anheuser-Busch, LLC ("A-B") owned approximately ii31.1/%
of our outstanding common stock.
Transactions with A-B, Ambev and Anheuser-Busch Worldwide Investments, LLC (“ABWI”)
In December 2015, we partnered with Ambev, the Brazilian subsidiary of Anheuser-Busch InBev SA, to distribute Kona beers into Brazil. In August 2016, we also entered into an International Distribution Agreement with ABWI, an affiliate of A-B, pursuant to which ABWI distributes our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our prior agreement with our other international distributor, CraftCan Travel LLC, and certain other limitations.
Contract Brewing Arrangement with Anheuser-Busch
Companies, LLC ("ABC")
On January 30, 2018, we entered into a Contract Brewing Agreement (the “Brewing Agreement”) with ABC, an affiliate of A-B, pursuant to which we brew, package, and palletize certain malt beverage products of A-B's craft breweries at our Portland, Oregon, and Portsmouth, New Hampshire, breweries as selected by ABC. Under the terms of the Brewing Agreement, ABC pays us a per barrel fee that varies based on the annual volume of the specified product brewed by us, plus (a) our actual incremental costs of brewing the product and (b) certain capital costs and costs of graphics and labeling that we incur in connection with the brewed products.
The Brewing Agreement expired
on December 31, 2019, but the parties continue to operate under the same terms. The Brewing Agreement contains specified termination rights, including, among other things, the right of either party to terminate the Brewing Agreement if (i) the other party fails to perform any material obligation under the Brewing Agreement or any other agreement between the parties, subject to certain cure rights, or (ii) the Master Distributor Agreement is terminated.
i
Transactions
with A-B, Ambev, ABWI and ABC consisted of the following (in thousands):
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
$
i20,752
$
i11,394
Refundable
deposits due to A-B
(i992)
(i1,197)
Amounts
due to A-B for services rendered
(i8,427)
(i5,976)
Net
amount due from A-B and ABWI
$
i11,333
$
i4,221
Related
Party Operating Leases
We lease our headquarters office space, banquet space and storage facilities located in Portland, land and certain equipment from itwo limited liability companies, both of whose members include our former Board Chair and his brother. This lease is included in the ROU asset and lease liabilities recorded on our Consolidated Balance Sheets. Lease payments to these lessors were as follows (in thousands):
We
hold lease and sublease obligations for certain office space and the land underlying the brewery and pub location in Kona, Hawaii, with a company whose owners have a charitable foundation that owns more than i5% of our common stock. The sublease contracts expire on various dates through 2020, with an extension at our option for itwoifive-year periods. We exercised our option to extend these leases commencing in September 2020. These leases are included in the ROU asset and lease liabilities recorded on our Consolidated Balance Sheets. Lease payments to this lessor were as follows (in thousands):
On June 3, 2020, we executed a Fifth Amendment (the "Amendment") to our Amended and Restated Credit Agreement dated as of November 30, 2015 (the "Credit Agreement") with Bank of America, N.A. ("BofA"). The primary changes effected by the Amendment were to: (i) revise the definitions of Eurodollar Fixed Rate and Eurodollar Floating Rate contained in Section 1.01 of the Credit Agreement
to provide that such rates may not be less than i0.75% at any time; and (ii) amend Section 2.05(d) to delay the loan commitment reductions of the revolving credit facility from March 31, 2020 to March 31, 2021.
The Credit Agreement provides for a $i45.0 million
reducing revolving facility, including a $i2.5 million sublimit for the issuance of standby letters of credit, as well as a $i10.8 million
term loan. As amended, the maximum amount of the revolving facility is subject to loan commitment reductions in the amount of $i750,000 each quarter beginning March 31, 2021. We may use the proceeds of the credit facility for general corporate purposes, including capital expenditures. The term of the credit facility expires on September 30, 2023.
As
of June 30, 2020, $i41.1 million was outstanding under the revolving facility and $i8.2 million was outstanding under the term loan, both at an interest rate of ii1.42/%.
At
June 30, 2020, we were in compliance with all applicable contractual financial covenants of the Credit Agreement.
Our
risk management objectives are to ensure that business and financial exposures to risk that have been identified and measured are minimized using the most effective and efficient methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated risks and management strives to structure proposed transactions to avoid or reduce risk whenever possible.
We have assessed our vulnerability to certain business and financial risks, including interest rate risk associated with our variable-rate long-term debt. To mitigate this risk, effective January
23, 2014, we entered into an interest rate swap contract with BofA for i75% of the term loan ("Term Loan") balance, to hedge the variability of interest payments associated with our variable-rate borrowings under our Term Loan with BofA. The Term Loan contract and the interest rate swap terminate on iSeptember 30,
2023. The Term Loan contract had a total notional value of $i6.1 million as of June 30, 2020. Through this swap agreement, we pay interest at a fixed rate of i2.86%
and receive interest at a floating-rate of the one-month LIBOR, which was i0.18% at June 30, 2020. It is likely that LIBOR will no longer be used as a reference rate by most, if not all, financial institutions before year-end 2021.
Since the interest rate swap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge accounting treatment.
As
of June 30, 2020, an unrealized net loss of $i0.5 million was recorded in Accumulated other comprehensive loss as a result of this hedge. The effective portion of the gain or loss on the derivative is reclassified into Interest expense in the same period during which we record Interest expense associated with the related debt. There was iino/
hedge ineffectiveness during the first six months of 2020 or 2019.
i
The fair value of our derivative instrument recorded as a component of Other liabilities on our Consolidated Balance Sheets was as follows (in thousands):
The
effect of our interest rate swap contract that was accounted for as a derivative instrument on our Consolidated Statements of Operations was as follows (in thousands):
Derivatives in Cash Flow Hedging Relationships
Amount of Gain (Loss) Recognized in Accumulated OCI (Effective Portion)
Location
of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
•Level 1 – quoted prices in active markets for identical securities as of the reporting date;
•Level 2 – other significant directly or indirectly observable inputs, including quoted prices
for similar securities, interest rates, prepayment speeds and credit risk; and
•Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The fair value of our interest rate swap was based on quarterly statements from the issuing bank. There were no changes to our valuation techniques during the six months ended June 30, 2020.
