Company Quick10K Filing
Quick10K
Craft Brew Alliance
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$14.82 19 $288
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-23 Enter Agreement
8-K 2019-05-14 Shareholder Vote, Officers
8-K 2019-04-24 Other Events
8-K 2019-02-04 Officers
8-K 2018-12-28 Officers
8-K 2018-12-21 Officers
8-K 2018-10-10 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-06-16 Officers, Regulation FD, Exhibits
8-K 2018-06-13 Officers
8-K 2018-05-29 Officers
8-K 2018-05-16 Shareholder Vote
8-K 2018-02-01 Officers
8-K 2018-01-12 M&A, Regulation FD, Exhibits
VZ Verizon Communications 233,580
BPR Brookfield Property REIT 14,690
PQG PQ Group Holdings 2,120
ROIC Retail Opportunity Investments 2,010
ORTX Orchard Therapeutics 1,720
NHC National Healthcare 1,190
SSTI Shotspotter 621
UNFI United Natural Foods 603
BROG Black Ridge Oil & Gas 270
UMRX Unum Therapeutics 102
BREW 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Recent Accounting Pronouncements
Note 3. Cash, Cash Equivalents and Restricted Cash
Note 4. Inventories
Note 5. Leases
Note 6. Acquisitions
Note 7. Related Party Transactions
Note 8. Debt
Note 9. Derivative Financial Instruments
Note 10. Fair Value Measurements
Note 11. Revenue Recognition
Note 12. Segment Results and Concentrations
Note 13. Significant Stock-Based Plan Activity and Stock-Based Compensation
Note 14. Earnings per Share
Note 15. Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. Exhibits
EX-10.1 cba-20190331ex101.htm
EX-10.2 cba-20190331ex102.htm
EX-31.1 cba-20190331xex311.htm
EX-31.2 cba-20190331xex312.htm
EX-32.1 cba-20190331xex321.htm
EX-99.1 cba-20190331xex991.htm

Craft Brew Alliance Earnings 2019-03-31

BREW 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019033110-q.htm 10-Q 03-31-2019 Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ______________
 
Commission File Number 0-26542
CRAFT BREW ALLIANCE, INC.
(Exact name of registrant as specified in its charter) 
Washington
 
91-1141254
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
929 North Russell Street
 
 
Portland, Oregon
 
97227-1733
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  (503) 331-7270
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐ 
Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒
Securities Registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.005 par value
BREW
The NASDAQ Stock Market LLC

The number of shares of the registrant’s common stock outstanding as of May 2, 2019 was 19,414,950.
 



CRAFT BREW ALLIANCE, INC.
INDEX TO FORM 10-Q
 
PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II ‑ OTHER INFORMATION
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
Item 6.
 
 
 

1


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
 
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except par value)
 
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash, cash equivalents and restricted cash
$
1,670

 
$
1,200

Accounts receivable, net
27,831

 
29,998

Inventory, net
19,748

 
17,216

Other current assets
5,310

 
3,121

Total current assets
54,559

 
51,535

Property, equipment and leasehold improvements, net
111,602

 
113,189

Operating lease right-of-use assets
19,390

 

Goodwill
21,935

 
21,986

Trademarks
44,245

 
44,289

Intangible and other assets, net
5,999

 
5,048

Total assets
$
257,730

 
$
236,047

Liabilities and Shareholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
23,408

 
$
17,552

Accrued salaries, wages and payroll taxes
6,379

 
5,635

Refundable deposits
4,093

 
4,123

Deferred revenue
5,176

 
6,015

Other accrued expenses
8,534

 
3,618

Current portion of long-term debt and finance lease obligations
829

 
919

Total current liabilities
48,419

 
37,862

Long-term debt and finance lease obligations, net of current portion
48,996

 
46,573

Fair value of derivative financial instruments
178

 
116

Deferred income tax liability, net
10,025

 
12,381

Long-term operating lease liabilities
19,607

 

Other liabilities
1,220

 
2,680

Total liabilities
128,445

 
99,612

Commitments and contingencies (Note 15)


 


Common shareholders' equity:
 

 
 

Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 19,411,870 and 19,382,641
97

 
97

Additional paid-in capital
144,274

 
144,013

Accumulated other comprehensive loss
(133
)
 
(86
)
Accumulated deficit
(14,953
)
 
(7,589
)
Total common shareholders' equity
129,285

 
136,435

Total liabilities and common shareholders' equity
$
257,730

 
$
236,047

 The accompanying notes are an integral part of these financial statements.

2


CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

 
Three Months Ended
March 31,
 
2019
 
2018
Sales
$
49,768

 
$
50,085

Less excise taxes
2,776

 
2,598

Net sales
46,992

 
47,487

Cost of sales
30,809

 
32,416

Gross profit
16,183

 
15,071

Selling, general and administrative expenses
25,565

 
14,748

Operating income (loss)
(9,382
)
 
323

Interest expense
(308
)
 
(134
)
Other income, net

 
34

Income (loss) before income taxes
(9,690
)
 
223

Income tax provision (benefit)
(2,326
)
 
62

Net income (loss)
$
(7,364
)
 
$
161

Basic and diluted net income (loss) per share
$
(0.38
)
 
$
0.01

Shares used in basic per share calculations
19,412

 
19,310

Shares used in diluted per share calculations
19,412

 
19,488

 
The accompanying notes are an integral part of these financial statements.


3


CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
Net income (loss)
$
(7,364
)
 
$
161

Unrealized gain (loss) on derivative hedge transactions, net of tax
(47
)
 
83

Comprehensive income (loss)
$
(7,411
)
 
$
244

 
The accompanying notes are an integral part of these financial statements.


4


CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
 
 
Total
Common Shareholders' Equity
 
 
Shares
 
Par Value
 
 
 
Accumulated Deficit
 
Balance at December 31, 2017
 
19,310

 
$
96

 
$
142,196

 
$
(164
)
 
$
(11,337
)
 
$
130,791

Adoption of accounting standard ASC 606
 

 

 

 

 
(394
)
 
(394
)
Stock-based compensation
 

 

 
485

 

 

 
485

Unrealized gain on derivative financial instruments, net of tax of $29
 

 

 

 
83

 

 
83

Net income
 

 

 

 

 
161

 
161

Balance at March 31, 2018
 
19,310

 
$
96

 
$
142,681

 
$
(81
)
 
$
(11,570
)
 
$
131,126


 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
 
 
Total
Common Shareholders' Equity
 
 
Shares
 
Par Value
 
 
 
Accumulated Deficit
 
Balance at December 31, 2018
 
19,383

 
$
97

 
$
144,013

 
$
(86
)
 
$
(7,589
)
 
$
136,435

Stock-based compensation, net of shares withheld for tax payments
 
29

 

 
418

 

 

 
418

Unrealized loss on derivative financial instruments, net of tax of $16
 

 

 

 
(47
)
 

 
(47
)
Tax payments related to stock-based awards
 

 

 
(157
)
 

 

 
(157
)
Net income
 

 

 

 

 
(7,364
)
 
(7,364
)
Balance at March 31, 2019
 
19,412

 
$
97

 
$
144,274

 
$
(133
)
 
$
(14,953
)
 
$
129,285



The accompanying notes are an integral part of these financial statements.


