Form 10-Q CRAFT BREW ALLIANCE, For: Sep 30

November 12, 2019 4:34 PM

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 September 30, 2019



☐	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



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

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 ☒

The number of shares of the registrant’s common stock outstanding as of November 7, 2019 was 19,466,244.

CRAFT BREW ALLIANCE, INC.

INDEX TO FORM 10-Q



PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements

	Consolidated Balance Sheets (unaudited) – September 30, 2019 and December 31, 2018	2

	Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2019 and 2018	3

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three and Nine Months Ended September 30, 2019 and 2018	4

	Consolidated Statements of Shareholders' Equity (unaudited) - Three and Nine Months Ended September 30, 2019 and 2018	5

	Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2019 and 2018	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II ‑ OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 6.	Exhibits	36

Signature		37

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CRAFT BREW ALLIANCE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except par value)



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash, cash equivalents and restricted cash	$	11,782		$	1,200
Accounts receivable, net	18,357			29,998
Inventory, net	21,500			17,216
Other current assets	4,025			3,121
Total current assets	55,664			51,535
Property, equipment and leasehold improvements, net	110,924			113,189
Operating lease right-of-use assets	23,841			—
Goodwill	21,935			21,986
Trademarks	44,211			44,289
Intangible and other assets, net	5,473			5,048
Total assets	$	262,048		$	236,047
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	19,475		$	17,552
Accrued salaries, wages and payroll taxes	5,881			5,635
Refundable deposits	3,467			4,123
Deferred revenue	3,251			6,015
Other accrued expenses	8,142			3,618
Current portion of long-term debt and finance lease obligations	1,498			919
Total current liabilities	41,714			37,862
Deferred revenue, non-current	20,300			—
Long-term debt and finance lease obligations, net of current portion	33,124			46,573
Fair value of derivative financial instruments	332			116
Deferred income tax liability, net	9,562			12,381
Long-term operating lease liabilities	24,269			—
Other liabilities	1,188			2,680
Total liabilities	130,489			99,612
Commitments and contingencies (Note 15)
Common shareholders' equity:
Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 19,466,244 and 19,382,641	97			97
Additional paid-in capital	145,276			144,013
Accumulated other comprehensive loss	(247		)	(86		)
Accumulated deficit	(13,567		)	(7,589		)
Total common shareholders' equity	131,559			136,435
Total liabilities and common shareholders' equity	$	262,048		$	236,047

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

Index

CRAFT BREW ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Sales	$	50,349		$	55,639		$	163,932		$	170,977
Less excise taxes	3,188			2,750			9,220			8,778
Net sales	47,161			52,889			154,712			162,199
Cost of sales	33,857			36,190			101,938			108,302
Gross profit	13,304			16,699			52,774			53,897
Selling, general and administrative expenses	16,465			16,712			61,411			47,317
Operating income (loss)	(3,161		)	(13		)	(8,637		)	6,580
Interest expense	(616		)	(107		)	(1,428		)	(348		)
Other income (expense), net	24			(13		)	57			42
Income (loss) before income taxes	(3,753		)	(133		)	(10,008		)	6,274
Income tax provision (benefit)	(2,529		)	(194		)	(4,030		)	1,600
Net income (loss)	$	(1,224	)	$	61		$	(5,978	)	$	4,674
Basic and diluted net income (loss) per share	$	(0.06	)	$	—		$	(0.31	)	$	0.24
Shares used in basic per share calculations	19,466			19,370			19,435			19,338
Shares used in diluted per share calculations	19,466			19,545			19,435			19,525

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

Index

CRAFT BREW ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Net income (loss)	$	(1,224	)	$	61	$	(5,978	)	$	4,674
Unrealized gain (loss) on derivative hedge transactions, net of tax	(25		)	38		(161		)	167
Comprehensive income (loss)	$	(1,249	)	$	99	$	(6,139	)	$	4,841

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

Index

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		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Common Shareholders' Equity
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
Issuance of shares under stock plans, net of shares withheld for tax payments	23	—		206			—			—			206
Stock-based compensation	29	1		201									202
Unrealized gain on derivative financial instruments, net of tax of $15	—	—		—			46			—			46
Tax payments related to stock-based awards	—	—		(84		)	—			—			(84		)
Net income	—	—		—			—			4,452			4,452
Balance at June 30, 2018	19,362	97		143,004			(35		)	(7,118		)	135,948
Issuance of shares under stock plans, net of shares withheld for tax payments	20	—		221			—			—			221
Stock-based compensation	—	—		372			—			—			372
Unrealized gain on derivative financial instruments, net of tax of $13	—	—		—			38			—			38
Tax payments related to stock-based awards	—	—		(8		)	—			—			(8		)
Net income	—	—		—			—			61			61
Balance at September 30, 2018	19,382	$	97	$	143,589		$	3		$	(7,057	)	$	136,632

Index



	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss						Total Common Shareholders' Equity
	Shares	Par Value		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Common Shareholders' Equity
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 loss	—	—		—			—			(7,364		)	(7,364		)
Balance at March 31, 2019	19,412	97		144,274			(133		)	(14,953		)	129,285
Stock-based compensation, net of shares withheld for tax payments	53	—		835			—			—			835
Unrealized loss on derivative financial instruments, net of tax of $31	—	—		—			(89		)	—			(89		)
Tax payments related to stock-based awards	—	—		(168		)	—			—			(168		)
Net income	—	—		—			—			2,610			2,610
Balance at June 30, 2019	19,465	97		144,941			(222		)	(12,343		)	132,473
Stock-based compensation, net of shares withheld for tax payments	1	—		335			—			—			336
Unrealized loss on derivative financial instruments, net of tax of $9	—	—		—			(25		)	—			(25		)
Net loss	—	—		—			—			(1,224		)	(1,224		)
Balance at September 30, 2019	19,466	$	97	$	145,276		$	(247	)	$	(13,567	)	$	131,559

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

Index

CRAFT BREW ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(5,978	)	$	4,674
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	7,993			7,985
Gain on sale or disposal of Property, equipment and leasehold improvements	(8		)	(549		)
Deferred income taxes	(2,764		)	(673		)
Stock-based compensation	1,589			1,058
Lease expense	171			—
Other	(189		)	206
Changes in operating assets and liabilities:
Accounts receivable, net	11,975			(676		)
Inventories	(3,851		)	(2,905		)
Other current assets	(1,120		)	2,360
Accounts payable and other accrued expenses	8,986			4,922
Deferred revenue	17,537			1,950
Accrued salaries, wages and payroll taxes	247			(1,128		)
Refundable deposits	(114		)	(560		)
Net cash provided by operating activities	34,474			16,664

Cash flows from investing activities:
Expenditures for Property, equipment and leasehold improvements	(10,478		)	(6,216		)
Proceeds from sale of Property, equipment and leasehold improvements	55			22,998
Restricted cash from sale of Property, equipment and leasehold improvements	—			515
Business combinations and asset acquisitions	(274		)	—
Net cash provided by (used in) investing activities	(10,697		)	17,297

Cash flows from financing activities:
Proceeds from issuance of long-term debt	5,192			—
Principal payments on debt and finance lease obligations	(798		)	(520		)
Net repayments under revolving line of credit	(17,264		)	(22,199		)
Proceeds from issuances of common stock	—			427
Tax payments related to stock-based awards	(325		)	(92		)
Net cash used in financing activities	(13,195		)	(22,384		)
Increase in Cash, cash equivalents and restricted cash	10,582			11,577

Cash, cash equivalents and restricted cash:
Beginning of period	1,200			579
End of period	$	11,782		$	12,156
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,414		$	396
Cash paid for income taxes, net	559			450
Cash paid for amounts included in measurement of lease liabilities	2,369			—
Supplemental disclosure of non-cash information:
Right-of-use assets obtained in exchange for operating lease obligations	$	24,898		$	—
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	937			205

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

Index

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.

Index

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, ASU 2018-10 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.

Index

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
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 September 30, 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 September 30, 2019 there were no bank overdrafts. As of December 31, 2018 there were $0.6 million of bank overdrafts included in Accounts payable on our Consolidated Balance Sheet. 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 September 30, 2019 we no longer had any restricted cash. Restricted cash of $0.5 million at December 31, 2018 represents 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.