We believe the carrying amounts of Cash and cash equivalents, Accounts receivable, Other current assets, Accounts payable, Accrued salaries, wages and payroll taxes, and Other accrued expenses are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.
i
We
had fixed-rate debt outstanding as follows (in thousands):
We
calculate the estimated fair value of our fixed-rate debt using a discounted cash flow methodology. Using estimated current interest rates based on a similar risk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt.
(1)Beer
Related sales include sales to A-B subsidiaries including Ambev, ABWI and ABC. Sales to wholesalers through the A-B distributor agreement in the three-month periods ended June 30, 2020 and 2019 represented i91.0% and i80.9%
of our Sales, respectively. Sales to wholesalers through the A-B distributor agreement in the six-month periods ended June 30, 2020 and 2019 represented i86.5% and i81.0%
of our Sales, respectively.
(2)Product sold through distributor agreements included domestic and international sales of owned and non-owned brands pursuant to terms in our distributor agreements.
(3)Brewpub sales include sales of promotional merchandise and sales of beer directly to customers.
(4)Other sales include sales of beer related merchandise, hops and spent grain.
/
Revenue is recognized when obligations under the terms of a contract
with our customers are satisfied; generally this occurs when the product arrives at distribution centers or when the wholesaler takes possession. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. We consider customer purchase orders, which in some cases are governed by a master agreement, to be the contracts with a customer. For each contract related to the production of beer, we consider the promise to transfer products, each of which is distinct, to be the identified performance obligation. The transaction price for each performance obligation is specifically identified within the contract with our customer and represents the fair standalone
selling price. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. Discounts are recognized as a reduction to Sales at the time we recognize the revenue. We generally do not grant return privileges, except in limited and specific circumstances.
As of June 30,
2020, we had receivables related to contracts with customers of $i30.2 million, net of the allowance for doubtful accounts of $i25,000.
As of December 31, 2019, we had receivables related to contracts with customers of $i17.5 million, net of the allowance for doubtful accounts of $i25,000.
As
of June 30, 2020 and December 31, 2019, contract liabilities, which consisted of obligations associated with our gift card programs, were $ii0.2/
million and were included in Other accrued expenses on the Consolidated Balance Sheets.
In cases where all conditions to a sale are not met at the time of sale, revenue recognition is deferred until all conditions are met. As of June 30, 2020 and December 31, 2019, Deferred revenue on our Consolidated Balance Sheets included $i21.1
million and $i22.7 million, respectively, related to our International Distribution Agreement ("IDA"). On August 23, 2019, ABC announced it would not make a Qualifying Offer and we received a one-time incentive payment in the amount of $i20.0
million on that date as required by the terms of the IDA. For the six months ended June 30, 2020, we recognized $i1.6 million as Sales and we expect to recognize an additional $i1.6
million of Deferred revenue as Sales in the remainder of 2020, $i3.2 million in 2021, and $i16.3 million thereafter.
Note
11. iSegment Results and Concentrations
Our chief operating decision maker monitors Net sales and gross margins of our Beer Related operations and our Brewpubs operations. Beer Related operations include the brewing operations and related domestic and international beer and cider sales of our Kona, Widmer Brothers, Redhook, Omission, AMB, Cisco, and Wynwood beer brands and Square Mile cider brand. Brewpubs operations primarily include our brewpubs, some of which are located adjacent
to our Beer Related operations. We do not track operating results beyond the gross margin level or our assets on a segment level.
i
Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
The
segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and, therefore, no asset by segment information is provided to our chief operating decision maker.
In preparing this financial information, certain expenses were allocated between the segments based on management estimates, while others were based on specific factors such as headcount. These factors can have a significant impact on the amount of Gross profit for each segment. While we believe we have applied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment Gross profit.
At
June 30, 2020, we had total unrecognized stock-based compensation expense of $i1.0 million, which will be recognized over the weighted average remaining vesting period of i1.5
years. In the first quarter of 2020, we reversed $i39,000 in stock compensation expense from Cost of sales as a result of the termination of unvested awards.
Note 13. iEarnings
Per Share
i
The reconciliation between the number of shares used for the basic and diluted per share calculations, as well as other related information, is as follows (in thousands):
Stock-based
awards not included in diluted per share calculations as they would be antidilutive
i7
i63
i—
i51
/
Note
14. iCommitments and Contingencies
The disclosure of purchase commitments in these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2019. The disclosures below relate to legal commitments with significant events occurring during the six months ended June 30, 2020.
We
are in the process of assessing the impact the COVID-19 pandemic will have on our future commitments and contingencies; we do not believe that there will be a material adverse effect on future commitments.
General
We are subject to various claims and pending or threatened lawsuits in the normal course of business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below
will have a material adverse effect on our financial position, results of operations or cash
flows, we cannot predict this with certainty.
