Note 1. Nature of Operations
Overview
Craft Brew Alliance, Inc. ("CBA") is the sixth largest craft brewing company in the U.S. and a leader in brewing, branding, and bringing to market world-class American craft beers.
Our distinctive portfolio combines the power of Kona Brewing Company, a fast-growing national craft beer brand, with strong regional craft 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 partnerships, 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 and has become one of the top craft brands in the U.S. As part of CBA, Kona has expanded its reach across all
50
U.S. states and approximately
30
international markets, while remaining deeply rooted in its home of Hawaii.
As the craft beer market continues to grow and consumers increasingly demand more local offerings, Craft Brew Alliance has expanded its portfolio of brands and maximized its brewing footprint through strategic partnerships with emerging craft beer brands in targeted markets. From 2015 to 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. Through these strategic partnerships, we gain local relevance in select beer geographies, while our partner breweries gain access to our world-class leadership and national brewing and sales infrastructure to grow their brands.
Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S.
We proudly brew and package our craft beers in
three
company-owned production breweries located in Portland, Oregon; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. In 2017, we completed the process of transitioning CBA brewing volume out of a partner brewery in Memphis, as part of a previous alternating proprietorship brewing arrangement, into Anheuser-Busch’s Fort Collins, Colorado brewery to leverage a contract brewing agreement with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of Anheuser-Busch, LLC (“A-B”) established in 2016. Additionally, we own and operate three innovation breweries in Portland, Oregon; Seattle, Washington; and Portsmouth, New Hampshire, which are primarily used for small-batch production and limited-release brews 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. In 2017, Kona beers were distributed in all 50 states. As increased competition put increasing pressure on craft brands outside of their home markets, we continued ongoing work to retrench and stabilize Widmer Brothers and Redhook in the Pacific Northwest. We expanded distribution of Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. across their respective home markets of North Carolina, New England, and South Miami.
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.
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 include our
five
brewpubs,
four
of which are located adjacent to our Beer Related operations, other merchandise sales, and sales of our beers directly to customers.
Basis of Presentation
The consolidated financial statements include the accounts of Craft Brew Alliance, Inc. and our wholly owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Note 2. Significant Accounting Policies
Cash and Cash Equivalents
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
December 31, 2017
and
2016
, we did
not
have any cash equivalents.
Under our cash management system, we utilize 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
December 31, 2017
there were
no
bank overdrafts. As of
December 31, 2016
there were
$1.1
million of bank overdrafts. 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.
Accounts Receivable
Accounts receivable primarily consists of trade receivables due from wholesalers and A-B for beer and promotional product sales. Because of state liquor laws and each wholesaler’s agreement with A-B, we do not have collectability issues related to the sale of our beer products. Accordingly, we do not regularly provide an allowance for doubtful accounts for beer sales. We have provided an allowance for promotional merchandise receivables that have been invoiced to the wholesaler, which reflects our best estimate of probable losses inherent in the accounts. We determine the allowance based on historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. The allowance for doubtful accounts was $
25,000
at both
December 31, 2017
and
2016
.
Activity related to our allowance for doubtful accounts was immaterial in
2017
,
2016
and
2015
.
Inventories
Inventories, except for pub food, beverages and supplies, are stated at the lower of standard cost or net realizable value. Pub food, beverages and supplies are stated at the lower of 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 on our Consolidated Balance Sheets.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in our Consolidated Statements of Operations.
Depreciation and amortization of property, equipment and leasehold improvements is provided on the straight-line method over the following estimated useful lives:
|
|
|
Buildings
|
30 – 50 years
|
Brewery equipment
|
10 – 25 years
|
Furniture, fixtures and other equipment
|
2 – 10 years
|
Vehicles
|
5 years
|
Leasehold improvements
|
The lesser of useful life or term of the lease
|
Valuation of Long-Lived Assets
We evaluate potential impairment of long-lived assets when facts and circumstances indicate that the carrying values of such assets may be impaired. An evaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscounted cash flows. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss in the current period in our Consolidated Statements of Operations. During
2017
, a
$0.5 million
impairment charge was recorded as a component of Selling, general and administrative expenses related to the sale of our Woodinville brewery (see Note 20). There were no impairments recorded during
2016
or
2015
.
Definite-lived intangible assets are amortized using a straight line basis of accounting. Definite-lived intangible assets and their respective estimated lives are as follows:
|
|
|
Distributor agreements
|
15 years
|
Non-compete agreements
|
5 years
|
Goodwill
Goodwill is not amortized but rather is reviewed for impairment at least annually, or more frequently if an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We first make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we then perform a two-step goodwill impairment test. Under the first step, the fair value of the reporting unit is compared to its carrying value, and, if an indication of goodwill impairment exists in the reporting unit, the second step of the impairment test is performed to measure the amount of any impairment loss. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill as determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. We conduct our annual impairment test as of December 31 of each year and have determined there to be no impairment for any of the periods presented.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist primarily of trademarks, domain name and recipes. We evaluate the recoverability of indefinite-lived intangible assets annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, by comparing the carrying amount of the asset to its estimated fair value measured by using discounted cash flows that the asset is expected to generate. We have determined there to be no impairment for any of the periods presented.
Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us and are reflected in our Consolidated Balance Sheets at cost and are depreciated over the estimated useful life of the keg. When draft beer is shipped to the wholesaler, we collect a refundable deposit, presented as a current liability, Refundable deposits, in our Consolidated Balance Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler.
We have experienced some loss of kegs and anticipate that some loss will occur in future periods due to the significant volume of kegs handled by each wholesaler and retailer, the homogeneous nature of kegs owned by most brewers, and the relatively small deposit collected for each keg when compared with its market value. In order to estimate forfeited deposits attributable to lost kegs, we periodically use internal records, records maintained by A‑B, records maintained by other third party vendors and historical information to estimate the physical count of kegs held by wholesalers and A-B. These estimates affect the amount recorded as equipment and refundable deposits as of the date of the consolidated financial statements. The actual liability for refundable deposits may differ from estimates. Our Consolidated Balance Sheets included $
4.5 million
and $
6.3 million
at
December 31, 2017
and
2016
, respectively, in Refundable deposits on kegs and
$10.0 million
and $
10.8 million
, respectively, in keg equipment, net of accumulated depreciation, included as a component of Property, equipment and leasehold improvements, net.
Concentrations of Risk
Financial instruments that potentially subject us to credit risk consist principally of Accounts receivable. While wholesalers and A-B account for substantially all Accounts receivable, this concentration risk is limited due to the number of wholesalers, their geographic dispersion and state laws regulating the financial affairs of wholesalers of alcoholic beverages.
Comprehensive Income (Loss)
Comprehensive income (loss) includes changes in the fair value of interest rate derivatives that are designated as cash flow hedges.
Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in connection with sales to a member of the A-B wholesale distributor network, when the products are delivered to the member. A member of the A-B wholesale distributor network may be a branch of A‑B or an independent wholesale distributor.
We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event.
We recognize revenue related to non-refundable payments to be received on specified dates throughout a contract term on a straight-line basis over the life of the related contract or contracts.