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):



	September 30, 2019		December 31, 2018
Raw materials	$	8,741	$	7,146
Work in process	3,370		3,219
Finished goods	5,740		4,319
Packaging materials	2,486		891
Promotional merchandise	600		1,139
Brewpub food, beverages and supplies	563		502
	$	21,500	$	17,216

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

Index

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):



	September 30, 2019			December 31, 2018
Operating lease liabilities:
Current lease liabilities included in Other accrued expenses	$	863		$	—
Long-term lease liabilities	24,269			—
Total operating lease liabilities	25,132			—
Financing lease liabilities:
Current portion included in Current portion of long-term debt and finance lease obligations	391			477
Long-term portion of lease liabilities included in Long-term debt and finance lease obligations, net of current portion	879			1,101
Total financing lease liabilities	1,270			1,578
Total lease liabilities	$	26,402		$	1,578
Weighted-average remaining lease term:
Operating leases	25 years
Finance leases	4 years
Weighted-average discount rate:
Operating leases	4.72		%
Finance leases	3.56		%

Index

As of September 30, 2019, the maturities of our operating lease liabilities were as follows (in thousands):



	Operating Leases
Remainder of 2019	$	518
2020	2,002
2021	2,028
2022	2,091
2023	1,958
Thereafter	34,234
Total minimum lease payments	42,831
Less: present value adjustment	(17,699		)
Operating lease liabilities	$	25,132

As of September 30, 2019, the maturities of our finance lease liabilities were as follows (in thousands):



	Finance Leases
Remainder of 2019	$	180
2020	333
2021	266
2022	199
2023	199
Thereafter	199
Total minimum lease payments	1,376
Less: present value adjustment	(106		)
Finance lease liabilities	$	1,270

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



	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost⁽¹⁾	$	904		$	2,642
Finance lease cost:
Amortization of right-of-use asset	42			127
Interest on lease liabilities	15			37
Sublease income	(69		)	(138		)
Total lease cost	$	892		$	2,668

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

Index

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 Brewers ("Cisco") and we increased our ownership interest in Wynwood Brewing Co. ("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 2019, we recorded immaterial adjustments to the allocation of the purchase price for the Cisco asset purchase and the AMB and Wynwood acquisitions.

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 during the fourth quarter of 2019.

Index

Note 7. Related Party Transactions

As of September 30, 2019 and December 31, 2018, Anheuser-Busch, LLC ("A-B") owned approximately 31.2% and 31.3%, respectively, 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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Gross sales to A-B and Ambev	$	38,740	$	41,737	$	129,779	$	129,588
International distribution fee earned from ABWI	812		850		2,436		2,550
International distribution fee from ABWI, recorded in Deferred revenue, net	19,188		650		17,564		1,950
Contract brewing fee earned from ABC	139		821		781		1,679
Margin fee paid to A-B, classified as a reduction of Sales	574		601		1,839		1,806
Inventory management and other fees paid to A-B, classified in Cost of sales	98		97		295		287
Media and other reimbursement from A-B, classified as a reduction of Selling, general and administrative expenses	—		192		—		192

Amounts due to or from A-B and ABWI were as follows (in thousands):



	September 30, 2019			December 31, 2018
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement	$	12,631		$	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	(3,712		)	(2,840		)
Amounts due to A-B for services rendered	(6,725		)	(5,140		)
Net amount due from A-B and ABWI	$	2,194		$	15,966

Index

Transactions with Wynwood Brewing Co. ("Wynwood")

As of September 30, 2019 and December 31, 2018, Wynwood was a wholly owned subsidiary. During the nine-month period ended September 30, 2018, we owned a 24.5% interest in Wynwood. The carrying value of our investment was $2.0 million as of September 30, 2018.

Transactions with Wynwood prior to its becoming a wholly owned subsidiary consisted of the following (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Master distributor fee earned	$	—	$	3	$	—	$	22
Share of loss, classified as a component of Other income (expense), net	—		22		—		44
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, 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, 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 September 30,				Nine Months Ended September 30,
2019		2018		2019		2018
$	41	$	41	$	123	$	123

We hold lease and sublease obligations for certain office space and the land underlying the brewery and pub location in Kona, Hawaii, with a company whose owners have a charitable foundation that owns more than 5% of our common stock. The sublease contracts expire on various dates through 2020, with an extension at our option for two five-year periods. We exercised our option to extend these leases commencing in September 2020. These leases are included in the ROU asset and lease liabilities recorded on our Consolidated Balance Sheets. Lease payments to this lessor were as follows (in thousands):



Three Months Ended September 30,				Nine Months Ended September 30,
2019		2018		2019		2018
$	172	$	145	$	511	$	435

Index

Note 8. Debt

Long-term debt consisted of the following (in thousands):



	September 30, 2019			December 31, 2018
Term loan, due September 30, 2023	$	8,494		$	8,823
Line of credit, due September 30, 2023	19,828			37,092
Secured borrowing, due June 21, 2026	5,030			—
	33,352			45,915
Less current portion, term loan and secured borrowing	(1,107		)	(442		)
	$	32,245		$	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 First 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 September 30, 2019, we had $25.2 million in funds available to be drawn upon from our Line of Credit and $19.8 million of borrowings outstanding. At September 30, 2019, $8.5 million was outstanding under the Term Loan.

Under the Credit Agreement as in effect at September 30, 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 2.00% for the Line of Credit and Term Loan based on our funded debt ratio. At September 30, 2019, our marginal rate was 2.00%, resulting in an annual interest rate of 4.09%.

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.

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. 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.

The Credit Agreement as in effect at September 30, 2019 required us to satisfy the following financial covenants: (i) a Consolidated Leverage Ratio (defined as Consolidated Net Funded Indebtedness to Consolidated EBITDA) 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 September 30, 2019, we were in compliance with all applicable contractual financial covenants of the Credit Agreement.

Index

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.

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 $6.4 million as of September 30, 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 2.04% at September 30, 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 September 30, 2019, an unrealized net loss of $0.3 million was 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 nine 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):



	September 30, 2019			December 31, 2018
Fair value of interest rate swap liability	$	(332	)	$	(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 September 30,
2019	$	(34	)	Interest expense	$	10
2018	$	52		Interest expense	$	13

Nine Months Ended September 30,
2019	$	(216	)	Interest expense	$	22
2018	$	225		Interest expense	$	52

See also Note 10.

Index

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.

The following table summarizes liabilities measured at fair value on a recurring basis (in thousands):



Fair Value at September 30, 2019	Level 1		Level 2			Level 3		Total
Interest rate swap	$	—	$	(332	)	$	—	$	(332	)

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 September 30, 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 nine months ended September 30, 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):



	September 30, 2019		December 31, 2018
Fixed-rate debt on Consolidated Balance Sheets	$	6,300	$	1,577
Estimated fair value of fixed-rate debt	6,576		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.

Index

Note 11. Revenue Recognition

The following table disaggregates our Sales by major source (in thousands):



	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	Beer Related⁽¹⁾		Brewpubs		Total		Beer Related⁽¹⁾		Brewpubs		Total
Product sold through distributor agreements⁽²⁾	$	42,667	$	—	$	42,667	$	139,700	$	—	$	139,700
Alternating proprietorship and contract brewing fees⁽³⁾	381		—		381		1,581		—		1,581
International distribution fees	812		—		812		2,436		—		2,436
Brewpubs⁽⁴⁾	—		5,991		5,991		—		18,260		18,260
Other⁽⁵⁾	498		—		498		1,955		—		1,955
	$	44,358	$	5,991	$	50,349	$	145,672	$	18,260	$	163,932



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	Beer Related⁽¹⁾		Brewpubs		Total		Beer Related⁽¹⁾		Brewpubs		Total
Product sold through distributor agreements⁽²⁾	$	45,326	$	—	$	45,326	$	139,141	$	—	$	139,141
Alternating proprietorship and contract brewing fees⁽³⁾	2,863		—		2,863		8,748		—		8,748
International distribution fees	850		—		850		2,550		—		2,550
Brewpubs⁽⁴⁾	—		6,166		6,166		—		18,278		18,278
Other⁽⁵⁾	434		—		434		2,260		—		2,260
	$	49,473	$	6,166	$	55,639	$	152,699	$	18,278	$	170,977

(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 period ended September 30, 2019 and 2018 represented 77.7% and 76.9% of our Sales, respectively. Sales to wholesalers through the A-B distributor agreement in the nine-month period ended September 30, 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 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 September 30, 2019, we had receivables related to contracts with customers of $18.4 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.

Index

As of September 30, 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 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. During the third quarter of 2019, we received the final 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. For the nine months ended September 30, 2019, we recognized $2.4 million as Sales, resulting in Deferred revenue of $23.6 million at September 30, 2019. We expect to recognize an additional $0.8 million of Deferred revenue as Sales in the remainder of 2019, $3.2 million in 2020, and $19.5 million thereafter.

