Note 1. Nature of Operations
Overview
Craft Brew Alliance, Inc. ("CBA") is the seventh largest craft brewing company in the U.S. and a leader in brewing, branding, and bringing to market world-class American craft beers and beverages.
Our distinctive portfolio combines the power of Kona Brewing Co., one of the top craft beer brands in the world, with strong regional breweries and innovative lifestyle brands, Appalachian Mountain Brewery, Cisco Brewers, Omission Brewing Co., Redhook Brewery, Square Mile Cider Co., Widmer Brothers Brewing, and Wynwood Brewing Co. We nurture the growth and development of our brands in today’s increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on innovation, local community and sustainability.
CBA was formed in 2008 through the merger of Redhook Brewery and Widmer Brothers Brewing, the two largest craft brewing pioneers in the Northwest at the time. Following a successful strategic brewing and distribution partnership, Kona Brewing Co. joined CBA in 2010. As part of CBA, Kona has expanded its reach across all 50 U.S. states and approximately 30 international markets, while remaining deeply rooted in its home of Hawaii.
As consumers increasingly seek more variety and more local offerings, Craft Brew Alliance has expanded its portfolio and home markets with strong regional craft beer brands in targeted markets. In 2015 and 2016, we formed strategic partnerships with Appalachian Mountain Brewery, based in Boone, North Carolina; Cisco Brewers, based in Nantucket, Massachusetts; and Wynwood Brewing Co., based in the heart of Miami’s vibrant multicultural arts district. Building on the success of these partnerships, we acquired all three brands in the fourth quarter of 2018, fundamentally transforming our footprint and paving the way to increase our investments in their growth and drive shareholder value.
We 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 2019, we continued to leverage our contract brewing agreement with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of Anheuser-Busch, LLC (“A-B”), through which we brew select CBA brands in A-B’s Fort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries in Portland, Oregon; Seattle, Washington; Portsmouth, New Hampshire; Boone North Carolina; and Miami, Florida, which are primarily used for small-batch production and limited-release beers offered primarily in our brewpubs and brands’ home markets.
We distribute our beers to retailers through wholesalers that are aligned with the A-B network. These sales are made pursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B, which extends through 2028. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. As competition puts increasing pressure on craft brands outside of their home markets, we invested in accelerating Kona’s growth through our first-ever national marketing campaign, expanded distribution of our newly acquired brands Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. across their respective home markets of North Carolina, New England, and South Miami, and continued our efforts to stabilize and strengthen Widmer Brothers and Redhook in the Pacific Northwest, which is a mature craft beer market.
Separate from our A-B wholesalers, we maintain an internal independent sales and marketing organization with resources across the key functions of brand management, field marketing, field sales, and national retail sales.
On November 11, 2019, CBA and Anheuser-Busch Companies, LLC ("ABC") jointly announced an agreement to expand their partnership, with ABC agreeing to purchase the remaining CBA shares it does not currently own in a merger transaction for $16.50 per share, in cash. ABC was formed in 1979 as the holding company of A-B. The transaction represents an exciting next step in a long and successful partnership between the two companies that traces back over 25 years. The transaction is subject to customary closing conditions, including approval by a majority of CBA’s shareholders not affiliated with ABC and certain regulatory approvals.
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.
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.
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.
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, Net income or Basic or diluted net income per share.
Note 2. Significant Accounting Policies
Cash, Cash Equivalents and Restricted Cash
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, 2019 and 2018, 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, 2019 and 2018, there were $0.3 million and $0.6 million of bank overdrafts, respectively. 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.
Cash and cash equivalents that are restricted as to withdrawal or use under terms of certain contractual agreements are recorded in Cash, cash equivalents and restricted cash on our Consolidated Balance Sheets. As of December 31, 2019 we no longer had any restricted cash. Restricted cash of $0.5 million at December 31, 2018 represented funds held in an escrow account from the sale of our Woodinville brewery related to a lien; the lien was resolved in our favor and the restriction was removed in the third quarter of 2019.
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, 2019 and 2018.
Activity related to our allowance for doubtful accounts was immaterial in 2019, 2018 and 2017.
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:
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Buildings
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30 – 50 years
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Brewery equipment
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10 – 25 years
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Furniture, fixtures and other equipment
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2 – 10 years
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Vehicles
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5 years
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Leasehold improvements
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The lesser of useful life or term of the lease
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Leases
We account for leases in accordance with Accounting Standards Codification (“ASC”) Topic 842, Leases, which we adopted on January 1, 2019, electing the optional transition method under which we initially applied the standard on that date without adjusting amounts for prior periods, which we continue to present in accordance with ASC 840, including related disclosures.
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 balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
If our leases do not provide an implicit rate, we develop an estimated incremental borrowing rate at the commencement date based on the estimated rate at which we would borrow, in the current economic environment, an amount equal to the lease payments over a similar term on a collateralized basis which is used to determine the present value of lease payments. There were no new operating lease obligations recognized at adoption in comparison to our operating lease obligations disclosed as of December 31, 2018. Our accounting for finance (formerly capital) leases is substantially unchanged.
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. There were no impairments recorded during 2019 or 2018.
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:
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Distributor agreements
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15 years
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Non-compete agreements
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2 years
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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 $3.4 million and $3.9 million at December 31, 2019 and 2018, respectively, in Refundable deposits on kegs and $8.5 million and $9.2 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. As our revenue recognition policy was not materially changed by the adoption of ASC 606 in 2018, this policy applied to all periods presented.
We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer, at which point our performance obligations have been fulfilled.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event, in both cases this marks the time when our performance obligation(s) are fulfilled.
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 as this effectively models the satisfaction over time of the underlying performance obligations.
See Note 13 for additional information.
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 until December 31, 2017, was $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 January 1, 2018, as a result of the Tax Cuts and Jobs Act ("TCJA"), our federal excise tax rate on beer decreased 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. Our beer brewed by
in A-B's Fort Collins, Colorado brewery is taxed at the large brewer rate of $18.00 per barrel. Due to an extension, these lower rates currently expire at the end of 2020. 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, 2019, 2018 and 2017, we recognized costs for all of these activities totaling $23.5 million, $16.9 million and $14.8 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 would 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. There are no interest or penalties accrued on the unrecognized tax benefits. We do not anticipate any changes to the unrecognized tax benefits within the coming year.
In the fourth quarter of 2017, we recognized the impact of the TCJA, 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 TCJA 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 sales of our beer and cider brands. 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 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. We are still evaluating the effect of the adoption of ASU 2018-15.
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. We are still evaluating the effect of the adoption of ASU 2018-13.
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. 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 2016-13
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. 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, ASU2018-10 and ASU 2018-11
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.
In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases." ASU 2018-10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. ASU 2018-10 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods.
In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements." ASU 2018-11 provides an optional transition method, that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods.
The new leases guidance affects all companies and organizations that lease assets, and requires them to record on their balance sheet right-of-use ("ROU") assets and lease liabilities for the rights and obligations created by those leases. Under ASC 842, a lease is an arrangement that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The new guidance retains a distinction between finance leases and operating leases, while requiring companies to recognize both types of leases on their balance sheet. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the criteria for distinguishing between capital leases and operating leases in legacy U.S. GAAP - ASC 840. Lessor accounting remains substantially the same as ASC 840, but with some targeted improvements to align lessor accounting with the lessee accounting model and with the revised revenue recognition guidance under ASC 606. The new standard and amendments require new qualitative and quantitative disclosures for both lessees and lessors.
On January 1, 2019, we adopted ASC 842 and elected the optional transition method under which we initially applied the standard on that date without adjusting amounts for prior periods, which we continue to present in accordance with ASC 840, including related disclosures. We evaluated the potential cumulative effect of applying the new leases guidance and determined that such an adjustment would be immaterial. In connection with our adoption, we:
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elected the package of three practical expedients available under the transition provisions which allowed us to: (i) not reassess whether expired or existing contracts were or contained leases, (ii) not reassess the lease classification for expired or existing leases, and (iii) not reassess initial direct costs for existing leases.