5


CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(7,364
)
 
$
161

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
2,726

 
2,736

(Gain) loss on sale or disposal of Property, equipment and leasehold improvements
8

 
(516
)
Deferred income taxes
(2,341
)
 
(605
)
Stock-based compensation
418

 
485

Lease expense
54

 

Other
66

 
73

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
2,466

 
(285
)
Inventories
(2,531
)
 
(1,791
)
Other current assets
(2,406
)
 
1,128

Accounts payable, deferred revenue and other accrued expenses
11,681

 
3,015

Accrued salaries, wages and payroll taxes
745

 
(1,185
)
Refundable deposits
(70
)
 
(475
)
Net cash provided by operating activities
3,452

 
2,741

 
 
 
 
Cash flows from investing activities:
 

 
 

Expenditures for Property, equipment and leasehold improvements
(5,173
)
 
(1,104
)
Proceeds from sale of Property, equipment and leasehold improvements
16

 
22,456

Restricted cash from sale of Property, equipment and leasehold improvements

 
515

Net cash provided by (used in) investing activities
(5,157
)
 
21,867

 
 
 
 
Cash flows from financing activities:
 

 
 

Principal payments on debt and finance lease obligations
(277
)
 
(174
)
Net borrowings (repayments) under revolving line of credit
2,609

 
(22,199
)
Tax payments related to stock-based awards
(157
)
 

Net cash provided by (used in) financing activities
2,175

 
(22,373
)
Increase in Cash, cash equivalents and restricted cash
470

 
2,235

 
 
 
 
Cash, cash equivalents and restricted cash:
 

 
 

Beginning of period
1,200

 
579

End of period
$
1,670

 
$
2,814

Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
335

 
$
178

Cash paid for income taxes, net

 
1

Supplemental disclosure of non-cash information:
 

 
 

Right-of-use assets obtained in exchange for operating lease obligations
$
19,726

 
$

Right-of-use assets obtained in exchange for finance lease obligations
$
2,538

 
$

Purchases of Property, equipment and leasehold improvements included in Accounts payable at end of period
1,384

 
203

The accompanying notes are an integral part of these financial statements.

6


CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report”). These consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements are unaudited but, in the opinion of management, reflect all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. All such adjustments were of a normal, recurring nature. The results of operations for such interim periods are not necessarily indicative of the results of operations for the full year.

Reclassifications
Certain reclassifications have been made to the prior year's data to conform to the current year's presentation. None of the changes affect our previously reported consolidated Net sales, Gross profit, Operating income (loss), Net income (loss) or Basic and diluted net income (loss) per share.

Note 2. Recent Accounting Pronouncements

ASU 2018-15
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 2017-12
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, on a prospective basis. We did not adopt ASU 2017-12 as it was not applicable to our financial position, results of operations or cash flows.

ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.


7


ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." ASU 2016-13 addresses accounting for credit losses for assets that are not measured at fair value through net income on a recurring basis. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted for fiscal years beginning after December 15, 2018. We do not expect the adoption of ASU 2016-13 to have a material effect on our financial position, results of operations or cash flows.

ASU 2016-02, 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:

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.
determined the land easement practical expedient was not applicable.
as applicable, used hindsight for specified determinations and assessments in applying the new leases guidance.
did not separate lease and associated non-lease components for transitioned leases, but instead are accounting for them together as a single lease component.
elected to utilize the recognition exemption for short-term leases of one year or less at inception

Our adoption did not change the classification of lease-related expenses in the Consolidated Statements of Operations, and we do not expect significant changes to our pattern of expense recognition. As a result, we expect our adoption will not materially affect our cash flows.



8


The adjustments to our Consolidated Balance Sheets upon adoption of ASC 842, effective January 1, 2019 were as follows (in thousands):
 
 
Balance at
December 31, 2018
 
Adjustments due to
ASC 842
 
Balance at
January 1, 2019
Assets
 
 
 
 
 
 
Accounts receivable
 
$
29,998

 
$
300

 
$
30,298

Other current assets
 
3,121

 
(216
)
 
2,905

Property, equipment and leasehold improvements, net
 
113,189

 
(2,538
)
 
110,651

Operating lease right-of-use assets
 

 
19,726

 
19,726

Intangible and other assets, net
 
5,048

 
1,140

 
6,188

 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
Other accrued expenses
 
3,618

 
269

 
3,887

Long-term lease liabilities
 

 
18,143

 
18,143


Note 3. 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 March 31, 2019 and December 31, 2018, we did not have any cash equivalents.

As part of our cash management system, we use a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances for accounting purposes. As of March 31, 2019, there were no bank overdrafts. As of December 31, 2018, there were $0.6 million of bank overdrafts. Changes in bank overdrafts from period to period are reported in the Consolidated Statements of Cash Flows as a component of operating activities within Accounts payable and Other accrued expenses.

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. Restricted cash of $0.5 million at March 31, 2019 and December 31, 2018 represents funds held in an escrow account from the sale of our Woodinville brewery related to a lien; we expect that the lien will be resolved in our favor and the restriction will be removed.

Note 4. Inventories

Inventories are stated at the lower of standard cost or net realizable value.

We regularly review our inventories for the presence of obsolete product attributed to age, seasonality and quality. If our review indicates a reduction in utility below the product’s carrying value, we reduce the product to a new cost basis. We record the cost of inventory for which we estimate we have more than a twelve-month supply as a component of Intangible and other assets, net on our Consolidated Balance Sheets.

Inventories consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Raw materials
$
7,137

 
$
7,146

Work in process
3,483

 
3,219

Finished goods
6,676

 
4,319

Packaging materials
1,186

 
891

Promotional merchandise
760

 
1,139

Brewpub food, beverages and supplies
506

 
502

 
$
19,748

 
$
17,216


Work in process is beer held in fermentation tanks prior to the filtration and packaging process.

9


Note 5. Leases

We lease office space, restaurant and production facilities, warehouse and storage space, land and equipment under operating leases that expire at various dates through the year ending December 31, 2064. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices or scheduled adjustments. We exercise judgment in determining the reasonably certain lease term based on the provisions of the underlying agreement, the economic value of leasehold improvements and other relevant factors. Certain leases require us to pay for insurance, taxes and maintenance applicable to the leased property. Under the terms of the land lease for our New Hampshire Brewery, we hold a first right of refusal to purchase the property should the lessor decide to sell the property.

We lease equipment under finance leases that expire at various dates through the year ending December 31, 2024. Ownership of the leased equipment transfers to us at the end of each lease term.