Index

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, Omission, AMB, Cisco, and Wynwood beer brands and Square Mile cider brand. Brewpubs operations primarily include our brewpubs, some of which are located adjacent to our Beer Related operations. We do not track operating results beyond the gross margin level or our assets on a segment level.

Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):



	Three Months Ended September 30,
2019	Beer Related			Brewpubs			Total
Net sales	$	41,170		$	5,991		$	47,161
Gross profit	$	12,692		$	612		$	13,304
Gross margin	30.8		%	10.2		%	28.2		%

2018
Net sales	$	46,723		$	6,166		$	52,889
Gross profit	$	16,261		$	438		$	16,699
Gross margin	34.8		%	7.1		%	31.6		%

	Nine Months Ended September 30,
2019	Beer Related			Brewpubs			Total
Net sales	$	136,452		$	18,260		$	154,712
Gross profit	$	50,876		$	1,898		$	52,774
Gross margin	37.3		%	10.4		%	34.1		%

2018
Net sales	$	143,921		$	18,278		$	162,199
Gross profit	$	52,913		$	984		$	53,897
Gross margin	36.8		%	5.4		%	33.2		%

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 September 30,				Nine Months Ended September 30,
2019		2018		2019		2018
77.7	%	76.9	%	80.0	%	77.2	%

Receivables from A-B and ABWI represented the following percentage of our Accounts receivable balance:



September 30, 2019		December 31, 2018
68.8	%	79.8	%

Index

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 September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
Cost of sales	$	(3	)	$	42	$	79	$	108
Selling, general and administrative expense	339			329		1,510		950
Total stock-based compensation expense	$	336		$	371	$	1,589	$	1,058

At September 30, 2019, we had total unrecognized stock-based compensation expense of $1.8 million, which will be recognized over the weighted average remaining vesting period of 2.0 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 September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Weighted average common shares used for basic EPS	19,466	19,370	19,435	19,338
Dilutive effect of stock-based awards	—	175	—	187
Shares used for diluted EPS	19,466	19,545	19,435	19,525

Stock-based awards not included in diluted per share calculations as they would be antidilutive	71	—	65	—

Note 15. Commitments and Contingencies

The disclosure of purchase commitments in these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2018. The disclosures below relate to legal commitments with significant events occurring during the nine months ended September 30, 2019.

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 May 30, 2019, we announced our entry into a definitive settlement agreement, which received preliminary approval from the Court on June 14, 2019. 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 settlement claims period ended October 7, 2019. The total cost of settling the litigation is not expected to be materially in excess of $4.7 million.

Index

Note 16. Subsequent Events

On November 11, 2019, Craft Brew Alliance, Inc., a Washington corporation (the “Company”), Anheuser-Busch Companies, LLC, a Delaware limited liability company (“A-B”), and Barrel Subsidiary, Inc., a Washington corporation and wholly owned subsidiary of A-B (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Agreement”), pursuant to which Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving entity in the Merger as a direct subsidiary of A-B. A-B, which currently owns 31.2% of the outstanding shares of the Company’s common stock, has agreed to acquire the remaining outstanding shares for $16.50 per share in cash (the “Merger Consideration”). The Agreement provides that, at the Effective Time, each then outstanding option to purchase Shares (a “Company Option”), whether vested or unvested, shall, automatically and without any action on the part of the holder thereof, fully vest (to the extent unvested) and shall be cancelled and converted into the right to receive (without interest) an amount in cash equal to the product of (i) the number of Shares subject to the Company Option immediately prior to the Effective Time multiplied by (ii) the excess, if any, of (A) the Merger Consideration over (B) the exercise price per Share of such Company Option. In addition, each then outstanding restricted stock unit award corresponding to Shares (a “Company RSU Award”) shall, automatically and without any required action on the part of the holder thereof, be cancelled and converted into the right to receive (without interest) an amount in cash equal to the product of (i) the number of Shares subject to such Company RSU Award (which number, for any performance-based Company RSU Awards, shall equal (x) for Company RSU Awards for the 2017-2019 performance cycle, thirty-three percent of the number of Shares that would be earned based on target performance and (y) for Company RSU Awards for the 2018-2020 and 2019-2021 performance cycles, one hundred percent of the number of Shares that would be earned on target performance), multiplied by (ii) the Merger Consideration. Completion of the transaction is contingent on the satisfaction of customary closing conditions, including approval by a majority of the outstanding shares held by shareholders not affiliated with A-B and certain regulatory approvals. The transaction is expected to close in 2020.

Index

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”). Certain forward-looking statements are subject to the anticipated occurrence and timing of the closing of the merger transaction pursuant to which Anheuser-Busch Companies, LLC, is expected to acquire Craft Brew Alliance, Inc. 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.

Index

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

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.

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; they 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 five brewpubs, four of which are located adjacent to our Beer Related operations, as well as other merchandise sales, and sales of our beers directly to customers.

Index

Following is a summary of our financial results:



Nine Months Ended September 30,	Net sales	Net income (loss)	Number of barrels sold
2019	$154.7 million	$(6.0) million	585,400
2018	$162.2 million	$4.7 million	587,400

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Sales	106.8	%	105.2	%	106.0	%	105.4	%
Less excise taxes	(6.8	)	(5.2	)	(6.0	)	(5.4	)
Net sales	100.0		100.0		100.0		100.0
Cost of sales	71.8		68.4		65.9		66.8
Gross profit	28.2		31.6		34.1		33.2
Selling, general and administrative expenses	34.9		31.6		39.7		29.2
Operating income (loss)	(6.7	)	—		(5.6	)	4.1
Interest expense	(1.3	)	(0.2	)	(0.9	)	(0.2	)
Other income (expense), net	0.1		—		—		—
Income (loss) before income taxes	(8.0	)	(0.3	)	(6.5	)	3.9
Income tax provision (benefit)	(5.4	)	(0.4	)	(2.6	)	1.0
Net income (loss)	(2.6	)%	0.1	%	(3.9	)%	2.9	%


(1)	Percentages may not add due to rounding.

Index

Segment Information

Net sales, Gross profit and Gross margin information by segment was as follows (dollars in thousands):



	Three Months Ended September 30,
2019	Beer Related			Brewpubs			Total
Net sales	$	41,170		$	5,991		$	47,161
Gross profit	$	12,692		$	612		$	13,304
Gross margin	30.8		%	10.2		%	28.2		%

2018
Net sales	$	46,723		$	6,166		$	52,889
Gross profit	$	16,261		$	438		$	16,699
Gross margin	34.8		%	7.1		%	31.6		%

	Nine Months Ended September 30,
2019	Beer Related			Brewpubs			Total
Net sales	$	136,452		$	18,260		$	154,712
Gross profit	$	50,876		$	1,898		$	52,774
Gross margin	37.3		%	10.4		%	34.1		%

2018
Net sales	$	143,921		$	18,278		$	162,199
Gross profit	$	52,913		$	984		$	53,897
Gross margin	36.8		%	5.4		%	33.2		%

Index

Sales by Category

Sales by category were as follows (dollars in thousands):



	Three Months Ended September 30,						Dollar
Sales by Category	2019			2018			Change			% Change
A-B and A-B related⁽¹⁾	$	39,117		$	42,807		$	(3,690	)	(8.6	)%
Contract brewing and beer related⁽²⁾	5,241			6,666			(1,425		)	(21.4	)%
Excise taxes	(3,188		)	(2,750		)	(438		)	15.9	%
Net beer related sales	41,170			46,723			(5,553		)	(11.9	)%
Brewpubs⁽³⁾	5,991			6,166			(175		)	(2.8	)%
Net sales	$	47,161		$	52,889		$	(5,728	)	(10.8	)%

	Nine Months Ended September 30,						Dollar
Sales by Category	2019			2018			Change			% Change
A-B and A-B related⁽¹⁾	$	131,157		$	132,011		$	(854	)	(0.6	)%
Contract brewing and beer related⁽²⁾	14,515			20,688			(6,173		)	(29.8	)%
Excise taxes	(9,220		)	(8,778		)	(442		)	5.0	%
Net beer related sales	136,452			143,921			(7,469		)	(5.2	)%
Brewpubs⁽³⁾	18,260			18,278			(18		)	(0.1	)%
Net sales	$	154,712		$	162,199		$	(7,487	)	(4.6	)%


(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 in 2018, fees earned pursuant to the Brewing Agreement with Anheuser-Busch Companies, LLC ("ABC"), and the international distribution fees earned from ABWI.


(2)	Beer related includes international sales of our beers, and brands, not sold through A-B or Ambev, as well as fees earned through alternating proprietorship agreements during 2018.