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•
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determined the land easement practical expedient was not applicable.
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•
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as applicable, used hindsight for specified determinations and assessments in applying the new leases guidance.
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•
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did not separate lease and associated non-lease components for transitioned leases, but instead are accounting for them together as a single lease component.
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•
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elected to utilize the recognition exemption for short-term leases of one year or less at inception
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Our adoption did not change the classification of lease-related expenses in the Consolidated Statements of Operations, and our pattern of expense recognition did not change significantly. As a result, our adoption did not materially affect our cash flows.
The adjustments to our Consolidated Balance Sheets upon adoption of ASC 842, effective January 1, 2019 were as follows (in thousands):
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Balance at
December 31, 2018
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Adjustments due to
ASC 842
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Balance at
January 1, 2019
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Assets
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Accounts receivable
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$
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29,998
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$
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300
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$
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30,298
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Other current assets
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3,121
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(216
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)
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2,905
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Property, equipment and leasehold improvements, net
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113,189
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(2,538
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)
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110,651
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Operating lease right-of-use assets
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—
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19,726
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19,726
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Intangible and other assets, net
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5,048
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1,140
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6,188
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Liabilities
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Other accrued expenses
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3,618
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269
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3,887
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Long-term lease liabilities
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—
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18,143
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18,143
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See Note 8 for additional information.
Note 4. Inventories
Inventories consisted of the following (in thousands):
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December 31,
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2019
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2018
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Raw materials
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$
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8,435
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$
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7,146
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Work in process
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2,862
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3,219
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Finished goods
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4,651
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4,319
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Packaging materials
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1,981
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891
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Promotional merchandise
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661
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1,139
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Pub food, beverages and supplies
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552
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502
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$
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19,142
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$
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17,216
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Work in process is beer held in fermentation tanks prior to the filtration and packaging process.
Note 5. Acquisitions and Investments
Acquisitions
Purchase of Intellectual Property of Cisco Brewers, Inc. ("Cisco")
On October 10, 2018, we purchased the intellectual property assets of Cisco relating to its malt beverage products (the "Products"), including all trademarks, logos, and recipes (the "Purchase Transaction"). We paid $23.0 million in cash from existing cash and borrowings on the line of credit (the "Purchase Price"), assumed certain liabilities relating to the acquired assets, and agreed to pay an additional amount as a cash incentive payment based on Product shipments in 2023 in excess of a specified number of barrels. Management determined that a future liability for this contingent payment was both probable and reasonably estimable at the time of the transaction. Based on the facts and circumstances at the transaction date, the amount of this liability was estimated to be $585,000 and was included in the cost of the acquired assets. The Purchase Transaction excluded certain assets owned by Cisco, including intellectual property rights associated with its operation of its brewpub in Nantucket and a taproom in Boston, Massachusetts, as well as our brewpub in Portsmouth, New Hampshire, which Cisco began operating in June 2018. Of the Purchase Price, $690,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the Purchase Transaction. During the fourth quarter of 2019, the $690,000 in escrow was remitted to the founders of Cisco.
We also entered into an agreement permitting Cisco to operate up to three initial brewpubs and any number of “pop-up” locations, royalty-free under a non-exclusive license arrangement, using the intellectual property rights associated with the Products acquired by us in the Purchase Transaction. The license agreement permits Cisco to operate additional brewpubs upon the payment of a $50,000 annual royalty per brewpub.
The Purchase Transaction was accounted for as an asset acquisition and certain transaction related costs of $677,000 were included in the cost of the acquired assets.
In evaluating the accounting treatment for the Purchase Transaction we identified a prior agreement as a preexisting relationship, effectively settled through the Purchase Transaction. Under the agreement, we made a payment in 2016 in exchange for Cisco's commitment to produce a minimum of 80% of their overall production at our Portsmouth brewery. At the time, this asset was valued at $0.4 million with amortization recorded based on the terms our master distribution agreement. In our assessment, this agreement ceased to have determinable value following the Purchase Transaction due to our control of materially all Cisco production. Accordingly, the remaining value of the asset of $0.2 million was recorded as a loss during the fourth quarter of 2018, as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.
The allocation of the purchase price for the Cisco asset purchase was as follows (in thousands):
|
|
|
|
|
|
|
Assets
|
|
|
Useful Life
|
Other intangible assets:
|
|
|
|
Non-compete agreements
|
$
|
43
|
|
|
2 years
|
Recipes
|
56
|
|
|
Indefinite
|
Trademark
|
24,163
|
|
|
indefinite
|
Net assets acquired
|
$
|
24,262
|
|
|
|
Acquisition of Appalachian Mountain Brewery ("AMB")On November 29, 2018, we acquired substantially all the assets of AMB, which operates a brewery and taproom in Boone, North Carolina, for $8.3 million in total consideration which was comprised of $7.4 million in cash, the extinguishment of $0.6 million of debt, and the settlement of a preexisting liability of $0.3 million. The source of cash consideration paid was from existing cash and borrowings on the line of credit. Of the purchase price, $671,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. During the fourth quarter of 2019, $668,000 of the $671,000 was remitted to the founder of AMB. The remaining $3,000 was remitted to us for the settlement of liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. The transaction was accounted for under the acquisition method of accounting and all assets acquired and liabilities assumed were recorded at their respective acquisition-date fair values. The excess of total consideration over the net identifiable assets acquired and liabilities assumed was recorded as goodwill. The key factors attributable to the creation of goodwill by the AMB acquisition are the assembled workforce and our assessment of the ability to generate cash flows beyond the lives of the finite-lived intangible assets. The expected income tax effect of the acquired assets and liabilities was also included in the determination of recorded goodwill. The goodwill is expected to be deductible for tax purposes. During 2019, we recorded immaterial adjustments to the allocation of the purchase price for the AMB acquisition.
The allocation of the purchase price for the AMB acquisition was as follows (in thousands):
|
|
|
|
|
|
|
Assets
|
|
|
Useful Life
|
Inventory
|
$
|
268
|
|
|
N/A
|
Property, equipment and leasehold improvements
|
1,252
|
|
|
3-39 years
|
Land
|
360
|
|
|
N/A
|
Goodwill
|
3,443
|
|
|
Indefinite
|
Other intangible assets:
|
|
|
|
Trademark
|
1,900
|
|
|
Indefinite
|
Co-exist agreement
|
650
|
|
|
Indefinite
|
Non-compete agreements
|
260
|
|
|
2 years
|
Recipes
|
140
|
|
|
Indefinite
|
|
8,273
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Gift cards
|
2
|
|
|
N/A
|
Net assets acquired
|
$
|
8,271
|
|
|
|
Transaction costs of $226,000 were expensed as incurred as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.
Increase in Ownership Interest of Wynwood Brewing Company, LLC ("Wynwood")
On July 12, 2017, we purchased a 24.5% interest in Wynwood, which operates a brewery and taproom in Miami, Florida, for $2.1 million in cash. This investment had a carrying value of $2.0 million on October 10, 2018. On October 10, 2018, we increased our ownership interest in Wynwood from 24.5% to 100% for $7.9 million additional consideration which was comprised of $6.8 million in cash and $1.1 million for the fair value of a contingent payment which we agreed to pay as a cash incentive based on product shipments in excess of specified number of barrels in each of 2019, 2020 and 2021. As of December 31, 2019, the fair value of our expected payments under this arrangement was $0.7 million. No payment was made for 2019 as the performance threshold was not met. Adjustments of $0.1 million and $0.3 million were made in the first and fourth quarters of 2019, respectively. The first quarter adjustment was recorded as an adjustment to goodwill within the open one-year measurement period for the transaction. The fourth quarter adjustment was recorded to other income.
The source of cash consideration paid was from existing cash and borrowings on the line of credit. Of the Purchase Price, $203,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. During the fourth quarter of 2019, $172,000 of the $203,000 was remitted to the founder of Wynwood and $29,000 was remitted to us for the settlement of liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. The remaining $2,000 was remitted to the escrow company for fees. Prior to becoming a wholly owned subsidiary, we accounted for our investment in Wynwood under the equity method of accounting and recorded it as a component of Intangible, equity method investment and other assets, net on our Consolidated
Balance Sheets. Following the completion of the acquisition, Wynwood became a wholly owned subsidiary and its results were fully consolidated beginning on October 10, 2018.