Excise Taxes
The federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers producing less than
two million
barrels of beer per calendar year, the federal excise tax is
$7.00
per barrel on the first
60,000
barrels of beer removed for consumption or sale during the calendar year, and
$18.00
per barrel for each barrel in excess of
60,000
barrels. Beginning in 2018, as a result of the “Tax Cuts and Jobs Act,” our federal excise tax rate on beer will decrease from
$7.00
per barrel to $3.50 per barrel on the first
60,000
barrels of beer removed for consumption or sale during the calendar year, and from
$18.00
per barrel to $16.00 per barrel for each barrel in excess of
60,000
barrels. These lower rates currently expire at the end of 2019. Individual states also impose excise taxes on alcoholic beverages in varying amounts. As presented in our Consolidated Statements of Operations, Sales reflects the amounts invoiced to A-B, wholesalers and other customers. Excise taxes due to federal and state agencies are not collected from our customers, but rather are our responsibility. Net sales, as presented in our Consolidated Statements of Operations, are reduced by applicable federal and state excise taxes.
Taxes Collected from Customers and Remitted to Governmental Authorities
We account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net (reduction of revenue) basis.
Shipping and Handling Costs
Costs incurred to ship our product are included in Cost of sales in our Consolidated Statements of Operations.
Advertising Expenses
Advertising costs, consisting of television, radio, print, outdoor advertising, on-line and social media, sponsorships, trade events, promotions and printed product information, as well as costs to produce these media, are expensed as incurred. The costs associated with point of sale display items and related promotional merchandise are inventoried and charged to expense when first used. For the years ended
December 31, 2017
,
2016
and
2015
, we recognized costs for all of these activities totaling $
14.8 million
, $
14.6 million
and $
16.2 million
, respectively, which are reflected as Selling, general and administrative expenses in our Consolidated Statements of Operations.
Advertising expenses frequently involve the local wholesaler sharing in the cost of the program. Reimbursements from wholesalers for advertising and promotion activities are recorded as a reduction to Selling, general and administrative expenses in our Consolidated Statements of Operations. Pricing discounts to wholesalers are recorded as a reduction of Sales in our Consolidated Statements of Operations.
Stock-Based Compensation
The fair value of restricted stock unit awards is determined based on the number of units granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various judgmental assumptions including expected volatility and option life.
The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures of stock-based awards based on historical experience and expected future activity.
The estimated fair value of performance-based stock awards is recognized over the service period based on an assessment of the probability that performance goals will be met. We re-measure the probability of achieving the performance goals during each reporting period. In future reporting periods, if we determine that performance goals are not probable of occurrence, no additional compensation expense will be recognized and any previously recognized compensation expense would be reversed.
Legal Costs
We are a party to legal proceedings arising in the normal course of business. We accrue for certain legal costs, including attorney fees, as well as potential settlement amounts and other losses related to various legal proceedings that are estimable and probable. If not estimable and probable, legal costs are expensed as incurred as a component of Selling, general and administrative expenses.
Income Taxes
Deferred income taxes are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
We recognize the benefits of tax return positions when it is determined that the positions are “more-likely-than-not” to be sustained by the taxing authority. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred. At
December 31, 2017
and
2016
, we did not have any unrecognized tax benefits or any interest and penalties accrued on unrecognized tax benefits.
In the fourth quarter of 2017, we recognized the impact of enacted tax legislation, which reduced our federal tax rate from 34% to 21% effective January 1, 2018. This reduction resulted in a
$6.9 million
decrease to our deferred tax liability, which was recognized as a reduction to our income tax provision in the fourth quarter of 2017, the period of enactment. Our accounting for the income tax effects of the new tax legislation is complete, and we do not anticipate adjustments to such accounting in future periods.
Segment Information
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 and Omission 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.
Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number of shares that were outstanding during the period. Diluted earnings per share include the dilutive effect of common share equivalents calculated under the treasury stock method. Performance-based restricted stock grants are included in basic and diluted earnings per share when the underlying performance metrics have been met.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under different assumptions or conditions.
Note 3. Recent Accounting Pronouncements
ASU 2017-12
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, on a prospective basis. We do not expect the adoption of ASU 2017-12 to have a material effect on our financial position, results of operations or cash flows.
ASU 2017-09
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting." ASU 2017-09 provides clarity and is expected to reduce both diversity in practice and the cost and complexity when accounting for a change to the terms of a stock-based award. ASU 2017-09 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to 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. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.
ASU 2016-15
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 addresses eight specific cash flow issues and how they should be reported on the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. We do not expect the adoption of ASU 2016-15 to have a material effect on our financial position, results of operations or cash flows.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." ASU 2016-13 addresses accounting for credit losses for assets that are not measured at fair value through net income on a recurring basis. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted for fiscal years beginning after December 15, 2018. We do not expect the adoption of ASU 2016-13 to have a material effect on our financial position, results of operations or cash flows.
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are still evaluating any potential impact that adoption of ASU 2016-02 may have on our financial position, results of operations or cash flows.
ASU 2016-01
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10)." ASU 2016-01 enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by addressing certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments simplify certain requirements and also reduce diversity in current practice for other requirements. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for the early application guidance specifically allowed in ASU 2016-01, early adoption is not permitted. We do not expect the adoption of ASU 2016-01 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-17
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes, and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments apply to all entities that present a classified statement of financial position and aligns the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards. ASU 2015-17 is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted this new accounting standard retrospectively in the first quarter of 2017. As of
December 31, 2017
and December 31, 2016, we had
$0.8 million
and
$2.1 million
of current deferred tax assets that are now classified as noncurrent on the Consolidated Balance Sheets under this new accounting standard.
ASU 2015-11
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)." ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out ("LIFO") method by prescribing that inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. The adoption of ASU 2015-11 in the first quarter of 2017 did not have a material effect on our financial position, results of operations or cash flows.
ASU 2014-09, ASU 2016-10 and ASU 2016-12
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09, as amended, affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies aspects of Topic 606 related to identifying performance obligations and the licensing implementation guidance, while retaining the related core principles for those areas. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements in ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients." ASU 2016-12 clarifies aspects of Topic 606 related to the guidance on assessing collectibility, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications. The effective date and transition requirements for ASU 2016-12 are the same as the effective date and transition requirements in ASU 2014-09.
The standards permit either the retrospective or the modified retrospective (cumulative effect) transition method. We have elected the modified retrospective transition method and are currently evaluating the impact of adopting Topic 606 on January 1, 2018. We are currently preparing to implement changes to its accounting policies and controls to support the new revenue recognition and disclosure requirements.
Note 4. Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Raw materials
|
$
|
4,290
|
|
|
$
|
6,947
|
|
Work in process
|
1,960
|
|
|
2,996
|
|
Finished goods
|
5,555
|
|
|
6,601
|
|
Packaging materials
|
410
|
|
|
567
|
|
Promotional merchandise
|
1,161
|
|
|
1,353
|
|
Pub food, beverages and supplies
|
468
|
|
|
627
|
|
|
$
|
13,844
|
|
|
$
|
19,091
|
|
Work in process is beer held in fermentation tanks prior to the filtration and packaging process.
Note 5. Equity Method Investment
On July 12, 2017, we purchased a
24.5%
interest in Wynwood Brewing Company, LLC ("Wynwood") for
$2.1 million
in cash. Our investment is accounted for under the equity method of accounting and is recorded as a component of Intangible, equity method investment and other assets, net on our Consolidated Balance Sheets. The carrying value of our investment was
$2.0 million
as of
December 31, 2017
.
