NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
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. Recent 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.
Note 3. 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 June 30, 2020 and December 31, 2019, we did not 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 $4.5 million and $0.3 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. Inventories
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.
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Raw materials
|
$
|
7,033
|
|
|
$
|
8,435
|
|
Work in process
|
3,859
|
|
|
2,862
|
|
Finished goods
|
6,157
|
|
|
4,651
|
|
Packaging materials
|
3,533
|
|
|
1,981
|
|
Promotional merchandise
|
704
|
|
|
661
|
|
Brewpub food, beverages and supplies
|
576
|
|
|
552
|
|
|
$
|
21,862
|
|
|
$
|
19,142
|
|
Work in process is beer held in fermentation tanks prior to the filtration and packaging process.
Note 5. 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 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.
Lease-related liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Operating lease liabilities:
|
|
|
|
Current lease liabilities included in Other accrued expenses
|
$
|
915
|
|
|
$
|
883
|
|
Long-term operating lease liabilities
|
23,556
|
|
|
24,037
|
|
Total operating lease liabilities
|
24,471
|
|
|
24,920
|
|
Financing lease liabilities:
|
|
|
|
Current portion of lease liabilities included in Current portion of long-term debt and finance lease obligations
|
302
|
|
|
296
|
|
Long-term portion of lease liabilities included in Long-term debt and finance lease obligations, net of current portion
|
652
|
|
|
804
|
|
Total financing lease liabilities
|
954
|
|
|
1,100
|
|
Total lease liabilities
|
$
|
25,425
|
|
|
$
|
26,020
|
|
Weighted-average remaining lease term:
|
|
|
|
Operating leases
|
24 years
|
|
24 years
|
Finance leases
|
4 years
|
|
4 years
|
Weighted-average discount rate:
|
|
|
|
Operating leases
|
4.72
|
%
|
|
4.72
|
%
|
Finance leases
|
3.73
|
%
|
|
3.70
|
%
|
As of June 30, 2020, the maturities of our operating lease liabilities were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
Remainder of 2020
|
$
|
1,014
|
|
2021
|
2,027
|
|
2022
|
2,082
|
|
2023
|
1,955
|
|
2024
|
1,933
|
|
Thereafter
|
32,301
|
|
Total minimum lease payments
|
41,312
|
|
Less: present value adjustment
|
(16,841)
|
|
Operating lease liabilities
|
$
|
24,471
|
|
As of June 30, 2020, the maturities of our finance lease liabilities were as follows (in thousands):
|
|
|
|
|
|
|
Finance Leases
|
Remainder of 2020
|
$
|
167
|
|
2021
|
266
|
|
2022
|
199
|
|
2023
|
199
|
|
2024
|
199
|
|
Thereafter
|
—
|
|
Total minimum lease payments
|
1,030
|
|
Less: present value adjustment
|
(76)
|
|
Finance lease liabilities
|
$
|
954
|
|
Components of lease cost were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating lease cost(1)
|
$
|
847
|
|
|
$
|
864
|
|
|
$
|
1,783
|
|
|
1,738
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of right-of-use asset
|
35
|
|
|
42
|
|
|
69
|
|
|
85
|
|
Interest on lease liabilities
|
9
|
|
|
12
|
|
|
19
|
|
|
25
|
|
Sublease income
|
(72)
|
|
|
(69)
|
|
|
(144)
|
|
|
(69)
|
|
Total lease cost
|
$
|
819
|
|
|
$
|
849
|
|
|
$
|
1,727
|
|
|
$
|
1,779
|
|
(1) Includes short-term, month-to-month lease and variable lease costs, which were immaterial.
Note 6. Related Party Transactions
As of June 30, 2020 and December 31, 2019, Anheuser-Busch, LLC ("A-B") owned approximately 31.1% 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.