Leases with an initial term of 12 months or less are not recorded on the 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 in 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 2, 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):

March 31,
2019
 
December 31,
2018
Operating lease liabilities:
 
 
 
Current lease liabilities included in Other accrued expenses
$
933

 
$

Long-term lease liabilities
19,607

 

Total operating lease liabilities
20,540

 

Financing lease liabilities:
 
 
 
Current portion included in Current portion of long-term debt and finance lease obligations
385

 
477

Long-term portion of lease liabilities in Long-term debt and finance lease obligations, net of current portion
1,028

 
1,101

Total financing lease liabilities
1,413

 
1,578

Total lease liabilities
$
21,953

 
$
1,578

Weighted-average remaining lease term:
 
 
 
Operating leases
27 years

 

Finance leases
5 years

 

Weighted-average discount rate:

 

Operating leases
4.91
%
 

Finance leases
3.55
%
 



10


As of March 31, 2019, the maturities of our operating lease liabilities were as follows (in thousands):
 
Operating Leases
2019
$
1,490

2020
1,689

2021
1,713

2022
1,705

2023
1,496

Thereafter
29,181

Total minimum lease payments
37,274

Less: present value adjustment
(16,734
)
Operating lease liabilities
$
20,540


As of March 31, 2019, the maturities of our finance lease liabilities were as follows (in thousands):
 
Finance Leases
2019
$
348

2020
333

2021
266

2022
199

2023
199

Thereafter
199

Total minimum lease payments
1,544

Less: present value adjustment
(131
)
Finance lease liabilities
$
1,413


We have additional operating lease liabilities of $3.8 million for lease contracts which have not yet commenced as of March 31, 2019, and, as such, have not been recognized on our Consolidated Balance Sheets. This lease is expected to commence during the third quarter of 2019 for a term of 3 years with an extension at our option for two 5-year periods.

Components of lease cost were as follows (in thousands):


Three Months Ended
March 31, 2019
Operating lease cost(1)
$
874

Finance lease cost
 
Amortization of right-of-use asset
42

Interest on lease liabilities
13

Total lease cost
$
929


(1) Includes short-term, month-to-month lease and variable lease costs, which were immaterial.


11


Total future minimum lease payments as of December 31, 2018 consisted of (in thousands):
 
Operating Lease Obligations
 
Capital Lease Obligations
2019
$
11,208

 
$
529

2020
1,937

 
333

2021
1,863

 
266

2022
1,793

 
199

2023
1,465

 
199

Thereafter
25,446

 
199

 
$
43,712

 
1,725

Amount representing interest
 
 
(148
)
 
 
 
$
1,577


Note 6. Acquisitions

On October 10, 2018, we purchased the intellectual property assets of Cisco and we increased our ownership interest in Wynwood from 24.5% to 100%. The purchase transaction of Cisco was accounted for as an asset acquisition. The increase in our ownership interest in Wynwood 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.

On November 29, 2018, we acquired substantially all the assets of Appalachian Mountain Brewery ("AMB"). The acquisition of AMB 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.

Given the close proximity of the closing dates of the acquisitions to the end of our fiscal year and the potential for working capital adjustments that may impact recognized amounts, the allocation of the purchase price to the underlying net assets was preliminary as of December 31, 2018. During the first quarter of 2019, we recorded immaterial adjustments to the allocation of the purchase price for the Cisco asset purchase and the Wynwood acquisition.

The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values recorded as of December 31, 2018. We expect to finalize these amounts no later than December 31, 2019.


12


Note 7. Related Party Transactions

As of March 31, 2019 and December 31, 2018, Anheuser-Busch, LLC ("A-B") owned approximately 31.3% of our outstanding common stock.

Transactions with A-B, Ambev and Anheuser-Busch Worldwide Investments, LLC (“ABWI”)
In December 2015, we partnered with Ambev, the Brazilian subsidiary of Anheuser-Busch InBev SA, to distribute Kona beers into Brazil. In August 2016, we also entered into an International Distribution Agreement with ABWI, an affiliate of A-B, pursuant to which ABWI distributes our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our prior agreement with our other international distributor, CraftCan Travel LLC, and certain other limitations.

Contract Brewing Arrangement with Anheuser-Busch Companies, LLC ("ABC")
On January 30, 2018, we entered into a Contract Brewing Agreement (the “Brewing Agreement”) with ABC, an affiliate of A-B, pursuant to which we brew, package, and palletize certain malt beverage products of A-B's craft breweries at our Portland, Oregon, and Portsmouth, New Hampshire, breweries as selected by ABC. Under the terms of the Brewing Agreement, ABC pays us a per barrel fee that varies based on the annual volume of the specified product brewed by us, plus (a) our actual incremental costs of brewing the product and (b) certain capital costs and costs of graphics and labeling that we incur in connection with the brewed products.

The Brewing Agreement, as extended, will expire on December 31, 2019, unless the arrangement is extended at the mutual agreement of the parties. The Brewing Agreement contains specified termination rights, including, among other things, the right of either party to terminate the Brewing Agreement if (i) the other party fails to perform any material obligation under the Brewing Agreement or any other agreement between the parties, subject to certain cure rights, or (ii) the Master Distributor Agreement is terminated.

Transactions with A-B, Ambev, ABWI and ABC consisted of the following (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Gross sales to A-B and Ambev
$
39,609

 
$
37,568

International distribution fee earned from ABWI
812

 
850

International distribution fee from ABWI, recorded in Deferred revenue

 
650

Contract brewing fee earned from ABC
538

 
463

Margin fee paid to A-B, classified as a reduction of Sales
541

 
518

Inventory management and other fees paid to A-B, classified in Cost of sales
90

 
90


Amounts due to or from A-B and ABWI were as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
$
22,275

 
$
17,946

Amounts due from ABWI and A-B related to international distribution fee and media reimbursement

 
6,000

Refundable deposits due to A-B
(3,335
)
 
(2,840
)
Amounts due to A-B for services rendered
(7,702
)
 
(5,140
)
Net amount due from A-B and ABWI
$
11,238

 
$
15,966



13


Transactions with Wynwood Brewing Co. ("Wynwood")
As of March 31, 2019 and December 31, 2018, Wynwood was a wholly owned subsidiary. During the three month period ended March 31, 2018, we owned a 24.5% interest in Wynwood. The carrying value of our investment was $2.0 million as of March 31, 2018.