See also Note 18.
Note 6. Other Current Assets and Other Accrued Expenses
Other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Prepaid property taxes
|
|
$
|
534
|
|
|
$
|
421
|
|
Prepaid insurance
|
|
518
|
|
|
448
|
|
Income taxes receivable
|
|
1,153
|
|
|
68
|
|
Other
|
|
2,130
|
|
|
1,558
|
|
|
|
$
|
4,335
|
|
|
$
|
2,495
|
|
Other accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Deferred international distribution fee from ABWI
|
|
$
|
3,385
|
|
|
$
|
1,785
|
|
Accrued pricing discounts
|
|
1,011
|
|
|
933
|
|
Other
|
|
1,357
|
|
|
1,390
|
|
|
|
$
|
5,753
|
|
|
$
|
4,108
|
|
Note 7. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Brewery equipment
|
|
$
|
97,606
|
|
|
$
|
113,460
|
|
Buildings
|
|
32,925
|
|
|
56,477
|
|
Land and improvements
|
|
3,821
|
|
|
7,606
|
|
Furniture, fixtures and other equipment
|
|
20,388
|
|
|
19,192
|
|
Leasehold improvements
|
|
16,239
|
|
|
9,786
|
|
Vehicles
|
|
106
|
|
|
125
|
|
Construction in progress
|
|
8,661
|
|
|
11,760
|
|
|
|
179,746
|
|
|
218,406
|
|
Less accumulated depreciation and amortization
|
|
(73,463
|
)
|
|
(96,436
|
)
|
|
|
$
|
106,283
|
|
|
$
|
121,970
|
|
Note 8. Goodwill and Intangible, Equity Method Investment and Other Assets
Goodwill
Goodwill totaled $
12.9 million
at both
December 31, 2017
and
2016
and there were
no
changes to the goodwill balance during
2017
,
2016
or
2015
. There are
no
impairment losses netted against the goodwill balance.
Intangible, Equity Method Investment and Other Assets
Intangible, equity method investment and other assets and the related accumulated amortization were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Trademarks and domain name
|
|
$
|
14,429
|
|
|
$
|
14,429
|
|
Recipes
|
|
700
|
|
|
700
|
|
|
|
|
|
|
Distributor agreements
|
|
2,200
|
|
|
2,200
|
|
Accumulated amortization
|
|
(1,393
|
)
|
|
(1,247
|
)
|
|
|
807
|
|
|
953
|
|
|
|
|
|
|
Other
|
|
348
|
|
|
348
|
|
Accumulated amortization
|
|
(255
|
)
|
|
(228
|
)
|
|
|
93
|
|
|
120
|
|
Intangible assets, net
|
|
16,029
|
|
|
16,202
|
|
|
|
|
|
|
Promotional merchandise
|
|
818
|
|
|
1,106
|
|
Deposits and other
|
|
2,076
|
|
|
2,174
|
|
Equity method investment
|
|
2,026
|
|
|
—
|
|
Intangible, equity method investment and other assets, net
|
|
$
|
20,949
|
|
|
$
|
19,482
|
|
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Amortization expense
|
|
$
|
260
|
|
|
$
|
199
|
|
|
$
|
222
|
|
Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
191
|
|
2019
|
172
|
|
2020
|
170
|
|
2021
|
147
|
|
2022
|
147
|
|
Thereafter
|
73
|
|
|
$
|
900
|
|
Note 9. Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Term loan, due September 30, 2023
|
|
$
|
9,244
|
|
|
$
|
9,653
|
|
Line of credit, due November 30, 2020
|
|
22,199
|
|
|
17,975
|
|
Capital lease obligations for equipment
|
|
1,855
|
|
|
1,635
|
|
|
|
33,298
|
|
|
29,263
|
|
Less current portion
|
|
(699
|
)
|
|
(1,317
|
)
|
|
|
$
|
32,599
|
|
|
$
|
27,946
|
|
Required principal payments on outstanding debt obligations as of
December 31, 2017
for the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
|
Line of
Credit
|
|
Capital
Lease
Obligations
|
2018
|
|
$
|
422
|
|
|
$
|
—
|
|
|
$
|
333
|
|
2019
|
|
442
|
|
|
—
|
|
|
529
|
|
2020
|
|
459
|
|
|
22,199
|
|
|
333
|
|
2021
|
|
477
|
|
|
—
|
|
|
266
|
|
2022
|
|
496
|
|
|
—
|
|
|
199
|
|
Thereafter
|
|
6,948
|
|
|
—
|
|
|
399
|
|
|
|
$
|
9,244
|
|
|
$
|
22,199
|
|
|
2,059
|
|
Amount representing interest
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
$
|
1,855
|
|
Term Loan and Line of Credit
We have a loan agreement (as amended, the “Loan Agreement”) with Bank of America, N.A. ("BofA"), which presently comprises a
$40.0 million
revolving line of credit (“Line of Credit”), including provisions for cash borrowings and up to
$2.5 million
notional amount of letters of credit, and a term loan (the “Term Loan”) with an original balance of
$10.8 million
. We may draw upon the Line of Credit for working capital and general corporate purposes until expiration on
November 30, 2020
. The maturity date of the Term Loan is
September 30, 2023
. At
December 31, 2017
, we had
$9.2 million
outstanding on our Term Loan and
$22.2 million
outstanding under the Line of Credit.
Under the Loan Agreement, 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
1.75%
for the Line of Credit and Term Loan based on our funded debt ratio. At
December 31, 2017
, our marginal rate was
0.75%
resulting in an annual interest rate of
2.26%
.
The Loan Agreement authorizes acquisitions within the same line of business as long as we remain in compliance with the financial covenants of the Loan Agreement and there is at least
$5.0 million
of availability remaining on the Line of Credit following the acquisition.
Under the Loan Agreement, a quarterly fee on the unused portion of the Line of Credit, including the undrawn amount of the related standby letter of credit, varies from
0.15%
to
0.30%
based upon our funded debt ratio.
At
December 31, 2017
, the quarterly fee was
0.15%
and the fee totaled the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Loan Agreement fee
|
|
$
|
37
|
|
|
$
|
36
|
|
|
$
|
24
|
|
An annual fee is payable in advance on the notional amount of each standby letter of credit issued and outstanding multiplied by an applicable rate ranging from
0.75%
to
1.75%
. We had
no
letters of credit outstanding during
2017
,
2016
or
2015
.
We were in compliance with all applicable contractual financial covenants of the Loan Agreement at
December 31, 2017
. These financial covenants under the Loan Agreement are measured on a trailing four-quarter basis. We are required to maintain a funded debt ratio of up to
3.5
to 1 and a fixed charge coverage ratio above
1.20
to 1. The funded debt ratio maximum is reduced to
3.0
to 1 on January 1, 2018.
The Loan Agreement is secured by substantially all of our personal property and fixtures and by our Oregon brewery. In addition, we are permitted to declare or pay dividends, repurchase outstanding common stock or incur additional debt, subject to limitations. We are restricted from entering into any agreement that would result in a change in control.
Note 10. Derivative Financial Instruments
Interest Rate Swap Contracts
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
75%
of the 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
September 30, 2023
. The Term Loan contract had a total notional value of
$6.9 million
as of
December 31, 2017
. Through this swap agreement, we pay interest at a fixed rate of
2.86%
and receive interest at a floating-rate of the one-month LIBOR, which was
1.49%
at
December 31, 2017
.