The transaction was accounted for under the acquisition method of accounting as a step acquisition. As required by this method, we remeasured our preexisting 24.5% equity interest to its acquisition-date fair value which was determined to be $2.1 million. As a result of the remeasurement, a net gain of $170,000 was recorded as a component of Other income (expense), net in our Consolidated Statements of Operations during the fourth quarter of 2018. The fair value of the equity interest was determined on a relative basis to the purchase price of the remaining 75.5% acquired by CBA. During 2019, we recorded immaterial adjustments to the allocation of the purchase price for the Wynwood acquisition.
All assets acquired and liabilities assumed were recorded at their respective acquisition-date fair values. The excess of total consideration, including the estimated fair value of our previously held equity interest in Wynwood, over the net identifiable assets acquired and liabilities assumed was recorded as goodwill. The key factors attributable to the creation of goodwill by the Wynwood acquisition are the assembled workforce and our assessment regarding the ability to generate cash flows beyond the lives of the finite-lived intangible assets. The expected income tax effect of the acquired assets and liabilities was also included in the determination of recorded goodwill. The goodwill is expected to be deductible for tax purposes.
The allocation of the purchase price for the Wynwood acquisition was as follows (in thousands):
|
|
|
|
|
|
|
Assets
|
|
|
Useful Life
|
Cash
|
$
|
79
|
|
|
N/A
|
Accounts receivable
|
14
|
|
|
N/A
|
Inventory
|
103
|
|
|
N/A
|
Prepaid expenses and other
|
40
|
|
|
N/A
|
Property, equipment and leasehold improvements
|
310
|
|
|
5 - 10 years
|
Goodwill
|
5,626
|
|
|
Indefinite
|
Other intangible assets:
|
|
|
|
Recipes
|
40
|
|
|
Indefinite
|
Non-Compete Agreements
|
260
|
|
|
2 years
|
Trademark
|
3,800
|
|
|
Indefinite
|
|
10,272
|
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
168
|
|
|
N/A
|
Accrued salaries, wages and payroll taxes
|
24
|
|
|
N/A
|
Refundable deposits
|
13
|
|
|
N/A
|
Other accrued expenses
|
3
|
|
|
N/A
|
Current portion of long-term debt
|
25
|
|
|
N/A
|
|
233
|
|
|
|
Net assets acquired
|
$
|
10,039
|
|
|
|
Transaction costs of $359,000 were expensed as incurred as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.
Primary Reasons Behind Transactions
We completed the Cisco, AMB and Wynwood transactions to unlock the full potential of each brand. Over the past several years, our partnerships with North Carolina-based AMB, Massachusetts-based Cisco, and Florida-based Wynwood have bolstered our brand portfolio with strong local brands and breweries in key markets, complementing Kona as the anchor of our portfolio strategy. Further, these partners have supported our strategic brewery evolution by leveraging the capability and location of the Portsmouth, New Hampshire brewery to increase production for partner brands as we rebalance our brewing footprint. We are continuing to increase marketing spend and resources to fuel each brand's growth and help drive continued innovation and greater levels of support for their local communities.
Financial Information
The acquisitions, both individually and as a whole, are not considered significant and, accordingly, certain results of operations information and pro forma financial information is not presented.
Note 6. Other Current Assets and Other Accrued Expenses
Other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Prepaid property taxes
|
|
$
|
—
|
|
|
$
|
553
|
|
Prepaid insurance
|
|
684
|
|
|
439
|
|
Income taxes receivable
|
|
342
|
|
|
537
|
|
Other
|
|
2,927
|
|
|
1,592
|
|
|
|
$
|
3,953
|
|
|
$
|
3,121
|
|
Other accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Accrued pricing discounts
|
|
$
|
1,204
|
|
|
$
|
781
|
|
Accrued legal settlement
|
|
4,519
|
|
|
—
|
|
Other
|
|
3,900
|
|
|
2,837
|
|
|
|
$
|
9,623
|
|
|
$
|
3,618
|
|
Note 7. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Brewery equipment
|
|
$
|
102,150
|
|
|
$
|
99,210
|
|
Buildings
|
|
34,544
|
|
|
34,525
|
|
Land and improvements
|
|
4,366
|
|
|
4,181
|
|
Furniture, fixtures and other equipment
|
|
20,630
|
|
|
20,438
|
|
Leasehold improvements
|
|
16,060
|
|
|
15,473
|
|
Vehicles
|
|
221
|
|
|
124
|
|
Construction in progress
|
|
26,052
|
|
|
22,001
|
|
|
|
204,023
|
|
|
195,952
|
|
Less accumulated depreciation and amortization
|
|
(90,686
|
)
|
|
(82,763
|
)
|
|
|
$
|
113,337
|
|
|
$
|
113,189
|
|
Note 8. 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 balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
If our leases do not provide an implicit rate, we develop an estimated incremental borrowing rate at the commencement date based on the estimated rate at which we would borrow, in the current economic environment, an amount equal to the lease payments over a similar term on a collateralized basis which is used to determine the present value of lease payments. There were no new operating lease obligations recognized at adoption in comparison to our operating lease obligations disclosed as of December 31, 2018. Our accounting for finance (formerly capital) leases is substantially unchanged.
As described further in Note 3, we adopted ASC 842 as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under ASC 840.
Lease-related liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Operating lease liabilities:
|
|
|
|
Current lease liabilities included in Other accrued expenses
|
$
|
883
|
|
|
$
|
—
|
|
Long-term lease liabilities
|
24,037
|
|
|
—
|
|
Total operating lease liabilities
|
24,920
|
|
|
—
|
|
|
|
|
|
Current portion included in Current portion of long-term debt and finance lease obligations
|
296
|
|
|
477
|
|
Long-term portion of lease liabilities included in Long-term debt and finance lease obligations, net of current portion
|
804
|
|
|
1,100
|
|
Total financing lease liabilities
|
1,100
|
|
|
1,577
|
|
Total lease liabilities
|
$
|
26,020
|
|
|
$
|
1,577
|
|
Weighted-average remaining lease term:
|
|
|
|
Operating leases
|
24 years
|
|
|
|
Finance leases
|
4 years
|
|
|
|
Weighted-average discount rate:
|
|
|
|
Operating leases
|
4.72
|
%
|
|
|
Finance leases
|
3.70
|
%
|
|
|
As of December 31, 2019, the maturities of our operating lease liabilities were as follows (in thousands):
|
|
|
|
|
|
Operating Leases
|
2020
|
$
|
2,012
|
|
2021
|
2,036
|
|
2022
|
2,091
|
|
2023
|
1,958
|
|
2024
|
1,933
|
|
Thereafter
|
32,301
|
|
Total minimum lease payments
|
42,331
|
|
Less: present value adjustment
|
(17,411
|
)
|
Operating lease liabilities
|
$
|
24,920
|
|
As of December 31, 2019, the maturities of our finance lease liabilities were as follows (in thousands):
|
|
|
|
|
|
Finance Leases
|
2020
|
$
|
333
|
|
2021
|
266
|
|
2022
|
199
|
|
2023
|
199
|
|
2024
|
199
|
|
Thereafter
|
—
|
|
Total minimum lease payments
|
1,196
|
|
Less: present value adjustment
|
(96
|
)
|
Finance lease liabilities
|
$
|
1,100
|
|
Components of lease cost were as follows (in thousands):
|
|
|
|
|
|
Year Ended
December 31, 2019
|
Operating lease cost(1)
|
$
|
3,571
|
|
Finance lease cost:
|
|
Amortization of right-of-use asset
|
169
|
|
Interest on lease liabilities
|
48
|
|
Sublease income
|
(215
|
)
|
Total lease cost
|
$
|
3,573
|
|
(1) Includes short-term, month-to-month lease and variable lease costs, which were immaterial.