Legal
On February 28, 2017 and March 6, 2017, respectively, itwo lawsuits, Sara Cilloni and Simone Zimmer v. Craft Brew Alliance, Inc., and Theodore Broomfield v. Kona Brewing Co. LLC, Kona Brew Enterprises, LLP, Kona Brewery LLC, and Craft Brew Alliance, Inc., were filed in the United
States District Court for the Northern Division of California. On April 7, 2017, the itwo lawsuits were consolidated into a single complaint under the Broomfield case. The lawsuit alleges that the defendants misled customers regarding the state in which Kona Brewing Company beers are manufactured. On May 30, 2019, we announced our entry into a definitive settlement agreement, which received preliminary approval from the Court on June
14, 2019. The settlement claims period ended October 7, 2019, and the Court entered a Final Judgment on February 11, 2020. A notice of appeal of the final judgment was filed by an objector on March 3, 2020. On June 30, 2020, the Court approved a settlement with the objector and the appeal was dismissed. We recorded a charge of $i4.7 million on a pre-tax basis in
the quarter ended March 31, 2019, based on our estimate of the probable costs of settling the litigation. The total cost of settling the litigation is currently expected to be approximately $i4.4 million.
In connection with the pending merger transaction with ABC, several lawsuits were filed on behalf of our shareholders. On January
3, 2020, a purported class action complaint brought on behalf of a putative class of our shareholders, captioned Kost et al. v. Craft Brew Alliance, Inc., et al., Case No. 20-2-00389-1 SEA, was filed in the Superior Court of Washington, King County (the “Kost Action”). On January 14, 2020, a second purported class action complaint brought on behalf of a putative class of our shareholders, captioned Birkby v. Craft Brew Alliance, Inc., et al., Case No. 20CV02867, was filed in the Circuit Court of the State of Oregon for the County of Multnomah (the “Birkby Action”). On July 9, 2020, a third purported class action complaint brought on behalf of a putative class of our shareholders, captioned Malloy v. Craft Brew Alliance, Inc., et al., Case No. 20CV23549, was filed in the Circuit Court of the State of Oregon for the County of Multnomah (the “Malloy Action”).
The Birkby, Malloy and Kost Actions assert state law claims for alleged breaches of fiduciary duty against our company and our directors, and the Birkby and Malloy Actions also assert claims against our Chief Executive Officer and ABC. The Malloy and Kost Actions also include allegations of material misstatements and omissions in our definitive proxy statement filed with the SEC on January 21, 2020 (the “Proxy Statement”).
In addition, ifour
complaints were filed in federal court asserting claims against our company and our directors under the federal securities laws and alleging material misstatements and omissions in the Proxy Statement: Sabatini et al. v. Craft Brew Alliance, Inc., et al., Case No. 1:20-cv-00138, filed in the United States District Court for the District of Delaware on January 29, 2020 on behalf of a putative class of our shareholders (the “Sabatini Action”), Halberstam v. Craft Brew Alliance, Inc., et al., Case No. 2:20-cv-01243, filed in the United States District Court for the Central District of California on February 7, 2020 on behalf of an individual shareholder (the “Halberstam Action”), Michael Roberts et al. v. Craft Brew Alliance, Inc., et al., Case No. 1:20-cv-00208, filed in the
United States District Court for the District of Delaware on February 12, 2020 on behalf of a putative class of our shareholders (the “Michael Roberts Action”), and Dennis Roberts v. Craft Brew Alliance, Inc., et al., Case No. 1:20-cv-00337, filed in the United States District Court for the District of Colorado on February 10, 2020 on behalf of an individual shareholder (the “Dennis Roberts Action”). The Sabatini Action also asserts claims against ABC and a subsidiary of ABC.
On February 18, 2020, we announced the resolution of claims with the plaintiffs in the Kost, Sabatini, Halberstam, and Michael Roberts Actions, whereby we filed supplemental disclosures and plaintiffs in the Kost, Sabatini, Halberstam, and Michael Roberts
Actions dismissed their individual claims with prejudice, and plaintiffs in the Kost, Sabatini, and Michael Roberts Actions dismissed their class claims without prejudice. We did not view the supplemental disclosures as material or required by applicable law, but determined to make the disclosures in order to avoid the expense and risks inherent in further litigation. On April 1, 2020, plaintiff in the Dennis Roberts Action dismissed his case without prejudice.
The Birkby and Malloy Actions have not been resolved. On March 31, 2020, the Court granted the parties’ joint motion to abate the Birkby Action until September 30, 2020. There have been no substantive proceedings to date in the Malloy Action.
Note
15. iPV Brewing Agreement
On June 10, 2020, Craft Brew Alliance, Inc., a Washington corporation (“Seller”), Kona Brewery LLC, a Hawaii limited liability company (the “Company”), and PV Brewing Partners, LLC, a Delaware limited liability company (“Buyer”, and together with Seller and the Company, the “Parties”), entered into a Membership
Interest Purchase Agreement (the “Purchase Agreement”), pursuant to which, among other things, Buyer agreed to purchase from Seller i100% of the outstanding membership interests of the Company (the “Equity Interests”). The Parties entered into the Purchase Agreement in connection with the previously announced Agreement and Plan of Merger, dated as of November
11, 2019, by and among Seller,
Anheuser-Busch Companies, LLC, a Delaware limited liability company (“ABC”), and Barrel Subsidiary, Inc., a Washington corporation and wholly owned subsidiary of ABC (“Merger Sub”), providing for the merger of Merger Sub with and into Seller, with Seller surviving as a wholly owned subsidiary of ABC (the “ABC Merger”).
Subject to the terms and conditions set forth in the Purchase Agreement, at the closing (the “Kona Closing”) of the transactions contemplated by the Purchase
Agreement (the “Kona Transaction”), Seller has agreed to sell to Buyer the Equity Interests for an aggregate purchase price of $i16 million in cash, of which $i5 million
will be payable at the Kona Closing and the remaining $i11 million to be paid by Buyer upon Seller’s achievement of certain construction and production milestones with respect to the New Brewery (as defined in the Purchase Agreement), with an option for Buyer to defer up to $i6 million
of such payment for a year following the Kona Closing, subject to the terms and conditions set forth in the Purchase Agreement. Any deferred amounts will be subject to interest. Buyer expects to fund the purchase price with a combination of debt and equity financing.