(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 September 30,	2019 Shipments	2018 Shipments	Increase (Decrease)		% Change		Change in Depletions⁽¹⁾
A-B and A-B related⁽²⁾	159,200	170,000	(10,800	)	(6.4	)%	2	%
Contract brewing and beer related⁽³⁾	24,100	24,000	100		0.4	%
Brewpubs	2,100	1,800	300		16.7	%
Total	185,400	195,800	(10,400	)	(5.3	)%

Nine Months Ended September 30,	2019 Shipments	2018 Shipments	Increase (Decrease)		% Change		Change in Depletions⁽¹⁾
A-B and A-B related⁽²⁾	515,300	514,800	500		0.1	%	0	%
Contract brewing and beer related⁽³⁾	64,200	67,000	(2,800	)	(4.2	)%
Brewpubs	5,900	5,600	300		5.4	%
Total	585,400	587,400	(2,000	)	(0.3	)%


(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 in 2018 and shipments pursuant to the Brewing Agreement with ABC.


(3)	Beer related includes international shipments of our beers, and shipments of our newly acquired brands, in each case not distributed through A-B or Ambev.

Index

The decrease in sales to A-B and A-B related in the three-month period ended September 30, 2019 compared to the same period of 2018 was primarily due to decreases in shipment volume, increases in promotional programming, partially offset by increases in average unit pricing. International distribution fees earned were $0.8 million in the three-month period ended September 30, 2019 and $0.9 million in the same period of 2018. The decrease in sales to A-B and A-B related in the nine-month period ended September 30, 2019 compared to the same period of 2018 was primarily due to increased promotional programming, partially offset by increases in average unit pricing and shipments. International distribution fees earned were $2.4 million in the nine-month period ended September 30, 2019 and $2.6 million in the same period of 2018.

The decreases in Contract brewing and beer related sales in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were primarily due to no longer receiving alternating proprietorship fees as a result of the acquisitions of Appalachian Mountain Brewing, Cisco Brewers and Wynwood Brewing in late 2018, as well as decreases in contract brewing shipment volumes, partially offset by sales of our newly acquired brands distributed outside the A-B distribution network. International shipment volumes decreased slightly in the nine-month period ended September 30, 2019 compared to the same period of 2018.

Brewpubs sales decreased slightly, or were relatively flat, in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018, primarily due to ceasing operations at our Portsmouth brewpub and leasing it to the founders of Cisco, which occurred at the beginning of April 2019, as well as the closure of the Portland taproom, which occurred at the end of January 2019, partially offset by the inclusion of the results of our newly acquired AMB and Wynwood brewpub operations, as well as increased sales at our Kona brewpub located on Hawaii's Big Island.

Shipments by Brand

The following table sets forth a comparison of shipments by brand (in barrels):



Three Months Ended September 30,	2019 Shipments	2018 Shipments	Increase (Decrease)		% Change		Change in Depletions
Kona	119,400	120,100	(700	)	(0.6	)%	7	%
Widmer Brothers	21,300	24,600	(3,300	)	(13.4	)%	(9	)%
Redhook	15,300	16,200	(900	)	(5.6	)%	(10	)%
Omission	10,900	11,400	(500	)	(4.4	)%	(8	)%
All other⁽¹⁾	16,400	14,500	1,900		13.1	%	5	%
Total⁽²⁾	183,300	186,800	(3,500	)	(1.9	)%	2	%

Nine Months Ended September 30,	2019 Shipments	2018 Shipments	Increase (Decrease)		% Change		Change in Depletions
Kona	384,900	360,100	24,800		6.9	%	6	%
Widmer Brothers	70,300	76,800	(6,500	)	(8.5	)%	(12	)%
Redhook	47,100	55,200	(8,100	)	(14.7	)%	(17	)%
Omission	31,100	34,500	(3,400	)	(9.9	)%	(9	)%
All other⁽¹⁾	42,600	39,500	3,100		7.8	%	3	%
Total⁽²⁾	576,000	566,100	9,900		1.7	%	0	%


(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 slight decrease in our Kona brand shipments in the three-month period ended September 30, 2019 compared to the same period of 2018 was primarily led by the decrease in shipments of Hanalei Island IPA and Longboard Lager brands, partially offset by increased shipments of Gold Cliff IPA and Big Wave Golden Ale brands. The increase in our Kona brand shipments in the nine-month period ended September 30, 2019 compared to the same period of 2018 was primarily led by continued demand for Big Wave Golden Ale and increased shipments of Gold Cliff IPA.

The decreases in our Widmer Brothers brand shipments in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were primarily due to decreases in Hefeweizen brand shipments.

Index

Redhook brand shipments decreased in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018, primarily due to decreases in Longhammer IPA and ESB brand shipments, partially offset by increases in Big Ballard IPA shipments.

Omission brand shipments decreased in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018, primarily due to decreases in shipments of the Pale Ale, Lager and IPA brands, partially offset by shipments of our newly released seltzer and increased shipments in the Ultimate Light brand.

The increases in All other shipments in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were primarily due to increases in shipments of our newly acquired Wynwood and AMB brands, partially offset by a decrease in shipments of Cisco Brewers brands in the nine-month period.

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 September 30,
	2019			2018
	Shipments	% of Total		Shipments	% of Total
Draft	41,400	22.6	%	43,500	23.3	%
Packaged	141,900	77.4	%	143,300	76.7	%
Total	183,300	100.0	%	186,800	100.0	%

	Nine Months Ended September 30,
	2019			2018
	Shipments	% of Total		Shipments	% of Total
Draft	130,000	22.6	%	132,500	23.4	%
Packaged	446,000	77.4	%	433,600	76.6	%
Total	576,000	100.0	%	566,100	100.0	%

The shifts in package mix from draft to packaged in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were 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.

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 September 30,				Dollar
	2019		2018		Change			% Change
Beer Related	$	28,478	$	30,462	$	(1,984	)	(6.5	)%
Brewpubs	5,379		5,728		(349		)	(6.1	)%
Total	$	33,857	$	36,190	$	(2,333	)	(6.4	)%

	Nine Months Ended September 30,				Dollar
	2019		2018		Change			% Change
Beer Related	$	85,576	$	91,008	$	(5,432	)	(6.0	)%
Brewpubs	16,362		17,294		(932		)	(5.4	)%
Total	$	101,938	$	108,302	$	(6,364	)	(5.9	)%

The decreases in Beer Related Cost of sales in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were primarily due to decreases in Beer Related Cost of sales on a per barrel basis. The decreases in our Beer Related Cost of sales on a per barrel basis were 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

Index

of our beer produced by A-B in its Fort Collins, Colorado brewery. These decreases were partially offset by increases in brewery costs on a per barrel basis due to higher fixed overhead related to our newly acquired breweries in Boone, North Carolina and Miami, Florida.

The decreases in Brewpubs Cost of sales in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were primarily due to ceasing operations and leasing of our Portsmouth brewpub to the founders of Cisco, and the closure of the Portland taproom, partially offset by the costs related to operating 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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Capacity Utilization	54	%	59	%	55	%	59	%

Our capacity utilization declined in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 due to a larger percentage of 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 September 30,				Dollar
	2019		2018		Change			% Change
Beer Related	$	12,692	$	16,261	$	(3,569	)	(21.9	)%
Brewpubs	612		438		174			39.7	%
Total	$	13,304	$	16,699	$	(3,395	)	(20.3	)%

	Nine Months Ended September 30,				Dollar
	2019		2018		Change			% Change
Beer Related	$	50,876	$	52,913	$	(2,037	)	(3.8	)%
Brewpubs	1,898		984		914			92.9	%
Total	$	52,774	$	53,897	$	(1,123	)	(2.1	)%

Gross profit as a percentage of Net sales, or gross margin, was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Beer Related	30.8	%	34.8	%	37.3	%	36.8	%
Brewpubs	10.2	%	7.1	%	10.4	%	5.4	%
Overall	28.2	%	31.6	%	34.1	%	33.2	%

The decreases in Beer Related Gross profit in the three and nine-month periods ended September 30, 2019, and in gross margin in the three-month period ended September 30, 2019 in each case compared to the same period of 2018 were primarily due to decreases in shipment volume and increases in brewery costs due to higher fixed overhead related to our newly acquired breweries in Boone, North Carolina and Miami, Florida, partially offset by cost savings related to no longer having alternating proprietorship material costs, and the lower costs related to having a portion of our beer produced by A-B in Fort Collins. The increase in Beer Related gross margin in the nine-month period ended September 30, 2019 compared to the same period of 2018 was primarily due to cost savings related to no longer having alternating proprietorship material costs, and the lower costs related to having a portion of our beer produced by A-B in Fort Collins, partially offset by a decrease in shipment volume.