Effective January 4, 2016, we entered into a
$9.1 million
notional amount interest rate swap contract with BofA, which expires
January 1, 2019
, to hedge the variability of interest payments associated with our variable-rate borrowings on our line of credit. The notional amount fluctuates based on a predefined schedule based on our anticipated borrowings. Through this swap agreement, we pay interest at a fixed rate of
1.28%
and receive interest at a floating-rate of the one-month LIBOR, which was
1.49%
at
December 31, 2017
.
Since the interest rate swaps hedge the variability of interest payments on variable rate debt with similar terms, they qualify for cash flow hedge accounting treatment.
As of
December 31, 2017
, unrealized net losses of
$221,000
were recorded in Accumulated other comprehensive loss as a result of these hedges. The effective portion of the gain or loss on the derivatives is reclassified into Interest expense in the same period during which we record Interest expense associated with the related debt. There was
no
hedge ineffectiveness during
2017
,
2016
or
2015
.
The fair value of our derivative instruments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Fair value of interest rate swaps
|
$
|
(221
|
)
|
|
$
|
(424
|
)
|
The effect of our interest rate swap contracts that were accounted for as derivative instruments 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)
|
Year Ended
December 31,
|
|
|
|
|
|
|
2017
|
|
$
|
203
|
|
|
Interest expense
|
|
$
|
150
|
|
2016
|
|
$
|
145
|
|
|
Interest expense
|
|
$
|
292
|
|
2015
|
|
$
|
(66
|
)
|
|
Interest expense
|
|
$
|
209
|
|
See also Note 11.
Note 11. Fair Value Measurements
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 following tables summarize liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(221
|
)
|
|
$
|
—
|
|
|
$
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(424
|
)
|
|
$
|
—
|
|
|
$
|
(424
|
)
|
We did not have any assets measured at fair value on a recurring basis at
December 31, 2017
or
December 31, 2016
.
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
2017
,
2016
or
2015
.
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.
We had fixed-rate debt outstanding as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Fixed-rate debt on balance sheet
|
$
|
1,855
|
|
|
$
|
935
|
|
Estimated fair value of fixed-rate debt
|
$
|
1,915
|
|
|
$
|
993
|
|
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.
Note 12. Segment Results and Concentrations
Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
Beer
Related
|
|
Brewpubs
|
|
Total
|
Net sales
|
$
|
179,830
|
|
|
$
|
27,626
|
|
|
$
|
207,456
|
|
Gross profit
|
$
|
63,412
|
|
|
$
|
1,846
|
|
|
$
|
65,258
|
|
Gross margin
|
35.3
|
%
|
|
6.7
|
%
|
|
31.5
|
%
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
173,657
|
|
|
$
|
28,850
|
|
|
$
|
202,507
|
|
Gross profit
|
$
|
55,667
|
|
|
$
|
3,932
|
|
|
$
|
59,599
|
|
Gross margin
|
32.1
|
%
|
|
13.6
|
%
|
|
29.4
|
%
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Net sales
|
$
|
176,343
|
|
|
$
|
27,825
|
|
|
$
|
204,168
|
|
Gross profit
|
$
|
58,610
|
|
|
$
|
3,586
|
|
|
$
|
62,196
|
|
Gross margin
|
33.2
|
%
|
|
12.9
|
%
|
|
30.5
|
%
|
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.
Sales to wholesalers through the A-B Distributor Agreement represented the following percentage of our Sales:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
74.9
|
%
|
|
77.8
|
%
|
|
81.2
|
%
|
Receivables from A-B represented the following percentage of our Accounts receivable balance:
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
74.4
|
%
|
|
66.6
|
%
|
All of our long-term assets are located in the U.S. and Sales outside of the U.S. are insignificant.
Note 13. Stock-Based Plans and Stock-Based Compensation
We maintain several stock incentive plans under which stock-based awards are, or have been, granted to employees and non-employee directors. We issue new shares of common stock upon exercise or settlement of the stock-based awards. All of our stock plans are administered by the Compensation Committee of our Board of Directors, which determines the grantees, the number of shares of common stock for which awards may be exercised or settled and the exercise or grant prices of such shares, among other terms and conditions of stock-based awards under our stock-based plans.
With the approval of the 2014 Stock Incentive Plan (the “2014 Plan”) in May 2014, no further grants of stock-based awards may be made under our 2010 Stock Incentive Plan (the “2010 Plan”). However, the provisions of the 2010 Plan will remain in effect until all outstanding awards are exercised, settled or terminated. Shares subject to terminated awards under the 2010 Plan are not added to the pool of shares available for grant pursuant to the 2014 Plan.
Shares to be issued upon the exercise of stock options and the vesting of stock awards will come from newly issued shares.
2014 Stock Incentive Plan
The 2014 Plan provides for grants of stock options, restricted stock, restricted stock units ("RSUs"), performance awards and stock appreciation rights, as well as other stock-based awards. While incentive stock options may only be granted to employees, awards other than incentive stock options may be granted to employees, non-employee directors and outside consultants. Options granted to our employees are generally subject to a
four
-year vesting period. Vested options generally remain exercisable for
ten years
following the date of grant. RSUs generally vest over a period of
three years
. The exercise price of stock options must be at least equal to the fair market value per share of our common stock on the date of grant. A maximum of
1,000,000
shares of common stock are authorized for issuance under the 2014 Plan. As of
December 31, 2017
, there were
421,581
shares available for future awards pursuant to the 2014 Plan.
Terms of awards granted pursuant to the 2010 Plan and predecessor plans were similar to the terms of awards granted pursuant to the 2014 Plan.
Stock-Based Compensation
Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average per share fair value of stock options granted
|
|
$
|
—
|
|
|
$
|
4.06
|
|
|
$
|
7.68
|
|
Intrinsic value of stock options exercised
|
|
265
|
|
|
223
|
|
|
92
|
|
Intrinsic value of fully-vested stock awards granted
|
|
1,812
|
|
|
944
|
|
|
42
|
|
Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Selling, general and administrative expense
|
$
|
1,197
|
|
|
$
|
1,005
|
|
|
$
|
1,074
|
|
Cost of sales
|
119
|
|
|
82
|
|
|
83
|
|
Total stock-based compensation expense
|
$
|
1,316
|
|
|
$
|
1,087
|
|
|
$
|
1,157
|
|
We amortize stock-based compensation on a straight-line basis over the vesting period of the individual awards, which is the requisite service period, with estimated forfeitures considered.
At
December 31, 2017
, we had total unrecognized stock-based compensation expense of
$2.9 million
, which will be recognized over the weighted average remaining vesting period of
1.9 years
.
The following weighted average assumptions were utilized in determining fair value pursuant to the Black-Scholes option pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
|
—
|
%
|
|
1.66
|
%
|
|
1.87
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected life
|
|
—
|
|
|
6.81 years
|
|
|
6.72 years
|
|
Volatility
|
|
—
|
%
|
|
51.70
|
%
|
|
61.50
|
%
|
The risk-free rate used is based on the U.S. Treasury yield curve over the estimated term of the options granted. Expected lives were estimated based on historical exercise data. The expected volatility is calculated based on the historical volatility of our common stock.