Note 9. Goodwill and Intangible and Other Assets
Goodwill
The rollforward of goodwill was as follows (in thousands):
|
|
|
|
|
|
Balance, December 31, 2016 and 2017
|
|
$
|
12,917
|
|
Goodwill acquired related to acquisition of AMB
|
|
3,443
|
|
Goodwill acquired related to acquisition of Wynwood
|
|
5,626
|
|
Balance, December 31, 2018
|
|
21,986
|
|
Goodwill adjustment related to acquisition of Wynwood
|
|
(51
|
)
|
Balance, December 31, 2019
|
|
$
|
21,935
|
|
There were no impairment losses netted against the goodwill balance at any date.
Intangible and Other Assets
Intangible and other assets and the related accumulated amortization were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Recipes
|
|
$
|
936
|
|
|
$
|
936
|
|
Co-Exist Agreement
|
|
650
|
|
|
650
|
|
|
|
|
|
|
Distributor agreements
|
|
2,200
|
|
|
2,200
|
|
Accumulated amortization
|
|
(1,687
|
)
|
|
(1,540
|
)
|
|
|
513
|
|
|
660
|
|
|
|
|
|
|
Non-compete agreements
|
|
563
|
|
|
563
|
|
Accumulated amortization
|
|
(327
|
)
|
|
(45
|
)
|
|
|
236
|
|
|
518
|
|
|
|
|
|
|
Other
|
|
386
|
|
|
379
|
|
Accumulated amortization
|
|
(300
|
)
|
|
(274
|
)
|
|
|
86
|
|
|
105
|
|
Intangible assets, net
|
|
2,421
|
|
|
2,869
|
|
|
|
|
|
|
Promotional merchandise
|
|
53
|
|
|
185
|
|
Deposits and other
|
|
463
|
|
|
1,994
|
|
Finance lease right-of-use asset
|
|
2,367
|
|
|
—
|
|
Intangible and other assets, net
|
|
$
|
5,304
|
|
|
$
|
5,048
|
|
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Amortization expense
|
|
$
|
493
|
|
|
$
|
394
|
|
|
$
|
260
|
|
Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows (in thousands):
|
|
|
|
|
2020
|
$
|
416
|
|
2021
|
165
|
|
2022
|
165
|
|
2023
|
89
|
|
2024
|
—
|
|
Thereafter
|
—
|
|
|
$
|
835
|
|
Note 10. Debt and Finance Lease Obligations
Long-term debt and finance lease obligations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Term loan, due September 30, 2023
|
|
$
|
8,381
|
|
|
$
|
8,823
|
|
Line of credit, due September 30, 2023
|
|
19,980
|
|
|
37,092
|
|
Secured borrowing, due June 21, 2026
|
|
4,874
|
|
|
—
|
|
Finance lease obligations for equipment
|
|
1,100
|
|
|
1,577
|
|
|
|
34,335
|
|
|
47,492
|
|
Less current portion
|
|
(1,415
|
)
|
|
(919
|
)
|
|
|
$
|
32,920
|
|
|
$
|
46,573
|
|
Required principal payments on outstanding debt obligations as of December 31, 2019 for the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
|
Line of
Credit
|
|
Secured Borrowing
|
|
Finance
Lease
Obligations
|
2020
|
|
$
|
459
|
|
|
$
|
—
|
|
|
$
|
660
|
|
|
$
|
333
|
|
2021
|
|
477
|
|
|
—
|
|
|
690
|
|
|
266
|
|
2022
|
|
496
|
|
|
—
|
|
|
722
|
|
|
199
|
|
2023
|
|
6,949
|
|
|
19,980
|
|
|
756
|
|
|
199
|
|
2024
|
|
—
|
|
|
—
|
|
|
791
|
|
|
199
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
1,255
|
|
|
—
|
|
|
|
$
|
8,381
|
|
|
$
|
19,980
|
|
|
$
|
4,874
|
|
|
1,196
|
|
Amount representing interest
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1,100
|
|
Term Loan and Line of Credit
On October 10, 2018, we executed a First Amendment (the "Amendment") to our Amended and Restated Credit Agreement with Bank of America, N.A. ("BofA") dated November 30, 2015 (as amended, the "Credit Agreement"). The Credit Agreement as amended by the First Amendment provides for a 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 an originally valued $10.8 million term loan (“Term Loan”). The primary changes effected by the First Amendment were to increase the maximum amount available under the Line of Credit from $40.0 million to $45.0 million and to extend the maturity date of the Line of Credit from November 30, 2020 to September 30, 2023, which is also the maturity date of the Term Loan. The maximum amount of the Line of Credit is subject to loan commitment reductions in the amount of $750,000 each quarter beginning March 31, 2020. The First Amendment also increased the limit on the total amount of investments that we may make in other craft brewers, other than the acquisitions of all or substantially all of the assets or controlling ownership interests, from $5.0 million to $10.0 million and revised the definition of Consolidated EBITDA to account for legal fees and costs associated with litigation described in Note 19. We may draw upon the Line of Credit for working capital and general corporate purposes.
At December 31, 2019, we had $20.0 million of borrowings outstanding under the Line of Credit and $8.4 million outstanding under the Term Loan.
Under the Credit Agreement as in effect at December 31, 2019, 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, 2019, our marginal rate was 2.00% resulting in an annual interest rate of 2.96%.
The Credit Agreement authorizes acquisitions within the same line of business as long as we remain in compliance with the financial covenants of the Credit Agreement and there is at least $5.0 million of availability remaining on the Line of Credit following the acquisition.
Under the Credit 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, 2019, the quarterly fee was 0.15% and the fee totaled the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Credit Agreement fee
|
|
$
|
37
|
|
|
$
|
52
|
|
|
$
|
37
|
|
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 2019, 2018 or 2017.
Effective May 7, 2019, we executed a Second Amendment to the Credit Agreement with BofA (the “Second Amendment”). EBITDA, as defined in the Second Amendment, includes certain adjustments specified in the Second Amendment. Per the Second Amendment, beginning July 1, 2019, and in each fiscal quarter thereafter, the maximum Consolidated Leverage Ratio is 3.50 to 1.00, as A-B did not make a Qualifying Offer as defined in the International Distribution Agreement with Anheuser-Busch Worldwide Investments, LLC, an affiliate of A-B.
Effective September 25, 2019, we executed a Third Amendment to the Credit Agreement with BofA that allows us to net Consolidated Funded Indebtedness with Qualified Cash and Cash Equivalents on hand in an amount not to exceed $10 million, to arrive at Consolidated Net Funded Indebtedness. Consolidated Leverage Ratio was revised to mean the ratio of Consolidated Net Funded Indebtedness to Consolidated EBITDA for the applicable measurement period.
Effective December 31, 2019, we executed a Fourth Amendment to the Credit Agreement with BofA (the "Fourth Amendment"). The primary changes effected by the Fourth Amendment were to: (i) add new defined terms relating to the Agreement and Plan of Merger, dated as of November 11, 2019, by and among CBA, Barrel Subsidiary, Inc., and Anheuser-Busch Companies, LLC (the "A-B Merger"); (ii) revise the definition of Consolidated EBITDA to account for legal fees and expenses paid in cash in connection with the A-B Merger; and (iii) revise the financial covenants.
As amended, the Credit Agreement requires us to satisfy the following financial covenants: (i) on or after the earliest to occur of July 1, 2020 or the termination of the A-B Merger, a Consolidated Leverage Ratio of 3.50 to 1.00; (ii) on or after the earliest to occur of July 1, 2020 or the termination of the A-B Merger, a Fixed Charge Coverage Ratio of 1.20 to 1.00; and (iii) on a trailing four-quarter basis at each of March 31, 2020 and June 30, 2020, a minimum Consolidated EBITDA of $3.0 million. Failure to maintain compliance with these covenants is an event of default and would give BofA the right to declare the entire outstanding loan balance immediately due and payable.