The increases in Brewpubs Gross profit and gross margin in the three and nine-month periods ended September 30, 2019 compared to the same periods 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, which is being leased to the founders of Cisco beginning in April 2019.

Index

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 September 30,						Dollar
	2019			2018			Change			% Change
Selling, general and administrative expenses	$	16,465		$	16,712		$	(247	)	(1.5	)%
As a % of Net sales	34.9		%	31.6		%

	Nine Months Ended September 30,						Dollar
	2019			2018			Change			% Change
Selling, general and administrative expenses	$	61,411		$	47,317		$	14,094		29.8	%
As a % of Net sales	39.7		%	29.2		%

SG&A was relatively constant for the three-month period ended September 30, 2019 compared to the same period of 2018.

The increase in SG&A for the nine-month period ended September 30, 2019 compared to the same period of 2018 was primarily due to an increase 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 $6.9 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, as well as increases in employee related costs. 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 September 30,				Dollar
2019		2018		Change		% Change
$	616	$	107	$	509	475.7	%

Nine Months Ended September 30,				Dollar
2019		2018		Change		% Change
$	1,428	$	348	$	1,080	310.3	%



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Average debt outstanding	$44,629		$10,665		$45,743		$13,056
Average interest rate	5.43	%	3.52	%	4.10	%	3.02	%

The increases in Interest expense in the three and nine-month periods ended September 30, 2019 compared to the same periods of 2018 were primarily due to increases in our average debt outstanding. The increases in our average debt outstanding were 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 40.3% benefit for the first nine months of 2019 and 25.5% expense in the first nine 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. A tax credit study was completed and the benefit was recognized in the third quarter of 2019. The study resulted in a benefit of approximately 14%, which is reflected within the 40.3% effective income tax rate.

Index

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 October 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 September 30, 2019 included $11.8 million of Cash and cash equivalents and $25.2 million available under our revolving credit facility.

At September 30, 2019 and December 31, 2018, we had $14.0 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 20.8% and 25.8%, respectively.

A summary of our cash flow information was as follows (in thousands):



	Nine Months Ended September 30,
	2019			2018
Net cash provided by operating activities	$	34,474		$	16,664
Net cash provided by (used in) investing activities	(10,697		)	17,297
Net cash used in financing activities	(13,195		)	(22,384		)
Increase in Cash, cash equivalents and restricted cash	$	10,582		$	11,577

Cash provided by operating activities of $34.5 million in the first nine months of 2019 resulted from our Net loss of $6.0 million, offset by net non-cash expenses of $6.8 million and changes in our operating assets and liabilities as discussed in more detail below.

Accounts receivable, net, decreased $11.6 million to $18.4 million at September 30, 2019 compared to $30.0 million at December 31, 2018. This decrease was primarily due to a decrease of $11.3 million in our receivable from A-B and ABWI, which totaled $12.6 million at September 30, 2019. Amounts due from ABWI related to the international distribution fee decreased by $6.0 million and our receivable from A-B decreased $5.3 million due to the timing of receipts and decreased shipments. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $4.3 million to $21.5 million at September 30, 2019 compared to $17.2 million at December 31, 2018. The increase was primarily due to an increase in raw materials as we purchased hops under raw material contracts and an increase in finished goods as a result of the timing of shipments in the fourth quarter of 2018 and third quarter of 2019, and seasonality.

Accounts payable increased $1.9 million to $19.5 million at September 30, 2019 compared to $17.6 million at December 31, 2018, primarily due to timing of payments for raw and component materials, marketing and capital expenditures.

Deferred revenue increased $17.6 million to $23.6 million at September 30, 2019 compared to $6.0 million at December 31, 2018, primarily due to the receipt of a $20.0 million one-time incentive payment from ABC as required by the terms of the International Distribution Agreement.

Capital expenditures of $10.5 million in the first nine months of 2019 were primarily directed to beer production capacity and efficiency improvements. As of September 30, 2019, we had an additional $0.9 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 early 2020, 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.

Index

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 First 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.

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.

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.

Index

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.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

During the third 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 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index

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 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:



10.1	Third Amendment to Amended and Restated Credit Agreement dated September 25, 2019 between Craft Brew Alliance, Inc. and Bank of America, N.A.
31.1	Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
31.2	Certification of Chief Financial Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
32.1*	Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
99.1*	Press Release dated November 12, 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

Index

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.

November 12, 2019	By:	/s/ Edwin A. Smith
		Edwin A. Smith
		Corporate Controller and Principal Accounting Officer

EXHIBIT 10.1

EXECUTION VERSION

THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

(this "Amendment"), dated as of September 25, 2019, is by and among CRAFT BREW ALLIANCE, INC., a Washington corporation (the "Borrower"), the Guarantors party hereto, and BANK OF AMERICA, N.A., as lender (in such capacity, the "Lender"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement.

WITNESSETH

WHEREAS, the Borrower, the Subsidiaries of the Borrower from time to time party thereto (the "Guarantors"), and the Lender are parties to that certain Amended and Restated Credit Agreement, dated as of November 30, 2015 (as amended, modified, extended, restated, replaced, or supplemented from time to time, the "Credit Agreement");

WHEREAS, the Loan Parties have requested that the Lender amend certain provisions of the Credit Agreement; and

WHEREAS, the Lender is willing to make such amendments to the Credit Agreement in accordance with and subject to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

AMENDMENTS

1.1 New Defined Terms. The following defined terms are hereby added to Section 1.01 of the Credit Agreement in the appropriate alphabetical order:

"Consolidated Net Funded Indebtedness" means, as of any date of determination for the Borrower and its Subsidiaries on a Consolidated basis, the sum of (a) all Consolidated Funded Indebtedness as of such date minus (b) Qualified Cash and Cash Equivalents of the Borrower and its Subsidiaries then on hand in amount not to exceed $10,000,000.

"Qualified Cash and Cash Equivalents" means, as to any Person, as of any date of determination, the aggregate amount of Unrestricted cash and Cash Equivalents held by such Person and its Subsidiaries in domestic deposit accounts or securities accounts maintained with the Lender under, or otherwise covered by a control agreement pursuant to, this Agreement. For purposes hereof, "Unrestricted" means, when referring to cash and Cash Equivalents of any Person, that such cash and Cash Equivalents (a) do not appear, or would not be required to appear, as "restricted" on the financial statements of such Person and its Subsidiaries (unless related to the Loan Documents or the Liens created thereunder), (b) are not subject to a Lien in favor of any Person other than the Lender under the Loan Documents or (c) are not otherwise unavailable to such Person or its Subsidiaries.

1.2 Amendment to Definition of Consolidated Leverage Ratio. The definition of "Consolidated Leverage Ratio" set forth in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

"Consolidated Leverage Ratio" means, as of any date of determination, the ratio of (a) Consolidated Net Funded Indebtedness as of such date to (b) Consolidated EBITDA for the most recently completed Measurement Period.

EXHIBIT 10.1

ARTICLE II

CONDITIONS TO EFFECTIVENESS

2.1 Closing Conditions. This Amendment shall become effective as of the day and year set forth above (the "Amendment Effective Date") upon satisfaction of the following conditions (in each case, in form and substance reasonably acceptable to the Lender):

(a)Executed Amendment. The Lender shall have received a copy of this Amendment duly executed by each of the Loan Parties and the Lender.

(b)Fees and Expenses. The Lender shall have received from the Borrower other fees and expenses that are payable in connection with the consummation of the transactions contemplated hereby and Lender's legal counsel shall have received from the Borrower payment of all outstanding fees and expenses previously incurred and all fees and expenses incurred in connection with this Amendment.

(c)Default. After giving effect to this Amendment, no Default or Event of Default shall exist.

(d)Miscellaneous. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall be reasonably satisfactory in form and substance to the Lender and its counsel.

ARTICLE III

MISCELLANEOUS

3.1 Amended Terms. On and after the Amendment Effective Date, all references to the Credit Agreement in each of the Loan Documents shall hereafter mean the Credit Agreement as amended by this Amendment. Except as specifically amended hereby or otherwise agreed, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed, including the Liens granted thereunder, and shall remain in full force and effect according to its terms.

3.2 Representations and Warranties of Loan Parties. Each of the Loan Parties represents and warrants as follows:

(a)It has taken all necessary action to authorize the execution, delivery and performance of this Amendment.

(b)This Amendment has been duly executed and delivered by such Person and constitutes such Person's legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity).

(c)No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Amendment.

