UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
_____________________________
  ☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2018
OR
☐           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
 
Name of each exchange on which registered
Common Stock, $0.005 par value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
 ________________

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No☒
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒  No ☐
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.   ☒
 
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). Check one: 
Large Accelerated Filer ☐
 
Accelerated Filer ☒
Non-accelerated Filer ☐ (Do not check if a smaller reporting company)
 
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 Act). Yes ☐  No ☒
 
The aggregate market value of the common equity held by non-affiliates of the registrant as of the last day of the registrant’s most recently completed second quarter on June 29, 2018 (based upon the closing price of the registrant’s common stock, as reported by the NASDAQ Stock Market, of $20.65 per share) was $261,465,571 .
 
The number of shares outstanding of the registrant’s common stock as of February 28, 2019 was 19,382,641 shares.

Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Shareholders’ Meeting are incorporated by reference into Part III.
 



CRAFT BREW ALLIANCE, INC.
2018 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
Page
 
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
PART III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
PART IV
 
 
 
 
Item 15.
 
 
 
Item 16.
 
 
 
 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K 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 “Item 1A. - Risk Factors” and those described from time to time in our future reports filed with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.
 
THIRD-PARTY INFORMATION

In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources or other third parties. Although we believe that the third-party sources of information we use are materially complete, accurate and reliable, there is no assurance of the accuracy, completeness or reliability of third-party information.

PART I

Item 1. Business

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.

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 ("AMB"), 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.

Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S. For more information about CBA and its brands, see “Available Information” on page 14 of this report.

We proudly brew and package our craft beers in three company-owned production breweries located in Portland, Oregon; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. In 2018, we continued to leverage our contract brewing agreement with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of Anheuser-Busch, LLC (“A-B”), through which we brew select CBA brands in A-B’s Fort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries in Portland, Oregon; Seattle, Washington; Portsmouth, New Hampshire; Boone, North Carolina; and Miami, Florida, which are primarily used for small-batch production and limited-release beers offered primarily in our brewpubs and brands’ home markets.

We distribute our beers to retailers through wholesalers that are aligned with the A-B network. These sales are made pursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B, which extends through 2028. As a result of this

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distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. As competition puts increasing pressure on craft brands outside of their home markets, we are continuing our efforts to stabilize and strengthen Widmer Brothers and Redhook in the Pacific Northwest, while expanding distribution of Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. across their respective home markets of North Carolina, New England, and South Miami.

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

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

Industry Background

We are one of the top seven brewers in the craft brewing segment of the U.S. brewing industry. The domestic beer market includes ales and lagers produced by large domestic brewers, international brewers and craft brewers. As the overall domestic market experienced a decrease in shipments of 1% in 2018 , the craft beer segment began to show signs of a slowdown. Shipments of craft beer in the U.S. are estimated by industry sources to have decreased by only 0.6% in 2018 over 2017 , compared to a 1.4% increase in 2017 over 2016 . Of total beer shipped in the U.S., craft beer shipments were approximately 14.3% in 2018 and 14.2% in 2017 . Approximately 29.0 million barrels and 29.2 million barrels, respectively, were shipped in the U.S. by the craft beer segment during 2018 and 2017 , while total beer sold in the U.S., including imported beer, was 202.6 million barrels and 204.6 million barrels, respectively. Compared with the other segments of the U.S. brewing industry, craft brewing is a relative newcomer. Twenty years ago, Redhook and Widmer Brothers Brewery were two of the approximately 200 craft breweries in operation. By the end of 2018 , the number of craft breweries in operation had grown to more than 7,000 . Industry sources estimate that craft beer produced by regional and national craft brewers, similar to us, accounts for approximately two-thirds of total craft beer sales, with one-third of the production brewed by smaller craft breweries.

Our comprehensive portfolio and national scale provide a competitive advantage in today’s market environment, which includes craft brewers, domestic specialty beers, and imports. Our distinctive brand portfolio is positioned to address significant changes in consumer trends, including increased demand for innovative flavors and styles, a growing interest in sustainability, and the increasing importance of local relevance. As an example, Kona Brewing is one of the top craft brewers, with a broad portfolio of beers that reflect a uniquely Hawaii-inspired flavor profile, a recognized track record in sustainable business practices, and deep ties to its local community as Hawaii’s longest-running craft brewery.

Business Strategy

At Craft Brew Alliance, we believe we have an advantaged strategy to sustain long-term growth in today’s increasingly complex beer market.

The central elements of our business strategy include:
Increased focus on topline growth, driving our Kona Plus portfolio strategy, supporting our strong regional craft brands in their home markets, and unlocking the potential of Kona as a global lifestyle brand.
Building on healthy business fundamentals, including strong revenue management and improved supply chain execution to expand gross margin.
Actualizing the future, through leveraging CBA’s enhanced partnership agreements with Anheuser-Busch to drive growth, value and cost savings, while continuing to explore potential new opportunities for innovation and to invest in our talent and culture.

Key Differentiators

Following are key differentiators that create competitive advantage for CBA in today’s rapidly evolving craft beer segment.

A distinctive portfolio of authentic craft beer brands anchored by Kona Brewing Co., which combines the power of one of the largest craft beer brands in the U.S with a strong stable of award-winning regional craft brands.
A transformational strategic relationship with Anheuser-Busch InBev, through which we have been able to gain access to the best route to market in the industry, optimize our brewery footprint, and support Kona’s global growth.

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A national brewing footprint that allows us to get our beers to market faster, fresher and more efficiently. We have significant flexibility to fully leverage the specific strengths of our distinct breweries and operations, as well as A-B's Fort Collins, Colorado brewery. Additionally, we guarantee the quality and consistency of all of our products through fine-tuned processes designed to ensure that everything, from brewing to quality-assurance to warehousing and distribution, meets our high standards. We believe that maximizing production under our direct supervision and through accomplished and expert partners is critical to our success. Further, we believe that our ability to engage in ongoing product innovation while controlling product quality provides critical competitive advantages. Each of our breweries is modern, has flexible production capabilities, and is designed to produce beer in smaller batches compared to the national domestic brewers, thereby allowing us to brew a wide variety of brand offerings. We believe that our investment in brewing and logistics technologies enables us to minimize brewery operating costs and consistently produce innovative beer styles.
Nationwide sales activation through robust partnerships with leading retailers. We leverage our national sales and marketing capabilities and complementary brand families to create a unique identity in the distribution channel and with the consumer.
National seamless distribution as an aligned brand within the Anheuser-Busch wholesaler network. This distribution footprint provides efficiencies in logistics and product delivery, state reporting and licensing, billing and collections. We have realized these efficiencies while maintaining full autonomy over the production, sale and marketing of our products as an independent craft beer company.
An experienced leadership team with expertise in the beer and beverage industries. The team has a proven ability to manage brand lifecycles, from development to turnaround, in both large and growth-company settings.
A commitment to innovation. In 2018, we launched the most comprehensive consumer research initiative in our company history, including pH, a quick test-and-learn product experiment, and two consumer-based studies with global consultancy Prophet and the Yale Center for Consumer Insights.

Strategic Partner Acquisitions

On October 10, 2018, we announced the acquisition of our three craft partner brands -- North Carolina-based Appalachian Mountain Brewery, Massachusetts-based Cisco Brewers, and Florida-based Wynwood Brewing Co. -- to begin unlocking the full potential of our expanded portfolio. The acquisitions build on our successful craft partnership strategy, launched in 2015. Over the past several years, the partnerships with AMB, Cisco, and Wynwood have bolstered CBA’s portfolio, anchored by Kona Brewing Co., with strong local brands and innovation breweries in key markets. Further, the partnerships helped propel CBA’s strategic brewery evolution by leveraging the production capability and location of the Portsmouth, New Hampshire brewery as CBA rebalanced its brewing footprint.
Under the purchase agreement with AMB, CBA acquired the AMB brand, brewery, and pub. The transaction closed November 29, 2018.
Under the agreement between CBA and Cisco, which closed October 10, 2018, CBA acquired the intellectual property assets of Cisco relating to its malt beverage products. Cisco’s founders continue to own and operate the Cisco Brewers brewpub properties and retail merchandising, including the original brewery and grounds in Nantucket.
Under CBA’s agreement with Wynwood Brewing Co., which also closed October 10, 2018, CBA purchased the remaining 75.5 percent equity interest in the Miami-based brewery, which became a wholly owned subsidiary of CBA. Wynwood’s operations will continue under the leadership of Co-founders Luis and his father “Pops” Brignoni.

Collectively, the acquisitions represent a milestone in enabling CBA and its shareholders to fully participate in the value that the partners will bring as wholly owned CBA brands.

Brand Overview

Our portfolio includes national brands Kona Brewing Company and Omission Brewing, as well as regional craft brands Appalachian Mountain Brewery, Cisco Brewers, Redhook Brewery, Square Mile Cider Company, Widmer Brothers Brewing, and Wynwood Brewing Co. with deep community roots.

We produce a variety of specialty craft beers and ciders using traditional brewing methods complemented by American innovation and invention. We brew our beers using high-quality hops, malted barley, wheat, rye and other natural traditional and nontraditional ingredients. To craft our ciders, we use three apple varieties from the Pacific Northwest and then use a lager beer yeast to make a unique and easy-to-drink hard cider.


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Below is an overview of our eight owned brands:

Kona Brewing Company
Kona Brewing Company was started in Kailua-Kona on the Island of Hawaii in the spring of 1994 by father and son team Cameron Healy and Spoon Khalsa, who had a dream to create fresh, local island brews made with spirit, passion and quality.

Today, Kona is Hawaii’s largest and favorite craft brewery, known for top-selling flagship beers Big Wave Golden Ale and Longboard Island Lager and award-winning innovative small-batch beers available across the islands. The Hawaii born and Hawaii-based craft brewery prides itself on brewing the freshest beer of exceptional quality closest to market. This helps to minimize its carbon footprint by reducing shipping of raw materials, finished beer and packaging materials. In 2019, Kona will open a new 100,000-barrel solar and battery-powered brewery in Kailua-Kona, which will allow Kona to brew more beer on the islands and meet increasing demand in its home state,while saving precious natural resources.

Kona Brewing Company has become one of the top craft beer brands in the world, while remaining steadfastly committed to its home market through a strong focus on innovation, sustainability and community outreach.

Omission Beer
Founded in 2012, Omission Brewing Co. is the first craft beer brand in the U.S. focused exclusively on brewing great-tasting beers with traditional beer ingredients, including malted barley, that are specially crafted to remove gluten. Each batch of Omission Beer is tested independently using the R5 competitive ELISA test to ensure that it contains gluten levels below the U.S. Food and Drug Administration (“FDA”) gluten-free standard of 20ppm or less. Omission’s line up of beers is the most awarded within the gluten reduced segment, and includes Omission Lager, Omission Pale Ale, Omission IPA, and Omission Ultimate Light Golden Ale, a full-flavored gluten-reduced ale with only 99 calories and 5 carbs, released in 2017.

Appalachian Mountain Brewery
Nestled in the High Country of North Carolina, Appalachian Mountain Brewery is Boone, NC’s beer pioneer. The brewery is dedicated to making seriously delicious craft beer while focusing its business model on community, sustainability and philanthropy. Through its beers, AMB supports a variety of non-profits that are dedicated to enriching the land, water, air and people of the High Country. Appalachian Mountain Brewery has earned numerous awards for its innovative craft beers and ciders, including Boone Creek Blonde Ale, which won a Gold Medal at the 2015 U.S. Open Beer Championships and a Gold Medal at the 2017 Great American Beer Festival Competition, as well as Not a Double IPA, which won a Silver Medal at the 2018 Great American Beer Festival. The brewery’s core portfolio also includes Long Leaf IPA, Spoaty Oaty Pale Ale, and Porter, which was a gold medal winner at the 2015 Great International Beer and Cider Competition.

Cisco Brewers
Located near Cisco Beach on the island of Nantucket, Cisco Brewers is Nantucket’s first craft brewery. Founded by hard-working, entrepreneurial islanders who began selling beer from their outdoor brewery in 1995, Cisco has carved out its own special place on Nantucket where they tough out the winters to celebrate the summers. Over the years they’ve attracted a cult following with visitors to the island and open the door to anyone willing to make the trek. Named a top travel destination by Time Magazine, Huffington Post, Travel & Leisure and Men's Journal, Cisco’s brewery is a common ground where people from all walks of life connect over classic and approachable craft beers like Whale’s Tale Pale Ale, Grey Lady Ale, Sankaty Light Lager, and most recently, Gripah IPA. In addition to its Nantucket location, Cisco operates a brewpub in Portsmouth, New Hampshire and opens seasonal pop-up pubs in New England.

Redhook Brewery
Redhook was born out of the entrepreneurial spirit of the early 1980s in the heart of Seattle. While the term didn’t exist at the time, Redhook became one of America’s first craft breweries with its focus on creating a better beer. From a modest start in a former transmission shop in the Seattle neighborhood of Ballard, to a Fremont trolley barn that housed The Trolleyman brewpub, to its current brewery in Seattle, Washington, Redhook continues its passion for brewing innovative beers that stand apart in today’s crowded craft beer marketplace.

Redhook opened Brewlab, an experimental 10-barrel brewery and pub, in the Capitol Hill neighborhood of Seattle in 2017.

Redhook’s beer lineup includes Big Ballard IPA, Bicoastal IPA, ESB, Long Hammer IPA and a variety of seasonal beers, including My Oh My Caramel Macchiato Milk Stout, Tangelic Halo Tangerine IPA, Winterhook, and more.