The Credit Agreement, as revised by the Fourth Amendment, in effect at December 31, 2019, had no required financial covenants and, therefore, at December 31, 2019, we were in compliance with all applicable contractual financial covenants of the Credit Agreement.
The Credit 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, other than the A-B Merger.
Secured Borrowing
On June 20, 2019 we executed an agreement with BofA, pursuant to our Master Lease Agreement, for $5.2 million in cash in exchange for a secured interest in our previously installed can line at our Portland brewing facility. The maturity date of the secured borrowing is June 21, 2026. We used the funds to pay down our Line of Credit. At December 31, 2019, $4.9 million was outstanding at an interest rate of 4.54%.
Note 11. 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 $6.3 million as of December 31, 2019. 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 1.75% at December 31, 2019.
Effective January 4, 2016, we entered into a $9.1 million notional amount interest rate swap contract with BofA, which was set to expire January 1, 2019, to hedge the variability of interest payments associated with our variable-rate borrowings on our Line of Credit. The notional amount fluctuated based on a predefined schedule based on our anticipated borrowings. This swap agreement was terminated effective January 18, 2018 as we paid off our Line of Credit, and we received interest of $27,000. With the asset purchase and acquisitions of Cisco, AMB, and Wynwood, we began borrowing again on our Line of Credit in the fourth quarter of 2018. We do not currently have an interest rate swap contract in place to hedge the variability of interest payments associated with our variable-rate borrowings on our Line of Credit.
Since our remaining 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 December 31, 2019, unrealized net losses of $278,000 were recorded in Accumulated other comprehensive loss as a result of our hedge. The effective portion of the gain or loss on 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 2019, 2018 or 2017.
The fair value of our derivative instruments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Fair value of interest rate swaps
|
$
|
(278
|
)
|
|
$
|
(116
|
)
|
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,
|
|
|
|
|
|
|
2019
|
|
$
|
(162
|
)
|
|
Interest expense
|
|
$
|
(41
|
)
|
2018
|
|
$
|
105
|
|
|
Interest expense
|
|
$
|
27
|
|
2017
|
|
$
|
203
|
|
|
Interest expense
|
|
$
|
150
|
|
See also Note 12.
Note 12. 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, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(278
|
)
|
|
$
|
—
|
|
|
$
|
(278
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(116
|
)
|
|
$
|
—
|
|
|
$
|
(116
|
)
|
We did not have any assets measured at fair value on a recurring basis at December 31, 2019 or 2018.
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 2019, 2018 or 2017.
We believe the carrying amounts of Cash, cash equivalents and restricted cash, 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,
|
|
2019
|
|
2018
|
Fixed-rate debt on balance sheet
|
$
|
5,973
|
|
|
$
|
1,577
|
|
Estimated fair value of fixed-rate debt
|
6,281
|
|
|
1,591
|
|
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.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Our non-financial assets, such as goodwill, intangible assets and property and equipment, are recorded at fair value when an impairment is recognized or at the time acquired in a business combination. As discussed in Note 5, we acquired substantially all of the assets of AMB and increased our ownership interest in Wynwood from 24.5% to 100% and recorded the acquired assets and liabilities, including goodwill, intangible assets and property and equipment at their estimated fair value. Also, as discussed in Note 5, we purchased the intellectual property assets of Cisco and recorded the intangible assets at their estimated fair value. The determination of the estimated fair value of such assets required the use of significant unobservable inputs which would be considered Level 3 fair value measurements.
Note 13. Revenue Recognition
On January 1, 2018, we adopted the Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" and all the related amendments (the "new revenue standard") for all of our revenue contracts, using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of Accumulated deficit. The adoption of ASC 606 did not have a material impact on our consolidated financial statements at January 1, 2018 or for the year ended December 31, 2018.
The following table disaggregates our Sales by major source (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Beer Related(1)
|
|
Brewpubs
|
|
Total
|
Product sold through distributor agreements(2)
|
|
$
|
173,575
|
|
|
$
|
—
|
|
|
$
|
173,575
|
|
Alternating proprietorship and contract brewing fees(3)
|
|
1,931
|
|
|
—
|
|
|
1,931
|
|
International distribution fees
|
|
3,248
|
|
|
—
|
|
|
3,248
|
|
Brewpubs(4)
|
|
—
|
|
|
23,696
|
|
|
23,696
|
|
Other(5)
|
|
2,184
|
|
|
|
|
|
2,184
|
|
|
|
$
|
180,938
|
|
|
$
|
23,696
|
|
|
$
|
204,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Beer Related(1)
|
|
Brewpubs
|
|
Total
|
Product sold through distributor agreements(2)
|
|
$
|
176,265
|
|
|
$
|
—
|
|
|
$
|
176,265
|
|
Alternating proprietorship and contract brewing fees(3)
|
|
10,612
|
|
|
—
|
|
|
10,612
|
|
International distribution fees
|
|
3,400
|
|
|
—
|
|
|
3,400
|
|
Brewpubs(4)
|
|
—
|
|
|
24,023
|
|
|
24,023
|
|
Other(5)
|
|
2,969
|
|
|
—
|
|
|
2,969
|
|
|
|
$
|
193,246
|
|
|
$
|
24,023
|
|
|
$
|
217,269
|
|
|
|
(1)
|
Beer Related sales include sales to Anheuser-Busch, LLC ("A-B") subsidiaries including Ambev, Anheuser-Busch Worldwide Investments, LLC (“ABWI”) and Anheuser-Busch Companies, LLC (“ABC”). Sales to wholesalers through the A-B distributor agreement in 2019 and 2018 represented 80.0% and 77.2%, 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)
|
Alternating proprietorship fees ceased in the fourth quarter of 2018.
|
|
|
(4)
|
Brewpub sales include sales of promotional merchandise and sales of beer directly to customers.
|
|
|
(5)
|
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 contract 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 standalone selling price. 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 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 December 31, 2018, we had receivables related to contracts with customers of $30.0 million, net of the allowance for doubtful accounts of $25,000.
As of December 31, 2019 and December 31, 2018, contract liabilities, which consisted of obligations associated with our gift card programs, were $0.2 million and $0.4 million, respectively, and were included in Other accrued expenses on the Consolidated Balance Sheets.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of accounting pursuant to ASC 606. 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.
We entered into an International Distribution Agreement ("IDA") with A-B for the rights to serve as our exclusive distributor in international territories defined by the IDA for an approximate 10-year period. The IDA represents a single international license to all territories defined in the IDA. Revenue is recognized on a straight-line basis over the approximate 10-year term of the agreement. In accordance with ASC 606, we evaluate the factors used in our estimates of variable consideration to be received under contracts on a quarterly basis. We estimate variable consideration as the most likely amount to which we expect to be entitled. During the third quarter of 2019, we received the final $20.0 million payment under the IDA which resulted in total consideration received of $34.0 million. We consider the 10-year contractual term of the IDA as the most likely term of the agreement and will recognize the revenue from these payments over that period. We believe that the possibility of a significant reversal of cumulative revenue recognized from this agreement under this conclusion is remote. Under the IDA, A-B has the right to issue purchase orders to distribute product in international territories defined by the IDA. Each purchase order placed under the IDA is a distinct performance obligation. The transaction price for each performance obligation is a sales-based royalty, which is recognized as revenue in accordance with the sales-based royalty exception. Accordingly, royalty revenue is recognized as the variability associated with the royalty is resolved, which is upon A-B's subsequent sale of our product.
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 December 31, 2018, Deferred revenue on our Consolidated Balance Sheets included $6.0 million related to the 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. During 2019, we recognized $3.2 million as Sales, resulting in Deferred revenue of $22.7 million at December 31, 2019. We expect to recognize an additional $3.2 million of Deferred revenue as Sales in 2020, $3.2 million in 2021, $3.2 million in 2022 and $13.0 million thereafter.