Transactions with A-B, Ambev, ABWI and ABC consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Gross sales to A-B and Ambev
|
$
|
47,876
|
|
|
$
|
51,430
|
|
|
$
|
84,580
|
|
|
$
|
91,039
|
|
International distribution fee earned from ABWI
|
812
|
|
|
812
|
|
|
1,624
|
|
|
1,624
|
|
Contract brewing fee earned from ABC
|
—
|
|
|
104
|
|
|
203
|
|
|
642
|
|
Margin fee paid to A-B, classified as a reduction of Sales
|
657
|
|
|
724
|
|
|
1,145
|
|
|
1,265
|
|
Inventory management and other fees paid to A-B, classified in Cost of sales
|
106
|
|
|
107
|
|
|
198
|
|
|
197
|
|
Amounts due to or from A-B and ABWI were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
|
$
|
20,752
|
|
|
$
|
11,394
|
|
|
|
|
|
Refundable deposits due to A-B
|
(992)
|
|
|
(1,197)
|
|
Amounts due to A-B for services rendered
|
(8,427)
|
|
|
(5,976)
|
|
Net amount due from A-B and ABWI
|
$
|
11,333
|
|
|
$
|
4,221
|
|
Related Party Operating Leases
We lease our headquarters office space, banquet space 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. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
$
|
42
|
|
|
$
|
41
|
|
|
$
|
84
|
|
|
$
|
82
|
|
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 5% of our common stock. The sublease contracts expire on various dates through 2020, with an extension at our option for two five-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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
$
|
476
|
|
|
$
|
171
|
|
|
$
|
648
|
|
|
$
|
339
|
|
Note 7. Long-Term Debt
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 0.75% 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 $45.0 million reducing revolving facility, including a $2.5 million sublimit for the issuance of standby letters of credit, as well as a $10.8 million term loan. As amended, the maximum amount of the revolving facility is subject to loan commitment reductions in the amount of $750,000 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, $41.1 million was outstanding under the revolving facility and $8.2 million was outstanding under the term loan, both at an interest rate of 1.42%.
At June 30, 2020, we were in compliance with all applicable contractual financial covenants of the Credit Agreement.
Note 8. Derivative Financial Instruments
Interest Rate Swap Contract
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 ("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 $6.1 million as of June 30, 2020. 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 0.18% 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 $0.5 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 no hedge ineffectiveness during the first six months of 2020 or 2019.
The fair value of our derivative instrument recorded as a component of Other liabilities on our Consolidated Balance Sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Fair value of interest rate swap liability
|
$
|
(507)
|
|
|
$
|
(278)
|
|
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)
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
2020
|
|
$
|
(6)
|
|
|
Interest expense
|
|
$
|
37
|
|
2019
|
|
$
|
(120)
|
|
|
Interest expense
|
|
$
|
6
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
2020
|
|
$
|
(230)
|
|
|
Interest expense
|
|
$
|
56
|
|
2019
|
|
$
|
(182)
|
|
|
Interest expense
|
|
$
|
12
|
|
See also Note 9.
Note 9. 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 table summarizes liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at June 30, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(507)
|
|
|
$
|
—
|
|
|
$
|
(507)
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2019
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(278)
|
|
|
$
|
—
|
|
|
$
|
(278)
|
|
We did not have any assets measured at fair value on a recurring basis at June 30, 2020 or December 31, 2019.
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.
We had fixed-rate debt outstanding as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Fixed-rate debt on Consolidated Balance Sheets
|
$
|
5,500
|
|
|
$
|
5,973
|
|
Estimated fair value of fixed-rate debt
|
6,026
|
|
|
6,281
|
|
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 10. Revenue Recognition
The following table disaggregates our Sales by major source (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
Beer Related(1)
|
|
Brewpubs
|
|
Total
|
|
Beer Related(1)
|
|
Brewpubs
|
|
Total
|
Product sold through distributor agreements(2)
|
|
$
|
50,826
|
|
|
$
|
—
|
|
|
$
|
50,826
|
|
|
$
|
89,685
|
|
|
$
|
—
|
|
|
$
|
89,685
|
|
Contract brewing fees
|
|
81
|
|
|
—
|
|
|
81
|
|
|
416
|
|
|
—
|
|
|
416
|
|
International distribution fees
|
|
812
|
|
|
—
|
|
|
812
|
|
|
1,624
|
|
|
—
|
|
|
1,624
|
|
Brewpubs(3)
|
|
—
|
|
|
463
|
|
|
463
|
|
|
—
|
|
|
5,597
|
|
|
5,597
|
|
Other(4)
|
|
575
|
|
|
—
|
|
|
575
|
|
|
1,260
|
|
|
—
|
|
|
1,260
|
|
|
|
$
|
52,294
|
|
|
$
|
463
|
|
|
$
|
52,757
|
|
|
$
|
92,985
|
|
|
$
|
5,597
|
|
|
$
|
98,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Beer Related(1)
|
|
Brewpubs
|
|
Total
|
|
Beer Related(1)
|
|
Brewpubs
|
|
Total
|
Product sold through distributor agreements(2)
|
|
$
|
55,905
|
|
|
$
|
—
|
|
|
$
|
55,905
|
|
|
$
|
97,033
|
|
|
$
|
—
|
|
|
$
|
97,033
|
|
Contract brewing fees
|
|
352
|
|
|
—
|
|
|
352
|
|
|
1,200
|
|
|
—
|
|
|
1,200
|
|
International distribution fees
|
|
812
|
|
|
—
|
|
|
812
|
|
|
1,624
|
|
|
—
|
|
|
1,624
|
|
Brewpubs(3)
|
|
—
|
|
|
6,066
|
|
|
6,066
|
|
|
—
|
|
|
12,269
|
|
|
12,269
|
|
Other(4)
|
|
680
|
|
|
—
|
|
|
680
|
|
|
1,457
|
|
|
—
|
|
|
1,457
|
|
|
|
$
|
57,749
|
|
|
$
|
6,066
|
|
|
$
|
63,815
|
|
|
$
|
101,314
|
|
|
$
|
12,269
|
|
|
$
|
113,583
|
|
(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 91.0% and 80.9% 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 86.5% and 81.0% 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 $30.2 million, net of the allowance for doubtful accounts of $25,000. As of December 31, 2019, we had receivables related to contracts with customers of $17.5 million, net of the allowance for doubtful accounts of $25,000.