(d)The representations and warranties of the Borrower and each other Loan Party contained in Article II of the Credit Agreement, Article V of the Credit Agreement or any other Loan Document, or which are contained in any document furnished at any time under or in connection herewith or therewith, shall (i) with respect to representations and warranties that contain a materiality qualification, be true and correct on and as of the Amendment Effective Date and (ii) with respect to representations and warranties that do not contain a materiality qualification, be true and correct in all material respects on and as of the as of the Amendment Effective Date, and except that the representations and warranties contained in Sections 5.05(a) and (b) of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to Sections 6.0l (a) and (b) of the Credit Agreement, respectively.

(e)After giving effect to this Amendment, no event has occurred and is continuing which constitutes a Default or an Event of Default.

EXHIBIT 10.1

(f)The Collateral Documents continue to create a valid security interest in, and Lien upon, the Collateral, in favor of the Lender, for the benefit of the Lender, which security interests and Liens are perfected in accordance with the terms of the Collateral Documents and prior to all Liens other than Permitted Liens.

(g)Except as specifically provided in this Amendment, the Obligations are not reduced or modified by this Amendment and are not subject to any offsets, defenses or counterclaims.

3.3 Reaffirmation of Obligations. Each Loan Party hereby ratifies the Credit Agreement and each other Loan Document to which it is a party and acknowledges and reaffirms (a) that it is bound by all terms of the Credit Agreement and each other Loan Document applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations.

3.4 Loan Document. This Amendment shall constitute a Loan Document under the terms of the Credit Agreement.

3.5 Expenses. The Borrower agrees to pay all reasonable costs and expenses of the Lender in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of the Lender's legal counsel.

3.6 Further Assurances. The Loan Parties agree to promptly take such action, upon the request of the Lender, as is necessary to carry out the intent of this Amendment.

3.7 Entirety. This Amendment and the other Loan Documents embody the entire agreement among the parties hereto and supersede all prior agreements and understandings, oral or written, if any, relating to the subject matter hereof.

3.8 Counterparts; Telecopy. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of an executed counterpart to this Amendment by telecopy or other electronic means shall be effective as an original and shall constitute a representation that an original will be delivered.

3.9 No Actions, Claims, Etc. As of the date hereof, each of the Loan Parties hereby acknowledges and confirms that it has no knowledge of any actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, against the Lender or the Lender's respective officers, employees, representatives, agents, counsel or directors arising from any action by such Persons, or failure of such Persons to act under the Credit Agreement on or prior to the date hereof.

3.10 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON.

3.11 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

3.12 Dispute Resolution; Waiver of Jury Trial. The dispute resolution and waiver of jury trial provisions set forth in Section 9.14 of the Credit Agreement are hereby incorporated by reference, mutatis mutandis.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

EXHIBIT 10.1

IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly executed on the date first above written.



BORROWER:
	CRAFT BREW ALLIANCE, INC., as the Borrower By: /s/ Andrew J. Thomas Name:Andrew J. Thomas Title:Chief Executive Officer



GUARANTORS:
	KONA BREWERY LLC, as a Guarantor By:/s/ Andrew J. Thomas Name:Andrew J. Thomas Title:Manager



	CRAFT VENTURES, LLC, as a Guarantor By: Craft Brew Alliance, Inc., its Manager By:/s/ Andrew J. Thomas Name:Andrew J. Thomas Title:Chief Executive Officer WYNWOOD BREWING COMPANY LLC, as a Guarantor By:/s/ Andrew J. Thomas Name:Andrew J. Thomas Title:Manager

Craft Brew Alliance, Inc.

Third Amendment to Amended and Restated Credit Agreement

Signature Page

EXHIBIT 10.1



LENDER:	BANK OF AMERICA, N.A., as Lender By: /s/ Michael Snook Name: Michael Snook Title: Senior Vice President

Craft Brew Alliance, Inc.

Third Amendment to Amended and Restated Credit Agreement

Signature Page

EXHIBIT 31.1

CERTIFICATION

I, Andrew J. Thomas, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Craft Brew Alliance, Inc. (the “Registrant”);


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;


4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and


5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.



Date:	November 12, 2019

By:	/s/ Andrew J. Thomas
	Andrew J. Thomas
	Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Christine N. Perich, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Craft Brew Alliance, Inc. (the “Registrant”);


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;


4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and


5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.



Date:	November 12, 2019

By:	/s/ Christine N. Perich
	Christine N. Perich
	Chief Financial and Strategy Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Craft Brew Alliance, Inc. (the “Registrant”) on Form 10-Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on November 12, 2019 (the “Report”), Andrew J. Thomas, the Chief Executive Officer of the Registrant, and Christine N. Perich, the Chief Financial and Strategy Officer of the Registrant, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to his and her knowledge:


1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.



Date:	November 12, 2019

BY:	/s/ Andrew J. Thomas
	Andrew J. Thomas
	Chief Executive Officer
	(Principal Executive Officer)

BY:	/s/ Christine N. Perich
	Christine N. Perich
	Chief Financial and Strategy Officer

EXHIBIT 99.1

FOR IMMEDIATE RELEASE

CRAFT BREW ALLIANCE REPORTS 2% TOTAL dEPLETIONS GROWTH IN THE THIRD QUARTER, LED BY 7% DEPLETIONS GROWTH FOR KONA

Year-to-date results reflect shipments and depletions converging as planned

CBA Management to discuss financial performance and provide high-level commentary on recently announced transaction with Anheuser-Busch during November 13 investor call

Portland, Ore. (November 12, 2019) - Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: BREW), a leading craft brewing company, today reported financial results for the third quarter and year to date ended September 30, 2019. CBA will hold a question and answer conference call for the third quarter and year-to-date ended September 30, 2019 on Wednesday, November 13, 2019. During the call, CBA management will also share high-level comments on the recently announced transaction with Anheuser-Busch (A-B).

CBA and A-B Expanded Partnership

On November 11, 2019, Craft Brew Alliance and A-B jointly announced an agreement to expand their partnership, with A-B agreeing to purchase the remaining CBA shares it does not already own in a merger transaction for $16.50 per share, in cash.

The transaction is subject to customary closing conditions, including approval by a majority of CBA’s shareholders not affiliated with A-B and certain regulatory approvals. The transaction is expected to close in 2020.

Reflecting on the quarter while also looking ahead, CBA Chief Executive Officer Andy Thomas said, “CBA’s third quarter depletions growth, fueled by Kona, is remarkable on a number of levels -- in absolute terms, in contrast to the market overall, and notwithstanding its absolute size already as a top 10 national craft brand. Moreover, within the Kona family, it’s clear that Big Wave is just getting started. And speaking of just getting started, we’re also extremely excited about the announcement made yesterday with A-B, which gives us greater opportunity to continue nurturing the growth of CBA’s portfolio while delivering certainty of value to our shareholders.”

Key performance highlights for the quarter and year-to-date include:

Kona growth outpacing the market

Kona’s depletion growth of 7% in the third quarter and 6% for the first nine months continued to outperform the craft segment and beer category overall, which were down 3.7% and 2%, respectively, compared to the same period in 2018. As competition and market complexity pressured established brands in both the on and off-premise, Kona’s momentum - ignited by the distribution drive earlier this year - was sustained through strong retail programming and promotional pricing initiatives. Now a top 10 craft brand as reported by Nielsen, Kona flagship Big Wave delivered double-digit domestic depletions growth in both channels during the third quarter, increasing by 17%, contributing to a 20% depletions increase year to date. During the third quarter we also made important strides in qualifying Big Wave for local production in Rio de Janeiro, which will enable us to unlock Kona’s full potential in Brazil.

La Rubia expansion

Emboldened by La Rubia’s continued strong performance in its home market of South Florida, where it now ranks in the top 8 leading craft brands per Nielsen, we accelerated expansion plans in the third quarter with a focus on targeting key Hispanic markets. Following La Rubia’s successful launch into Puerto Rico during the summer, the team most recently introduced the beer and its authentic story to new consumers in New York and Connecticut.

Beer gross margins stable, pub margins expand

Despite a decrease in gross margin for the third quarter, 28.2% compared to 31.6% in the third quarter of 2018, our year-to-date gross margin was 34.1%, a 90-basis point improvement over the same period last year. The third quarter decrease reflects lower

beer gross margins of 30.8%, primarily due to volume deleveraging and promotional pricing to support expanded distribution following our marketing investments. These impacts were partially offset by benefits realized through our evolved footprint, which includes leveraging our brewing partnership with Anheuser-Busch. On a year-to-date basis, our beer gross margin expanded 50 basis points to 37.3% compared to the same period in 2018. We continued to make strong progress in improving our pub gross margins, which expanded 310 basis points to 10.2% in the third quarter, contributing to a 500 basis point expansion to 10.4% year to date, compared to the same periods last year.