Transactions with Wynwood prior to its becoming a wholly owned subsidiary consisted of the following (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Master distributor fee earned
$

 
$
7

Share of loss, classified as a component of Other income (expense), net

 
23

Refund of investment, classified as a reduction in the carrying value of the equity method investment

 
23


Related Party Operating Leases
We lease our headquarters office space, restaurant and storage facilities located in Portland, land and certain equipment from two limited liability companies, both of whose members include our former Board Chair, who is also a significant shareholder, and his brother, who continues to be employed by us. This lease is included in the ROU asset and lease liabilities recorded on our Consolidated Balance Sheets. Lease payments to these lessors were as follows (in thousands):
Three Months Ended
March 31,
2019
 
2018
$
41

 
$
41


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 five-year periods. This lease is included in the ROU asset and lease liabilities recorded on our Consolidated Balance Sheets. Lease payments to these lessors were as follows (in thousands):
Three Months Ended
March 31,
2019
 
2018
$
168

 
$
143



14


Note 8. Debt

Long-term debt consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Term loan, due September 30, 2023
$
8,711

 
$
8,823

Line of credit, due September 30, 2023
39,701

 
37,092

 
48,412

 
45,915

Less current portion, term loan
(444
)
 
(442
)
 
$
47,968

 
$
45,473


Credit Agreement
On October 10, 2018, we executed a First Amendment (the " First Amendment") to our Amended and Restated Credit Agreement with Bank of America, N.A. ("BofA") dated November 30, 2015 (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 a $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 Amendment also increased the limit on the total amount of investments that we may make in other craft brewers, other than the acquisition of all or substantially all of the assets or controlling ownership interests, from $5.0 million to $10.0 million. We may draw upon the Line of Credit for working capital and general corporate purposes.

As of March 31, 2019, we had $5.3 million in funds available to be drawn upon from our Line of Credit and $39.7 million borrowings outstanding. At March 31, 2019, $8.7 million was outstanding under the Term Loan.

Under the Credit Agreement as in effect at March 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 March 31, 2019, our marginal rate was 1.75%, resulting in an annual interest rate of 3.24%.

Accrued interest for the Term Loan is due and payable monthly. Principal payments on the Term Loan are due monthly in accordance with an agreed-upon schedule set forth in the Credit Agreement, with any unpaid principal balance and unpaid accrued interest due and payable on September 30, 2023.

The Credit Agreement authorizes acquisitions within the same line of business as long as we remain in compliance with the financial covenants of the Credit Agreement and there is at least $5.0 million of availability remaining on the Line of Credit following the acquisition.

The Credit Agreement as in effect at March 31, 2019 required us to satisfy the following financial covenants: (i) a Consolidated Leverage Ratio of up to 3.50 to 1.00 and (ii) a Fixed Charge Coverage Ratio of at least 1.20 to 1.00. Failure to maintain compliance with these covenants is an event of default and would give BofA the right to declare the entire outstanding loan balance immediately due and payable.

At March 31, 2019, we were not in compliance with the Consolidated Leverage Ratio (the "Leverage Ratio") covenant for the Credit Agreement, as we did not to meet the required Consolidated Funded Indebtedness to Consolidated EBITDA ("EBITDA") ratio for the trailing twelve months ended March 31, 2019. We executed a Second Amendment to the Credit Agreement with BofA effective May 7, 2019 ( the “Second Amendment”) that increased the permitted Leverage Ratio to a maximum of 5.50 to 1.00 for the period from January 1, 2019 through June 30, 2019. Beginning July 1, 2019, and in each fiscal quarter thereafter, the maximum Leverage Ratio will be 3.50 to 1.00 as long as A-B has not made a Qualifying Offer as defined in the International Distributor Agreement with an affiliate of A-B. If A-B makes a Qualifying Offer on or before August 23, 2019, beginning July 1, 2019 through March 31, 2020, the maximum Leverage Ratio will be 4.75 to 1.00; and beginning April 1, 2020, and in each fiscal quarter thereafter, the maximum Leverage Ratio will be 3.50 to 1.00. EBITDA as defined in the Second Amendment is similar to Consolidated EBITDA but includes certain adjustments specified in the Second Amendment.

15


Note 9. 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 ("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 $6.5 million as of March 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 2.49% at March 31, 2019.

Since the interest rate swap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge accounting treatment.

As of March 31, 2019, unrealized net loss of $0.2 million were recorded in Accumulated other comprehensive income (loss) as a result of these hedges. The effective portion of the gain or loss on the derivatives is reclassified into Interest expense in the same period during which we record Interest expense associated with the related debt. There was no hedge ineffectiveness during the first three months of 2019 or 2018.

The fair value of our derivative instruments recorded as a component of Other liabilities on our Consolidated Balance Sheets was as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Fair value of interest rate swaps - asset (liability)
$
(178
)
 
$
(116
)
 
The effect of our interest rate swap contracts that were accounted for as a derivative instrument on our Consolidated Statements of Operations was as follows (in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss)
Recognized in Accumulated OCI (Effective Portion)
 
Location of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
 
Amount of Loss Reclassified from Accumulated OCI into
Income (Effective Portion)
Three Months Ended
March 31,
 
 
 
 
 
 
2019
 
$
(62
)
 
Interest expense
 
$
6

2018
 
$
112

 
Interest expense
 
$
22

See also Note 10.

Note 10. 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.


16


The following table summarizes liabilities measured at fair value on a recurring basis (in thousands):
Fair Value at March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap
 
$

 
$
(178
)
 
$

 
$
(178
)
 
 
 
 
 
 
 
 
 
Fair Value at December 31, 2018
 
 

 
 

 
 

 
 

Interest rate swaps
 
$

 
$
(116
)
 
$

 
$
(116
)

We did not have any assets measured at fair value on a recurring basis at March 31, 2019 or December 31, 2018.

The fair value of our interest rate swaps was based on quarterly statements from the issuing bank. There were no changes to our valuation techniques during the three months ended March 31, 2019.

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):
 
March 31,
2019
 
December 31,
2018
Fixed-rate debt on Consolidated Balance Sheets
$
1,413

 
$
1,577

Estimated fair value of fixed-rate debt
1,421

 
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.


17


Note 11. Revenue Recognition

The following table disaggregates our Sales by major source (in thousands):
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
 
Beer Related1
 
Brewpubs
 
Total
 
Beer Related1
 
Brewpubs
 
Total
Product sold through distributor agreements2
 
$
41,128

 
$

 
$
41,128

 
$
39,667

 
$

 
$
39,667

Alternating proprietorship and contract brewing fees3
 
847

 

 
847

 
2,710

 

 
2,710

International distribution fees
 
812

 

 
812

 
850

 

 
850

Brewpubs4
 

 
6,203

 
6,203

 

 
6,011

 
6,011

Other5
 
778

 

 
778

 
847

 

 
847

 
 
$
43,565

 
$
6,203

 
$
49,768

 
$
44,074

 
$
6,011

 
$
50,085


(1)
Beer Related sales include sales to A-B subsidiaries including Ambev, ABWI and ABC. Sales to wholesalers through the A-B distributor agreement in the three-month periods ended March 31, 2019 and 2018 represented 81.2% and 76.6% 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, spent grain and an export manager fee.
 
Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally this occurs when the product arrives at distribution centers or when the wholesaler takes possession. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. We consider customer purchase orders, which in some cases are governed by a master agreement, to be the contracts with a customer. For each contract related to the production of beer, we consider the promise to transfer products, each of which is distinct, to be the identified performance obligation. The transaction price for each performance obligation is specifically identified within the contract with our customer and represents the fair standalone selling price. 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 March 31, 2019, we had receivables related to contracts with customers of $27.8 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 March 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, 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 a 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 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. We have evaluated, on a quarterly basis, the qualitative factors, including current market conditions and our relationship with A-B, and we consider receiving $34.0 million over the 10-year term of the IDA the most likely outcome under the IDA. 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

18


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. For the three months ending March 31, 2019, we have recognized $0.8 million as Sales, resulting in Deferred revenue of $5.2 million at March 31, 2019. In the absence of receiving a qualified offer, we expect to earn the right to receive an additional $20.0 million in the remainder of 2019. We expect to recognize an additional $2.4 million of Deferred revenue as Sales in the remainder of 2019, $3.2 million in 2020, and $19.5 million thereafter.

Note 12. Segment Results and Concentrations

Our chief operating decision maker monitors Net sales and gross margins of our Beer Related operations and our Brewpubs operations. Beer Related operations include the brewing operations and related domestic and international beer and cider sales of our Kona, Widmer Brothers, Redhook and Omission beer brands and Square Mile cider brand. Brewpubs operations primarily include our brewpubs, some of which are located adjacent to our Beer Related operations. We do not track operating results beyond the gross margin level or our assets on a segment level.

Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
 
 
Three Months Ended March 31,
2019
 
Beer
Related
 
Brewpubs
 
Total
Net sales
 
$
40,789

 
$
6,203

 
$
46,992

Gross profit
 
$
15,508

 
$
675

 
$
16,183

Gross margin
 
38.0
%
 
10.9
%
 
34.4
%
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

Net sales
 
$
41,476

 
$
6,011

 
$
47,487

Gross profit
 
$
14,710

 
$
361

 
$
15,071

Gross margin
 
35.5
%
 
6.0
%
 
31.7
%
 
The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and, therefore, no asset by segment information is provided to our chief operating decision maker.

In preparing this financial information, certain expenses were allocated between the segments based on management estimates, while others were based on specific factors such as headcount. These factors can have a significant impact on the amount of Gross profit for each segment. While we believe we have applied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment Gross profit.

Sales to wholesalers through the A-B distributor agreement represented the following percentage of our Sales:
 
Three Months Ended March 31,
2019
 
2018
81.2
%
 
76.6
%
 
Receivables from A-B and ABWI represented the following percentage of our Accounts receivable balance:
 
March 31,
2019
 
December 31,
2018
80.0
%
 
79.8
%


19


Note 13. Significant Stock-Based Plan Activity and Stock-Based Compensation

Stock-Based Compensation
Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Cost of sales
$
48

 
$
52

Selling, general and administrative expense
370

 
433

Total stock-based compensation expense
$
418

 
$
485


At March 31, 2019, we had total unrecognized stock-based compensation expense of $2.6 million, which will be recognized over the weighted average remaining vesting period of 2.4 years.
 
Note 14. Earnings Per Share

The reconciliation between the number of shares used for the basic and diluted per share calculations, as well as other related information, is as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Weighted average common shares used for basic EPS
19,412

 
19,310

Dilutive effect of stock-based awards

 
178

Shares used for diluted EPS
19,412

 
19,488

 


 


Stock-based awards not included in diluted per share calculations as they would be antidilutive
42

 


Note 15. Commitments and Contingencies

General
We are subject to various claims and pending or threatened lawsuits in the normal course of business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceeding described below will have a material adverse effect on our financial position, results of operations or cash flows, we cannot predict this with certainty.

Legal
On February 28, 2017 and March 6, 2017, respectively, two lawsuits, Sara Cilloni and Simone Zimmer v. Craft Brew Alliance, Inc., and Theodore Broomfield v. Kona Brewing Co. LLC, Kona Brew Enterprises, LLP, Kona Brewery LLC, and Craft Brew Alliance, Inc., were filed in the United States District Court for the Northern Division of California. On April 7, 2017, the two lawsuits were consolidated into a single complaint under the Broomfield case. The lawsuit alleges that the defendants misled customers regarding the state in which Kona Brewing Company beers are manufactured. On April 28, 2017, we filed a motion to dismiss the complaint, which was granted in part and denied in part on September 1, 2017. On September 26, 2018, the court granted Plaintiffs’ motion for class certification, forming a class of persons within the state of California who purchased certain Kona Brewing Company products within the relevant statute of limitations period. Our motion for reconsideration was denied on October 16, 2018. On April 25, 2019, we announced an agreement in principle to settle the litigation. The parties will file a Motion for Preliminary Approval by May 23, 2019, with a hearing on the Motion set for June 13, 2019. We recorded charge of $4.7 million on a pre-tax basis for the quarter ended March 31, 2019, based on our current estimate of the probable costs of settling the litigation. It is reasonably possible that the total cost of settling the litigation will exceed current estimates, especially if the number of class members who submit claims materially exceeds expectations.


20


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q includes forward-looking statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may,” “plan” and similar expressions or their negatives identify forward-looking statements, which generally are not historical in nature. These statements are based upon assumptions and projections that we believe are reasonable, but are by their nature inherently uncertain. Many possible events or factors could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed, including those risks and uncertainties described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report”), and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”). Caution should be taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein, as well as the audited Consolidated Financial Statements and Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2018 Annual Report. The discussion and analysis includes period-to-period comparisons of our financial results. Although period-to-period comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.

21


Overview

Craft Brew Alliance, Inc. ("CBA") is the eighth largest craft brewing company in the U.S. and a leader in brewing, branding, and bringing to market world-class American craft beers.

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, including Appalachian Mountain Brewery, Cisco Brewers, Omission Brewing Co., Redhook Brewery, Square Mile Cider Co., Widmer Brothers Brewing, and Wynwood Brewing Co. We nurture the growth and development of our brands in today’s increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on innovation, local community and sustainability.

CBA was formed in 2008 through the merger of Redhook Brewery and Widmer Brothers Brewing, the two largest craft brewing pioneers in the Northwest at the time. Following a successful strategic brewing and distribution partnership, Kona Brewing Co. joined CBA in 2010. As part of CBA, Kona has expanded its reach across all 50 U.S. states and approximately 30 countries, while remaining deeply rooted in its home of Hawaii.

As consumers increasingly seek more variety and more local offerings, Craft Brew Alliance has expanded its portfolio and home markets with strong regional craft beer brands in targeted markets. In 2015 and 2016, we formed strategic partnerships with Appalachian Mountain Brewery, based in Boone, North Carolina; Cisco Brewers, based in Nantucket, Massachusetts; and Wynwood Brewing Co., based in the heart of Miami’s vibrant multicultural arts district. Building on the success of these partnerships, we acquired all three brands in the fourth quarter of 2018, fundamentally transforming our footprint and paving the way to increase our investments in their growth and drive shareholder value. In 2019, CBA launched The pH Experiment as a separate business unit focused on anticipating drinkers’ needs and quickly rolling out new offerings to quench their thirst.

Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S.