Square Mile Cider Company
Launched in 2013, Square Mile Cider is the hard cider for the modern-day pioneers celebrating the spirit of the Pacific Northwest. We set out to reinvigorate an enduringly classic American beverage with a blend of hand-selected apples combined with unique

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Northwest ingredients. Square Mile Cider produces three varieties of hard cider: Original Apple Cider, Hopped Apple Cider, and Rosé Apple Cider, which debuted in 2017 as one of the first rosé ciders in the market.

Widmer Brothers Brewing
Widmer Brothers Brewing was founded in 1984 in Portland, Oregon. Brothers Kurt and Rob Widmer, with help from their father, Ray, helped lead the Pacific Northwest craft beer movement when they began brewing unique interpretations of traditional German beer styles. In 1986, Widmer Brothers Brewing introduced the original American-style Hefeweizen, which elevated the brewery to national acclaim. Since then, Hefe has grown to become Oregon’s favorite craft beer and the brewery has continued to push the boundaries, developing beers with an unapologetic, uncompromised commitment to innovation.

Widmer Brothers currently brews a variety of award-winning beers. Its flagship Hefe, has won more than 30 medals, including nine from the Great American Beer Festival. The brewery’s other beers include Upheaval IPA, Drop Top Amber Ale, and a full seasonal lineup.

Wynwood Brewing Company
Wynwood Brewing Company is Miami’s first craft production brewery. Founded by Luis Brignoni and his father Luis “Pops” Brignoni Sr., Wynwood is deeply rooted in its founders’ Puerto Rican heritage and the brewery’s namesake neighborhood, the vibrant Wynwood Arts District. Wynwood Brewing Co. operates a 15-barrel brewhouse and taproom in the heart of the Wynwood Art District and distributes a variety of year-round, seasonal and limited beer offerings throughout South Florida, including flagship La Rubia Blonde Ale, Laces IPA, and Pop’s Porter, which earned a Gold Medal at the 2014 Great American Beer Festival.

Developments in Brands and Packaging

Our recent brand and packaging developments include:

Kona Brewing
In 2018, Kona Brewing Co. expanded its portfolio with two new national brands, Kanaha Blonde Ale, a refreshing ale made with real mango fruit, and Gold Cliff IPA, a bold, hoppy IPA with tropical pineapple. Building on increasing consumer trends around living an active lifestyle, Kanaha Blonde Ale is only 99 calories, 4 carbs, and 4.2% ABV.

As with all of Kona’s beers, Kanaha Blonde Ale and Gold Cliff IPA were named for real locations and experiences in Hawaii. The low-calorie and refreshing Kanaha was named for the popular kite-surfing beaches of Kanaha on the North Shore of Maui. And the bold, juicy 7.2% ABV Gold Cliff IPA pays homage to the southern tip of Lanai, where the island’s first pineapple field sits atop cliffs that overlook cobalt blue waters.  2018 represented another year of robust growth for Kona, which grew volumes by 7%, exceeding the growth rate for the overall craft category. Kona’s growth was primarily led by flagship Big Wave, which grew depletions by 8% over 2017, and Longboard Lager, with distribution across all 50 states and approximately 30 international markets. In response to continued demand for its flagships in its home market, Kona also released Big Wave Golden Ale and Longboard Lager in new 18-packs of 12oz cans in Hawaii.

Omission Brewing Co.
Omission Brewing Co. remains the market leader in the gluten-removed beer category. In 2018, Omission expanded distribution of its newest national brand, Omission Ultimate Light, a refreshing 5-carb, 99-calorie gluten removed golden ale. Ultimate Light joins Omission’s national portfolio which includes Omission IPA, Omission Lager,  and Omission Pale Ale - which earned a Silver Medal at the 2018 Great American Beer Festival. In 2018, Omission continued to expand distribution of Ultimate Light in 12oz cans in four U.S markets, Austin, Boston, Denver, and Phoenix.

Widmer Brothers Brewing
In 2018, Widmer Brothers continued to focus on the brewery’s flagship Hefe, which is the best-selling craft beer in Oregon. The brewery celebrated Hefe Day in May 2018 with a celebration at the taproom and adjacent beer garden featuring $0.86 Hefe specials. In December 2018, Widmer Brothers launched co-branded Portland Trail Blazers 16oz. Hefe cans, building on the longest-running craft beer partnership in the NBA and further supporting their award-winning flagship, which picked up its ninth medal from the Great American Beer Festival Competition in 2018.

Widmer Brothers added fan favorites Deadlift Imperial IPA and Green & Gold Kolsch to their 2018 seasonal lineup. Deadlift Imperial IPA, a bold double IPA that packs a flavorful hop punch and a smooth finish, was originally brewed in 2010 under a different name. The beer released in 6-packs, 12-packs, and draft as the spring seasonal and transitioned to a year-round offering in the fall. Green & Gold Kolsch, a crisp, golden-colored beer with aromas of strawberry and cracked black pepper, released in April 2018 as Widmer Brothers’ summer seasonal.


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As a tribute to the neighborhood and city that has supported the brewery for over 30 years, Widmer Brothers introduced the Portland Pub Series Variety Pack, featuring beers that originated in the 10-barrel innovation brewery, including Russell Street IPA, PDX Pils, Steel Bridge Porter, and Hefe X, a rotating series featuring the brewery’s flagship Hefe with additions of different hop varietals. Widmer Brothers also launched several small-batch cans and bottles from the innovation brewery throughout the year, including Closing Time IPA, brewed in collaboration with rideshare company Lyft, which included a unique code to receive a ride discount. The brewery also released Le Petit Brasseur, one of the first craft beers bottled in reusable 500ml bottles in partnership with Oregon Bottle Drop.

Redhook Brewery
In 2018, Redhook bolstered its year-round portfolio, which includes Big Ballard Imperial IPA, Long Hammer IPA, ESB, and Bicoastal IPA, adding four new beers to its seasonal and Brewlab Limited Release Series lineups. My Oh My Caramel Macchiato Milk Stout, a rich, espresso-driven milk stout brewed with coffee and dark malts, released in January as a spring seasonal, and Tangelic Halo IPA, a tangerine IPA packed with naturally citrusy hops, debuted in May as the summer seasonal.

Building on the success of the Brewlab Limited Release Series in 2017, in 2018 Redhook released two new Limited Release beers based on recipes first brewed on Brewlab’s innovation brewery: Peaches for Me IPA and Continuous Revelation Coffee IPA. Loaded with juicy peach and mango and amplified by a trio of hops, Peaches for Me IPA was released in 6-pack bottles and draft. Continuous Revelation Coffee IPA brings together two Pacific Northwest staples: great beer and great coffee, and the coffee-laced IPA hit shelves in 6-packs in the latter half of 2018. Both limited release brews, as well as Tangelic Halo IPA, were also included in seasonal Hoppy Hook Pack variety packs.

Redhook Brewlab, Redhook’s innovation brewery and pub in the vibrant Capitol Hill neighborhood of Seattle, celebrated its one-year anniversary in August 2018, and was honored to be voted Best Brewery, Best Bar, and Best Happy Hour in Seattle Weekly’s 2018 Best Of issue.

Square Mile Cider Company
In 2018, Square Mile Cider Company added Rosé Apple Cider to its year-round lineup. First released in 2017 as a seasonal offering, Rosé Apple Cider is a dry apple cider made with rose hips and hibiscus for a rosé flavor and pink hue. Square Mile Cider Company, which finds its inspiration from the pioneering spirit of the original Oregon pioneers, continued to focus on distribution in 12 states with their three ciders: Original Apple Cider, a classic American hard cider; Hopped Apple Cider, a hopped version of the classic American hard cider, with the addition of Citra and Galaxy hops; and Rosé Apple Cider.

Brewing Operations

Brewing Facilities
We use highly automated brewing equipment at our owned production breweries and innovation breweries. As of December 31, 2018 , our total owned production capacity was 855,000 barrels. Our breweries include:

Oregon Brewery . Our Oregon Brewery is our largest capacity production brewery, which has an annual capacity of 630,000 barrels. In 2018, we completed the installation of a new canning line, which will enable us to produce a variety of can sizes - such as 12oz, 16oz and 19.2oz - to meet consumer demand. The brewery utilizes a CO 2 recovery system to capture and repurpose CO 2 naturally produced during the brewing process, eliminating the need to purchase and transport CO 2, thus further supporting our focus on sustainability.
New Hampshire Brewery . Our New Hampshire Brewery utilizes a 100-barrel brewing system, with an annual capacity of 215,000 barrels, and uses an anaerobic waste-water treatment facility with power co-generation that completes the process cycle.
Hawaii Brewery . Our current Hawaii Brewery utilizes a 25-barrel brewing system, with an annual capacity of 10,000 barrels, and a 229-kilowatt photovoltaic solar energy generating system to supply approximately 50 percent of its energy requirements through renewable energy. In 2018, we continued to make progress on construction of a new 100,000-barrel brewery located steps away from our existing brewery and pub in Kona. The new brewery, which is being built with best-in-class sustainability and innovation, is scheduled to go online in the latter half of 2019.
Innovation Breweries . In 2018, we continued to leverage a 10-barrel small-batch innovation brewery built for Redhook in Seattle. The heart of the new brewery is a High Efficiency Brewing System that uses a mash filter press, allowing us to use significantly less water and energy than a typical brewery. The brewery’s flexibility enables Redhook to produce hundreds of different beer recipes that can be tested in the pub and scaled for larger production based on popularity. Our Portland 10-barrel innovation brewery and New Hampshire 3-barrel innovation brewery - as well as our newly acquired 10-barrel brewery in North Carolina and 15-barrel brewery in Florida, continued to focus on producing small batch beers for the local markets.


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In addition to our owned brewing capacity, we continued to produce CBA beers in A-B’s Fort Collins, Colo. brewery as part of a brewing agreement with ABCS. This partnership, which began in 2016, allows us to produce up to 300,000 barrels at this location annually.

Packaging
We package our craft beers in cans, bottles and kegs. All of our production breweries, with the exception of the Hawaii Brewery, have fully automated bottling and keg lines, and our Portsmouth and Portland breweries both have canning capability. The bottle fillers at all of the breweries utilize a carbon dioxide environment during bottling, ensuring that minimal oxygen is dissolved in the beer and extending the beer’s shelf life. We offer an assortment of packages to highlight the unique characteristics of each of our beers and to provide greater opportunities for customers to drink our beers in more locations and at more events and occasions, matching the active lifestyles and preferences of our consumers. Additionally, in our Hawaii brewpub and Seattle brewpub, we package our small-batch and innovation beers for consumers in crowlers.

Quality Control
We monitor production and quality control at all of our breweries, with central coordination at the Oregon Brewery. All of the production breweries have an on-site laboratory where microbiologists and lab technicians supervise on-site yeast propagation, monitor product quality, test products, measure color and bitterness, and test for oxidation and unwanted bacteria. We also regularly utilize outside laboratories for independent product analysis. In addition, every batch of beer that we produce goes through an internal taste panel to ensure that it meets our taste and profile standards.

Ingredients and Raw Materials
We currently purchase a significant portion of our malted barley from two suppliers and our premium-quality select hops, mostly grown in the Pacific Northwest, from competitive sources. We also periodically purchase small lots of hops from international sources, such as New Zealand and Western Europe, which we use to achieve a special hop character in certain beers. In order to ensure the supply of the hop varieties used in our products, we enter into supply contracts for our hop requirements. We believe that comparable quality malted barley and hops are available from alternate sources at competitive prices, although there can be no assurance that pricing would be consistent with our current arrangements. We currently cultivate our own yeast supply for certain strains and maintain a separate, secure supply in-house. We have access to multiple competitive sources for packaging materials, such as labels, six-pack carriers, crowns, cans and shipping cases.

Contract Brewing
In an effort to absorb excess capacity, we enter into contract brewing arrangements under which we produce beer in volumes and per specifications as designated by the arrangements.

During 2018 , we shipped 28,200 barrels under contract brewing arrangements, compared to 17,700 barrels in 2017 and 26,700 in 2016 .

Innovation
In 2018, we launched a comprehensive consumer research effort, beginning with the pH Experiment, a test-and-learn initiative that enabled us to quickly gather insights around consumer taste preferences and consumption trends. Additionally, we embarked on two consumer research projects with global consultancy Prophet and the Yale Center for Customer Insights to help understand new segmentation strategies. Combined with the ongoing learnings from our innovation breweries in Boone, Kailua-Kona, Miami, Portland, Portsmouth, and Seattle, these initiatives will broaden our view of today’s changing consumer landscape and inform the evolution of our business model and portfolio in 2019 and beyond.

Brewpubs Operations

We own and operate brew-pub restaurants and retail stores in our brewery home markets that support consumer awareness and research and development. In the fourth quarter of 2018, as part of the acquisition of our strategic partners, we added the AMB brewpub in Boone, NC and the Wynwood Brewing Co. brewpub in Miami, Florida, expanding our total brewpubs to seven. Our brewpub restaurants allow us to interact directly with over 1.5 million consumers annually in our home markets, which support brand awareness and trial. Our brewers are continually experimenting with different varieties of hops and malts in all styles of beer, and our brewpubs allow us to bring those beers to market in test-size batches in order to evaluate their potential prior to releasing them on a wider basis.


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Distribution

With limited exceptions, all brewers in the United States are required to sell their beers to independent wholesalers, who then sell the beers to retailers. We are the only independent craft brewer in the U.S. to have established a wholly aligned distribution network through our partnership with A-B. This partnership provides us national distribution, which results in both an effective distribution presence in each market and administrative efficiencies. Our beers are available for sale directly to consumers in draft, cans and bottles at restaurants, bars and liquor stores, as well as in cans and bottles at supermarkets, warehouse clubs, convenience stores and drug stores. We sell beer directly to consumers at our brewpubs and breweries.