As of June 30, 2020 and December 31, 2019, contract liabilities, which consisted of obligations associated with our gift card programs, were $0.2 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 $21.1 million and $22.7 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 $20.0 million on that date as required by the terms of the IDA. For the six months ended June 30, 2020, we recognized $1.6 million as Sales and we expect to recognize an additional $1.6 million of Deferred revenue as Sales in the remainder of 2020, $3.2 million in 2021, and $16.3 million thereafter.
Note 11. Segment 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.
Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
2020
|
|
Beer
Related
|
|
Brewpubs
|
|
Total
|
Net sales
|
|
$
|
48,915
|
|
|
$
|
463
|
|
|
$
|
49,378
|
|
Gross profit
|
|
$
|
15,155
|
|
|
$
|
(1,407)
|
|
|
$
|
13,748
|
|
Gross margin
|
|
31.0
|
%
|
|
(303.9)
|
%
|
|
27.8
|
%
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
Net sales
|
|
$
|
54,493
|
|
|
$
|
6,066
|
|
|
$
|
60,559
|
|
Gross profit
|
|
$
|
22,676
|
|
|
$
|
611
|
|
|
$
|
23,287
|
|
Gross margin
|
|
41.6
|
%
|
|
10.1
|
%
|
|
38.5
|
%
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
Beer
Related
|
|
Brewpubs
|
|
Total
|
Net sales
|
|
$
|
87,682
|
|
|
$
|
5,597
|
|
|
$
|
93,279
|
|
Gross profit
|
|
$
|
30,137
|
|
|
$
|
(1,206)
|
|
|
$
|
28,931
|
|
Gross margin
|
|
34.4
|
%
|
|
(21.5)
|
%
|
|
31.0
|
%
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
Net sales
|
|
$
|
95,282
|
|
|
$
|
12,269
|
|
|
$
|
107,551
|
|
Gross profit
|
|
$
|
38,184
|
|
|
$
|
1,286
|
|
|
$
|
39,470
|
|
Gross margin
|
|
40.1
|
%
|
|
10.5
|
%
|
|
36.7
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
91.0
|
%
|
|
80.9
|
%
|
|
86.5
|
%
|
|
81.0
|
%
|
Receivables from A-B and ABWI represented the following percentage of our Accounts receivable balance:
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
68.8
|
%
|
|
65.1
|
%
|
Note 12. Significant Stock-Based Plan Activity and Stock-Based Compensation
Stock-Based Compensation
Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of sales
|
$
|
10
|
|
|
$
|
34
|
|
|
$
|
(16)
|
|
|
$
|
82
|
|
Selling, general and administrative expense
|
267
|
|
|
801
|
|
|
740
|
|
|
1,171
|
|
Total stock-based compensation expense
|
$
|
277
|
|
|
$
|
835
|
|
|
$
|
724
|
|
|
$
|
1,253
|
|
At June 30, 2020, we had total unrecognized stock-based compensation expense of $1.0 million, which will be recognized over the weighted average remaining vesting period of 1.5 years. In the first quarter of 2020, we reversed $39,000 in stock compensation expense from Cost of sales as a result of the termination of unvested awards.
Note 13. Earnings Per Share
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Weighted average common shares used for basic EPS
|
19,545
|
|
|
19,443
|
|
|
19,524
|
|
|
19,416
|
|
Dilutive effect of stock-based awards
|
148
|
|
|
150
|
|
|
164
|
|
|
—
|
|
Shares used for diluted EPS
|
19,693
|
|
|
19,593
|
|
|
19,688
|
|
|
19,416
|
|
|
|
|
|
|
|
|
|
Stock-based awards not included in diluted per share calculations as they would be antidilutive
|
7
|
|
|
63
|
|
|
—
|
|
|
51
|
|
Note 14. Commitments 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, 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 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 $4.7 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 $4.4 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, four 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. PV 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 100% 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 $16 million in cash, of which $5 million will be payable at the Kona Closing and the remaining $11 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 $6 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.