In connection with the Purchase Agreement, following the Kona Closing, Seller, or an affiliate of Seller, will enter into certain ancillary agreements with Buyer or the Company, including (a) a transition services agreement under which Buyer will receive certain transitional services, (b) an intellectual property license agreement providing for certain licensing arrangements regarding certain Company-related intellectual property related to the “Kona” brand, (c) a brewing and packaging
agreement under which Seller and certain of its affiliates will brew, bottle and package certain Company-branded beer products for Buyer on a transitional basis and (d) a distribution agreement under which Anheuser-Busch Sales of Hawaii, Inc., a Delaware corporation and an affiliate of ABC, will provide certain sales, promotion and distribution services to Buyer in the State of Hawaii.
The Purchase Agreement contains certain customary representations, warranties and covenants of Seller regarding the Company, including a covenant to operate the Company in the ordinary course of business consistent with past practice. The Purchase Agreement also contains certain customary
representations, warranties and covenants of both Seller and Buyer relating to the Kona Transaction. Closing of the Kona Transaction is conditioned upon, and will not occur in the absence of, completion of the ABC Merger. The Kona Closing will take place upon the later of (a) August 3, 2020 or (b) immediately following, or on the business day of, the closing of the ABC Merger or such later date as required by the Department of Justice (the “DOJ”), in each case, following the satisfaction or waiver of all of the closing conditions to the Kona Transaction (other than conditions that by their nature are to be satisfied at the Kona Closing, but subject to the fulfillment or waiver of those conditions at such time). The Purchase Agreement provides for certain termination rights, including the right of either party to terminate the Purchase Agreement if Seller is notified by the DOJ that (i) Buyer is not an acceptable
purchaser of the Company, (ii) the Purchase Agreement is not an acceptable manner of divesting the Company (provided, however, in the case of (ii), only after the Parties have reasonably sought to modify the Purchase Agreement to satisfy DOJ staff, consistent with their obligations under the Purchase Agreement) or (iii) a divestiture is not an acceptable remedy in order to obtain regulatory clearance of the ABC Merger.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q includes forward-looking statements. Generally, the words “believe,”“expect,”“intend,”“estimate,”“anticipate,”“project,”“will,”“may,”“plan” and similar expressions or their negatives identify forward-looking statements, which generally are not historical in nature. These statements are based upon assumptions and projections that we believe are reasonable, but are by their nature inherently uncertain. Many possible events or factors could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed, including those risks and uncertainties described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for
the year ended December 31, 2019 (“2019 Annual Report”), the risk factor set forth in Part II, Item 1A below, and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”). Certain forward-looking statements are subject to the anticipated occurrence and timing of the closing of the merger transaction pursuant to which Anheuser-Busch Companies, LLC ("ABC"), is expected to acquire Craft Brew Alliance, Inc.(the "ABC Merger" Caution should be taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein, as well as the audited Consolidated Financial Statements
and Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Annual Report. The discussion and analysis includes period-to-period comparisons of our financial results. Although period-to-period comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.
Overview
Craft Brew Alliance, Inc. ("CBA") is the eighth largest craft brewing company in the U.S. and a leader in brewing, branding, and bringing to market world-class American craft beers and beverages.
Our
distinctive portfolio combines the power of Kona Brewing Co., one of the top craft beer brands in the world, with strong regional breweries and innovative lifestyle brands, Appalachian Mountain Brewery, Cisco Brewers, Omission Brewing Co., Redhook Brewery, Square Mile Cider Co., Widmer Brothers Brewing, and Wynwood Brewing Co. We nurture the growth and development of our brands in today’s increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on innovation, local community and sustainability.
CBA was formed in 2008 through the merger of Redhook Brewery and Widmer Brothers Brewing, the two largest craft brewing pioneers in the Northwest at the time. Following a successful strategic brewing and distribution partnership, Kona Brewing Co. joined CBA in 2010. As part of CBA, Kona
has expanded its reach across all 50 U.S. states and approximately 30 countries, while remaining deeply rooted in its home of Hawaii.
As consumers increasingly seek more variety and more local offerings, Craft Brew Alliance has expanded its portfolio and home markets with strong regional craft beer brands in targeted markets. In 2015 and 2016, we formed strategic partnerships with Appalachian Mountain Brewery, based in Boone, North Carolina; Cisco Brewers, based in Nantucket, Massachusetts; and Wynwood Brewing Co., based in the heart of Miami’s vibrant multicultural arts district. Building on the success of these partnerships, we acquired all three brands in the fourth quarter of 2018, fundamentally transforming our footprint and paving the way to increase our investments in their growth and drive shareholder value.
We
own and operate three production breweries located in Portland, Oregon; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. Through our contract brewing agreement with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of Anheuser-Busch, LLC ("A-B"), we also brew select CBA brands in A-B’s Fort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries in Portland, Oregon; Seattle, Washington; Portsmouth, New Hampshire; Boone, North Carolina; and Miami, Florida, which are primarily used for small-batch production and limited-release beers offered primarily in our brewpubs and brands’ home markets.
We distribute our beers to retailers through wholesalers that are aligned with the A-B network. These sales are made pursuant to a Master Distributor Agreement
(the “A-B Distributor Agreement”) with A-B, which extends through 2028. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated.
Separate from our A-B wholesalers, we maintain an internal independent sales and marketing organization with resources across the key functions of brand management, field marketing, field sales, and national retail sales.