We distribute in all 50 states, pursuant to a master distributor agreement with A-B that allows us access to A-B’s national distribution network. For additional information regarding our relationship with A-B, see “ Relationship with Anheuser-Busch, LLC ” below. Management believes that our competitors in the craft beer segment generally negotiate distribution relationships separately with wholesalers in each locality and, as a result, typically distribute through a variety of wholesalers representing differing national beer brands with uncoordinated territorial boundaries.

In 2018 and 2017 , we sold approximately 653,300 barrels and 654,200 barrels, respectively, to the wholesalers in A-B’s distribution network, accounting for 87.4% of our shipment volume for the 2018 and 2017 periods.

Sales and Marketing

In addition to leveraging our owned brewpubs and retail locations, we promote our products through a national sales and marketing network that includes, but is not limited to, i) creating and executing a range of advertising programs; ii) training and educating wholesalers and retailers about our products; and iii) promoting our name, product offerings, brands, and experimental beers at local festivals, venues and brewpubs.

We advertise and promote our products through an assortment of media, including television, radio, billboard, print, digital and social media, including Facebook, Twitter and Instagram, in key markets and by participating in cooperative programs with our wholesalers. We believe that the financial commitment by the distributor helps align the distributor’s interests with ours, and the distributor’s knowledge of the local market results in an advertising and promotion program that is targeted in a manner that will best promote our products.

Our breweries also play a significant role in increasing consumer awareness of our products and enhancing our image as a craft brewer. Thousands of visitors take tours at our breweries each year and all of our production breweries have a retail restaurant or pub where our products are served. In addition, several of the breweries have meeting space that the public can rent for business meetings, parties and holiday events, and that we use to entertain and educate wholesalers, retailers and the media about our products. At our brewpubs, we sell various items of apparel and other merchandise bearing our trademarks, which creates further awareness of our beers and brands. To further promote retail canned and bottled product sales, and in response to local competitive conditions, we regularly recommend that wholesalers offer discounts to retailers in most of our markets.

Relationship with Anheuser-Busch, LLC

As a significant element of our business operations, we have entered into various contractual relationships with A-B as described in more detail below. With regard to agreements with A-B or one of its affiliates that provide for the payment of fees or other compensation in exchange for products or services, due to the related party nature of the agreements, the contract pricing may not be commensurate with amounts that an independent market participant would pay.

Distributor Agreement
The Master A-B Distributor Agreement (the "A-B Distributor Agreement"), as amended in August 2016, provides for the distribution of our brands in all states, territories and possessions of the United States, including the District of Columbia and, except with respect to Kona beers, all U.S. military, diplomatic, and governmental installations in a U.S. territory or possession. Under the A-B Distributor Agreement, we have granted A-B the right of first refusal to distribute our products, including any internally developed new products, but excluding new products that we may acquire. We are responsible for marketing our products to A-B’s wholesalers, as well as to retailers and consumers.

As amended in August 2016, the term of the A-B Distributor Agreement will expire on December 31, 2028. The A-B Distributor Agreement is also subject to immediate termination, by either party, upon the occurrence of standard events of default as defined in the agreement. Additionally, the A-B Distributor Agreement may be terminated by A-B, with six months’ prior written notice to us, upon the occurrence of any of the following events:


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we engage in incompatible conduct that damages the reputation or image of A‑B or the brewing industry;
any A-B competitor or affiliate thereof acquires 10% or more of our outstanding equity securities, and that entity designates one or more persons to our board of directors;
our current chief executive officer ceases to function in that role or is terminated, and a satisfactory successor, in A‑B’s opinion, is not appointed within six months;
we are merged or consolidated into or with any other entity or any other entity merges or consolidates into or with us without A-B’s prior approval; or
A-B, its subsidiaries, affiliates, or parent, incur any obligation or expense as a result of a claim asserted against them by or in our name, or by our affiliates or shareholders, and we do not reimburse and indemnify A-B and its corporate affiliates on demand for the entire amount of the obligation or expense.

A-B also has the right to deliver a revocation notice and reinstitute the terms of the A-B Distributor Agreement as they existed prior to August 23, 2016, following a “change of control event” that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed. A “change of control event” includes, with certain exceptions, (i) the acquisition by a person or group of beneficial ownership on a fully diluted basis of 50% or more of our equity securities (or the equity securities of the surviving entity in any merger, consolidation, share exchange or other business combination involving us), (ii) a change in the composition of our board of directors during any consecutive 12-month period such that the incumbent directors cease to constitute at least a majority of the board of directors, or (iii) the completion of a sale, lease, exchange, or other transfer of (A) the Kona brand or (B) 50% or more of our assets based on fair market value.

A-B would have a similar revocation right at any time following the earliest to occur of (x) our rejection of a “qualifying offer” by A-B, (y) the completion of a transaction implementing A-B’s qualifying offer, and (z) our failure to enter into a definitive transaction agreement with A-B within 120 days following receipt of A-B’s qualifying offer, with certain exceptions. A “qualifying offer” means an offer or proposal on customary terms and conditions, with certain exceptions, made by A-B (or one of its affiliates) for the acquisition of all of our outstanding common stock not owned by A-B or its affiliates, for a specified aggregate value (subject to adjustment for changes in capitalization). From and after August 24, 2018, the specified value for a qualifying offer must be at least $24.50 per share.

Under the A-B Distributor Agreement, we pay $0.25 per case-equivalent as a margin fee. Beginning on January 1, 2019, we will reinvest an aggregate amount equal to $0.25 per case-equivalent in sales and marketing efforts for our products. If A-B were to exercise its revocation right described above, the margin fee payable under the A-B Distribution Agreement would revert to $0.75 per case-equivalent.

International Distribution Agreement
On August 23, 2016, we also entered into an International Distribution Agreement (the “International Distribution Agreement”) with Anheuser-Busch Worldwide Investments, LLC (“ABWI”), an affiliate of A-B, pursuant to which ABWI will be the sole and exclusive distributor of our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our agreement with our existing international distributor, CraftCan Travel LLC, and certain other limitations, in each case as set forth in the International Distribution Agreement. Under the International Distribution Agreement, following delivery of notice to us, ABWI may also elect to commence brewing outside of the United States some or all of the products to be distributed in the non-U.S. jurisdictions covered by the International Distribution Agreement.

Under the terms of the International Distribution Agreement, with respect to our exported products produced by us, ABWI will pay us our costs of production plus reasonable out-of-pocket expenses relating to export shipment costs. Additionally, ABWI will pay us an international royalty fee based on volume of our products sold by ABWI, equal to either $40 per barrel or $30 per barrel, depending on certain factors described in the International Distribution Agreement, which royalty fee will be subject to escalation annually, beginning in calendar year 2018, on the terms described in the International Distribution Agreement. In addition, for calendar years 2016, 2017 and 2018, ABWI has paid us one-time fees of $3.0 million, $5.0 million and $6.0 million, respectively. The sum of the fees is recognized in Beer Related Net sales on a straight-line basis over the 10-year contract term, while the fees are collected in the first quarter of the year following the applicable calendar year.

The International Distribution Agreement contains specified termination rights, including, among other things, the right of either party to terminate the International Distribution Agreement if (a) the other party fails to perform any material obligation under the International Distribution Agreement, subject to certain cure rights or (b) the Brewing Agreement (as defined below) is terminated pursuant to certain specified provisions thereof. In addition, ABWI has the right to terminate the International Distribution Agreement upon 90 days’ prior written notice to us following (i) a “change of control event” (as defined above) that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed, or (ii) the earliest of (x) our rejection of a “qualifying offer” (as defined above), (y) the completion of a transaction implementing a qualifying offer, and (z) our failure to enter into a definitive transaction agreement within 120 days following receipt of a qualifying offer, with certain

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exceptions (each of the foregoing subclauses (x) through (z), a “qualifying offer lapse”). Following termination of the International Distribution Agreement due to a qualifying offer lapse, or any change of control event, ABWI shall have the right to purchase the international distribution rights for each of our brands then being distributed under the International Distribution Agreement at the fair market value of such rights, and on otherwise customary terms and conditions, as set forth in the International Distribution Agreement.

Under the International Distribution Agreement, ABWI will also be required to make a one-time $20.0 million payment to us on August 23, 2019. The payment is being recognized in Beer Related Net sales on a straight-line basis over the 10-year contract term. However, ABWI will not (subject to compliance with certain notice requirements) be obligated to make such one-time payment if, prior to that date, (i) a “change of control event” occurs or a definitive agreement for a transaction constituting a change of control event is entered into, (ii) ABWI (or an affiliate thereof) makes a qualifying offer and there is a qualifying offer lapse or (iii) we enter into a definitive agreement with ABWI (or an affiliate thereof) with respect to a qualifying offer but such agreement is subsequently terminated, other than for certain regulatory reasons (in which case the $20.0 million shall remain payable). Unless terminated sooner, the International Distribution Agreement will continue in effect until December 31, 2026.

Contract Brewing Arrangements
On August 23, 2016, we entered into a Contract Brewing Agreement (the “Brewing Agreement”) with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of A-B, pursuant to which ABCS will brew, bottle and package up to 300,000 barrels of our mutually agreed products annually, in facilities owned by ABCS within the United States, for an initial term through December 31, 2026. Production of CBA's products in ABCS’s brewery in Fort Collins, Colorado, began in the second quarter of 2017. We share equally with ABCS in any cost savings arising from the Brewing Agreement, provided that our cost savings will equal at least $10.00 per barrel on an aggregate basis, following certain adjustments as set forth in the Brewing Agreement. The Brewing Agreement provides specified termination rights, including, among other things, the right of either party to terminate the Brewing Agreement if (i) the other party fails to perform any material obligation under the Brewing Agreement, subject to certain cure rights, (ii) the International Distribution Agreement (as defined above) is terminated pursuant to certain specified provisions thereof, or (iii) subject to certain conditions, if the A-B Distributor Agreement (as defined above) is terminated pursuant to certain specified provisions thereof.

In addition, ABCS has the right to terminate the Brewing Agreement, upon 90 days’ prior written notice to us, following (i) a change of control event (as defined above) that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed, or (ii) the earliest to occur of (x) our rejection of a “qualifying offer” (as defined above), (y) the completion of a transaction implementing a qualifying offer, and (z) our failure to enter into a definitive transaction agreement within 120 days following receipt of a qualifying offer, with certain exceptions.

On January 30, 2018, we also entered into a Contract Brewing Agreement with Anheuser-Busch Companies, LLC (“ABC”), another A-B affiliate, pursuant to which we agreed to brew, package, and palletize certain malt beverage products of A-B's craft breweries at our Portland, Oregon, and Portsmouth, New Hampshire breweries, as selected by ABC. Under the terms of this agreement, ABC 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 agreement, as extended, will expire on December 31, 2019, unless further extended by mutual agreement. The agreement also contains specified termination rights, including, among other things, the right of either party to terminate it if (i) the other party fails to perform any material obligation under the agreement or any other agreement between the parties, subject to certain cure rights, or (ii) the A-B Distributor Agreement is terminated.

Exchange Agreement
We have also entered into an Amended and Restated Exchange and Recapitalization Agreement (the “Exchange Agreement”) with A-B, pursuant to which we have granted A-B certain contractual rights. The Exchange Agreement originally was entered into in 2004 as part of a recapitalization in which we redeemed preferred shares held by A-B in exchange for cash and the shares of our common stock currently held by A-B. A-B owned 6,069,047 , or approximately 31.3% , of our outstanding shares of common stock at December 31, 2018 .


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The Exchange Agreement entitles A-B to designate two members of our board of directors. A-B also generally has the right to have a designee on each committee of the board of directors, except where prohibited by law or stock exchange requirements, or with respect to a committee formed to evaluate transactions or proposed transactions between A-B and us. The Exchange Agreement contains limitations on our ability to take certain actions without A-B’s prior consent, including, but not limited to, our ability to issue equity securities or acquire or sell assets or stock, amend our Articles of Incorporation or Bylaws, grant board representation rights, enter into certain transactions with affiliates, distribute our products in the United States other than through A-B or as provided in the A-B Distributor Agreement, or voluntarily terminate our listing on the Nasdaq Stock Market.

On August 23, 2016, we entered into an amendment to the Exchange Agreement with A-B providing it with rights, following a “change of control event” or a “qualifying offer,” similar to those described above under “Amendment to A-B Distributor Agreement.”

Fees
We pay fees to A-B in connection with the sale of our products, including margin fees, invoicing, staging and cooperage handling fees, and inventory manager fees. In addition, our contract brewing arrangements call for the payment of fees to the respective brewing partner, and A-B pays us distribution costs and fees and royalty fees under the International Distribution Agreement.

See Note 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

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.

Competition

We compete in the craft brewing market, as well as in the much larger alcoholic beverage market, which encompasses domestic and imported beers, flavored alcohol beverages, spirits, wine and ciders. Increasingly, we are also monitoring the impact of marijuana as more states pass legalization.

In 2018, the craft brewing industry continued to experience unprecedented change and competition, characterized by three trends: 1) the growing number and popularity of new local craft breweries that captured market share from established craft breweries; 2) continued acquisition and investment activity between craft brewers, large domestic and foreign brewers, and private equity firms; and 3) continued competitive pressure from international brewers, such as Crown, which target both domestic and craft beer drinkers. In 2018, according to industry sources, A-B and MillerCoors accounted for almost 80% of total beer shipped in the U.S., excluding imports. In addition, A-B and MillerCoors continued to invest in smaller craft breweries and nurtured separate craft-focused divisions in an effort to capitalize on the growing craft beer segment and consumer demand for locally produced products.