Note 14. 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 sales of our beer and brands. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
Beer
Related
|
|
Brewpubs
|
|
Total
|
Net sales
|
$
|
169,275
|
|
|
$
|
23,696
|
|
|
$
|
192,971
|
|
Gross profit
|
$
|
60,601
|
|
|
$
|
2,248
|
|
|
$
|
62,849
|
|
Gross margin
|
35.8
|
%
|
|
9.5
|
%
|
|
32.6
|
%
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
182,163
|
|
|
$
|
24,023
|
|
|
$
|
206,186
|
|
Gross profit
|
$
|
66,958
|
|
|
$
|
1,365
|
|
|
$
|
68,323
|
|
Gross margin
|
36.8
|
%
|
|
5.7
|
%
|
|
33.1
|
%
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
Net sales
|
$
|
179,830
|
|
|
$
|
27,626
|
|
|
$
|
207,456
|
|
Gross profit
|
$
|
63,412
|
|
|
$
|
1,846
|
|
|
$
|
65,258
|
|
Gross margin
|
35.3
|
%
|
|
6.7
|
%
|
|
31.5
|
%
|
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 percentages of our Sales:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2019
|
|
2018
|
|
2017
|
80.0
|
%
|
|
77.2
|
%
|
|
74.9
|
%
|
Receivables from A-B represented the following percentages of our Accounts receivable balance:
|
|
|
|
|
|
December 31,
|
2019
|
|
2018
|
65.1
|
%
|
|
79.8
|
%
|
All of our long-term assets are located in the U.S. and Sales outside of the U.S. are insignificant.
Note 15. 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, 2019, there were 298,296 shares available for future awards pursuant to the 2014 Plan.
Terms of awards granted pursuant to the 2010 Plan 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Intrinsic value of stock options exercised
|
|
$
|
230
|
|
|
$
|
388
|
|
|
$
|
265
|
|
Intrinsic value of fully-vested stock awards granted
|
|
1,590
|
|
|
992
|
|
|
1,812
|
|
Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Selling, general and administrative expense
|
$
|
1,907
|
|
|
$
|
1,334
|
|
|
$
|
1,197
|
|
Cost of sales
|
99
|
|
|
150
|
|
|
119
|
|
Total stock-based compensation expense
|
$
|
2,006
|
|
|
$
|
1,484
|
|
|
$
|
1,316
|
|
We amortize stock-based compensation expense 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, 2019, we had total unrecognized stock-based compensation expense of $1.5 million, which will be recognized over the weighted average remaining vesting period of 1.8 years.
Stock-Based Awards Plan Activity
Stock Option Activity
Stock option activity for the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
Outstanding at December 31, 2018
|
|
306,490
|
|
|
$
|
9.82
|
|
Exercised
|
|
(38,367
|
)
|
|
10.39
|
|
Canceled
|
|
(3,325
|
)
|
|
7.69
|
|
Outstanding at December 31, 2019
|
|
264,798
|
|
|
9.76
|
|
Certain information regarding options outstanding as of December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Number
|
|
264,798
|
|
|
242,552
|
|
Weighted average exercise price
|
|
$
|
9.76
|
|
|
$
|
9.94
|
|
Aggregate intrinsic value (in thousands)
|
|
$
|
1,784
|
|
|
$
|
1,590
|
|
Weighted average remaining contractual term
|
|
4.7 years
|
|
|
4.6 years
|
|
Restricted Stock Unit Activity
In February 2019, we granted a total of 58,087 RSUs with a grant date fair value of $17.18 per share to selected executive officers and other members of our executive and impact leadership teams. The RSUs will vest on March 31, 2022, provided that the participant continues to be employed through that date. A total of 4,370 RSUs were forfeited due to participants separating from the company prior to the vesting date of March 31, 2022.
In April 2019, we granted 950, 2,533 and 3,799 RSUs, for a total of 7,282 RSUs with a grant date fair value of $13.92 per share to an executive officer. The RSUs will vest on March 31, 2020, December 31, 2020 and March 31, 2022, respectively, provided that the participant continues to be employed through that date.
In June 2019, we granted a total of 25,896 RSUs with a grant date fair value of $13.50 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, 2019. For this grant, we did not achieve our EBITDA target for the year ended December 31, 2019, so the RSUs will not vest on May 31, 2020.
In February 2018, we granted a total of 46,035 RSUs with a grant date fair value of $18.25 per share to selected executive officers and other members of our executive and impact leadership teams. The RSUs will vest on March 31, 2021, provided that the participant continues to be employed through that date. A total of 7,481 RSUs were forfeited due to participants separating from the company before March 31, 2021.
In February 2018, we also granted a total of 750 RSUs with a grant date fair value of $18.25 per share to a member of the impact leadership team that vested on April 30, 2019.
In May 2018, we granted a total of 500 RSUs with a grant date fair value of $18.75 per share to a member of the impact leadership team. The RSUs vested on May 31, 2019.
In May 2018, we also granted a total of 1,080 RSUs with a grant date fair value of $18.75 per share to a member of the impact leadership team that will vest on March 31, 2021, provided that the participant continues to be employed though that date.
In June 2018, we granted a total of 12,806 RSUs with a grant date fair value of $19.60 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, 2018. For this grant, 92.3% of the target number of RSUs vested on May 31, 2019.
In October 2018, we granted a total of 2,602 RSUs with a grant date fair value of $17.23 per share to new members of our impact leadership team. The RSUs will vest on October 10, 2021, provided that the participant continues to be employed through that date.
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 will vest on March 31, 2020. A total of 18,305 RSUs were forfeited due to participants separating from the company before March 31, 2020.
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, 87.3% of the target number of RSUs vested on May 31, 2018.
In November 2017, we granted 4,393 RSUs with a grant date fair value of $19.35 per share to an executive officer. For this grant, 879 RSUs vested on December 31, 2018 and 1,757 RSUs vested on December 31, 2019. The remaining RSUs will vest on December 31, 2020, provided that the participant continues to be employed 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. A total of 39,775 RSUs vested on March 31, 2019, for participants that continued to be employed through that date. A total of 12,728 RSUs were forfeited due to participants separating from the company before March 31, 2019.
Performance-Based Stock Awards Activity
We granted performance-based stock awards to selected executives in each of the past eight years. Performance goals for the 2019 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, 2019 will vest from zero to 125% of the targeted number of performance shares.
Cumulative activity related to performance-based awards during the year ended December 31, 2019 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, 2019
|
|
79,368
|
|
|
$
|
16.85
|
|
Granted (target amount)
|
|
59,586
|
|
|
16.21
|
|
Not expected to vest due to failure to meet performance goals
|
|
(30,918
|
)
|
|
15.85
|
|
Awards expected to vest as of December 31, 2019
|
|
108,036
|
|
|
16.78
|
|
Stock Grants
On the date of our 2019 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 $50,000, except for the chairman whose grant had a fair value of $72,500. The 2019 grants included 3,243 fully-vested shares of common stock issued to seven of our non-employee directors; the chairman received 4,702 shares, for a total of 27,403 shares.
On August 23, 2019, pursuant to our purchase agreement with Cisco Brewers Inc., each non-employee Cisco advisory board member received a grant of fully-vested shares of our common stock with a fair value of $5,145. This grant included 500 fully-vested shares of common stock issued to two non-employee Cisco advisory board members for a total of 1,000 shares.