Stock-Based Awards Plan Activity
Stock Option Activity
Stock option activity for the year ended
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
Outstanding at December 31, 2016
|
|
440,247
|
|
|
$
|
9.83
|
|
Granted
|
|
—
|
|
|
—
|
|
Exercised
|
|
(30,826
|
)
|
|
9.84
|
|
Canceled
|
|
(49,708
|
)
|
|
9.42
|
|
Outstanding at December 31, 2017
|
|
359,713
|
|
|
9.88
|
|
Certain information regarding options outstanding as of
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Number
|
|
359,713
|
|
|
195,059
|
|
Weighted average exercise price
|
|
$
|
9.88
|
|
|
$
|
9.91
|
|
Aggregate intrinsic value
|
|
$
|
3,351,000
|
|
|
$
|
1,812,000
|
|
Weighted average remaining contractual term
|
|
6.7 years
|
|
|
6.1 years
|
|
Restricted Stock Unit Activity
In February 2017, we granted a total of
59,395
RSUs with a grant date fair value of $
15.85
per share to selected executive officers and other members of our executive and impact leadership teams. The RSUs vest on
March 31, 2020
, provided that the participant continues to be employed through that date.
In June 2017, we granted a total of
14,526
RSUs with a grant date fair value of $
17.45
per share to our full-time, non-executive employees, subject to our achievement of EBITDA at a specified target level for the year ended
December 31, 2017
. For this grant,
84%
of the target number of RSUs will vest on
May 31, 2018
, subject to participants' continued employeement through that date.
In November 2017, we granted
4,393
RSUs with a grant date fair value of
$19.35
per share to an executive officer. These RSUs vest in installments on each of
December 31, 2018
,
December 31, 2019
, and
December 31, 2020
, per a vesting schedule, subject to the participant's continued employment through that date.
During 2016, we granted a total of
52,503
RSUs with a weighted average grant date fair value of
$7.69
per share to selected officers and other members of our leadership teams. The RSUs will vest on
March 31, 2019
, provided that the participant continues to be employed through that date.
Performance-Based Stock Awards Activity
We granted performance-based stock awards to selected executives in each of the past seven years. Performance goals for the 2017 awards are tied to target amounts of the compounded-average growth rates of Net Sales and average adjusted EBITDA margin over a
three
-year performance period. The awards outstanding at
December 31, 2017
will vest from
zero
to
125%
of the targeted number of performance shares.
For the 2012 grant,
46%
of the target number of performance shares were earned in 2015. No shares were earned for the 2013 grant and we do not expect any shares to be earned pursuant to the 2014 grant due to failure to meet the specified performance goals. Awards, if earned, are paid in shares of our common stock.
Cumulative activity related to performance-based awards during the year ended
December 31, 2017
was as follows (in shares):
|
|
|
|
|
|
|
|
|
|
|
Awards Expected to Vest
|
|
Weighted Average Grant Date Fair Value Per Share
|
Awards expected to vest as of January 1, 2017
|
|
189,703
|
|
|
$
|
9.61
|
|
Granted (target amount)
|
|
61,218
|
|
|
15.85
|
|
Not expected to vest due to failure to meet performance goals
|
|
(67,200
|
)
|
|
13.10
|
|
Awards expected to vest as of December 31, 2017
|
|
183,721
|
|
|
10.41
|
|
Stock Grants
On the date of our 2017 Annual Meeting of Shareholders, each non-employee director received an annual grant of fully-vested shares of our common stock with a fair value of
$45,000
, except for the chairman whose grant had a fair value of
$67,500
. The
2017
grants included
2,778
fully-vested shares of common stock granted to
seven
of our non-employee directors; the chairman received
4,167
shares, for a total of
23,613
shares.
Note 14. Earnings Per Share
The following table reconciles shares used for basic and diluted earnings per share ("EPS") and provides other information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Weighted average common shares used for basic EPS
|
19,284
|
|
|
19,225
|
|
|
19,152
|
|
Dilutive effect of stock-based awards
|
163
|
|
|
—
|
|
|
23
|
|
Shares used for diluted EPS
|
19,447
|
|
|
19,225
|
|
|
19,175
|
|
|
|
|
|
|
|
|
Stock-based awards not included in diluted per share calculations as they would be antidilutive
|
25
|
|
|
221
|
|
|
241
|
|
Note 15. Income Taxes
All of our income is generated in the U.S. The components of income tax provision (benefit) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current federal
|
|
$
|
(413
|
)
|
|
$
|
(378
|
)
|
|
$
|
491
|
|
Current state
|
|
331
|
|
|
32
|
|
|
133
|
|
|
|
(82
|
)
|
|
(346
|
)
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal
|
|
(5,368
|
)
|
|
285
|
|
|
728
|
|
Deferred state
|
|
(32
|
)
|
|
75
|
|
|
148
|
|
|
|
(5,400
|
)
|
|
360
|
|
|
876
|
|
|
|
$
|
(5,482
|
)
|
|
$
|
14
|
|
|
$
|
1,500
|
|
Income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Provision at U.S. statutory rate
|
|
$
|
1,374
|
|
|
$
|
(104
|
)
|
|
$
|
1,264
|
|
State taxes, net of federal benefit
|
|
189
|
|
|
49
|
|
|
182
|
|
Effect of tax rate change on deferred tax assets and liabilities
|
|
(6,923
|
)
|
|
—
|
|
|
—
|
|
Permanent differences, primarily meals and entertainment
|
|
180
|
|
|
264
|
|
|
250
|
|
Stock-based compensation
|
|
(11
|
)
|
|
(41
|
)
|
|
—
|
|
Domestic production activities deduction
|
|
—
|
|
|
(20
|
)
|
|
(63
|
)
|
Tax credits
|
|
(291
|
)
|
|
(134
|
)
|
|
(133
|
)
|
|
|
$
|
(5,482
|
)
|
|
$
|
14
|
|
|
$
|
1,500
|
|
Significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
|
Net operating losses and tax credit carryforwards
|
|
$
|
982
|
|
|
$
|
496
|
|
Accrued salaries and severance
|
|
1,127
|
|
|
1,207
|
|
Other
|
|
1,497
|
|
|
1,615
|
|
|
|
3,606
|
|
|
3,318
|
|
Deferred tax liabilities
|
|
|
|
|
Property, equipment and leasehold improvements
|
|
(12,287
|
)
|
|
(15,194
|
)
|
Intangible assets
|
|
(4,054
|
)
|
|
(6,112
|
)
|
Other
|
|
(151
|
)
|
|
(193
|
)
|
|
|
(16,492
|
)
|
|
(21,499
|
)
|
|
|
$
|
(12,886
|
)
|
|
$
|
(18,181
|
)
|
As of
December 31, 2017
, included in our net operating losses and tax credit carryforwards were the following (in thousands):
|
|
|
|
|
State NOLs, tax effected
|
$
|
26
|
|
Federal NOLs, tax effected
|
208
|
|
Federal employer FICA tips credit
|
748
|
|
We also have an AMT credit carryforward of
$340,000
, which is refundable over the next five years pursuant to recently enacted tax legislation. As such, the carryforward is recognized as a tax receivable on our Consolidated Balance Sheets as of December 31, 2017.