Competition varies by regional market. Depending on the local market preferences and distribution, we have encountered strong competition from microbreweries, regional specialty brewers and several national craft brewers that include MillerCoors’ Tenth and Blake Beer Company division (“Tenth and Blake”), Constellation Brands, and A-B’s craft division. A-B’s craft division includes Goose Island, Blue Point Brewing, 10 Barrel Brewing Company, Elysian, Golden Road, Shock Top, Karbach Brewing, Devil's Backbone and others. Because of the large number of participants and offerings in this segment, along with the accelerating consumer preference for local offerings, the competition for packaged product placements and especially draft beer placements has intensified. Although certain of these competitors distribute their products nationally and may have greater financial and other resources than we have, we believe that we possess certain competitive advantages. Our unique portfolio strategy combines strong national lifestyle brands with distinctive regional craft brands, supported by the scale and specialization of our production breweries, strategically distributed sales and marketing resources, and alignment within the A-B distribution network.

We also compete against imported brands, such as Heineken, Stella Artois, Corona Extra and Guinness, which typically have significantly greater financial resources than we have. Although imported beers currently account for a greater share of the U.S. beer market than craft beers, we believe that craft brewers possess certain competitive advantages over some importers, including lower transportation costs, no importation costs, proximity to and familiarity with local consumers, a higher degree of product freshness, eligibility for lower federal excise taxes and absence of exposure to currency fluctuations.

In response to the growth of the craft beer segment, the major domestic national brewers have invested in purchasing small craft breweries. The major national brewers, including Tenth and Blake through MillerCoors, and A-B craft brands through A-B, have

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significantly greater financial resources than we do and have access to a greater array of advertising and marketing tools to create product awareness of their offerings.

In the past several years, several major distilled spirits producers and national brewers have introduced flavored alcohol beverages. Products such as hard seltzers, Smirnoff Ice, the hard soda category, and Mike’s Hard Lemonade have captured sizable market share in the higher-priced end of the malt beverage industry. We believe sales of these products, along with strong growth in the import and craft beer segments of the malt beverage industry, contributed to an increase in the overall U.S. alcohol market. These products are particularly popular in certain regions and markets in which we sell our products.

Competition for consumers of craft beers also comes from wine and spirits, which reflects today’s millennial consumers who typically drink across three alcoholic beverage categories in a single drinking occasion. Growth in this segment appears to be attributable to competitive pricing, targeted advertising, increased merchandising and greater consumer interest in local wine and craft spirits. Recently, the wine industry has been aided, on a limited basis, by its ability to sell outside of the three-tier system, allowing sales to be made directly to consumers. While the craft beer segment competes with wine and spirits, it also benefits from many of the same advantages enjoyed by wine and spirit producers, including consumers who allow themselves affordable luxuries in the form of high quality alcoholic beverages.

A significant portion of our sales continues to be in the Pacific Northwest and in California, which we believe are among the most competitive craft beer markets in the U.S., both in terms of number of participants and consumer awareness. We believe that these areas offer significant competition for our products, not only from other craft brewers but also from the growing wine market and from flavored alcohol beverages. Additionally, we are monitoring the impact of cannabis as more states legalize marijuana for retail sales. Our recent marketing efforts have been focused on promoting the national relevance of Kona as a leading lifestyle brand, the authenticity of our pioneering owned brands and the creativity of our partner brands, along with better segmenting our marketing strategies to communicate the attributes of our portfolio to our target consumers. We believe that our broad array of beers and brands enables us to offer an assortment of flavors and experiences that appeal to more people.

Segment and Enterprise-Wide Information

See Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for the required segment and enterprise-wide information.

Regulation

Our business is highly regulated at federal, state and local levels. Various permits, licenses and approvals necessary for our brewery, wineries and pub operations and the sale of alcoholic beverages are required from a number of agencies, including the U.S. Treasury Department, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the U.S. Department of Agriculture, the FDA, state alcohol regulatory agencies, and state and local health, sanitation, safety, fire and environmental agencies. In addition, the beer industry is subject to substantial federal and state excise taxes.

The FDA issued a proposed rule in November 2015 on the use of “gluten-free” labeling for fermented and hydrolyzed foods and beverages that may affect our ability to market our Omission Beer as “crafted to reduce gluten.” The proposed rule was under review by the Office of Management and Budget and was expected to become final in late 2018 but no final rule was ever issued. It appears the adoption will continue to be delayed under the current administration’s executive order to reduce and freeze new regulations. See Item 1A. Risk Factors for additional information.

We operate our breweries, and wineries to produce hard cider, under federal licensing requirements imposed by the TTB. The TTB requires the filing of a “Brewer’s Notice” upon the establishment of a commercial brewery and the filing of an amended Brewer’s Notice whenever there is a material change in the brewing or warehousing locations, brewing or packaging equipment, brewery ownership, or officers or directors. The TTB requires us to obtain a winery permit and registration for each facility we produce hard cider. Our operations are subject to audit and inspection by the TTB at any time.

Management believes that we have all the licenses, permits and approvals required for our current operations. Existing permits or licenses could be revoked if we fail to comply with the terms of such permits or licenses and additional permits or licenses may be required in the future for our current operations or because of expanding our operations.

Beginning January 1, 2018, the federal excise taxes imposed on domestic brewers, such as us, that produce less than 2 million barrels annually, were reduced from $7.00 to $3.50 per barrel on the first 60,000 barrels shipped annually and from $18.00 to $16.00 per barrel on the first 6 million barrels shipped annually for all other brewers and all beer importers. Barrels shipped in excess of 6 million barrels in a given year continue to be subject to a federal excise tax of $18 per barrel on beer sold for consumption

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in the United States. Certain states also levy excise taxes on alcoholic beverages but are usually paid by the wholesaler. Also, while the existing excise tax on hard cider did not change from $0.226 per gallon, the small producer tax credit for hard cider was expanded to $0.062 on the first 30,000 gallons for an effective rate of $0.164 per gallon; the tax credit on the next 100,000 gallons produced became $0.056 for an effective rate of $0.17 per gallon; and producers like us who produce between 130,000 and 750,000 gallons of hard cider annually receive a $0.033 credit for an effective tax rate of $0.193 per gallon. We pay excise taxes in states where we produce (Hawaii, Oregon, Washington, New Hampshire, North Carolina and Florida).

Although the reductions in federal excise taxes described above are set to expire at the end of 2019, the Beer Institute, of which we are a member, and other industry groups support making federal excise tax relief for all brewers and beer importers permanent. Excise taxes may be increased in the future by the federal government or any state government or both. In the past, increases in excise taxes on alcoholic beverages have been considered in connection with various governmental budget-balancing or funding proposals.

Federal and State Environmental Regulation
Our brewing operations are subject to environmental regulations and local permitting requirements and agreements regarding, among other things, air emissions, water discharges and the handling and disposal of hazardous wastes. While we have no reason to believe the operation of our breweries violates any such regulation or requirement, if such a violation were to occur, or if environmental regulations were to become more stringent in the future, we could be adversely affected.

Dram Shop Laws
The serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server being held liable to third parties for injuries caused by the intoxicated customer. Our restaurants and brewpubs have addressed this issue by maintaining reasonable hours of operation and routinely performing training for personnel.

Trademarks

We have obtained U.S. trademark registrations for numerous products. Trademark registrations generally include brand names and logos and specific product names.   The Kona Brewing Co., Widmer Brothers Brewing, Redhook, and Omission marks and certain other marks are also registered in various foreign countries. We regard our Kona, Widmer Brothers, Redhook, Omission, Square Mile, Cisco, AMB, Wynwood and other trademarks as having substantial value and as being an important factor in the marketing of our products. We also have several similar international trademarks. We are not aware of any infringing uses that could materially affect our current business or any prior claim to the trademarks that would prevent us from using such trademarks in our business. Our policy is to pursue registration of our material trademarks in our markets whenever possible and to oppose vigorously any infringement of our trademarks.

Employees

At December 31, 2018 , we employed approximately 665 people, including 310 employees in the brewpubs and retail stores, 150 employees in production, 131 employees in sales and marketing and 74 employees in corporate and administration. Included in the totals above are 187 part-time employees and 2 seasonal or temporary employees. None of our employees are represented by a union or employed under a collective bargaining agreement. We believe our relations with our employees to be good.

Available Information

Our Internet address is www.craftbrew.com. There we make available, free of charge, our annual report on Form 10‑K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of our website. The other information posted on our website is not part of this or any other report we file with or furnish to the SEC.

Item 1A. Risk Factors
 
If we are unable to gauge trends and react to changing consumer preferences in a timely and cost-effective manner, our sales and market share may decrease and our gross margin may be adversely affected.
The costs and management attention involved in maintaining an innovative brand portfolio have been, and are expected to continue to be, significant. If we have not gauged consumer preferences correctly, or are unable to maintain consistently high quality beers as we develop new brands, our overall brand image may be damaged. If this were to occur, our future sales, results of operations and cash flows would be adversely affected. Also, increased costs associated with developing new products may have a negative effect on our gross margin.

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We rely on the reputation of our brands.
Our success depends on our ability to maintain and enhance the image and reputation of our existing products and to develop a favorable image and reputation for new products. The image and reputation of our products may be reduced in the future and concerns about product quality, even when unfounded, could tarnish the image and reputation of our products. An event, or series of events, that materially damages the reputation of one or more of our brands could have an adverse effect on the value of that brand and subsequent revenues from that brand or business. Restoring the image and reputation of our products may be costly and may not be possible.

Increased competition could adversely affect sales and results of operations.
We compete in the highly competitive craft beer market, as well as in the much larger specialty beer category, which includes the imported beer segment and fuller-flavored beers offered by major brewers. We face increasing competition from producers of wine, spirits and flavored alcohol beverages offered by the larger brewers and spirit producers. We are also monitoring the impact of cannabis as more states legalize marijuana for retail sale. Increased competition could adversely affect our future sales and results of operations. See "Competition" in Part I, Item 1 of this report.

Our business is sensitive to reductions in discretionary consumer spending.
Consumer demand for luxury or perceived luxury goods, including craft beer, can be sensitive to downturns in the economy and the corresponding impact on discretionary spending. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, job losses and unemployment or underemployment, perceived or actual declines in disposable consumer income and wealth, and changes in consumer confidence in the economy, could significantly reduce customer demand for craft beer in general, and the products we offer specifically. Furthermore, our consumers may choose to replace our products with the fuller-flavored national brands or other more affordable, although lower quality, alternatives available in the market. Any such decline in consumption of our products would likely have a significant negative impact on our operating results.

Changes in consumer preferences or public attitudes about alcohol could decrease demand for our products.
If consumers become unwilling to accept our products or if general consumer trends lead to a decrease in the demand for beer, including craft beer, our sales and results of operations would be adversely affected. There is no assurance that the craft brewing segment will experience growth in future periods. If the markets for wine, spirits or flavored alcohol beverages continue to grow, this could draw consumers away from the beer industry in general and our products specifically. Further, the alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over alcohol-related social problems, including drunk driving, underage drinking and health consequences from the misuse of alcohol. In reaction to these concerns, steps may be taken to restrict advertising by beer producers, to impose additional cautionary labeling or packaging requirements, or to increase excise or other taxes on beer. Any such developments may have a significant adverse impact on our financial condition, operating results and cash flows.

The Food and Drug Administration (“FDA”) issued a proposed rule in November 2015 on the use of “gluten-free” labeling for fermented and hydrolyzed foods and beverages that may affect our ability to market our Omission Beer.
CBA launched Omission beer in May 2012 as the first brand of craft beer to be brewed in the United States using conventional beer ingredients (including malted barley, a gluten-containing grain) and “crafted to remove gluten.” Omission beers are brewed similarly to other craft beers except that, at the point of fermentation, a brewing enzyme called Brewers Clarex™ is added which breaks apart the gluten protein chains. Samples from each batch are tested internally using the R5 Competitive ELISA method for gluten content before packaging. The beers are then packaged into bottles in a closed packaging environment to eliminate any chance of cross contamination. Packaged samples are also sent to an independent third party lab for testing before the lot is released from the brewery. We post all test results on our website for consumers to view before they decide to purchase the beer.

Omission beers are subject to regulation by the Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (“TTB”), but as a result of overlapping jurisdictions of the FDA and TTB, the role each agency plays in the regulation of fermented alcohol beverages, and the commitments the two agencies have made to work together to establish consistent gluten labeling policies for comparable alcohol beverage products, the above referenced FDA notice of proposed rulemaking has far-reaching implications for fermented alcohol beverages, like Omission Beer, that are subject to regulation by both the FDA and TTB. In accordance with the TTB’s premarket approval requirements, the TTB approved Omission labeling, including its gluten-related claims, as per their policy concerning gluten content statements in the labeling and advertising of malt beverages.


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If the FDA's proposed rule becomes final as written, the TTB’s policy may be superseded, which would have a significant impact on our ability to market and sell our Omission beers as “crafted to remove gluten” and negatively impact our operating results. The proposed rule was under review by the Office of Management and Budget in 2017 and was expected to become final in late 2018. It appears adoption of a final rule will continue to be delayed under the current administration’s executive order to reduce and freeze new regulations.

We may identify material weaknesses in our internal control over financial reporting in the future, which, if not remediated, could result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Management identified a material weakness in our internal control over financial reporting related to accounting for complex revenue transactions for the year ended December 31, 2016, which was subsequently remediated in 2017. However, additional material weaknesses in our internal control environment may be identified in the future, which could result in material misstatements in our financial statements and a loss of investor confidence in the integrity of our financial reporting and other public disclosures, potentially triggering increased sales of our common stock and downward pressure on our stock price.