Innovation and learning for future growth

CBA’s investments in consumer insights and innovation continued to influence our portfolio, both within and outside of traditional beer. As suppliers race to saturate the market with trending products, CBA’s pH Experiment business unit remains focused on listening closely to consumer needs and testing differentiated offerings that address future untapped opportunities. Following the launch of multiple test-sprints this year, the team is already working on identifying what consumers will want next.

Summary of financial results for the third quarter and year-to-date 2019


•	Kona depletions grew 7% in the third quarter and 6% year to date from the comparable periods in 2018.

◦

Total CBA depletions increased by 2% in the third quarter, improving the year-to-date trend to flat compared to the same period a year ago. CBA’s positive depletion trend reflects strong growth for Kona, as well as the larger role that our newly acquired brands now play in our overall portfolio mix. As a reminder, CBA’s year-to-date depletions were impacted by significant retailer out-of-stock issues that dampened Kona’s growth in key markets during critical selling periods. During the third quarter, we implemented several merchandiser pilot programs to improve retailer execution, and early indications point to positive benefits that will support continued execution improvement in 2020.


•	Kona shipments were flat for the third quarter, primarily reflecting efforts to rebalance inventory levels as a result of the out-of-stock issues mentioned above. For the nine-month period, Kona shipments were up 7%, compared to the same period a year ago.


◦	CBA owned beer shipments decreased by 2% in the third quarter and increased by 2% year to date compared to the same period a year ago.


•	Owned beer sales were $39.5 million for the third quarter and $130.6 million year to date, a decrease of 7.4% and flat respectively from the same periods a year ago. Our third quarter owned beer sales decrease is attributed to promotional pricing and lower shipment volume, partially offset by improvements in brand family mix.

◦

Total net sales were $47.2 million for the third quarter and $154.7 million year to date, a decrease of 10.8% and 4.6% respectively from the same periods a year ago. In 2018, we received alternating proprietorship fees from Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing, which represented $1.6 million in the third quarter and $5.7 million year to date. With those brands now fully owned and excluding the impact of the alternating proprietorship fees, our 2019 net sales comparison would be a decrease of 8.0% for the third quarter and a decrease of 1.2% year to date.


•	Total company gross margin in the third quarter was 28.2%, compared to 31.6% in the third quarter of 2018, while year-to-date gross margin was 34.1%, a 90-basis point improvement over the same period last year.


◦	Beer gross margin was 30.8% in the third quarter versus 34.8% in the third quarter of 2018, primarily attributed to volume deleveraging and promotional pricing. Year-to-date beer gross margin was 37.3%, a 50-basis-point improvement over the same period in 2018.


◦	Brewpub gross margin continued to improve, expanding 310 basis points to 10.2% in the third quarter, primarily reflecting improvements as a result of our reshaped pub footprint. Our year-to-date brewpub gross margin expanded 500 basis points over the same period last year, to 10.4%.


•	Selling, general and administrative expense (“SG&A”) was $16.5 million in the third quarter, slightly lower than the third quarter last year.

◦

Year-to-date SG&A increased by $14.1 million, to $61.4 million, primarily attributed to the national marketing investment to fuel Kona’s growth and a $4.7 million pre-tax expense related to the Kona class action lawsuit settlement accrued as a one-time expense in the first quarter. The claim period ended October 7, 2019, and the total cost of litigation is not expected to materially exceed the $4.7 million accrual.


•	Net loss for the quarter was $1.2 million compared to net income of $0.1 million in the third quarter in 2018. Our net loss for the quarter includes the benefit of federal research and development (“R&D”) tax credits, worth approximately $1.6M, or $0.08 per share, that were realized on recent operational investments.


◦	On a year-to-date basis, we recorded a net loss of $6.0 million primarily attributed to the Kona class action accrual. On an adjusted non-GAAP basis excluding the $3.6 million after-tax impact of the accrual, and adding back the $1.6 million R&D tax credit, our year-to-date net loss was $4.0 million.


•	We recorded a net loss per share of $0.06 in the third quarter, which included the $0.08 benefit from R&D tax credits.


◦	Year to date, we recorded a net loss per share of $0.31. On an adjusted non-GAAP basis excluding the $3.6 million after-tax expense accrual, and adding back the $0.08 R&D tax credit, our net loss per share was $0.20.

2019 Financial Guidance

On September 5, 2019, we updated our 2019 guidance as follows:


•	Depletions and shipments range of flat to an increase of 3%.


•	Average price increases of 1% to 2%.


•	Gross margin rate of 34.5% to 36.5%.


•	SG&A range between $75 million and $79 million, which reflects a $4.7 million one-time expense related to the Kona class action lawsuit settlement.


•	Capital expenditures range between $13 million and $17 million.

In addition, our effective tax rate is expected to approximate 40% for the year as a result of the benefit of our R&D tax credits. Excluding the discrete credits, our effective rate would have been approximately 25% as updated on September 5, 2019.

Additional Information about the Merger and Where to Find It:

This press release is not intended to and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy or an invitation to purchase or subscribe for any securities or the solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in contravention of applicable law. The Company plans to mail to its shareholders the definitive Proxy Statement in connection with the transaction. INVESTORS AND SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ THE PROXY STATEMENT AND OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC CAREFULLY WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT A-B, THE COMPANY, THE TRANSACTION AND RELATED MATTERS. Investors and security holders will be able to obtain free copies of the Proxy Statement (when available) and other documents filed with the SEC by A-B and the Company through the website maintained by the SEC at www.sec.gov. In addition, investors and security holders will be able to obtain free copies of the documents filed with the SEC by the Company in the Investor Relations section of the Company’s website at www.craftbrew.gcs-web.com or by contacting the Company’s Investor Relations at [email protected] or by calling 503-331-7270.

Forward Looking Statements:

Some of the statements in this [communication] are forward-looking statements (or forward-looking information) within the meaning of applicable U.S. securities laws. These include statements using the words “believe,” “target,” “outlook,” “may,” “will,” “should,” “could,” “estimate,” “continue,” “expect,” “intend,” “plan,” “predict,” “potential,” “project,” “intend,” “estimate,” “aim,” “on track,” “target,” “opportunity,” “tentative,” “positioning,” “designed,” “create,” “seek,” “would,” “upside,” “increases,” “goal,” “guidance” and “anticipate,” and similar statements (including where the word “could,” “may,” or “would” is used rather than the word “will”) and the negative of such words and phrases, which do not describe the present or provide information about the past. There is no guarantee that the expected events or expected results will actually occur. Such statements reflect the current views of management of the Company and are subject to a number of risks and uncertainties. These statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, operational and other factors. Any changes in these assumptions or other factors could cause actual results to differ materially from current expectations. All forward-looking statements attributable to the Company, or persons acting on either on its behalf, and are expressly qualified in their entirety by the cautionary statements set forth in this paragraph. Undue reliance should not be placed on such statements. In addition, material risks that could cause actual results to differ from forward-looking statements include: the inherent uncertainty associated with financial or other projections, including depletions and shipments; the effect of out-of-stock issues and lower contract brewing shipments; price increases; gross margin rate improvement; the level and effect of SG&A expense; the effect of the class action settlement; effective tax rate changes; the risk associated with the Company’s ability to obtain the shareholder approval required to consummate the merger and the timing of the closing of the merger, including the risk that the conditions to the transaction are not satisfied on a timely basis or

at all and the failure of the transaction to close for any other reason; the outcome of any legal proceedings that may be instituted against the parties and others related to the merger agreement; unanticipated difficulties or expenditures relating to the transaction, the response of business partners and retention as a result of the announcement and pendency of the transaction; the anticipated size of the markets and continued demand for A-B’s products and the impact of competitive responses to the announcement of the transaction. Additional risks are described under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 6, 2019. Forward-looking statements speak only as of the date they are made. Except as required by law, neither A-B’s nor the Company has any intention or obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements.

Participants in Solicitation:

The Company and certain of its respective directors, executive officers and employees may be considered participants in the solicitation of proxies in connection with the proposed transaction. Information regarding the persons who may, under the rules of the SEC, be deemed participants in the solicitation of the shareholders of the Company in connection with the transaction, including a description of their respective direct or indirect interests, by security holdings or otherwise, will be included in the Proxy Statement described above when it is filed with the SEC. Additional information regarding the Company’s directors and executive officers is also included in the Company’s proxy statement for its 2019 Annual Meeting of Stockholders, which was filed with the SEC on April 10, 2019, or its Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 6, 2019. These documents are available free of charge as described above.