In assessing the realizability of our deferred tax assets, we consider future taxable income expected to be generated by the projected differences between financial statement depreciation and tax depreciation, cumulative earnings generated to date and other evidence available to us. Based upon this consideration, we assessed that all of our deferred taxes are more likely than not to be realized, and, as such, we have not recorded a valuation allowance as of
December 31, 2017
or
2016
.
There were no unrecognized tax benefits as of
December 31, 2017
or
2016
and we do not anticipate significant changes to our unrecognized tax benefits within the next twelve months.
Note 16. Employee Benefit Plans
We sponsor a defined contribution 401(k) plan for all employees
18
years or older. Employee contributions may be made on a before-tax basis, limited by IRS regulations. For the years ended
December 31, 2017
,
2016
and
2015
, we matched
50%
of the employee’s contributions up to
6%
of eligible compensation. Eligibility for the matching contribution in all years began after the participant had worked a minimum of
three
months. Our matching contributions to the plan vest ratably over
five
years of service by the employee. During
2017
,
2016
and
2015
, we used approximately
$69,000
,
$198,000
and
$17,000
, respectively, of previously forfeited matching contributions to fund current matching contributions, which decreased expense for the corresponding periods. We recognized expense associated with matching contributions as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
401(k) expense
|
|
$
|
805
|
|
|
$
|
882
|
|
|
$
|
817
|
|
Note 17. Commitments and Contingencies
General
We are subject to various claims and pending or threatened lawsuits in the normal course of business. We are not currently party to any claims or legal proceedings that management believes are reasonably probable to have a material adverse effect on our financial position, results of operations or cash flows.
Operating Leases
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. 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.
Minimum aggregate future lease payments under non-cancelable operating leases as of
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
2018
|
$
|
9,179
|
|
2019
|
2,039
|
|
2020
|
1,714
|
|
2021
|
1,381
|
|
2022
|
1,374
|
|
Thereafter
|
20,713
|
|
|
$
|
36,400
|
|
Rent expense under all operating leases, including short-term rentals as well as cancelable and noncancelable operating leases, gross, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Rent expense
|
|
$
|
2,869
|
|
|
$
|
2,613
|
|
|
$
|
2,042
|
|
We sub-leased corporate office space to an unrelated party pursuant to a
5
-year lease that began in February 2011. In December 2014, the lease agreement was amended to extend the lease through 2025, with an option to cancel in 2020 with
180
days’ written notice and a payment of
$150,000
. In December 2017, we entered into an agreement to sell the property where the sub-leased corporate office space was located to an unrelated party. The sale of the property was finalized in January 2018, so will no longer receive rental payments pursuant to this agreement. We recognized rental income related to the sublease, which was recorded as an offset to rent expense in our Consolidated Statements of Operations, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Rental income
|
|
$
|
406
|
|
|
$
|
369
|
|
|
$
|
369
|
|
We lease our headquarters office space, restaurant and storage facilities located in Portland, land and certain equipment from
two
limited liability companies, both of whose members include our former Board Chair, and his brother, who continues to be employed by us. Lease payments to these lessors were as follows (in thousands) and are included in the Rent expense under all operating leases above:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
$
|
136
|
|
|
$
|
120
|
|
|
$
|
120
|
|
The lease for the headquarters office space and restaurant facility expires in 2034, with an extension at our option for
two
10
-year periods, while the lease for the other facilities, land and equipment expires in 2022 with an extension at our option for an additional
5
-year period. We hold a right to purchase the headquarters office space and restaurant facility at the greater of
$2.0 million
or the fair market value of the property as determined by a contractually established appraisal method. The right to purchase is not valid in the final year of either renewal term, as applicable. All lease terms are considered to be arm’s-length.
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 include a shareholder who owns more than
5%
of our common stock. The sublease contracts expire on various dates through
2020
, with an extension at our option for
two
5
-year periods. Lease payments to this lessor were as follows (in thousands) and are included in the Rent expense under all operating leases above:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
$
|
574
|
|
|
$
|
554
|
|
|
$
|
524
|
|
All lease terms are considered to be arm’s-length. In December 2015, related to the execution of the long-term land lease with an unrelated third party for our new Kona brewery, we also paid approximately
$100,000
to the lessor described above to acquire its right of first refusal on the land lease from the unrelated third party.
Purchase and Sponsorship Commitments
We periodically enter into commitments to purchase certain raw materials in the normal course of business. Furthermore, we have entered into purchase commitments and commodity contracts to ensure we have the necessary supply of malt and hops to meet future production requirements. Certain of the malt and hop commitments are for crop years through 2022. We believe that malt and hop commitments in excess of future requirements, if any, will not have a material impact on our financial condition or results of operations. We may take delivery of the commodities in excess of our requirements or make payments against the purchase commitments earlier than contractually obligated, which means our cash outlays in any particular year may exceed or be less than the commitment amount disclosed.
In certain cases, we have executed agreements with selected vendors to source our requirements for specific malt and hop varieties for the years ending December 31, 2018, 2019, 2020, 2021 and 2022; however, either the quantity to be delivered or the full price for the commodity has not been established at the present time. To the extent the commitment is not measurable or has not been fixed, that portion of the commitment has been excluded from the table below.
We have entered into multi-year sponsorship and promotional commitments with certain professional sports teams and entertainment companies. Generally, in exchange for our sponsorship consideration, we post signage and provide other promotional materials at the site or the event. The terms of these sponsorship commitments expire at various dates through December 31, 2022.
Aggregate future payments under purchase and sponsorship commitments as of
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
Sponsorship
Obligations
|
|
Total
|
2018
|
|
$
|
11,839
|
|
|
$
|
1,663
|
|
|
$
|
13,502
|
|
2019
|
|
4,787
|
|
|
549
|
|
|
5,336
|
|
2020
|
|
4,165
|
|
|
468
|
|
|
4,633
|
|
2021
|
|
3,196
|
|
|
289
|
|
|
3,485
|
|
2022
|
|
49
|
|
|
578
|
|
|
627
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
24,036
|
|
|
$
|
3,547
|
|
|
$
|
27,583
|
|
Legal
On February 28, 2017 and March 6, 2017, respectively,
two
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 two lawsuits were consolidated into a single complaint under the Broomfield case. The consolidated lawsuit purports to be a class action brought on behalf of all persons who purchased Kona Brewing Company beer within the relevant statute of limitations period. The lawsuit alleges that the defendants misled customers regarding the state in which Kona Brewing Company beers are manufactured and in describing Kona Brewing Company beer as “craft beer.” On April 28, 2017, we filed a motion to dismiss the complaint. The motion to dismiss was granted in part and denied in part on September 1, 2017. We have not recorded any liabilities with respect to the claims. We intend to vigorously defend against the foregoing action.
Note 18. Related Party Transactions
For additional related party transactions, see Notes 5 and 17.
As of each of
December 31, 2017
and
2016
, A-B owned approximately
31.4%
of our outstanding common stock.
Transactions with Anheuser-Busch, LLC (“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 will distribute our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our agreement with our existing international distributor, CraftCan Travel LLC, and certain other limitations summarized in "International Distribution Agreement" below.