Product safety and quality concerns may have a material adverse effect on our business.
Our success depends in large part on our ability to maintain consumer confidence in the safety and quality of our products. We have rigorous product safety and quality standards which we expect our breweries and our brewing partners to meet. We take precautions to ensure that our beverage products and our associated packaging materials, such as bottles, crowns, cans and other containers, meet accepted food safety and regulatory standards. We cannot assure, however, that, despite our strong commitment to product safety and quality, we will always meet these standards. If our products fail to satisfy applicable product safety and quality standards or are found to be contaminated or adulterated, we may be required to conduct costly product recalls and may become subject to product liability claims and negative publicity, which could cause our reputation and business to suffer.

We have a continuing relationship with Anheuser-Busch, LLC and the current distribution network that would be difficult to replace.
Most of our products are sold and distributed through A-B’s distribution network. If the A-B Distributor Agreement were terminated, we would be faced with a number of operational tasks, including establishing and maintaining direct contracts with the existing wholesaler network or negotiating agreements with replacement wholesalers on an individual basis, and enhancing our credit evaluation, billing and accounts receivable processes. Such an undertaking would require significant effort and substantial time to complete, during which the distribution of our products could be impaired.

We are dependent on our wholesalers for the sale of our products.
Although substantially all of our products are sold and distributed through A-B, we continue to rely heavily on wholesalers, many of which are independent, for the sale of our products to retailers. Independent wholesalers make their own business decisions that may not align with our interests and there is no assurance that the sales efforts of distributors will be effective in generating sales of our products.

Any disruption in the ability of the wholesalers, A-B, or us to distribute products efficiently due to any significant operational problems, such as widespread labor union strikes or the loss of a major wholesaler as a customer, could hinder our ability to get our products to retailers and could have a material adverse impact on our sales, results of operations and cash flows. A-B has been purchasing distributors in states where it is legally permissible, which could impact our distribution if the A-B relationship were to end. During 2018 , 34% of our shipments were through A-B owned distributors.

Our investments in our sales and marketing infrastructure may negatively affect our financial results without increasing sales.
We intend to continue to reinvest cost savings in selling, general and administrative expenses in our sales and marketing infrastructure, including increased spending to support our Kona brand. Also, beginning January 1, 2019, the terms of the A-B Distributor Agreement require that we reinvest an additional $0.25 per case-equivalent in our sales and marketing efforts for our products. While we seek to design effective advertising and promotions to support our brands, these efforts may not lead to enhanced brand equity or higher sales in the long term.

Our agreements with A-B may limit our ability to engage in certain activities and investments.
The Exchange Agreement requires us to obtain A-B's consent prior to undertaking certain activities and investments. For example, we must obtain A-B's consent before acquiring another brewer if the purchase price exceeds $30 million or purchasing a non-brewing entity if the purchase price exceeds $2 million. If A-B opposes strategic or financial investments proposed by our management, A-B may decline to give its consent to activities or investments that our management believes are in the best interest of our shareholders.


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A-B has an influential voice in decisions of the board of directors and shareholders.
A-B owns 31.3% of our outstanding common stock, making A-B our largest shareholder. In addition, under the Exchange Agreement, A-B may designate two nominees to our board of directors. These directors also participate on our audit, compensation, and nominating and governance committees as non-voting observers, and one of these directors participates on our strategic planning committee as a voting member. As a result, A-B has an influential voice in deliberations of the board of directors and shareholders. A-B and its affiliates also have the right to terminate our contract brewing arrangements and to rescind certain amendments to our other contracts with them upon the occurrence of certain events. See “Relationship with Anheuser-Busch, LLC” in Item 1. Business above for additional information.

Expansion of our Kona brewery may be subject to various risks, including cost overruns, construction delays, and inability to fully utilize additional production capacity, which may adversely affect our financial condition and results of operations.
During 2015, we held a ground-breaking ceremony on the site of a new, state-of-the-art brewing facility in Kailua-Kona, Hawaii, with an annual production capacity of 100,000 barrels at a total estimated cost of approximately $20 million. As with all projects of this magnitude, there is the risk of significant cost overruns, which could require us to increase our borrowing under our revolving credit facility or to find additional financing. We may also experience unforeseen construction delays, which could result in our inability to bring the new Kona brewery into production as scheduled, adversely affecting our results of operations and financial condition. In addition, if we do not achieve sufficient growth in product sales to absorb the increased production capacity, we may be unable to realize our goals for gross margin improvement, which would have a negative impact on our results of operations and return on investment.

We expect to continue to make strategic investments in improvements aimed at increasing the efficiency, capabilities and capacity of our breweries, improving our ordering and logistics systems, and enhancing the customer experience at our brewpubs. Failure to realize the anticipated benefits and generate adequate returns on such capital improvement projects may have a material adverse effect on our results of operations and cash flows.

Unavailability of production at our brewing partner may adversely affect our capacity and disrupt our ability to satisfy demand for our products.
In 2016, we entered into a contract brewing agreement with ABCS and, once fully optimized, anticipate producing up to 300,000 barrels of our beer at this facility annually. If production at this facility should be disrupted due to unforeseen circumstances, our ability to produce and ship sufficient quantities of our beer to meet demand in certain key geographic markets, particularly Texas and the southeastern United States, could be significantly impaired, resulting in decreased sales and a negative impact on our wholesaler relationships in those markets.

Operating breweries at production levels substantially below their current designed capacities could negatively impact our financial results.
As of December 31, 2018 , the annual working capacity of our breweries was approximately 855,000 barrels. Due to many factors, including seasonality and production schedules of various draft products and bottled products and packages, actual production capacity will rarely, if ever, approach full working capacity. We believe that capacity utilization of the breweries will fluctuate throughout the year, and even though we expect that capacity of our breweries will be efficiently utilized during periods when our sales are strongest, there likely will be periods when the capacity utilization will be lower. If we experience contraction in our sales and brewing volumes, the resulting excess capacity and unabsorbed overhead will have an adverse effect on our gross margins, operating cash flows and overall financial performance. We periodically evaluate whether we expect to recover the costs of our production breweries over the course of their useful lives. If facts and circumstances indicate that the carrying value of these long-lived assets may be impaired, an evaluation of recoverability will be performed by comparing the carrying value of the assets to projected future undiscounted cash flows along with other quantitative and qualitative analyses. If we determine that the carrying value of such assets does not appear to be recoverable, we will recognize an impairment loss by a charge against current operations, which could have a material adverse effect on our results of operations.

Our sales are concentrated in the Pacific Northwest, California and Hawaii.
Our sales in 2018 were concentrated in Washington, Oregon, California and Hawaii and, consequently, our future sales may be adversely affected by changes in economic and business conditions within these states. We also believe the Pacific Northwest and California are among the most competitive craft beer markets in the United States, both in terms of number of market participants and consumer awareness. The Pacific Northwest and California offer significant competition to our products, not only from other craft brewers, but also from the major domestic brewers, wine producers and flavored alcohol beverages.


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We are dependent upon the continued service of our senior management and other key personnel.
Our future success is dependent on the continued service of our senior management and other key employees, particularly Andrew Thomas, our Chief Executive Officer. The loss of the services of our senior management and other key employees could have a material adverse effect on our operations. Additionally, the loss of Andrew Thomas as our Chief Executive Officer, and the failure to find a replacement satisfactory to A-B, would be a termination event under the A-B Distributor Agreement.

We also may be unable to retain existing management, sales, marketing, operational and other support personnel critical to our success, which could result in harm to significant customer relationships, loss of key information, expertise or know-how, and unanticipated recruiting and training costs.

Our gross margin may fluctuate.
Future gross margin may fluctuate and even decline as a result of many factors, including: product pricing levels; sales mix between draft and packaged product sales and within the various packaged products, including bottles and cans; level of fixed and semi-variable operating costs; level of production at our breweries in relation to current production capacity; availability and prices of raw materials, production inputs such as energy, and packaging materials; rates charged for freight; and federal and state excise taxes. The high percentage of fixed and semi-variable operating costs causes our gross margin to be particularly sensitive to relatively small changes in sales volume or price increases in the various components of our production and distribution.

We may be subject to litigation that could adversely affect our business and results of operations.
We may be subject to various types of litigation, including fair trade practice, product liability, and employment-related claims. Such litigation may be time consuming, distracting and costly, and could have a material adverse effect on our business and results of operations. See Note 18, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements found in Part II, Item 8 of this report, for additional information related to legal proceedings.

We are dependent on certain suppliers for key raw materials, packaging materials and production inputs.
Although we seek to maintain back-up and alternative suppliers for all key raw materials and production inputs, we are reliant on certain third parties for key raw materials, packaging materials and utilities. Any disruption in the willingness or ability of these third parties to supply these critical components could hinder our ability to continue production of our products, which could have a material adverse impact on our financial condition, results of operations and cash flows.

Our ability to obtain key ingredients for our products, including hops and malt, is dependent on a number of factors, including competition from other brewers, weather, and the decisions of growers regarding which crops to grow.
We purchase most of our raw materials from U.S. brokers, many of which rely on foreign sources, particularly for malt. As a result, prices for these ingredients may be affected by foreign currency fluctuations. Also, as consumer preference for innovative craft beer products increases, the demand for new hop varietals has grown, and many breweries enter into multi-year contracts with growers.

There is a growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse affect on global temperatures, weather and precipitation patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain agricultural commodities necessary for our products, such as barley, hops, sugar and corn. Climate change may also subject us to water scarcity and quality risks due to large amounts of water required to produce our products, including water consumed in the agricultural supply chain. In the event that climate change causes water over-exploitation or has a negative effect on water availability or quality, the price of water may increase and may result in unfavorable changes to applicable water-related taxes and regulations, which could lead to increased regulatory pressures, production costs or capacity constraints. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make investments in facilities and equipment due to increased regulatory pressures.

There is no assurance that we will be able to obtain certain of our ingredients in a timely fashion to meet consumer demand, and our gross margin may be adversely affected if we are required to pay higher prices to obtain needed ingredients that are in high demand. Such factors may also result in lower sales of our products, which would have a negative effect on our financial results.


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We may experience higher packaging costs and shipping costs, which could adversely affect our financial results.
Many of our packaging materials, particularly glass, are obtained from a single source. Although we believe alternative suppliers of packaging materials, including bottles, cans, carriers and labels, are available, a number of factors, including consolidation in the packaging industry and competition from other manufacturers in need of packaging materials, may result in supply shortages or higher prices, which could adversely affect our financial results. We have also seen recent increases in shipping costs for our products. While we are seeking to manage those costs through more efficient management of brewery operations and logistics, we may not be successful. We also may not be able to pass along increased costs through higher prices for our products, or even maintain our current pricing levels, with a corresponding negative impact on our financial results.

Higher health care costs may have an adverse effect on our operating results.
We are self-insured with respect to health care expenses for our employees. From time to time, we experienced higher than average medical expense claims with a corresponding adverse effect on our Selling, general and administrative expenses. If we experience higher costs in the future, our operating results may be negatively affected.

A failure in any of our supply chain processes could harm our ability to effectively operate our business.
Our results are highly dependent on our ability to accurately forecast and execute throughout the entire supply chain, including sales forecasting, raw material ordering, brewing and distribution. The combination of our recent growth and increased brand complexity has increased the operating complexity of our business. We cannot guarantee that we will effectively manage such complexity without experiencing planning failures, operating inefficiencies, or other issues that could have an adverse effect on our business.

We engage in electronic communications between third parties, including A-B and our wholesalers, as part of our supply chain processes. Any interruptions or errors in our electronic interfaces may negatively affect our operating activities.

Our information systems may experience an interruption or breach in security.
We rely on computer information systems to conduct our business. We have policies and procedures in place to protect against and reduce the occurrence of failures, interruptions, or breaches of security of these systems. However, there can be no assurances that these policies and procedures will eliminate the occurrence of failures, interruptions or breaches of security or that they will adequately restore our systems or minimize any such events. The occurrence of a failure, interruption or breach of security of our computer information systems could result in loss of intellectual property, delays in our production, loss of critical information, or other events, any of which could harm our future sales or operating results.

We manage and store various proprietary information and sensitive or confidential data relating to our business, including sensitive and personally identifiable information. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our employees, or our customers, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information. Any such breach, loss, or disclosure could result in litigation and potential liability for us, damage our brand image and reputation, or otherwise harm our business. In addition, our current data protection measures might not protect us against increasingly sophisticated and aggressive threats, while the cost and operational consequences of implementing further data protection measures could be significant.

An increase in excise taxes could adversely affect our financial condition and results of operations.
The U.S. federal government currently levies an excise tax of $18.00 per barrel on beer sold for consumption in the United States. However, brewers, such as us, that produce less than two million barrels annually, are now taxed at $3.50 per barrel on the first 60,000 barrels shipped, with the remainder of the shipments taxed at $16.00 per barrel, due to the passage of the Tax Cuts and Jobs Act in December 2017. If the tax cut is not permanently extended, this new rate is scheduled to return to $7.00 per barrel for the first 60,000 barrels and $18.00 per barrel up to two million barrels annually in 2020. The individual states in which we operate also impose excise taxes on beer and other alcohol beverages in varying amounts. Federal and state legislators routinely consider various proposals to impose additional excise taxes on the production of alcoholic beverages, including beer. Any such increases in excise taxes, if enacted, or the failure of the current federal excise tax rates to be extended permanently, would adversely affect our financial condition, results of operations, and cash flows.