About Craft Brew Alliance

Craft Brew Alliance (CBA) is a leading craft brewing company that brews, brands, and brings to market world-class American craft beers.

Our distinctive portfolio combines the power of Kona Brewing Company, a dynamic, fast-growing national craft beer brand, 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. CBA nurtures the growth and development of its brands in today’s increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on partnerships, local community and sustainability.

Formed in 2008, CBA is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S. CBA beers are available in all 50 U.S. states and 30 different countries around the world. For more information about CBA and our brands, please visit www.craftbrew.com.

CONTACT: Jenny McLean, Director of Communications, [email protected]

Craft Brew Alliance, Inc.

Condensed Consolidated Statements of Operations

(Dollars and shares in thousands, except per share amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Sales	$	50,349		$	55,639		$	163,932		$	170,977
Less excise taxes	3,188			2,750			9,220			8,778
Net sales	47,161			52,889			154,712			162,199
Cost of sales	33,857			36,190			101,938			108,302
Gross profit	13,304			16,699			52,774			53,897
As percentage of net sales	28.2		%	31.6		%	34.1		%	33.2		%
Selling, general and administrative expenses	16,465			16,712			61,411			47,317
Operating income (loss)	(3,161		)	(13		)	(8,637		)	6,580
Interest expense	(616		)	(107		)	(1,428		)	(348		)
Other income (expense), net	24			(13		)	57			42
Income (loss) before income taxes	(3,753		)	(133		)	(10,008		)	6,274
Income tax provision (benefit)	(2,529		)	(194		)	(4,030		)	1,600
Net income (loss)	$	(1,224	)	$	61		$	(5,978	)	$	4,674

Basic and diluted net income (loss) per share	$	(0.06	)	$	—		$	(0.31	)	$	0.24
Weighted average shares outstanding:
Basic	19,466			19,370			19,435			19,338
Diluted	19,466			19,545			19,435			19,525
Total shipments (in barrels):
Core Brands	183,300			186,800			576,000			566,100
Contract Brewing	2,100			9,000			9,400			21,300
Total shipments	185,400			195,800			585,400			587,400
Change in depletions ⁽¹⁾	2		%	1		%	0		%	2		%


(1)	Change in depletions reflects the period-over-period change in barrel volume sales of beer by wholesalers to retailers.

Craft Brew Alliance, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)



	September 30,
	2019		2018
Current assets:
Cash, cash equivalents and restricted cash	$	11,782	$	12,156
Accounts receivable, net	18,357		28,460
Inventory, net	21,500		17,271
Other current assets	4,025		1,275
Total current assets	55,664		59,162
Property, equipment and leasehold improvements, net	110,924		104,225
Operating lease right-of-use assets	23,841		—
Goodwill	21,935		12,917
Trademarks	44,211		14,415
Intangible and other assets, net	5,473		5,829
Total assets	$	262,048	$	196,548
Current liabilities:
Accounts payable	$	19,475	$	18,899
Accrued salaries, wages and payroll taxes	5,881		4,749
Refundable deposits	3,467		4,029
Deferred revenue	3,251		5,335
Other accrued expenses	8,142		2,415
Current portion of long-term debt and finance lease obligations	1,498		816
Total current liabilities	41,714		36,243
Deferred revenue, non-current	20,300		—
Long-term debt and finance lease obligations, net of current portion	33,124		9,763
Other long-term liabilities	35,351		13,910
Total common shareholders' equity	131,559		136,632
Total liabilities and common shareholders' equity	$	262,048	$	196,548

Craft Brew Alliance, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(5,978	)	$	4,674
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	7,993			7,985
Gain on sale or disposal of Property, equipment and leasehold improvements	(8		)	(549		)
Deferred income taxes	(2,764		)	(673		)
Other, including stock-based compensation	1,571			1,264
Changes in operating assets and liabilities:
Accounts receivable, net	11,975			(676		)
Inventories	(3,851		)	(2,905		)
Other current assets	(1,120		)	2,360
Accounts payable and other accrued expenses	8,986			4,922
Deferred revenue	17,537			1,950
Accrued salaries, wages and payroll taxes	247			(1,128		)
Refundable deposits	(114		)	(560		)
Net cash provided by operating activities	34,474			16,664
Cash flows from investing activities:
Expenditures for Property, equipment and leasehold improvements	(10,478		)	(6,216		)
Proceeds from sale of Property, equipment and leasehold improvements	55			22,998
Restricted cash from sale of Property, equipment and leasehold improvements	—			515
Business combinations and asset acquisitions	(274		)	—
Net cash provided by (used in) investing activities	(10,697		)	17,297
Cash flows from financing activities:
Proceeds from issuance of long-term debt	5,192			—
Principal payments on debt and finance lease obligations	(798		)	(520		)
Net repayments under revolving line of credit	(17,264		)	(22,199		)
Proceeds from issuances of common stock	—			427
Tax payments related to stock-based awards	(325		)	(92		)
Net cash used in financing activities	(13,195		)	(22,384		)
Increase in Cash, cash equivalents and restricted cash	10,582			11,577
Cash, cash equivalents and restricted cash, beginning of period	1,200			579
Cash, cash equivalents and restricted cash, end of period	$	11,782		$	12,156

Craft Brew Alliance, Inc.

Select Financial Information on a Trailing Twelve-Month Basis

(Dollars in thousands, except per share amounts)

(Unaudited)



	Twelve Months Ended
	September 30,
	2019			2018			Change				% Change
Net sales	$	198,699		$	208,165		$	(9,466	)		(4.5	)%
Gross profit	$	67,200		$	68,773		$	(1,573	)		(2.3	)%
As percentage of net sales	33.8		%	33.0		%	80			bps
Selling, general and administrative expenses	76,666			60,423			16,243				26.9	%
Operating income (loss)	$	(9,466	)	$	8,350		$	(17,816	)		(213.4	)%

Net income (loss)	$	(6,510	)	$	12,509		$	(19,019	)		(152.0	)%


Income per share:
Basic	$	(0.34	)	$	0.65		$	(0.99	)		(152.3	)%
Diluted	$	(0.34	)	$	0.64		$	(0.98	)		(153.1	)%

Total shipments (in barrels):
Core Brands	729,300			724,100			5,200				0.7	%
Contract Brewing	16,200			25,300			(9,100		)		(36.0	)%
Total shipments	745,500			749,400			(3,900		)		(0.5	)%
Change in depletions ⁽¹⁾	0		%	(2		)%


(1)	Change in depletions reflects the period-over-period change in barrel volume sales of beer by wholesalers to retailers.

Supplemental Disclosures Regarding Non-GAAP Financial Information

Craft Brew Alliance, Inc.

Reconciliation of Adjusted EBITDA to Net income (loss)

(In thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	(1,224	)	$	61		$	(5,978	)	$	4,674
Interest expense	616			107			1,428			348
Income tax provision (benefit)	(2,529		)	(194		)	(4,030		)	1,600
Depreciation expense	2,483			2,521			7,624			7,713
Amortization expense	124			77			369			272
Stock-based compensation	336			371			1,589			1,058
Gain on disposal of assets	(30		)	(55		)	(8		)	(549		)
Kona class action expense	18			—			4,920			—
Adjusted EBITDA	$	(206	)	$	2,888		$	5,914		$	15,116

CBA has presented Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) in these tables to provide investors with additional information to evaluate our operating performance on an ongoing basis using criteria that are used by management. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation and other non-cash charges, including loss on impairment of assets and net gain or loss on disposal of property, equipment and leasehold improvements. We use Adjusted EBITDA, among other measures, to evaluate operating performance, to plan and forecast future periods’ operating performance, and as an incentive compensation target for certain management personnel.

As Adjusted EBITDA is not a measure of operating performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), this measure should not be considered in isolation of, or as a substitute for, net income (loss) as an indicator of operating performance, or net cash provided by (used in) operating activities as an indicator of liquidity. The use of Adjusted EBITDA instead of net income (loss) has limitations as an analytical tool, including the inability to determine profitability; the exclusion of interest expense and associated cash requirements, given the level of our indebtedness; and the exclusion of depreciation and amortization which represent significant and unavoidable operating costs, given the capital expenditures needed to maintain our operations. We compensate for these limitations by relying on GAAP results. Our computation of Adjusted EBITDA may differ from similarly titled measures used by other companies. As Adjusted EBITDA excludes certain financial information compared with net income (loss) and net cash provided by (used in) operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. The table above shows a reconciliation of Adjusted EBITDA to net income (loss).

StreetInsider

Log in to your account:

Form 10-Q CRAFT BREW ALLIANCE, For: Sep 30

Categories