Transactions with A-B, Ambev and ABWI consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Gross sales to A-B and Ambev
|
|
$
|
163,368
|
|
|
$
|
168,929
|
|
|
$
|
179,974
|
|
International distribution fee earned from ABWI
|
|
3,400
|
|
|
1,216
|
|
|
—
|
|
International distribution fee from ABWI, recorded as deferred revenue in Other accrued expenses
|
|
3,384
|
|
|
1,784
|
|
|
—
|
|
Margin fee paid to A-B, classified as a reduction of Sales
|
|
2,277
|
|
|
2,420
|
|
|
2,594
|
|
Inventory management and other fees paid to A-B, classified in Cost of sales
|
|
384
|
|
|
377
|
|
|
396
|
|
Media reimbursement from A-B, classified as a reduction of Selling, general and administrative expenses
|
|
290
|
|
|
750
|
|
|
—
|
|
Amounts due to or from A-B and ABWI were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
|
$
|
15,663
|
|
|
$
|
12,246
|
|
Amounts due from ABWI and A-B related to international distribution fee and media reimbursement
|
5,000
|
|
|
3,750
|
|
Refundable deposits due to A-B
|
(1,619
|
)
|
|
(2,162
|
)
|
Amounts due to A-B for services rendered
|
(4,836
|
)
|
|
(1,782
|
)
|
Net amount due from A-B and ABWI
|
$
|
14,208
|
|
|
$
|
12,052
|
|
Agreements with Anheuser-Busch, LLC
Contract Brewing Agreement
On August 23, 2016, we entered into a Contract Brewing Agreement (the “Brewing Agreement”) with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of A-B, pursuant to which ABCS will brew, bottle and package up to
300,000
barrels of our mutually agreed products annually, in facilities owned by ABCS within the United States, for an initial term through December 31, 2026. Under the terms of the Brewing Agreement, we will share equally in any cost savings arising from the Brewing Agreement, provided that our cost savings will equal at least
$10.00
per barrel on an aggregate basis, following certain adjustments, as set forth in the Brewing Agreement.
The Brewing Agreement provides 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, subject to certain cure rights, (ii) the International Distribution Agreement (as defined below) is terminated pursuant to certain specified provisions thereof or (iii) subject to certain conditions, if the Master Distributor Agreement (as defined below) is terminated pursuant to certain specified provisions thereof.
In addition, ABCS has the right to terminate the Brewing Agreement upon
90
days’ prior written notice to us following (i) a "change of control event" (as defined below) that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed, or (ii) the earliest of (x) our rejection of a “qualifying offer” (as defined below), (y) the completion of a transaction implementing a qualifying offer, and (z) our failure to enter into a definitive transaction agreement within
120
days following receipt of a qualifying offer, with certain exceptions.
Under the terms of each of the Brewing Agreement, the International Distribution Agreement, the Master Distributor Agreement and the Recapitalization Agreement (as defined below) (collectively, the “Commercial Arrangements”), a “qualifying offer” is defined to include any offer made by ABCS or an affiliate thereof, for the acquisition of all of the issued and outstanding shares of our common stock not owned by ABCS or its affiliates, on customary terms and conditions for a transaction of the type proposed by ABCS or its affiliate, in each case, for an aggregate value of (x) not less than
$22.00
per share of our common stock if the offer is made on or prior to August 23, 2017, (y) not less than
$23.25
per share of our common stock if the offer is made during the period beginning August 24, 2017 through August 23, 2018 and (z) not less than
$24.50
per share of our common stock if the offer is made on or after August 24, 2018. A “change of control event” includes, with certain exceptions, (i) the acquisition by a person or group of beneficial ownership on a fully diluted basis of 50% or more of our equity securities (or the equity securities of the surviving entity in any merger, consolidation, share exchange or other business combination involving us), (ii) a change in the composition of our board of directors during any consecutive 12-month period such that the incumbent directors cease to constitute at least a majority of the board of directors, or (iii) the completion of a sale, lease, exchange, or other transfer of (A) the Kona brand or (B) 50% or more of our assets based on fair market value.
International Distribution Agreement
On August 23, 2016, we also entered into an International Distribution Agreement (the “International Distribution Agreement”) with ABWI pursuant to which ABWI will be the sole and exclusive distributor of our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our agreement with our existing international distributor, CraftCan Travel LLC, and certain other limitations, in each case as set forth in the International Distribution Agreement. Under the International Distribution Agreement, following delivery of notice to us, ABWI may also elect to commence brewing outside of the United States some or all of the products to be distributed in the non-U.S. jurisdictions covered by the International Distribution Agreement.
Under the terms of the International Distribution Agreement, with respect to our exported products produced by us, ABWI will pay us our costs of production plus reasonable out-of-pocket expenses relating to export shipment costs. Additionally, ABWI will pay us an international royalty fee based on volume of our products sold by ABWI, equal to either
$40
per barrel or
$30
per barrel, depending on certain factors described in the International Distribution Agreement, which royalty fee will be subject to escalation annually, beginning in calendar year 2018, on the terms described in the International Distribution Agreement. For calendar year 2016, 2017 and 2018, ABWI will also pay us one-time fees of
$3.0 million
,
$5.0 million
and
$6.0 million
, respectively. These amounts are subject to proration if the International Distribution Agreement is terminated early in any given year. The sum of the fees is recognized in Beer Related Net sales on a straight-line basis over the
10
-year contract term, while the fees are collected in the first quarter of the year following the applicable calendar year.
The International Distribution Agreement contains specified termination rights, including, among other things, the right of either party to terminate the International Distribution Agreement if (a) the other party fails to perform any material obligation under the International Distribution Agreement, subject to certain cure rights or (b) the Brewing Agreement is terminated pursuant to certain specified provisions thereof. In addition, ABWI has the right to terminate the International Distribution Agreement upon
90
days’
prior written notice to us following (i) a “change of control event” (as defined above) that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed, or (ii) the earliest of (x) our rejection of a “qualifying offer” (as defined above), (y) the completion of a transaction implementing a qualifying offer, and (z) our failure to enter into a definitive transaction agreement within
120
days following receipt of a qualifying offer, with certain exceptions (each of the foregoing subclauses (x) through (z), a “qualifying offer lapse”). Following termination of the International Distribution Agreement due to a qualifying offer lapse, or any change of control event, ABWI shall have the right to purchase the international distribution rights for each of our brands then being distributed under the International Distribution Agreement at the fair market value of such rights, and on otherwise customary terms and conditions, as set forth in the International Distribution Agreement.
Under the International Distribution Agreement, ABWI will also be required to make a one-time
$20.0 million
payment to us on August 23, 2019. The payment is being recognized in Beer Related Net sales on a straight-line basis over the
10
-year contract term. However, ABWI will not (subject to compliance with certain notice requirements) be obligated to make such one-time payment if, prior to that date, (i) a “change of control event” occurs or a definitive agreement for a transaction constituting a change of control event is entered into, (ii) ABWI (or an affiliate thereof) makes a qualifying offer and there is a qualifying offer lapse or (iii) we enter into a definitive agreement with ABWI (or an affiliate thereof) with respect to a qualifying offer but such agreement is subsequently terminated, other than for certain regulatory reasons (in which case the
$20.0 million
shall remain payable). Unless terminated sooner, the International Distribution Agreement will continue in effect until December 31, 2026.