We are subject to tax liabilities imposed by the jurisdictions where we operate.
Tax liabilities may vary significantly and are subject to change. Among others, these taxes include income taxes, property taxes, indirect  taxes  (excise,  sales, use  and  gross receipts  taxes),  payroll  taxes,  and withholding  taxes. We may not be able to pass these tax costs on to consumers and remain competitive. New tax laws and regulations and changes to existing tax laws and regulations could materially and adversely affect our financial results.


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We are subject to governmental regulations affecting our breweries and brewpubs.
Our business is highly regulated by federal, state, and local laws and regulations. These laws and regulations govern all aspects of the production and distribution of beer, including permitting, licensing, trade practices, labeling, advertising and marketing, distributor relationships and various other matters. A variety of federal, state and local governmental authorities also levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Noncompliance with such laws and regulations may cause the TTB or any particular state or jurisdiction to revoke its license or permit, restricting our ability to conduct business, or result in the imposition of significant fines or penalties. One or more regulatory authorities could determine that we have not complied with applicable licensing or permitting regulations or have not maintained the approvals necessary for us to conduct business within our jurisdiction. If licenses, permits or approvals necessary for our brewery or pub operations were unavailable or unduly delayed, or if any permits or licenses that we hold were to be revoked, or additional permits or licenses were required in the future, including as a result of expanding our operations, our ability to conduct business may be disrupted, which would have a material adverse effect on our financial condition, results of operations and cash flows.

Government shutdowns may adversely affect our ability to timely launch new products.
When the U.S. Congress does not pass, or the President does not sign, budget legislation that establishes discretionary spending levels by the start of the U.S. government's fiscal year, funding to certain agencies lapses and non-essential operations cease until the funding is restored. This may affect agencies under the Department of Health and Human Services and Department of the Treasury. Between December 21, 2018 and January 24, 2019, the country experienced the longest government shutdown in U.S. history. Because TTB operations were halted, over 50 of our label and formula applications in need of approval sat idle. The cessation in TTB operations forced us to delay or alter the launch of several new products, resulting in operational, sales and marketing disruptions. The continuation or reoccurrence of such shutdowns in the future may have a material adverse effect on our financial condition and results of operations and may force us to alter our plans for product rollouts and marketing campaigns.

The craft beer business is seasonal in nature, and we are likely to experience fluctuations in results of operations.
Sales of craft beer products are somewhat seasonal, with the first and fourth quarters historically being lower and the rest of the year generating stronger sales. Our sales volume may also be affected by weather conditions and selling days within a particular period. Therefore, the results for any given quarter will likely not be indicative of the results that may be achieved for the full fiscal year. If an adverse event such as a regional economic downturn or poor weather conditions should occur during the second and third quarters, the adverse impact to our revenues would likely be greater as a result of the seasonality of our business.

We may be unable to access public or private debt markets to fund our operations and contractual commitments at competitive rates, on commercially reasonable terms, or in sufficient amounts, if at all.
We depend, in part, on our revolving line of credit with Bank of America, N.A. ("BofA"), to fund our operations and commitments for capital expenditures. This credit line expires on September 30, 2023 . Our capital expenditures in 2019 are expected to range from $15 million to $19 million . A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for debt. These factors include general economic conditions, disruptions or declines in the global capital markets, our financial performance or outlook, and credit. An adverse change in any or all of these factors may materially adversely affect our ability to fund our operations and contractual or financing commitments.

If our business does not perform as expected, including if we generate less revenue than anticipated from our operations or encounter significant unexpected costs, we may fail to comply with the financial covenants under our credit facilities. If we do not comply with our financial covenants and we do not obtain a waiver or amendment, BofA may elect to cause all amounts owed to become immediately due and payable. Any default may require us to seek additional capital or modifications to our credit facilities, which may not be available or which may be costly. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We entered into strategic relationships with certain regional brewers that increased the complexity and execution risks of our operations.
As discussed in more detail in Item 1. Business in this report, we recently acquired the remaining equity in Wynwood Brewing Co. in Miami, Florida, and certain assets of Appalachian Mountain Brewery in North Carolina and Cisco Brewers in Massachusetts. These acquisitions have increased the complexity of our operations, including brewing, packaging, marketing and selling their brands and managing employees in additional geographic locations, with increased demands on our management team. There can be no assurance that we will be able to successfully integrate these strategic acquisitions without experiencing unexpected costs, operating challenges or control deficiencies.

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Acquisitions subject us to various risks, including risks relating to selection and pricing of acquisition targets, integration of acquired companies into our business and assumption of unanticipated liabilities.
We may continue to pursue acquisitions or joint venture or investment opportunities in the future. We cannot assure that we will be able to identify or take advantage of such opportunities. If we do pursue such transactions, we may not realize the anticipated benefits. Acquisitions and similar transactions, both those completed recently and those that may occur in the future, involve many risks, including risks relating to the assumption of unforeseen liabilities of an acquired business, adverse accounting charges resulting from the acquisition, and difficulties in integrating acquired companies into our business, both from a cultural perspective, as well as with respect to technological integration. Our inability to successfully integrate acquired businesses or manage joint ventures may lead to increased costs, failure to generate expected returns, or even a total loss of amounts invested, any of which could have a material adverse effect on our financial condition and results of operations.

Changes in state laws regarding distribution arrangements may adversely impact our operations.
States in which we have a significant sales presence may enact legislation that significantly alters the competitive environment for the beer distribution industry. Any change in the competitive environment in those states could have an adverse effect on our future sales and results of operations and may impact the financial stability of wholesalers on which we rely.

Any change in, or violation of, federal and state environmental regulations could adversely affect our operations.
Our brewing operations are subject to environmental regulations and local permitting requirements and agreements regarding, among other things, air emissions, water discharges and the handling and disposal of hazardous wastes. While we have no reason to believe the operation of our breweries violates any such regulation or requirement, if such a violation were to occur, or if environmental regulations were to become more stringent in the future, we may be adversely affected.

A small number of shareholders hold a significant ownership percentage of our common stock and uncertainty over their continuing ownership plans could cause the market price of our common stock to decline.
As noted above, A-B has a significant ownership stake in us. In addition, three of our founders, together, beneficially own approximately 2.0 million shares, or 10.3% , of our common stock. Collectively, these two groups own 41.6% of our equity. All of these shares are available for sale in the public market, subject to volume, manner of sale and other requirements under the Securities Act of 1933. Such sales in the public market, or the perception that such sales may occur, could cause the market price of our common stock to decline.

We do not intend to pay and are limited in our ability to declare or pay dividends; accordingly, shareholders must rely on stock appreciation for any return on their investment in us.
We do not anticipate paying cash dividends. Further, under our loan agreement with BofA, we are not permitted to declare or pay a dividend unless we meet certain financial covenants. As a result, only appreciation of the price of our common stock will provide a return to shareholders. Investors seeking cash dividends should not invest in our common stock.

The fair value of our intangible assets, including goodwill, may become impaired.
As a result of recent acquisitions, including the acquisition of Kona Brewing Company in 2010, as of December 31, 2018 , we had goodwill of $22.0 million and other various intangible assets, net, of $47.2 million on our Consolidated Balance Sheets, which, combined, represented nearly 29.3% of our total assets. If any circumstances were to occur, such as economic recession or other factors causing a reduction in consumer demand, or for any other reason we were to experience a significant decrease in sales growth, with a corresponding negative impact on our estimated cash flows associated with these assets, our analyses of these assets may conclude that a decrease in the fair value of these assets has occurred. In that event, we would be required to recognize a potentially significant loss on impairment of these assets. Any such impairment loss would be charged against current operations in the period of change and potentially have a material adverse effect on our results of operations.

We may not be able to protect our intellectual property rights.
Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how. We have been granted numerous trademark registrations and patents covering our brands and products and have filed, and expect to continue to file, trademark and patent applications seeking to protect newly developed brands and products. We cannot be sure that trademark and patent registrations will be issued with respect to any of our applications. There is also a risk that we could, by omission, fail to renew a trademark or patent on a timely basis or that our competitors will challenge, invalidate or circumvent any existing or future trademarks and patents issued to, or licensed by, us.


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Although we have taken appropriate action to protect our portfolio of intellectual property rights (including patent applications, trademark registration and domain names), we cannot be certain that the steps we have taken will be sufficient or that third parties will not infringe upon or misappropriate proprietary rights. Moreover, some of the countries in which we operate offer less effective intellectual property protection than is available in Europe or the United States. If we are unable to protect our proprietary rights against infringement or misappropriation, it could have a material adverse effect on our business, results of operations, cash flows or financial condition and, in particular, on our ability to develop our business.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We own and operate three highly-automated, small-batch production breweries: the Oregon Brewery, the New Hampshire Brewery, and the Hawaii Brewery, as well as five small, innovation brewing systems in Portland, Oregon, Seattle, Washington, Portsmouth, New Hampshire, Boone, North Carolina and Miami, Florida. We lease the sites upon which the Hawaii Brewery and Brewpubs, the New Hampshire Breweries and Brewpub, the Portland Innovation Brewery, and Oregon Brewpub, the Boone Cidery, the Miami Brewery and Taproom are located, in addition to our office space and warehouse locations in Portland, Oregon for our corporate, administrative and sales functions and the office space location in Miami, Florida for administrative and sales functions. In 2014, we entered into a lease for space in Southern California for our national sales office, which expires in 2019. In 2015, we entered into a long-term land lease for the location of our new Kona brewery, which expires in 2064, and in 2016, we entered into a lease for our new Redhook pub in Seattle, which expires in 2026. Certain of these leases are with related parties. See Notes 18 and 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for further discussion regarding these arrangements.

Certain information regarding our production breweries is as follows (capacity in thousands of barrels):
Production Breweries
 
Square
Footage
 
Current
Annual Capacity
Oregon Brewery
 
185,000

 
630

New Hampshire Brewery
 
125,000

 
215

Hawaiian Brewery
 
11,000

 
10

 
 
 

 
855


Late in the fourth quarter of 2017, we completed several phases of an expansion to increase flexibility of our Oregon Brewery which did not materially impact our overall capacity for 2017 and, in 2016, we broke ground on a new 100,000 barrel brewery near our existing brewery and pub in Kona, which is expected to be fully operational in the latter half of 2019.

In 2016, we entered into a contract brewing agreement with ABCS with the ability to have up to 300,000 barrels produced annually and, during the second quarter of 2017, production began in their facilities.

Substantially all of our personal property and fixtures, as well as the real properties associated with the Oregon Brewery, secure our loan agreement with BofA. See Note 9 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

Item 3. Legal Proceedings

We are involved, from time to time, in claims, proceedings and litigation arising in the normal course of business. We believe that, to the extent that any pending or threatened litigation involving us or our properties exists, such litigation is not likely to have a material adverse effect on our financial condition, cash flows or results of operations.

See Note 18, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements found in Part II, Item 8 of this report, for additional information related to legal proceedings.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock trades on the NASDAQ Stock Market (“NASDAQ”) under the trading symbol BREW. The table below sets forth, for the fiscal quarters indicated, the reported high and low closing sale prices of our common stock, as reported on NASDAQ:
 
2017
 
High
 
Low
Quarter 1
 
$
17.25

 
$
12.40

Quarter 2
 
17.45

 
12.25

Quarter 3
 
18.90

 
16.75

Quarter 4
 
19.80

 
17.15

 
 
 
 
 
2018
 
High
 
Low
Quarter 1
 
$
19.90

 
$
17.85

Quarter 2
 
20.85

 
18.25

Quarter 3
 
21.00

 
16.15

Quarter 4
 
18.55

 
14.10


We had 676 common shareholders of record as of February 28, 2019 .
 
We have not declared or paid any dividends during our existence. Under the terms of our loan agreement with BofA, we are permitted to declare or pay dividends without BofA’s consent, subject to limitations. We anticipate that, for the foreseeable future, all earnings will be retained for the operation and expansion of our business and that we will not pay cash dividends. The payment of dividends, if any, in the future, will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, capital and operating requirements, restrictions in future financing agreements, our general financial condition, and general business conditions.

Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is included in Part III, Item 12 of this report.
 
Recent Sales of Unregistered Securities
None.

Issuer Purchases of Equity Securities
We did not repurchase any of our common stock during the fourth quarter of 2018 .


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Stock Performance Graph
The following line-graph presentation compares cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment and reinvestment of dividends, of (a) Craft Brew Alliance, Inc., (b) a broad-based equity market index and (c) an industry-specific index. The broad-based market index used is the NASDAQ Composite Index and the industry-specific index used is the S&P 500 Beverages Index.

Total Return to Shareholders
(includes reinvestment of dividends)
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

CHART-4A080C9C863D5E668ED.JPG

 
 
 
Base
Period
 
Indexed Returns
Year Ended
Company/Index
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
Craft Brew Alliance, Inc.
 