On November
11, 2019, we jointly announced with Anheuser-Busch Companies, LLC ("ABC") an agreement to expand our partnership, with ABC agreeing to purchase our remaining shares it does not currently own in the ABC Merger for $16.50 per share, in cash. On February 25, 2020, CBA shareholders, not including A-B, voted overwhelmingly in favor of the agreement. The transaction, which represents an exciting next step in a long and successful partnership between the two companies, remains subject to customary closing conditions, including certain regulatory approvals.
On June 10, 2020, we announced an update to our pending merger transaction with ABC. To expedite the regulatory review process and alleviate any potential regulatory concerns regarding the expanded partnership, CBA and ABC have agreed to the
purchase of CBA’s Kona Brewing operations in Hawaii by PV Brewing Partners, a team of investors with decades of combined beer industry expertise. The arrangement which does not include CBA's Kona Brewing business outside of Hawaii, is contingent on the closing of our pending transaction with ABC.
In early March 2020, we began seeing the impact of the COVID-19 pandemic on our business. The impact has remained primarily visible in significantly reduced demand from the on-premise channel and the closure of our brewpubs for on-premise business throughout the second quarter. Despite these challenges, our breweries were able to quickly shift focus to core products in packaging, enabling our sales and marketing teams to continue ensuring our wholesalers had inventory to meet demand from off-premise retailers.
We operate in two segments: Beer
Related operations and Brewpubs operations. Beer Related operations include the brewing, and domestic and international sales, of craft beers and ciders from our breweries. Brewpubs operations primarily include our five brewpubs, four of which are located adjacent to our Beer Related operations, as well as other merchandise sales, and sales of our beers directly to customers.
Following is a summary of our financial results:
Six
Months Ended June 30,
Net sales
Net income (loss)
Number of barrels sold
2020
$93.3 million
$1.0 million
363,300
2019
$107.6 million
$(4.8) million
400,000
Results
of Operations
The following table sets forth, for the periods indicated, certain information from our Consolidated Statements of Operations expressed as a percentage of Net sales(1):
(1)A-B and A-B related includes domestic and international sales sold through A-B and Ambev, fees earned pursuant to the Brewing Agreement with Anheuser-Busch Companies, LLC ("ABC"), and the international
distribution fees earned from ABWI.
(2)Beer related includes international sales and owned brands not sold through A-B or Ambev.
(3)Brewpubs sales include sales of promotional merchandise and sales of beer directly to customers.
Shipments by Category
Shipments by category were as follows (in barrels):
(1)Change
in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers.
(2)A-B and A-B related includes domestic and international shipments distributed through A-B and Ambev, and shipments pursuant to the Brewing Agreement with ABC.
(3)Beer related includes international shipments and shipments of our owned brands not distributed through A-B or Ambev.
The decreases in sales to A-B and A-B related in the three and six-month periods ended June 30,
2020 compared to the same periods of 2019 were primarily due to decreases in shipment volume, increases in promotional discounting, and an accrual for anticipated keg returns due to COVID-19, partially offset by increases in average unit pricing. The decreases in shipment volume were primarily attributed to the sharp decline in draft sales beginning in March 2020 and continuing through the second quarter of 2020 as a result of the closure of most on-premise retail locations across the country. We expect the demand for draft beer to remain low for the third quarter of 2020 and, potentially, into the fourth quarter of 2020. As our shipments further trend towards packaged beer, we expect our average unit pricing to increase as the sales price for packaged beer is greater than draft.
The decreases in Contract
brewing and beer related sales in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to decreases in international shipment volumes, shipments of brands distributed outside the A-B distribution network, and contract brewing shipment volumes, as well as a decrease in sales of beer related merchandise.
Brewpubs sales decreased in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019, primarily due to the closure of our brewpubs to on-premise business that began in mid-March and continuing through the second quarter of 2020 due to the COVID-19 pandemic and public health and government-mandated strict social distancing
requirements. During the second quarter of 2020, our brewpubs were operating with a to-go and delivery model or closed entirely. We continue to monitor state and county guidelines, as well as our own safety requirements to establish appropriate reopening plans for our brewpubs. As such, our brewpub in Boone re-opened for dine-in service in mid-June and our Kona and Koko brewpubs re-opened for dine-in service in mid-July. We expect our Brewpub sales to remain low for the third quarter of 2020 and, potentially, into the fourth quarter of 2020.
Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):
(1)All
other includes the shipments and depletions from our Square Mile, AMB, Cisco Brewers, and Wynwood brand families.
(2)Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.
The decreases in our Kona brand shipments in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily led by decreases in shipments of Big Wave Golden Ale, Longboard Larger, and Hanalei Island IPA brands, partially offset by increases of our newly released Island Seltzer and Kona Light, as well as increases in Kona Wave Rider and Island Hopper variety packs.
The
decreases in our Widmer Brothers brand shipments in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to decreases in Hefeweizen brand shipments.
Redhook brand shipments remained relatively consistent in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019, primarily due to a decrease in Longhammer IPA brand shipments, partially offset by an increase in Big Ballard IPA brand shipments.
Omission
brand shipments increased in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019, primarily due to increased shipments of Omission Ultimate Light and our newly released seltzer.
The decreases in All other shipments in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to decreases in AMB, Cisco, and Wynwood brand shipments.
Shipments by Package
The following table sets forth a comparison of our shipments by package, excluding shipments produced under our contract brewing arrangements (in barrels):
The
shifts in package mix from draft to packaged in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to widespread closures in the on-premise channel that were caused by the COVID-19 pandemic and government-mandated strict social distancing requirements. We expect this trend to continue for the third quarter of 2020 and, potentially, into the fourth quarter of 2020.