We proudly brew and package our craft beers in three company-owned production breweries located in Portland, Oregon; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. In 2018, 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 are continuing our efforts to stabilize and strengthen Widmer Brothers and Redhook in the Pacific Northwest, while expanding distribution of Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. across their respective home markets of North Carolina, New England, and South Miami.

Separate from our A-B wholesalers, we maintain an internal independent sales and marketing organization with resources across the key functions of brand management, field marketing, field sales, and national retail sales.

We operate in two segments: Beer Related operations and Brewpubs operations. Beer Related operations include the brewing, and domestic and international sales, of craft beers and ciders from our breweries. Brewpubs operations primarily include our seven brewpubs, six of which are located adjacent to our Beer Related operations, as well as other merchandise sales, and sales of our beers directly to customers.




22


Following is a summary of our financial results:
Three Months Ended March 31,
 
Net sales
 
Net income (loss)
 
Number of
barrels sold
2019
 
$47.0 million
 
$(7.4) million
 
169,500
2018
 
$47.5 million
 
$0.2 million
 
167,000

Results of Operations

The following table sets forth, for the periods indicated, certain information from our Consolidated Statements of Operations expressed as a percentage of Net sales(1):
 
Three Months Ended
March 31,
 
2019
 
2018
Sales
105.9
 %
 
105.5
 %
Less excise taxes
(5.9
)
 
(5.5
)
Net sales
100.0

 
100.0

Cost of sales
65.6

 
68.3

Gross profit
34.4

 
31.7

Selling, general and administrative expenses
54.4

 
31.1

Operating income (loss)
(20.0
)
 
0.7

Interest expense
(0.7
)
 
(0.3
)
Other income, net

 
0.1

Income (loss) before income taxes
(20.6
)
 
0.5

Income tax provision (benefit)
(4.9
)
 
0.1

Net income (loss)
(15.7
)%
 
0.3
 %

(1)
Percentages may not add due to rounding.

Segment Information
Net sales, Gross profit and Gross margin information by segment was as follows (dollars in thousands):
 
 
Three Months Ended March 31,
2019
 
Beer
Related
 
Brewpubs
 
Total
Net sales
 
$
40,789

 
$
6,203

 
$
46,992

Gross profit
 
$
15,508

 
$
675

 
$
16,183

Gross margin
 
38.0
%
 
10.9
%
 
34.4
%
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

Net sales
 
$
41,476

 
$
6,011

 
$
47,487

Gross profit
 
$
14,710

 
$
361

 
$
15,071

Gross margin
 
35.5
%
 
6.0
%
 
31.7
%
 

23


Sales by Category
Sales by category were as follows (dollars in thousands):
 
 
Three Months Ended March 31,
 
Dollar
 
 
Sales by Category
 
2019
 
2018
 
Change
 
% Change
A-B and A-B related(1)
 
$
40,418

 
$
38,363

 
$
2,055

 
5.4
 %
Contract brewing and beer related(2)
 
3,147

 
5,711

 
(2,564
)
 
(44.9
)%
Excise taxes
 
(2,776
)
 
(2,598
)
 
(178
)
 
6.9
 %
Net beer related sales
 
40,789

 
41,476

 
(687
)
 
(1.7
)%
Brewpubs(3)
 
6,203

 
6,011

 
192

 
3.2
 %
Net sales
 
$
46,992

 
$
47,487

 
$
(495
)
 
(1.0
)%

(1)
A-B and A-B related includes domestic and international sales of our owned brands sold through A-B and Ambev, as well as non-owned brands sold pursuant to master distribution agreements, fees earned pursuant to the Brewing Agreement with ABC and the international distribution fees earned from ABWI.
(2)
Beer related includes international sales of our beers, and brands, not sold through A-B or Ambev, as well as fees earned through alternating proprietorship agreements.
(3)
Brewpubs sales include sales of promotional merchandise and sales of beer directly to customers.

Shipments by Category
Shipments by category were as follows (in barrels):
Three Months Ended March 31,
 
2019 Shipments
 
2018 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions
(1)
A-B and A-B related(2)
 
154,600

 
146,500

 
8,100

 
5.5
 %
 
(5
)%
Contract brewing and beer related(3)
 
13,100

 
18,700

 
(5,600
)
 
(29.9
)%
 
 

Brewpubs
 
1,800

 
1,800

 

 
 %
 
 

Total
 
169,500

 
167,000

 
2,500

 
1.5
 %
 
 


(1)
Change in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers.
(2)
A-B and A-B related includes domestic and international shipments of our owned brands distributed through A-B and Ambev, as well as non-owned brands distributed pursuant to master distribution agreements and shipments pursuant to the Brewing Agreement with ABC.
(3)
Beer related includes international shipments of our beers, and brands, not distributed through A-B or Ambev.

The increase in sales to A-B and A-B related in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to increases in average unit pricing and shipment volume and favorable shifts in package type and geographic mix, partially offset by promotional programming. International distribution fees earned were $0.8 million in the three-month period ended March 31, 2019 and $0.9 million in the same period of 2018.

The decrease in Contract brewing and beer related sales in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to no longer receiving alternating proprietorship fees as a result of the acquisitions of Appalachian Mountain Brewing, Cisco Brewers and Wynwood Brewing, as well as decreases in contract brewing and international shipment volumes, partially offset by the sales of our newly acquired brands not distributed through the A-B distribution network.

Brewpubs sales increased in the three-month period ended March 31, 2019 compared to the same period of 2018, primarily as a result of our newly acquired AMB and Wynwood brewpub operations, partially offset by decreased sales at our Portsmouth brewpub and the closure of the Portland taproom, which occurred at the end of January 2019.


24


Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):
Three Months Ended March 31,
 
2019 Shipments
 
2018 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions
Kona
 
108,800

 
99,000

 
9,800

 
9.9
 %
 
1
 %
Widmer Brothers
 
21,600

 
23,300

 
(1,700
)
 
(7.3
)%
 
(17
)%
Redhook
 
14,800

 
18,600

 
(3,800
)
 
(20.4
)%
 
(23
)%
Omission
 
9,100

 
10,300

 
(1,200
)
 
(11.7
)%
 
(10
)%
All other(1)
 
10,100

 
9,400

 
700

 
7.4
 %
 
7
 %
Total(2)
 
164,400

 
160,600

 
3,800

 
2.4
 %
 
(5
)%

(1)
All other includes the shipments and depletions from our Square Mile brand family, as well as the previously non-owned AMB, Cisco Brewers, and Wynwood brand families, shipped by us pursuant to distribution agreements.
(2)
Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.

The increase in our Kona brand shipments in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily led by continued demand for Big Wave Golden Ale.

The decrease in our Widmer Brothers brand shipments in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to a decrease in Hefeweizen brand shipments.

Redhook brand shipments decreased in the three-month period ended March 31, 2019 compared to the same period of 2018, primarily due to a decrease in Longhammer IPA and ESB brand shipments.

Omission brand shipments decreased in the three-month period ended March 31, 2019 compared to the same period of 2018, primarily due to a decrease in the shipments of Pale Ale and Lager brands.