Note 16. 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,
|
|
2019
|
|
2018
|
|
2017
|
Weighted average common shares used for basic EPS
|
19,447
|
|
|
19,349
|
|
|
19,284
|
|
Dilutive effect of stock-based awards
|
—
|
|
|
208
|
|
|
163
|
|
Shares used for diluted EPS
|
19,447
|
|
|
19,557
|
|
|
19,447
|
|
|
|
|
|
|
|
|
Stock-based awards not included in diluted per share calculations as they would be antidilutive
|
73
|
|
|
—
|
|
|
25
|
|
Note 17. 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,
|
|
|
2019
|
|
2018
|
|
2017
|
Current federal
|
|
$
|
(1,052
|
)
|
|
$
|
1,222
|
|
|
$
|
(413
|
)
|
Current state
|
|
(273
|
)
|
|
571
|
|
|
331
|
|
|
|
(1,325
|
)
|
|
1,793
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
Deferred federal
|
|
(4,500
|
)
|
|
(135
|
)
|
|
(5,368
|
)
|
Deferred state
|
|
(874
|
)
|
|
(371
|
)
|
|
(32
|
)
|
|
|
(5,374
|
)
|
|
(506
|
)
|
|
(5,400
|
)
|
|
|
$
|
(6,699
|
)
|
|
$
|
1,287
|
|
|
$
|
(5,482
|
)
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
Provision at U.S. statutory rate
|
|
$
|
(4,120
|
)
|
|
$
|
1,140
|
|
|
$
|
1,374
|
|
State taxes, net of federal benefit
|
|
(1,023
|
)
|
|
210
|
|
|
189
|
|
Effect of tax rate change on deferred tax assets and liabilities
|
|
—
|
|
|
—
|
|
|
(6,923
|
)
|
Permanent differences, primarily meals and entertainment
|
|
155
|
|
|
111
|
|
|
180
|
|
Stock-based compensation
|
|
(3
|
)
|
|
(42
|
)
|
|
(11
|
)
|
Other adjustments
|
|
(149
|
)
|
|
—
|
|
|
—
|
|
Tax credits
|
|
(1,833
|
)
|
|
(132
|
)
|
|
(291
|
)
|
Unrecognized tax benefits
|
|
274
|
|
|
—
|
|
|
—
|
|
|
|
$
|
(6,699
|
)
|
|
$
|
1,287
|
|
|
$
|
(5,482
|
)
|
Significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax assets
|
|
|
|
|
Net operating losses and tax credit carryforwards
|
|
$
|
5,565
|
|
|
$
|
11
|
|
Accrued salaries and severance
|
|
1,060
|
|
|
1,089
|
|
Right-of-use liability
|
|
5,030
|
|
|
—
|
|
Other
|
|
3,529
|
|
|
1,403
|
|
|
|
15,184
|
|
|
2,503
|
|
Deferred tax liabilities
|
|
|
|
|
Property, equipment and leasehold improvements
|
|
(12,222
|
)
|
|
(10,783
|
)
|
Intangible assets
|
|
(4,594
|
)
|
|
(3,977
|
)
|
Right-of-use asset
|
|
(5,144
|
)
|
|
—
|
|
Other
|
|
(190
|
)
|
|
(124
|
)
|
|
|
(22,150
|
)
|
|
(14,884
|
)
|
|
|
$
|
(6,966
|
)
|
|
$
|
(12,381
|
)
|
As of December 31, 2019, included in our net operating losses and tax credit carryforwards were the following (in thousands):
|
|
|
|
|
State NOLs, tax effected (expire in 2022-2039)
|
$
|
541
|
|
Federal NOLs, tax effected (no expiration date)
|
2,417
|
|
Federal employer FICA tips credit (expire in 2036-2039)
|
691
|
|
Federal research and development tax credit, net of $274 of unrecognized tax benefits (expire in 2035-2039)
|
1,916
|
|
We also have an AMT credit carryforward of $120,000 which is refundable over the next four years. As such, the carryforward is recognized as a tax receivable on our Consolidated Balance Sheets as of December 31, 2019.
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, 2019 or 2018.
A reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Unrecognized tax benefits – January 1
|
$
|
—
|
|
|
$
|
—
|
|
Gross increases – tax positions in current period
|
274
|
|
|
—
|
|
Unrecognized tax benefits – December 31
|
$
|
274
|
|
|
$
|
—
|
|
Included in the balance of unrecognized tax benefits as of December 31, 2019 are $0.3 million of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2019 are $0.3 million of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.
Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred. There were no interest or penalties accrued on the unrecognized tax benefits at December 31, 2019 and we do not anticipate any changes to the unrecognized tax benefits within the coming year.
Our federal tax returns for 2016 through 2019 remain subject to examination by the Internal Revenue Service (“IRS”), while our tax credit carryovers from 2015 can be examined to the extent they are utilized on a future return. Our state income tax returns for 2016 through 2019 remain subject to examination, and 2015 state income tax returns are subject to examination in state jurisdictions that have a four year statute of limitations. We are currently not under audit in any jurisdiction, and have not concluded any federal or state tax audits.
Note 18. 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, 2019, 2018 and 2017, 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 2019, 2018 and 2017, we used approximately $73,000, $110,000 and $69,000, 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,
|
|
|
2019
|
|
2018
|
|
2017
|
401(k) expense
|
|
$
|
811
|
|
|
$
|
786
|
|
|
$
|
805
|
|
Note 19. 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, 2019 are as follows (in thousands):
|
|
|
|
|
2020
|
$
|
7,470
|
|
2021
|
2,118
|
|
2022
|
1,947
|
|
2023
|
1,524
|
|
2024
|
1,436
|
|
Thereafter
|
24,604
|
|
|
$
|
39,099
|
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
Rent expense
|
|
$
|
3,571
|
|
|
$
|
2,908
|
|
|
$
|
2,869
|
|
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 we no longer receive rental payments pursuant to this agreement.
We sub-lease brewpub space to the founders of Cisco Brewers pursuant to a 5-year lease that began in April 2019. Cisco has the option to extend the lease term for three 5-year periods.
We recognized rental income related to the subleases, which was recorded as an offset to rent expense in our Consolidated Statements of Operations, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Rental income
|
|
$
|
215
|
|
|
$
|
—
|
|
|
$
|
406
|
|
Future minimum lease rentals pursuant to this agreement as of December 31, 2019 are as follows (in thousands):
|
|
|
|
|
2020
|
$
|
286
|
|
2021
|
286
|
|
2022
|
286
|
|
2023
|
286
|
|
2024
|
72
|
|
Thereafter
|
—
|
|
|
$
|
1,216
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2019
|
|
2018
|
|
2017
|
$
|
164
|
|
|
$
|
164
|
|
|
$
|
136
|
|
The lease for the headquarters office space and banquet space 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.
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. 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):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2019
|
|
2018
|
|
2017
|
$
|
683
|
|
|
$
|
611
|
|
|
$
|
574
|
|
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 2023. 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, 2020, 2021, 2022, 2023 and 2024; 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, 2023.
Aggregate future payments under purchase and sponsorship commitments as of December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
Sponsorship
Obligations
|
|
Total
|
2020
|
|
$
|
6,121
|
|
|
$
|
2,129
|
|
|
$
|
8,250
|
|
2021
|
|
5,590
|
|
|
1,098
|
|
|
6,688
|
|
2022
|
|
2,332
|
|
|
770
|
|
|
3,102
|
|
2023
|
|
638
|
|
|
239
|
|
|
877
|
|
2024
|
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
14,681
|
|
|
$
|
4,236
|
|
|
$
|
18,917
|
|
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. 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 expected to be approximately $4.4 million.
In connection with the Merger, several lawsuits were filed on behalf of shareholders of the Company. On January 3, 2020, a purported class action complaint brought on behalf of a putative class of the Company’s 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 the Company’s 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”). The Birkby and Kost Actions assert state law claims for alleged breaches of fiduciary duty against the Company and its directors. The Kost Action also brings claims against the Company’s Chief Executive Officer and ABC, and includes allegations of material misstatements and omissions in the Company’s 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 the Company and its directors under the federal securities laws and alleging material misstatements and omissions in the Company’s 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 the Company’s 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 the Company’s 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 brings claims against ABC and Merger Sub.
On February 18, 2020, the Company announced the resolution of claims with the plaintiffs in the Kost, Sabatini, Halberstam, and Michael Roberts Actions, whereby the Company filed supplemental disclosures and plaintiffs in the Kost, Sabatini, Halberstam, and Michael Roberts Actions agreed to dismiss their individual claims with prejudice, and plaintiffs in the Kost, Sabatini, and Michael Roberts Actions agreed to dismiss their class claims without prejudice. The Birkby and Dennis Roberts Actions have not been resolved. The Company 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.
Note 20. Related Party Transactions
For additional related party transactions, see Notes 5 and 19.