Cost of Sales
Cost of sales includes purchased raw and component materials, direct labor, overhead and shipping costs.
Information regarding Cost of sales was as follows (dollars in thousands):
Three
Months Ended June 30,
Dollar
2020
2019
Change
% Change
Beer Related
$
33,760
$
31,817
$
1,943
6.1
%
Brewpubs
1,870
5,455
(3,585)
(65.7)
%
Total
$
35,630
$
37,272
$
(1,642)
(4.4)
%
Six
Months Ended June 30,
Dollar
2020
2019
Change
% Change
Beer Related
$
57,545
$
57,098
$
447
0.8
%
Brewpubs
6,803
10,983
(4,180)
(38.1)
%
Total
$
64,348
$
68,081
$
(3,733)
(5.5)
%
The
increases in Beer Related Cost of sales in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to increases in our Beer Related Cost of sales on a per barrel basis, partially offset by a decrease in shipment volume. As our shipments shift to packaged beer our average unit costs increase as the cost to produce packaged beer is greater than draft.
The decreases in Brewpubs Cost of sales in the three and six-month periods ended June 30, 2020 compared to the same periods
of 2019 were primarily due to the closure of our brewpubs to on-premise business that began in mid-March and continued through the second quarter of 2020 due to the COVID-19 pandemic and public health and government-mandated strict social distancing requirements. As we begin to re-open our brewpubs we expect Brewpub Cost of sales to increase.
Capacity Utilization
Capacity utilization is calculated by dividing total shipments by approximate working capacity and was as follows:
Our
capacity utilization was flat in the three-month period ended June 30, 2020 and declined slightly in the six-month period ended June 30, 2020 compared to the same periods of 2019 due to a smaller percentage of our beer being brewed by ABCS. We also experienced a decrease in our capacity utilization as a result of the decrease in demand for draft beer.
Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):
Three
Months Ended June 30,
Dollar
2020
2019
Change
% Change
Beer Related
$
15,155
$
22,676
$
(7,521)
(33.2)
%
Brewpubs
(1,407)
611
(2,018)
(330.3)
%
Total
$
13,748
$
23,287
$
(9,539)
(41.0)
%
Six
Months Ended June 30,
Dollar
2020
2019
Change
% Change
Beer Related
$
30,137
$
38,184
$
(8,047)
(21.1)
%
Brewpubs
(1,206)
1,286
(2,492)
(193.8)
%
Total
$
28,931
$
39,470
$
(10,539)
(26.7)
%
Gross
profit as a percentage of Net sales, or gross margin, was as follows:
The
decreases in Beer Related Gross profit and gross margin in the three and six-month periods ended June 30, 2020, compared to the same periods of 2019 were primarily due to decreases in shipment volumes, increases in promotional pricing, and increases in average unit costs on a per barrel basis, partially offset by increases in average unit pricing.
The decrease in Brewpubs Gross profit and gross margin in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to the closure of our brewpubs to on-premise business beginning in mid-March and continuing through the second quarter of 2020 due to the COVID-19 pandemic.
Selling, general and administrative expenses (“SG&A”) include compensation and related expenses for our sales and marketing activities, management, legal and other professional and administrative support functions.
Information regarding SG&A was as follows (dollars in thousands):
Three
Months Ended June 30,
Dollar
2020
2019
Change
% Change
Selling, general and administrative expenses
$
12,908
$
19,381
$
(6,473)
(33.4)
%
As
a % of Net sales
26.1
%
32.0
%
Six Months Ended June 30,
Dollar
2020
2019
Change
%
Change
Selling, general and administrative expenses
$
27,369
$
44,946
$
(17,577)
(39.1)
%
As a % of Net sales
29.3
%
41.8
%
The
decrease in SG&A for the three-month period ended June 30, 2020 compared to the same period of 2019 was primarily due to a decrease in creative and media spend related to the non-recurring Kona marketing campaign of $1.9 million in 2019 and reduced market spend in an effort to control costs in response to the COVID-19 pandemic, as well as a decrease in employee related costs, partially offset by an increase in professional fees related to the ABC merger.
The decreases in SG&A for the six-month period ended June 30, 2020 compared to the same period of 2019 was primarily due to decreases in creative and media spend related to the non-recurring Kona marketing campaign of $6.5 million in 2019, reduced market spend in an effort to control costs in response to the COVID-19 pandemic,
and a non-recurring charge related to the settlement of the Kona class action lawsuit in the first quarter of 2019 of $4.7 million, as well as a decrease in employee related costs, and a one-time legal settlement benefit of $1.0 million related to our former Woodinville property received in March 2020, partially offset by an increase in professional fees related to the ABC merger.
Interest Expense
Information regarding Interest expense was as follows (dollars in thousands):
The decreases in Interest expense in the three and six-month periods ended June 30, 2020 compared to the same periods of 2019 were primarily due to lower average interest rates.
Income Tax Benefit
Our effective
income tax rate was 12.8% for the first six months of 2020 and 24.0% in the first six months of 2019. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes and tax credits. In the first six months of 2020, we recognized a one-time tax benefit of $0.4 million related to the net operating loss carryback provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
We
have required capital primarily for the construction and development of our production breweries, to support our brewery footprint evolution, and to fund our working capital needs. Historically, we have financed our capital requirements through cash flows from operations, bank borrowings and the sale of common and preferred stock. We anticipate meeting our obligations for the twelve months beginning July 1, 2020 primarily from cash on hand, cash flows generated from operations and borrowing under our line of credit as the need arises. Capital resources available to us at July 1, 2020 included $0.1 million of Cash and cash equivalents and $3.9 million available under our revolving credit facility.