$
100.00

 
$
81.24

 
$
50.97

 
$
102.92

 
$
116.93

 
$
87.15

NASDAQ Composite
 
100.00

 
113.40

 
119.89

 
128.89

 
165.29

 
158.87

S&P 500 Beverages Index
 
100.00

 
112.53

 
122.62

 
122.63

 
141.95

 
133.64



24

Index

Item 6.   Selected Financial Data

The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this report.
In thousands,
except per share amounts
 
Year Ended December 31,
Statement of Operations Data
 
2018
 
2017
 
2016
 
2015
 
2014
Net sales (1)
 
$
206,186

 
$
207,456

 
$
202,507

 
$
204,168

 
$
200,022

Cost of sales
 
137,863

 
142,198

 
142,908

 
141,972

 
141,312

Gross profit
 
68,323

 
65,258

 
59,599

 
62,196

 
58,710

Selling, general and administrative expenses (2) (3)
 
62,572

 
60,463

 
59,224

 
57,932

 
53,000

Operating income
 
5,751

 
4,795

 
375

 
4,264

 
5,710

Interest expense and other income (expense), net
 
(322
)
 
(754
)
 
(681
)
 
(546
)
 
(611
)
Income (loss) before provision for income taxes
 
5,429

 
4,041

 
(306
)
 
3,718

 
5,099

Income tax provision (benefit) (4)
 
1,287

 
(5,482
)
 
14

 
1,500

 
2,022

Net income (loss)
 
$
4,142

 
$
9,523

 
$
(320
)
 
$
2,218

 
$
3,077

Basic and diluted net income (loss) per share
 
$
0.21

 
$
0.49

 
$
(0.02
)
 
$
0.12

 
$
0.16

Shares used in basic per share calculations
 
19,349

 
19,284

 
19,225

 
19,152

 
19,038

Shares used in diluted per share calculations
 
19,557

 
19,447

 
19,225

 
19,175

 
19,126


 
 
December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
1,200

 
$
579

 
$
442

 
$
911

 
$
981

Working capital
 
13,673

 
38,005

 
13,082

 
8,933

 
6,380

Total assets
 
236,047

 
209,637

 
200,405

 
188,429

 
176,931

Current portion of long-term debt and capital leases
 
919

 
699

 
1,317

 
507

 
1,157

Long-term debt and capital leases, net of current portion
 
46,573

 
32,599

 
27,946

 
18,991

 
13,720

Other long-term obligations
 
15,177

 
14,764

 
19,844

 
19,057

 
18,068

Shareholders’ equity
 
136,435

 
130,791

 
119,661

 
118,738

 
115,417


(1) Net sales in 2017 includes a $3.4 million fee from Pabst, related to the termination of the brewing agreements.
(2) Selling, general and administrative expenses in 2018 includes a gain of $0.5 million related to the sale of the Woodinville brewing and bottling equipment.
(3)
Selling, general and administrative expenses in 2017 includes a $1.0 million fee from Pabst related to the termination of a purchase option agreement, as well as a $0.5 million impairment charge related to the sale of our Woodinville brewery.
(4)
The income tax benefit in 2017 includes a $6.9 million benefit related to the effect on our deferred tax assets and liabilities of a change in Federal income tax rates from 34% to 21%.


25

Index

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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.

Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in Portland, Oregon and operates breweries and brewpubs across the U.S. For more information about CBA and its brands, see “Available Information” on page 14 of this report.

We proudly brew and package our craft beers in three company-owned production breweries located in Portland, Oregon; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. In 2018, we continued to leverage our contract brewing agreement with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of Anheuser-Busch, LLC (“A-B”), through which we brew select CBA brands in A-B’s Fort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries in Portland, Oregon; Seattle, Washington; Portsmouth, New Hampshire; Boone, North Carolina; and Miami, Florida, which are primarily used for small-batch production and limited-release beers offered primarily in our brewpubs and brands’ home markets.

We distribute our beers to retailers through wholesalers that are aligned with the A-B network. These sales are made pursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B, which extends through 2028. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. As competition puts increasing pressure on craft brands outside of their home markets, we are continuing our efforts to stabilize and strengthen Widmer Brothers and Redhook in the Pacific Northwest, while expanding distribution of Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. across their respective home markets of North Carolina, New England, and South Miami.

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

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



26

Index

Following is a summary of our financial results:
 
 
Net Sales
 
Net Income (Loss)
 
Number of
Barrels Sold
2018
 
$206.2 million
 
$4.1 million
 
747,600
2017
 
$207.5 million
 
$9.5 million
 
748,300
2016
 
$202.5 million
 
$(0.3) million
 
775,600

Sale of Woodinville Brewery
See Notes 20 and 21 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for a discussion of the termination of our agreements with Pabst Brewing Company, LLC, and Pabst Northwest Brewing Company, LLC (collectively, "Pabst"), the determination in 2017 to classify our Woodinville Brewery assets as held for sale and a $0.5 million impairment charge recorded related to the assets held for sale. The sale was completed in early 2018 and when settled, resulted in a $0.5 million gain on sale of assets (see Note 21 of Notes to Consolidated Financial Statements).

Agreements with Anheuser-Busch, LLC

On August 23, 2016, we entered into a Contract Brewing Agreement (the “Brewing Agreement”) with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of A-B, pursuant to which ABCS has agreed to brew, bottle and package up to 300,000 barrels of our mutually agreed products annually, in facilities owned by ABCS within the United States, for an initial term through December 31, 2026. Production began in A-B's Fort Collins, Colorado brewery in the second quarter of 2017.

In December 2015, we partnered with Ambev, the Brazilian subsidiary of Anheuser-Busch InBev SA, to distribute Kona beers in Brazil. On August 23, 2016, we also entered into an International Distribution Agreement (the “International Distribution Agreement”) with Anheuser-Busch Worldwide Investments, LLC (“ABWI”), an affiliate of A-B, pursuant to which ABWI will be our sole and exclusive distributor of our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our agreement with our existing international distributor, CraftCan Travel LLC, and certain other limitations, in each case as set forth in the International Distribution Agreement. Unless terminated sooner, the International Distribution Agreement will continue in effect until December 31, 2026.

On August 23, 2016, we entered into Amendment No. 3 to the A-B Distributor Agreement. Pursuant to Amendment No. 3, the A-B Distributor Agreement was extended through December 31, 2028 (the “Term”). The existing margin fee structure of $0.25 per case-equivalent will apply throughout the Term. Without Amendment No. 3, beginning on January 1, 2019, a margin fee of $0.75 per case equivalent would have been payable by us under the A-B Distributor Agreement. Amendment No. 3 also provides that, beginning on January 1, 2019, we will reinvest an aggregate amount equal to $0.25 per case equivalent in sales and marketing efforts for our products, subject to specified terms and conditions.

On January 30, 2018, we entered into a Contract Brewing Agreement with Anheuser-Busch Companies, LLC (“ABC”), another
A-B affiliate, pursuant to which we agreed to brew, package, and palletize certain malt beverage products of A-B's craft breweries at our Portland, Oregon, and Portsmouth, New Hampshire, breweries as selected by ABC. Under the terms of this agreement, ABC 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 agreement, as extended, will expire on December 31, 2019.

For additional information, see Note 19 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report.


27

Index

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) :
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Sales
 
105.4
 %
 
105.8
 %
 
106.5
 %
Less excise tax
 
5.4

 
5.8

 
6.5

Net sales
 
100.0

 
100.0

 
100.0

Cost of sales
 
66.9

 
68.5

 
70.6

Gross profit
 
33.1

 
31.5

 
29.4

Selling, general and administrative expenses
 
30.3

 
29.1

 
29.2

Operating income
 
2.8

 
2.3

 
0.2

Interest expense
 
(0.3
)
 
(0.3
)
 
(0.4
)
Other income (expense), net
 
0.1

 

 

Income (loss) before income taxes
 
2.6

 
1.9

 
(0.2
)
Income tax provision (benefit)
 
0.6

 
(2.6
)
 

Net income (loss)
 
2.0
 %
 
4.6
 %
 
(0.2
)%

(1)
Percentages may not sum due to rounding.

Segment Information
Net sales, Gross profit and Gross margin information by segment was as follows (dollars in thousands):
 
 
Year Ended December 31,
2018
 
Beer Related
 
Brewpubs
 
Total
Net sales
 
$
182,163

 
$
24,023

 
$
206,186

Gross profit
 
$
66,958

 
$
1,365

 
$
68,323

Gross margin
 
36.8
%
 
5.7
%
 
33.1
%
2017
 
 
 
 
 
 
Net sales
 
$
179,830

 
$
27,626

 
$
207,456

Gross profit
 
$
63,412

 
$
1,846

 
$
65,258

Gross margin
 
35.3
%
 
6.7
%
 
31.5
%
2016
 
 
 
 
 
 
Net sales
 
$
173,657

 
$
28,850

 
$
202,507

Gross profit
 
$
55,667

 
$
3,932

 
$
59,599

Gross margin
 
32.1
%
 
13.6
%
 
29.4
%

Net Sales by Category
The following tables set forth a comparison of Net sales by category (dollars in thousands):
 
 
Year Ended December 31,
 
Dollar
Change
 
% Change
Sales by Category
 
2018
 
2017
 
A-B and A-B related (1)
 
$
167,638

 
$
164,491

 
$
3,147

 
1.9
 %
Contract brewing and beer related (2)
 
25,608

 
27,430

 
(1,822
)
 
(6.6
)%
Excise taxes
 
(11,083
)
 
(12,091
)
 
1,008

 
(8.3
)%
Net beer related sales
 
182,163

 
179,830

 
2,333

 
1.3
 %
Brewpubs (3)
 
24,023

 
27,626

 
(3,603
)
 
(13.0
)%
Net sales
 
$
206,186

 
$
207,456

 
$
(1,270
)
 
(0.6
)%


28


 
 
Year Ended December 31,
 
Dollar
Change
 
% Change
Sales by Category
 
2017
 
2016
 
A-B and A-B related (1)
 
$
164,491

 
$
167,725

 
$
(3,234
)
 
(1.9
)%
Contract brewing and beer related (2)
 
27,430

 
19,052

 
8,378

 
44.0
 %
Excise taxes
 
(12,091
)
 
(13,120
)
 
1,029

 
(7.8
)%
Net beer related sales
 
179,830

 
173,657

 
6,173

 
3.6
 %
Brewpubs (3)
 
27,626

 
28,850

 
(1,224
)
 
(4.2
)%
Net sales
 
$
207,456

 
$
202,507

 
$
4,949

 
2.4
 %

(1)
A-B and A-B related includes domestic and international sales of our owned brands sold through A-B and Ambev, non-owned brands sold pursuant to master distribution agreements, contract brewing fees earned from ABC which began in 2018, international distribution fees earned from ABWI and the sale of hops to A-B.
(2)
Beer related includes international and domestic beer sales not sold through A-B or Ambev, as well as fees earned through alternating proprietorship agreements.
(3)
Brewpubs sales include sales of promotional merchandise and sales of beer directly to customers.

Shipments by Category
Shipments by category were as follows (in barrels):
Year Ended December 31,
 
2018 Shipments
 
2017 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions (1)
A-B and A-B related (2)
 
653,300

 
654,200

 
(900
)
 
(0.1
)%
 
(2
)%
Contract brewing and beer related (3)
 
86,700

 
84,800

 
1,900

 
2.2
 %
 
 

Brewpubs
 
7,600

 
9,300

 
(1,700
)
 
(18.3
)%
 
 

Total
 
747,600

 
748,300

 
(700
)
 
(0.1
)%
 
 


Year Ended December 31,
 
2017 Shipments
 
2016 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions (1)
A-B and A-B related (2)
 
654,200

 
693,300

 
(39,100
)
 
(5.6
)%
 
(1
)%
Contract brewing and beer related (3)
 
84,800

 
72,600

 
12,200

 
16.8
 %
 
 

Brewpubs
 
9,300

 
9,700

 
(400
)
 
(4.1
)%
 
 

Total
 
748,300

 
775,600

 
(27,300
)
 
(3.5
)%
 
 


(1)
Change in depletions reflects the year-over-year change in barrel volume sales of beer by our 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, non-owned brands distributed pursuant to master distribution agreements and contract brewing volume produced for ABC which began in 2018.
(3)
Beer related includes domestic and international shipments of our beers not distributed through A-B or Ambev.

The increase in sales to A-B and A-B related in 2018 compared to 2017 was primarily due to an increase in average unit pricing, contract brewing fees earned and the sale of hops, partially offset by unfavorable brand family mix.

The decrease in sales to A-B and A-B related in 2017 compared to 2016 was primarily due to a decrease in shipment volume as we continued to reduce our inventory levels at our wholesaler partners as part of our ongoing efforts to address slowing craft segment growth and the on-going inventory pressures facing distributors in today’s complex craft beer market, partially offset by an increase in average unit pricing. The decrease was also partially offset by $3.4 million of international distribution fees earned in 2017 compared to $1.2 million earned in 2016 related to our international distribution agreement with ABWI, which began in the third quarter of 2016.

The average gross revenue per barrel, excluding excise taxes and net of discounting, on shipments of beer through the A-B distribution network increased by 1.4% in 2018 compared to 2017 , primarily due to pricing increases, partially offset by shifts in brand family mix. The average gross revenue per barrel, excluding excise taxes and net of discounting, on shipments of beer through the A-B distribution network increased by 2.4% in 2017 compared to 2016 , primarily due to pricing increases and shifts in brand family, package and geographic mix. Price changes implemented by us have generally followed craft beer market pricing

29


trends. During 2018 , 2017 and 2016 , we sold 87.4% , 87.4% and 89.4% , respectively, of our beer through A-B at wholesale pricing levels.

The decrease in contract brewing and beer related sales in 2018 compared to 2017 was primarily due to $3.4 million of non-recurring fees earned in the 2017 period from Pabst Northwest Brewing Company ("Pabst") related to a contract brewing volume shortfall and termination fees, partially offset by an increase in international shipments of our beers not distributed through A-B or Ambev and an increase in our alternating proprietorship fees. As a result of our asset purchase of Cisco and acquisitions of AMB and Wynwood, we no longer have alternating proprietorship agreements as of the respective asset purchase and acquisition dates. We expect this to have an unfavorable impact on our 2019 and future Contract brewing and beer related sales.