As of December 31, 2019 and 2018, A-B owned approximately 31.1% and 31.3%, respectively, 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 other 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):
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Year Ended December 31,
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2019
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2018
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2017
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Gross sales to A-B and Ambev
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$
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162,658
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$
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166,534
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$
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163,368
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International distribution fee earned from ABWI
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3,248
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3,400
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3,400
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Cumulative international distribution fee from ABWI, recorded as deferred revenue
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22,736
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5,985
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3,384
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Margin fee paid to A-B, classified as a reduction of Sales
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2,294
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2,296
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2,277
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Inventory management and other fees paid to A-B, classified in Cost of sales
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384
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383
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384
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Media reimbursement from A-B, classified as a reduction of Selling, general and administrative expenses
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—
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500
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290
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Amounts due to or from A-B and ABWI were as follows (in thousands):
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December 31,
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2019
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2018
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Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
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$
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11,394
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$
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17,946
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Amounts due from ABWI and A-B related to international distribution fee and media reimbursement
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—
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6,000
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Refundable deposits due to A-B
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(1,197
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)
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(2,840
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)
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Amounts due to A-B for services rendered
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(5,976
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)
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(5,140
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)
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Net amount due from A-B and ABWI
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$
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4,221
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$
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15,966
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Agreements with Anheuser-Busch, LLC
Contract Brewing Agreements
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. Production of CBA's products in ABCS’s brewery in Fort Collins, Colorado, began in the second quarter of 2017.We share equally with ABCS 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 above) is terminated pursuant to certain specified provisions thereof, or (iii) subject to certain conditions, if the A-B Distributor Agreement (as defined above) is terminated pursuant to certain specified provisions thereof.
On January 30, 2018, we also entered into a Contract Brewing Agreement with ABC, pursuant to which we agreed to 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 this agreement, ABC paid 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 agreement expired on December 31, 2019.
Distributor Agreement
The Master A-B Distributor Agreement (the "A-B Distributor Agreement"), as amended in August 2016, provides for the distribution of our brands in all states, territories and possessions of the United States, including the District of Columbia and, except with respect to Kona beers, all U.S. military, diplomatic, and governmental installations in a U.S. territory or possession. Under the A-B Distributor Agreement, we have granted A-B the right of first refusal to distribute our products, including any internally developed new products, but excluding new products that we may acquire. We are responsible for marketing our products to A-B’s wholesalers, as well as to retailers and consumers.
As amended in August 2016, the term of the A-B Distributor Agreement will expire on December 31, 2028, unless terminated earlier as a result of the Merger or otherwise. The A-B Distributor Agreement is also subject to immediate termination, by either party, upon the occurrence of standard events of default as defined in the agreement. Additionally, the A-B Distributor Agreement may be terminated by A-B, with six months’ prior written notice to us, upon the occurrence of any of the following events:
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•
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we engage in incompatible conduct that damages the reputation or image of A‑B or the brewing industry;
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•
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any A-B competitor or affiliate thereof acquires 10% or more of our outstanding equity securities, and that entity designates one or more persons to our board of directors;
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•
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our current chief executive officer ceases to function in that role or is terminated, and a satisfactory successor, in A‑B’s opinion, is not appointed within six months;
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•
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we are merged or consolidated into or with any other entity or any other entity merges or consolidates into or with us without A-B’s prior approval; or
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•
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A-B, its subsidiaries, affiliates, or parent, incur any obligation or expense as a result of a claim asserted against them by or in our name, or by our affiliates or shareholders, and we do not reimburse and indemnify A-B and its corporate affiliates on demand for the entire amount of the obligation or expense.
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Under the A-B Distributor Agreement, we pay $0.25 per case-equivalent as a margin fee. In addition, since January 1, 2019, we have been required to reinvest an aggregate amount equal to $0.25 per case-equivalent in sales and marketing efforts for our products.
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 is 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 other 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 pays us our costs of production plus reasonable out-of-pocket expenses relating to export shipment costs. Additionally, ABWI pays 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 is subject to escalation annually, beginning in calendar year 2018, on the terms described in the International Distribution Agreement. For calendar years 2016, 2017, 2018, and 2019 ABWI has paid us one-time fees of $3.0 million, $5.0 million, $6.0 million and $20.0 million in January of 2017, 2018 and 2019 and August 2019, respectively. The sum of the fees is recognized in Beer Related Net sales on a straight-line basis over the 10-year contract term.
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 (as defined below) is terminated pursuant to certain specified provisions thereof. Unless terminated sooner, including upon completion of the Merger, the International Distribution Agreement will continue in effect until December 31, 2026.
Contract pricing may not be commensurate with amounts that an independent market participant would pay due to the related party nature of the agreements.
Exchange Agreement
We have also entered into an Amended and Restated Exchange and Recapitalization Agreement (the “Exchange Agreement”) with A-B, pursuant to which we have granted A-B certain contractual rights. The Exchange Agreement originally was entered into in 2004 as part of a recapitalization in which we redeemed preferred shares held by A-B in exchange for cash and the shares of our common stock currently held by A-B. A-B owned 6,069,047, or approximately 31.1%, of our outstanding shares of common stock at December 31, 2019.
The Exchange Agreement entitles A-B to designate two members of our board of directors. A-B also generally has the right to have a designee on each committee of the board of directors, except where prohibited by law or stock exchange requirements, or with respect to a committee formed to evaluate transactions or proposed transactions between A-B and us. The Exchange Agreement contains limitations on our ability to take certain actions without A-B’s prior consent, including, but not limited to, our ability to issue equity securities or acquire or sell assets or stock, amend our Articles of Incorporation or Bylaws, grant board representation rights, enter into certain transactions with affiliates, distribute our products in the United States other than through A-B or as provided in the A-B Distributor Agreement, or voluntarily terminate our listing on the Nasdaq Stock Market.
Transactions with Wynwood
As of December 31, 2019 and 2018, Wynwood was a wholly owned subsidiary and, as of December 31, 2017, we owned a 24.5% interest in Wynwood. See Note 5 for additional information.
Transactions with Wynwood consisted of the following (in thousands):
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Year Ended December 31,
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2019
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2018
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2017
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Master distributor fee earned
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$
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—
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$
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27
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$
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18
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Royalty fee paid
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—
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—
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94
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Brewery representative reimbursement, classified as a reduction of Selling, general and administrative expenses
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—
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—
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90
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Share of loss, classified as a component of Other income (expense), net
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—
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44
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75
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Refund of investment, classified as a reduction in the carrying value of the equity method investment
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—
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23
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—
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Note 21. 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 costs 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 22 for a discussion of the classification of the assets related to our Woodinville brewery as assets held for sale.
Note 22. Assets Held for Sale and Sale of Woodinville, Washington Brewery
Assets held for sale at December 31, 2017 represented the assets related to our Woodinville, Washington Brewery, which was designated as held for sale on May 1, 2017. At the end of 2017, a $0.5 million impairment charge was recorded, as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations, related to the sale of our Woodinville brewery, which was sold on January 12, 2018 to assignees of Sound Commercial Investment Holdings, LLC, for a total purchase price of $24.5 million (the "Sale Transaction").
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 $0.6 million from the sale proceeds and recorded a gain of $0.5 million during the quarter ended March 31, 2018 related to the Sale Transaction, which was recorded as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.
In contemplation of the sale of certain brewing and bottling equipment included in the Sale Transaction, $0.5 million of the total purchase price was placed in escrow following the closing. If the purchaser of the equipment had sold it for less than $3.5 million, the shortfall would have been paid to the purchaser up to the amount held in escrow, with the balance, if any, paid to us. The Woodinville brewing and bottling equipment was sold for more than $3.5 million in the first quarter of 2018 and, accordingly, the $0.5 million in escrow was remitted to us.
Assets held for sale were as follows (in thousands):
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December 31,
2017
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Brewery equipment
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$
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6,972
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Buildings
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12,562
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Land and improvements
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3,451
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Furniture, fixtures and other equipment
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454
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23,439
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Impairment of assets held for sale
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(493
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)
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$
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22,946
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