The increases in All other shipments in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to an increase in our newly acquired AMB and Wynwood brands, partially offset by a decrease in the shipments of Cisco Brewers and Square Mile brands.

Shipments by Package
The following table sets forth a comparison of our shipments by package, excluding shipments produced under our contract brewing arrangements (in barrels):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
Shipments
 
% of Total
 
Shipments
 
% of Total
Draft
 
37,500

 
22.8
%
 
39,200

 
24.4
%
Packaged
 
126,900

 
77.2
%
 
121,400

 
75.6
%
Total
 
164,400

 
100.0
%
 
160,600

 
100.0
%

The shift in package mix from draft to packaged in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to the continued competition for on-premise draft sales as well as the continued success of our Kona brand family, which is more heavily weighted to packaged sales.


25


Cost of Sales
Cost of sales includes purchased raw and component materials, direct labor, overhead and shipping costs.

Information regarding Cost of sales was as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Dollar
 
 
 
2019
 
2018
 
Change
 
% Change
Beer Related
$
25,281

 
$
26,766

 
$
(1,485
)
 
(5.5
)%
Brewpubs
5,528

 
5,650

 
(122
)
 
(2.2
)%
Total
$
30,809

 
$
32,416

 
$
(1,607
)
 
(5.0
)%

The decrease in Beer Related Cost of sales in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to a decrease in Beer Related Cost of sales on a per barrel basis. The decrease in our Beer Related Cost of sales on a per barrel basis was primarily due to cost savings related to no longer having alternating proprietorship material costs as a result of the acquisitions of the AMB, Cisco and Wynwood brands, as well as the lower cost of having a portion of our beer produced by A-B in its Fort Collins, Colorado brewery. These decreases were partially offset by increases in brewery costs due to higher fixed overhead related to our newly acquired breweries in Boone, North Carolina and Miami, Florida.
 
The decrease in Brewpubs Cost of sales in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to the closure of the Portland taproom, partially offset by costs related to our newly acquired AMB and Wynwood brewpub operations.

Capacity Utilization
Capacity utilization is calculated by dividing total shipments by approximate working capacity and was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Capacity Utilization
47
%
 
52
%

Our capacity utilization declined in the three-month period ended March 31, 2019 compared to the same period of 2018 due to a larger percentage our our beer being brewed by ABCS as part of our contract brewing relationship and evolving brewery footprint.

Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Dollar
 
 
 
2019
 
2018
 
Change
 
% Change
Beer Related
$
15,508

 
$
14,710

 
$
798

 
5.4
%
Brewpubs
675

 
361

 
314

 
87.0
%
Total
$
16,183

 
$
15,071

 
$
1,112

 
7.4
%

Gross profit as a percentage of Net sales, or gross margin, was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Beer Related
38.0
%
 
35.5
%
Brewpubs
10.9
%
 
6.0
%
Overall
34.4
%
 
31.7
%
 
The increases in Beer Related Gross profit and gross margin in the three-month period ended March 31, 2019 compared to the same period of 2018 were primarily due to increases in unit pricing and shipment volume and the lower costs related to having a portion of our beer produced by A-B in Fort Collins, as well as cost savings related to no longer having alternating proprietorship material costs, partially offset by increases in brewery costs due to higher fixed overhead related to our newly acquired breweries in Boone, North Carolina and Miami, Florida.


26


The increases in Brewpubs Gross profit and gross margin in the three-month period ended March 31, 2019 compared to the same period of 2018 were primarily due to the net results of our newly acquired AMB and Wynwood brewpub operations, partially offset by declines in our Portsmouth brewpub.

Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) include compensation and related expenses for our sales and marketing activities, management, legal and other professional and administrative support functions.

Information regarding SG&A was as follows (dollars in thousands):
 
Three Months Ended
March 31,
 
Dollar
 
 
 
2019
 
2018
 
Change
 
% Change
Selling, general and administrative expenses
$
25,565

 
$
14,748

 
$
10,817

 
73.3
%
As a % of Net sales
54.4
%
 
31.1
%
 
 
 
 

The increase in SG&A for the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to increases in creative and media spend related to our Kona marketing campaign, including our first national campaign during the NCAA's basketball tournament, March Madness, of $4.6 million, and a $4.7 million charge based on our current estimate of the probable costs of settling the litigation related to the Kona class action lawsuit. See Note 15 of Notes to Consolidated Financial Statements included in Part 1, Item 1 of this report.

Interest Expense
Information regarding Interest expense was as follows (dollars in thousands):
Three Months Ended
March 31,
 
Dollar
 
 
2019
 
2018
 
Change
 
% Change
$
308

 
$
134

 
$
174

 
129.9
%

 
Three Months Ended
March 31,
 
2019
 
2018
Average debt outstanding
$44,880
 
$16,554
Average interest rate
2.69
%
 
2.70
%

The increase in Interest expense in the three-month period ended March 31, 2019 compared to the same period of 2018 was primarily due to an increase in our average debt outstanding. The increase in our average debt outstanding was due to borrowing on our line of credit to facilitate the acquisitions that were completed in the three-month period ended December 31, 2018.

Income Tax Provision (Benefit)
Our effective income tax rate was 24.0% for the first three months of 2019 and 27.8% in the first three months of 2018. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes and tax credits.

Liquidity and Capital Resources

We have required capital primarily for the construction and development of our production breweries, to support our brewery footprint evolution, and to fund our working capital needs. Historically, we have financed our capital requirements through cash flows from operations, bank borrowings and the sale of common and preferred stock. We anticipate meeting our obligations for the twelve months beginning April 1, 2019 primarily from cash on hand, cash flows generated from operations and borrowing under our line of credit as the need arises. Capital resources available to us at March 31, 2019 included $1.2 million of Cash and cash equivalents and $5.3 million available under our revolving credit facility.

At March 31, 2019 and December 31, 2018, we had $6.1 million and $13.7 million of working capital, respectively, and our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 27.8% and 25.8%, respectively.


27


A summary of our cash flow information was as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Net cash provided by operating activities
$
3,452

 
$
2,741

Net cash provided by (used in) investing activities
(5,157
)
 
21,867

Net cash provided by (used in) financing activities
2,175

 
(22,373
)
Increase in Cash, cash equivalents and restricted cash
$
470

 
$
2,235


Cash provided by operating activities of $3.5 million in the first three months of 2019 resulted from our Net loss of $7.4 million, net non-cash expenses of $0.9 million and changes in our operating assets and liabilities as discussed in more detail below.

Accounts receivable, net, decreased $2.2 million to $27.8 million at March 31, 2019 compared to $30.0 million at December 31, 2018. This decrease was primarily due to a net decrease of $1.7 million in our receivable from A-B and ABWI, which totaled $22.3 million at March 31, 2019. Amounts due from ABWI related to the international distribution fee decreased by $6.0 million, partially offset by an increase of $4.3 million in our receivable from A-B. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $2.5 million to $19.7 million at March 31, 2019 compared to $17.2 million at December 31, 2018. The increase was primarily due to an increase in finished goods of $2.4 million as a result of the timing of shipments in the fourth quarter of 2018 and first quarter of 2019, seasonality and the forecasted demand for our beer.