At June 30, 2020 and December 31,
2019, we had $17.8 million and $1.6 million of working capital, respectively, and our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 30.2% and 21.5%, respectively.
A summary of our cash flow information was as follows (in thousands):
Net
cash provided by (used in) operating activities
$
(7,962)
$
4,120
Net cash used in investing activities
(12,653)
(9,692)
Net cash provided by financing activities
20,284
5,342
Decrease
in Cash and cash equivalents
$
(331)
$
(230)
Cash used in operating activities of $8.0 million in the first six months of 2020 resulted from our Net income of $1.0 million and net non-cash expenses of $5.9 million, offset by changes in our operating assets and liabilities as discussed in more detail below.
Accounts receivable, net, increased $12.7 million to $30.2 million at June 30, 2020 compared to $17.5 million at December 31,
2019. This increase was primarily due to the timing of shipments and an increase of $9.4 million in our receivable from A-B and ABWI, which totaled $20.8 million at June 30, 2020. Historically, we have not had collection problems related to our accounts receivable.
Inventories increased $2.8 million to $21.9 million at June 30, 2020 compared to $19.1 million at December 31, 2019. The increase was primarily due to an increase in packaging materials and finished goods as a result of the timing of shipments in the fourth quarter of 2019 and second quarter of 2020, seasonality and the forecasted demand for our beer.
Accounts payable increased $4.5 million to $20.3
million at June 30, 2020 compared to $15.8 million at December 31, 2019, primarily due to timing of payments for raw and component materials, marketing, capital expenditures and excise tax payments which were postponed by the Alcohol and Tobacco Tax and Trade Bureau due to the COVID-19 pandemic.
Capital expenditures of $12.7 million in the first six months of 2020 were primarily directed to beer production capacity and efficiency improvements. As of June 30, 2020, we had an additional $0.1 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to $1.6 million at December 31, 2019. We anticipate capital expenditures will not exceed a total of $13.5 million
in 2020, primarily for our new Kona brewery and enterprise resource planning software.
Credit Agreement
Our Amended and Restated Credit Agreement with Bank of America, N.A. ("BofA") dated November 30, 2015 (as amended, the "Credit Agreement") provides for a revolving line of credit (“Line of Credit”) of up to $45.0 million, including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $10.8 million term loan (“Term Loan”). The maturity date of the Line of Credit and the Term Loan is September 30, 2023. We entered into a Fifth Amendment to the Credit Agreement on June 3, 2020, which changed the date as of which the maximum amount of the Line
of Credit is subject to loan commitment reductions of $750,000 per quarter to March 31, 2021, rather than March 31, 2020. The Fifth Amendment also revised the definitions of Eurodollar Fixed Rate and Eurodollar Floating Rate contained in Section 1.01 of the Credit Agreement to provide that such rates may not be less than 0.75% at any time.
As of June 30, 2020, we had $3.9 million in funds available to be drawn from our Line of Credit and $41.1 million of borrowings outstanding. At June 30, 2020, $8.2 million was outstanding under the Term Loan.
Under
the Credit Agreement as in effect at June 30, 2020, interest accrues at an annual rate based on the London Inter-Bank Offered Rate (“LIBOR”) Daily Floating Rate plus a marginal rate. The marginal rate varies from 0.75% to 2.00% for the Line of Credit and Term Loan based on our funded debt ratio. At June 30, 2020, our marginal rate was 1.75%, resulting in an annual interest rate of 1.42%. It is likely that LIBOR will no longer be used as a reference rate by most, if not all, financial institutions before year-end 2021.
Accrued interest for the Term Loan is due and payable monthly. Principal payments on the Term Loan are due monthly in accordance with an agreed-upon schedule set forth in the Credit Agreement, with any unpaid principal balance and unpaid accrued interest due and payable on September 30,
2023.
The Credit Agreement authorizes acquisitions within the same line of business as long as we remain in compliance with the financial covenants of the Credit Agreement and there is at least $5.0 million of availability remaining on the Line of Credit following the acquisition. With respect to investments in other craft brewers, other than acquisitions of all or substantially all of
the assets or controlling ownership interests, the Credit Agreement limits each investment to $10.0 million. We may draw upon
the Line of Credit for working capital and general corporate purposes.
The Credit Agreement requires us to satisfy the following financial covenants: (i) on or after the earliest to occur of July
1, 2020 or the termination of the ABC Merger transaction, a Consolidated Leverage Ratio of 3.50 to 1.00; (ii) on or after the earliest to occur of July 1, 2020 or the termination of the ABC Merger transaction, a Fixed Charge Coverage Ratio of 1.20 to 1.00; and (iii) on a trailing four-quarter basis at each of March 31, 2020 and June 30, 2020, a minimum Consolidated EBITDA of $3.0 million. Failure to maintain compliance with these covenants is an event of default and would give BofA the right to declare the entire outstanding loan balance immediately due and payable. At June 30, 2020, we were in compliance with all applicable contractual financial covenants of the Credit Agreement.
Secured
Borrowing
On June 20, 2019 we executed an agreement with BofA, pursuant to our Master Lease Agreement, for $5.2 million in cash in exchange for a secured interest in our previously installed can line at our Portland brewing facility. The maturity date of the secured borrowing is June 21, 2026. We used the funds to pay down our Line of Credit. At June 30, 2020, $4.5 million was outstanding at an interest rate of 4.54%.
Critical Accounting Policies and Estimates
Our financial statements are based upon the selection
and application of significant accounting policies that require management to make significant estimates and assumptions. Judgments and uncertainties affecting the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. Our estimates are based upon historical experience, market trends and financial forecasts and projections, and upon various other assumptions that management believes to be reasonable under the circumstances at various points in time. Actual results may differ, potentially significantly, from these estimates.