Amendment to Master Distributor Agreement and Amendment to Exchange and Recapitalization Agreement
On August 23, 2016, we entered into Amendment No. 3 (“Amendment No. 3”) to the Amended and Restated Master Distributor Agreement with A-B, dated as of May 1, 2011, as amended, between us and A-B (the “Master Distributor Agreement”). Pursuant to Amendment No. 3, A-B and we agreed to extend the Master Distributor Agreement through December 31, 2028 (the “Term”), and to maintain the existing margin fee structure of
$0.25
per case-equivalent in the Master Distributor Agreement through the Term. Without Amendment No. 3, beginning on January 1, 2019, a margin fee of
$0.75
per case equivalent would have been payable by us under the Master Distributor Agreement. Amendment No. 3 also provides that, beginning on January 1, 2019, we will reinvest an aggregate amount equal to
$0.25
per case equivalent in sales and marketing efforts for our products, subject to specified terms and conditions set forth in Amendment No. 3.
Pursuant to Amendment No. 3, A-B will have the ability to deliver a revocation notice and reinstitute the terms of the Master Distributor Agreement as they existed prior to Amendment No. 3 following (i) a “change of control event” (as defined above) that occurs prior to the third anniversary of Amendment No. 3 or for which a definitive agreement is entered into prior to the third anniversary of Amendment No. 3 and is subsequently consummated or (ii) the earliest of (a) our rejection of a "qualifying offer" (as defined above), (b) the consummation of a transaction underlying a qualifying offer, and (c)
120
days following the receipt of a qualifying offer by us, if A-B (or an affiliate thereof) and we are unable to enter into a definitive agreement with respect thereto, notwithstanding A-B’s (or its affiliate’s) and our good faith and reasonable efforts to negotiate such a definitive agreement, subject to certain additional conditions.
Contract pricing may not be commensurate with amounts that an independent market participant would pay due to the related party nature of the agreements.
Transactions with Wynwood
As of
December 31, 2017
we owned a
24.5%
interest in Wynwood.
Transactions with Wynwood consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Master distributor fee earned
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Royalty fee paid
|
|
94
|
|
|
—
|
|
|
—
|
|
Brewery representative reimbursement, classified as a reduction of Selling, general and administrative expenses
|
|
90
|
|
|
—
|
|
|
—
|
|
Share of loss, classified as a component of Other income (expense), net
|
|
75
|
|
|
—
|
|
|
—
|
|
Amounts receivable from or due to Wynwood were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Amounts receivable related to raw materials and alternating proprietorship fees
|
$
|
148
|
|
|
$
|
—
|
|
Amounts receivable related to Brewery representative reimbursements
|
32
|
|
|
—
|
|
Amounts due related to purchases of beer pursuant to the distributor agreement
|
(116
|
)
|
|
—
|
|
Amounts due related to Royalty fees
|
(4
|
)
|
|
—
|
|
Net amount receivable
|
$
|
60
|
|
|
$
|
—
|
|
Note 19. Brewing Arrangement and Termination Thereof with Pabst Northwest Brewing Company
On January 8, 2016, we entered into brewing agreements ("the brewing agreements") with Pabst Northwest Brewing Company ("Pabst"), a subsidiary of Pabst Brewing Company, under which Pabst had the ability to brew selected Rainier Brewing Company and other brands at our brewery in Woodinville, Washington under a license agreement and was required to pay us contract brewing volume shortfall fees in each of 2016 and 2017 stemming from brewing volumes below committed levels. In conjunction with the brewing agreements, we granted Pabst an option to purchase the Woodinville brewery and adjacent pub, as well as related assets, at any time prior to termination of the brewing agreements.
Effective May 1, 2017, we reached an agreement with Pabst to terminate the brewing agreements. Pabst's option to purchase the Woodinville brewery and adjacent pub was also terminated. Pabst agreed to pay us
$2.7 million
in connection with the termination of the brewing agreements and purchase option.
We deferred recognition of the termination payment in our results of operations until the fourth quarter of 2017 due to the potential obligation to pay Pabst up to
$2.7 million
if the Woodinville brewery was sold to a specified party, which did not occur. Of the
$2.7 million
.
$1.7 million
was recorded in Sales and
$1.0 million
was recorded in Selling, general and administrative expenses.
Ceasing Production at our Woodinville, Washington Brewery
We ceased production at our Woodinville, Washington brewery as of July 1, 2017. As a result, we incurred
$250,000
in incremental employee and severance related costs and
$150,000
to safely and properly prepare the brewing equipment to become idle during the second and third quarters of 2017, respectively. We incurred approximately
$100,000
in additional cost during the fourth quarter of 2017 to further prepare the brewing equipment to be idle, which were expensed as incurred. These expenses are recorded in our Consolidated Statements of Operations for the applicable periods.
See Note 20 for a discussion of the classification of the assets related to our Woodinville brewery as assets held for sale.
Note 20. Assets Held for Sale
Designating the Woodinville, Washington Brewery as Held for Sale
We designated our Woodinville, Washington brewery as held for sale on May 1, 2017 and, accordingly, we ceased depreciating the related assets and recorded them on our Consolidated Balance Sheets at the lower of carrying value or fair value less estimated selling costs. We expected to sell the Woodinville property, including the adjacent pub, within
12
months of the date it was classified as held for sale. During
2017
, a
$0.5 million
impairment charge was recorded related to the sale of our Woodinville brewery, which was completed in early 2018.
The proximity to our largest and most efficient owned brewery in Portland, Oregon, which recently underwent a capacity expansion, as well as the decrease in our contract brewing volume, made our Woodinville capacity redundant. Production volume from our Woodinville brewery was transferred to our Portland brewery in the second quarter of 2017. The Woodinville pub operations ceased on December 29, 2017 in anticipation of finalizing the sale of the Woodinville property.
Assets held for sale were as follows (in thousands):
|
|
|
|
|
|
|
|
December 31,
2017
|
Brewery equipment
|
|
$
|
6,972
|
|
Buildings
|
|
12,562
|
|
Land and improvements
|
|
3,451
|
|
Furniture, fixtures and other equipment
|
|
454
|
|
|
|
23,439
|
|
Impairment of assets held for sale
|
|
(493
|
)
|
|
|
$
|
22,946
|
|
See Note 21 for a discussion of the sale of the Woodinville brewery in January 2018.
Note 21. Subsequent Events
Sale of Woodinville, Washington Brewery
On January 12, 2018, we sold our Woodinville brewery to assignees of Sound Commercial Investment Holdings, LLC, for a total purchase price of
$24.5 million
(the "Sale Transaction"), pursuant to the terms and conditions in the Commercial and Investment Real Estate Purchase and Sale Agreement between the parties dated as of November 29, 2017, as amended by an Addendum dated December 29, 2017, and a Second Addendum dated January 5, 2018 (as amended, the "Agreement"). The assets that were sold included the real property, equipment, fixtures, mechanical systems, and certain personal property used in our operation of the brewery and adjacent brewpub. We paid real estate brokerage commissions totaling
$560,000
from the sale proceeds.
In contemplation of the sale of certain brewing and bottling equipment included in the Sale Transaction,
$500,000
of the total purchase price will be placed in escrow within
60
days following the closing. If the purchaser of the equipment sells it for less than
$3.5 million
, the shortfall will be paid to the purchaser up to the amount held in escrow, with the balance, if any, paid to us. If the equipment has not been sold within
180
days following the closing date, the
$500,000
in escrow will be paid to us.
Cross 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 will 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 will pay 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 will expire on December 31, 2018, unless the arrangement is extended at the mutual agreement of the parties. 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.