Accounts payable increased $5.8 million to $23.4 million at March 31, 2019 compared to $17.6 million at December 31, 2018, primarily due to timing of payments related to our contract brewing relationship with ABCS, raw and component materials, marketing and capital expenditures.

Capital expenditures of $5.2 million in the first three months of 2019 were primarily directed to beer production capacity and efficiency improvements. As of March 31, 2019, we had an additional $1.4 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to $3.1 million at December 31, 2018. Beginning in 2015 through expected completion in 2019, we are investing approximately $20 million in a new Kona brewery. We anticipate total capital expenditures of approximately $13.0 million to $17.0 million in 2019 primarily for our new Kona brewery and the addition of a new can line in our Portland brewery to address consumer demand.

Credit Agreement
On October 10, 2018, we executed a First Amendment (the " First 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 a $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 Amendment also increased the limit on the total amount of investments that we may make in other craft brewers, other than the acquisition of all or substantially all of the assets or controlling ownership interests, from $5.0 million to $10.0 million. We may draw upon the Line of Credit for working capital and general corporate purposes.

As of March 31, 2019, we had $5.3 million in funds available to be drawn upon from our Line of Credit and $39.7 million borrowings outstanding. At March 31, 2019, $8.7 million was outstanding under the Term Loan.

Under the Credit Agreement as in effect at March 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 March 31, 2019, our marginal rate was 1.75%, resulting in an annual interest rate of 3.24%.

Accrued interest for the Term Loan is due and payable monthly. Principal payments on the Term Loan are due monthly in accordance with an agreed-upon schedule set forth in the Credit Agreement, with any unpaid principal balance and unpaid accrued interest due and payable on September 30, 2023.

28


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.

The Credit Agreement as in effect at March 31, 2019 required us to satisfy the following financial covenants: (i) a Consolidated Leverage Ratio of up to 3.50 to 1.00 and (ii) a Fixed Charge Coverage Ratio of at least 1.20 to 1.00. Failure to maintain compliance with these covenants is an event of default and would give BofA the right to declare the entire outstanding loan balance immediately due and payable.

At March 31, 2019, we were not in compliance with the Consolidated Leverage Ratio covenant for the Credit Agreement, as we did not meet the required Consolidated Funded Indebtedness to Consolidated EBITDA ratio for the trailing twelve months ended March 31, 2019. Consolidated EBITDA is defined as earnings before interest, taxes, depreciation, amortization and certain other adjustments as defined in the Credit Agreement. We executed a Second Amendment to the Credit Agreement with BofA effective May 7, 2019 (the “Second Amendment”). The Second Amendment increases the permitted Leverage Ratio to a maximum of 5.50 to 1.00 for the period from January 1, 2019 through June 30, 2019. Beginning July 1, 2019, and each fiscal quarter thereafter, the maximum Consolidated Leverage Ratio will be 3.50 to 1.00 as long as A-B has not made a Qualifying Offer as defined in the International Distribution Agreement with an affiliate of A-B. If A-B makes a Qualifying Offer on or before August 23, 2019, beginning July 1, 2019 through March 31, 2020, the maximum Consolidated Leverage Ratio will be 4.75 to 1.00; and beginning April 1, 2020, and during each fiscal quarter thereafter, the maximum Leverage Ratio will be 3.50 to 1.00.

See also Note 8 of Notes to Consolidated Financial Statements included in Part 1, Item 1 of this report.

Critical Accounting Policies and Estimates

Our financial statements are based upon the selection and application of significant accounting policies that require management to make significant estimates and assumptions. Judgments and uncertainties affecting the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. Our estimates are based upon historical experience, market trends and financial forecasts and projections, and upon various other assumptions that management believes to be reasonable under the circumstances at various points in time. Actual results may differ, potentially significantly, from these estimates.

Our critical accounting policies, as described in our 2018 Annual Report on Form 10-K, relate to goodwill, indefinite-lived intangible assets, long-lived assets, refundable deposits on kegs, revenue recognition and deferred taxes. Other than as described in Notes 2 and 5 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q regarding accounting for leases, there have been no changes to our critical accounting policies since December 31, 2018.

Seasonality

Our sales generally reflect a degree of seasonality, with the first and fourth quarters historically exhibiting low sales levels compared to the second and third quarters. Accordingly, our results for any particular quarter are not likely to be indicative of the results to be achieved for the full year.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

See Notes 2 and 5 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our 2018 Annual Report on Form 10-K, which was filed with the SEC on March 6, 2019.


29


Item 4. Controls and Procedures

Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) under the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.While reasonable assurance is a high level of assurance, it does not mean absolute assurance. Disclosure controls and internal control over financial reporting cannot prevent or detect all errors, misstatements or fraud. In addition, the design of a control system must recognize that there are resource constraints, and the benefits associated with controls must be proportionate to their costs.

30


Changes in Internal Control Over Financial Reporting
During the first quarter of 2019, there were no changes in our internal control over financial reporting identified in connection with the above evaluation required by Exchange Act Rule 13a-15 or 15d-15, except those disclosed below, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Beginning January 1, 2019, we implemented ASC 842, Leases. Although the new standard is not expected to have a material impact on our ongoing net income, we implemented changes to our processes related to accounting for leases and the control activities within them. These included reviewing contracts to determine whether they contain express or implied leases and reviewing leases periodically to determine whether reassessments have been triggered and whether lease lives remain appropriate.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 15 of Notes to Consolidated Financial Statements included in Part 1, Item 1 of this report.

Item 1A. Risk Factors

There have been no changes in our reported risk factors since the filing of our 2018 Annual Report on Form 10-K, which was filed with the SEC on March 6, 2019.

Item 5. Other Information

Effective May 7, 2019, we entered into a Second Amendment to Amended and Restated Credit Agreement (the "Second Amendment") with BofA. The Second Amendment was executed by the parties on May 7, 2019. The material changes effected by the Second Amendment are described in Note 8 of Notes to the Consolidated Financial Statements included in Part I, Item 1 of this report, which description is incorporated herein by reference. Such description is qualified in its entirety by reference to the full text of the Second Amendment, a copy of which is attached to this report as Exhibit 10.2 and incorporated herein by reference.

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
Employment Agreement between the Registrant and Christine Perich, dated March 26, 2019
Second Amendment to Amended and Restated Credit Agreement dated May 7, 2019 between Craft Brew Alliance, Inc. and Bank of America, N.A.
Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
Certification of Chief Financial Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
Press Release dated May 8, 2019
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
CRAFT BREW ALLIANCE, INC.
 
 
 
 
 
May 8, 2019
By: 
/s/ Edwin A. Smith
 
 
 
Edwin A. Smith
 
 
 
Corporate Controller and
Principal Accounting Officer
 

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