Our critical accounting policies, as described in our 2019 Annual Report, relate to goodwill, indefinite-lived intangible assets, long-lived assets, refundable deposits on kegs, revenue recognition, deferred taxes and leases. There have been no changes to our critical accounting policies
since December 31, 2019.
Seasonality
Our sales generally reflect a degree of seasonality, with the first and fourth quarters historically exhibiting low sales levels compared to the second and third quarters. Accordingly, our results for any particular quarter are not likely to be indicative of the results to be achieved for the full year.
Off-Balance Sheet Arrangements
We do not have any off-balance
sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our reported market risks and risk management policies since the filing of our 2019 Annual Report, which was filed with the SEC on March 11, 2020.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e)) under the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.While reasonable assurance is a high level of assurance, it does not mean absolute assurance. Disclosure controls and internal control over financial reporting cannot prevent
or detect all errors, misstatements or fraud. In addition, the design of a control system must recognize that there are resource constraints, and the benefits associated with controls must be proportionate to their costs.
Changes in Internal Control Over Financial Reporting
As a result of the COVID-19 pandemic, certain employees began working remotely in March 2020. These changes to the working environment did not have a material effect on our internal control over financial reporting. During the second quarter of 2020, there were no changes in our internal control over financial reporting identified in connection with the above evaluation required by Exchange Act Rule 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 14 of Notes to Consolidated Financial Statements included in Part 1, Item 1 of this report.
Item 1A. Risk Factors
There have been no changes in our reported risk factors since the filing of our 2019 Annual Report, which was filed with the SEC on March 11, 2020, with the exception of the addition of the following risk factor:
The
Global COVID-19 Pandemic Has Disrupted Our Business and Our Financial Condition; Our Operating Results Have Been, and Are Expected To Continue to be, Adversely Affected by the Outbreak and Its Effects.
Our operations and business have been, and may continue to be, materially and adversely affected by the COVID-19 pandemic and related weakening of economic conditions and declines in consumer demand. National, state and local governments have responded to the COVID-19 pandemic in various ways, including by declaring states of emergency, restricting people from gathering in groups, or interacting within a certain physical distance and, in certain cases, ordering businesses to close or limit operations or requiring people to stay at home. Although we have been permitted to continue to operate our breweries, there are no assurances that we will be permitted to operate these facilities under future government orders or other restrictions,
or that our contract brewing partner will similarly be permitted to continue to operate. In particular, limitations on or closures of our Oregon, New Hampshire or Hawaii breweries, or ABCS, our contract brewing partner, in Colorado, could have a material adverse impact on our ability to manufacture products and service customers, and could have a material adverse impact on our business, financial condition and results of operations.
During the second quarter of 2020, the principal effect of the global COVID-19 pandemic on our operations was to significantly reduce demand for draft from the on-premise channel due to the closure of our brewpubs of on-premise business. We expect this impact to continue as the
situation remains dynamic and subject to rapid and possibly material changes. Continued or additional disruptions to our business and potential associated effects on our financial condition and results of operations include, but are not limited to:
•reduced demand for our products due to adverse and uncertain economic conditions such as increased unemployment, a prolonged downturn in economic growth and other financial hardships, and a decline in consumer confidence;
•unpredictable consumer behaviors and reduced demand for our products
due to on-premise closures, government quarantines and other restrictions on social gatherings;
•inability to manufacture and ship our products in quantities necessary to meet consumer demand and achieve planned shipment and depletion targets due to disruptions at our owned breweries and our contract brewing partner's brewery caused by:
◦our inability to maintain a sufficient workforce at our owned breweries due to the health-related effects of COVID-19 and similar staffing issues at our contract brewing partner's brewery;
◦disruptions at our owned breweries and our contract
brewing partner's brewery caused by an inability to maintain a sufficient quantity of essential supplies, such as raw and packaging materials, and personal protective equipment, or to maintain logistics and other manufacturing and supply chain capabilities necessary for the manufacture and distribution of our products; or
◦failure of third parties on which we rely, including our inventory suppliers (such as suppliers of aluminum cans due to increased demand for packaged beer), our contract brewing partner, distributors, and logistics and transportation providers, to continue to meet their obligations to us, which may be caused by their own financial or operational difficulties;
•potential incremental costs associated with mitigating the
effects of the pandemic on our operations, including increased labor, freight and logistics costs and other expenses; and
•significant changes in the conditions in markets in which we produce, sell or distribute our products, including prolonged or additional quarantines, government and regulatory actions and closures or other restrictions that limit or close our operating and manufacturing facilities, restrict the ability of our employees to perform necessary business functions, restrict or prevent consumer access to our products, or otherwise prevent our third parties from sufficiently staffing operations, including operations necessary for the production, distribution, sale and support of our products.
Conditions such as those outlined above could place limitations on our ability to operate effectively and could
have a material adverse effect on our operations, financial condition and operating results. We have implemented policies and procedures at our owned breweries to address potential risks, including mandating work from home for all non-production employees, making face masks available, reorganizing workspaces to increase physical distancing between and among shifts, and increasing hours of cleaning per day. As the situation continues to evolve and more information and guidance become available, we may adjust our current policies and procedures to address the rapidly changing variables related to the pandemic. Additional impacts may arise of which we are not currently aware. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.
Membership Interest Purchase Agreement, dated June 10, 2020, by and among Craft Brew Alliance, Inc., Kona Brewery LLC and PV Brewing Partners, LLC (incorporated
by reference from Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on June 11, 2020)
Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101
* Furnished, not filed
**Exhibits and schedules have been omitted from this filing pursuant to Item 601(a)(5)
of Regulation S-K and will be furnished to the Securities and Exchange Commission upon request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