The increase in contract brewing and beer related sales in 2017 compared to 2016 was primarily due to an increase in our alternating proprietorship volume and an increase in international shipments of our beers not distributed through A-B or Ambev. Contract brewing shortfall and termination fees earned from Pabst were $3.4 million in 2017 compared to a contract brewing shortfall fee of $1.6 million in 2016 . In addition, we had a slight increase in our contract brewing volume in 2017 compared to 2016 .

Brewpubs sales decreased in 2018 compared to 2017 , primarily as a result of the closure of our Woodinville brewpub which occurred at the end of 2017, partially offset by increased sales at our Kona brewpub on the big island of Kailua-Kona in Hawaii and our Redhook Brewlab being operational for a full year.

Brewpubs sales decreased in 2017 compared to 2016 , primarily as a result of decreased guest counts across our mainland brewpubs, partially offset by an increased guest count at our Kona brewpub on the big island of Kailua-Kona in Hawaii and the opening of our newest brewpub, Redhook Brewlab, in Seattle, Washington. Our Woodinville brewpub closed at the end of 2017.

Excise taxes vary directly with the volume of beer shipped. Additionally, beginning January, 1, 2018, the federal excise taxes imposed on domestic brewers, such as us, that produce less than 2 million barrels annually, were reduced from $7.00 to $3.50 per barrel on the first 60,000 barrels shipped annually and from $18.00 to $16.00 per barrel on the first 6 million barrels shipped annually for all other brewers and all beer importers. Also, while the existing excise tax on hard cider did not change, the small producer tax credit for hard cider was expanded. Producers like us, who produce between 130,000 and 750,000 gallons of hard cider annually, receive a $0.033 credit for an effective tax rate of $0.193 per gallon.

Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):
Year Ended December 31,
 
2018 Shipments
 
2017 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions
Kona
 
456,300

 
424,600

 
31,700

 
7.5
 %
 
8
 %
Widmer Brothers
 
98,700

 
123,300

 
(24,600
)
 
(20.0
)%
 
(19
)%
Redhook
 
71,200

 
94,200

 
(23,000
)
 
(24.4
)%
 
(27
)%
Omission
 
44,700

 
44,000

 
700

 
1.6
 %
 
 %
All other (1)
 
48,500

 
44,500

 
4,000

 
9.0
 %
 
12
 %
Total (2)
 
719,400

 
730,600

 
(11,200
)
 
(1.5
)%
 
(2
)%

Year Ended December 31,
 
2017 Shipments
 
2016 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions
Kona
 
424,600

 
397,400

 
27,200

 
6.8
 %
 
10
 %
Widmer Brothers
 
123,300

 
148,100

 
(24,800
)
 
(16.7
)%
 
(16
)%
Redhook
 
94,200

 
127,200

 
(33,000
)
 
(25.9
)%
 
(24
)%
Omission
 
44,000

 
42,900

 
1,100

 
2.6
 %
 
(2
)%
All other (1)
 
44,500

 
33,300

 
11,200

 
33.6
 %
 
17
 %
Total (2)
 
730,600

 
748,900

 
(18,300
)
 
(2.4
)%
 
(1
)%

(1)
All other includes the shipments and depletions from our Appalachian Mountain Brewing, Cisco Brewers, Square Mile, and Wynwood Brewing brand families.
(2)
Total shipments by brand include international shipments and exclude shipments that we produced for others under our contract brewing arrangements.

The increase in our Kona brand shipments in 2018 compared to 2017 was due to increases in both in domestic and international shipments, primarily led by demand for Big Wave Golden Ale and Kanaha Blonde Ale, partially offset by a decline in Longboard Lager.

The increase in our Kona brand shipments in 2017 compared to 2016 was due to increases in both in domestic and international shipments, primarily led by demand for Hanalei Island IPA and Big Wave Golden Ale, partially offset by a decline in Castaway IPA.

The decrease in our Widmer Brothers brand shipments in 2018 compared to 2017 was led by a decrease in Hefeweizen brand shipments, primarily due to a continued strategic focus on the home market of Oregon, partially offset by the release of Green and Gold Kolsch and Deadlift IPA.

The decrease in our Widmer Brothers brand shipments in 2017 compared to 2016 was led by a decrease in Hefeweizen brand shipments, primarily due to a continued strategic focus on the home market of Oregon, partially offset by the release of Drifter and the Hefe Fruit variety pack.

The decrease in our Redhook brand shipments in 2018 compared to 2017 was primarily due to a continued strategic focus on the home market of Washington, led by a decline in Longhammer IPA and ESB brand shipments, partially offset by an increase in Big Ballard IPA.

The decrease in our Redhook brand shipments in 2017 compared to 2016 was primarily due to a continued strategic focus on the home market of Washington, led by a decline in Longhammer IPA and ESB brand shipments, partially offset by higher demand for Big Ballard IPA and the release of Bicoastal IPA.

The slight increase in our Omission brand shipments in 2018 compared to 2017 was primarily led by increased demand for Omission Ultimate Light brand, offset by a decrease in our Pale Ale and Lager brands.
 
The increase in our Omission brand shipments in 2017 compared to 2016 was primarily led by increased demand for our new brand Omission Ultimate Light, which was introduced in the first quarter of 2017, offset by a decrease in Omission Pale Ale.

The increase in our All other shipments in 2018 compared to 2017 was primarily due to an increase in shipment volumes related to our distribution agreements with Wynwood Brewing and Appalachian Mountain Brewing. During the fourth quarter of 2018, the distribution agreements with Wynwood Brewing and Appalachian Mountain Brewing terminated when their shipments began being treated as owned.

The increase in our All other shipments in 2017 compared to 2016 was primarily due to an increase in shipment volumes related to our distribution agreements with Wynwood Brewing, Cisco Brewers and Appalachian Mountain Brewing.

Shipments by Package
The following table sets forth a comparison of our shipments by package, excluding contract brewing shipments produced under our contract brewing arrangements (in barrels):
Year Ended December 31,
 
2018
 
2017
 
2016
 
Shipments
 
% of Total
 
Shipments
 
% of Total
 
Shipments
 
% of Total
Draft
 
169,200

 
23.5
%
 
165,600

 
22.7
%
 
171,100

 
22.8
%
Packaged
 
550,200

 
76.5
%
 
565,000

 
77.3
%
 
577,800

 
77.2
%
Total
 
719,400

 
100.0
%
 
730,600

 
100.0
%
 
748,900

 
100.0
%

The package mix was relatively consistent through the three-year period.


30


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


31


Information regarding Cost of sales was as follows (dollars in thousands):
 
 
Year Ended December 31,
 
Dollar
 
 
 
 
2018
 
2017
 
Change
 
% Change
Beer Related
 
$
115,205

 
$
116,418

 
$
(1,213
)
 
(1.0
)%
Brewpubs
 
22,658

 
25,780

 
(3,122
)
 
(12.1
)%
Total
 
$
137,863

 
$
142,198

 
$
(4,335
)
 
(3.0
)%

 
 
Year Ended December 31,
 
Dollar
 
 
 
 
2017
 
2016
 
Change
 
% Change
Beer Related
 
$
116,418

 
$
117,990

 
$
(1,572
)
 
(1.3
)%
Brewpubs
 
25,780

 
24,918

 
862

 
3.5
 %
Total
 
$
142,198

 
$
142,908

 
$
(710
)
 
(0.5
)%

The decrease in Beer Related Cost of sales in 2018 compared to 2017 was primarily due to a decrease in Beer Related Cost of sales on a per barrel basis. The decrease in our Beer Related Cost of sales on a per barrel basis was primarily due to the lower cost of having a portion of our beer produced by A-B in its Fort Collins, Colorado brewery, as well as cost savings associated with removing the Woodinville facility from our brewing footprint and the termination of our contract brewing agreement in Memphis, which had higher costs on a per barrel basis. The decreases were partially offset by increases in brewery costs due to higher fixed overhead, distribution rates on a per barrel basis and an increase in the quantity of hops shipped from our inventory. As a result of our asset purchase of Cisco and acquisitions of AMB and Wynwood we no longer have alternating proprietorship agreements. We expect this to have a favorable impact on our 2019 and future Beer Related Cost of sales.

The decrease in Beer Related Cost of sales in 2017 compared to 2016 was primarily due to a decrease in cost of goods related to lower shipment volume, efficiency improvements and improved distribution rates on a per barrel basis, partially offset by an increase in brewery costs on a per barrel basis and alternating proprietorship volume.

Early in the fourth quarter of 2016, we laid off approximately half of our production employees at our Woodinville brewery. The fourth quarter costs of the layoff were immaterial and effectively offset by the cost savings in the fourth quarter.

Brewpubs Cost of sales decreased in 2018 compared to 2017 primarily due to closure of the Woodinville brewpub and conversion of the Portland brewpub into a taproom, partially offset by the costs of opening our new brewpub in Seattle.

Brewpubs Cost of sales increased in 2017 compared to 2016 primarily due to increases in employee related costs and rent and other startup costs related to our Seattle brewpub, partially offset by a decrease in guest counts.

Capacity Utilization
Capacity utilization is calculated by dividing total shipments from our owned breweries by approximate working capacity of those breweries and was as follows:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Capacity utilization
 
57
%
 
60
%
 
67
%

In June 2014, we initiated full-scale brewing with our brewing partner in Memphis, Tennessee. This partnership provided us scalable capacity and we had the ability to produce up to 100,000 barrels at this location annually. Production ceased with this brewing partner during the second quarter of 2017. In 2016, we entered into a contract brewing agreement with ABCS with the ability to have up to 300,000 barrels produced annually and, during the second quarter of 2017, production began in their facilities.

Our capacity utilization declined in 2018 compared to 2017 due to a larger percentage of our beer being brewed by ABCS as part of our contract brewing relationship and evolving brewery footprint.

Our capacity utilization declined in 2017 compared to 2016 due to reductions in wholesaler inventories, as well as a larger percentage of our beer being brewed by ABCS as part of our contract brewing relationship and shifts in our brewery footprint.

As discussed in Notes 20 and 21 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report, we ceased production at our Woodinville, Washington brewery during the second quarter of 2017, which reduced the capacity of our owned breweries beginning in the third quarter of 2017. As a result, beginning with the third quarter of 2017, our capacity utilization calculation was revised to exclude, from the denominator, the production capacity of our Woodinville, Washington brewery, which we estimated to be approximately 220,000 barrels per year.

Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):
 
 
Year Ended December 31,
 
Dollar
 
 
 
 
2018
 
2017
 
Change
 
% Change
Beer Related
 
$
66,958

 
$
63,412

 
$
3,546

 
5.6
 %
Brewpubs
 
1,365

 
1,846

 
(481
)
 
(26.1
)%
Total
 
$
68,323

 
$
65,258

 
$
3,065

 
4.7
 %

 
 
Year Ended December 31,
 
Dollar
 
 
 
 
2017
 
2016
 
Change
 
% Change
Beer Related
 
$
63,412

 
$
55,667

 
$
7,745

 
13.9
 %
Brewpubs
 
1,846

 
3,932

 
(2,086
)
 
(53.1
)%
Total
 
$
65,258

 
$
59,599

 
$
5,659

 
9.5
 %

Gross profit as a percentage of Net sales, or gross margin rate, was as follows:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Beer Related
 
36.8
%
 
35.3
%
 
32.1
%
Brewpubs
 
5.7
%
 
6.7
%
 
13.6
%
Total
 
33.1
%
 
31.5
%
 
29.4
%

The increase in Beer Related Gross profit and gross margin in 2018 compared to 2017 was primarily due to increased unit pricing, lower excise tax rates, and the lower costs related to having a portion of our beer produced by A-B in Fort Collins, partially offset by $3.4 million of non-recurring fees earned from Pabst related to a contract brewing volume shortfall in 2017, and increases in brewery costs and distribution rates on a per barrel basis.

The increases in Beer Related Gross profit and gross margin rate in 2017 compared to 2016 were primarily due to increased unit pricing and higher alternating proprietorship volume, as well as a $2.2 million increase in the ABWI international distribution fee earned and $1.8 million of additional fees earned from Pabst related to contract brewing volume shortfall and termination fees in 2017 compared to 2016 , and a decrease in distribution rates on a per barrel basis. The favorable benefits to Beer Related Gross profit were partially offset by an increase in brewery costs on a per barrel basis and a decrease in shipment volume.

The decreases in Brewpubs Gross profit and gross margin in 2018 compared to 2017 were primarily due to the closure of our Woodinville brewpub and the net costs associated with our brewpub in Seattle, partially offset by the increased sales at our Kona brewpub.

The decreases in the Brewpubs Gross profit and gross margin rate in 2017 compared to 2016 were primarily due to decreased guest counts, increased employee related costs and costs related to preparations to open our Seattle brewpub.

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


32


Information regarding SG&A was as follows (dollars in thousands): 
 
 
Year Ended December 31,
 
Dollar
Change
 
% Change
 
 
2018
 
2017
 
 
 
$
62,572

 
$
60,463

 
$
2,109

 
3.5
%
As a % of Net sales
 
30.3
%
 
29.1
%
 
 

 
 


 
 
Year Ended December 31,
 
Dollar
Change
 
% Change
 
 
2017
 
2016
 
 
 
$
60,463

 
$
59,224

 
$
1,239

 
2.1
%
As a % of Net sales
 
29.1
%
 
29.2
%
 
 

 
 


The increase in SG&A in 2018 compared to 2017 was primarily due to increases in in-market promotional spend and professional fees, partially offset by a gain of $0.5 million in the first quarter of 2018 related to the sale of the Woodinville brewing and bottling equipment and a decrease in general and administrative costs.

The increase in SG&A in 2017 compared to 2016 was primarily due to increased professional fees, technology related expenses and an impairment charge of $0.5 million related to the sale of our Woodinville Brewery, partially offset by a $1.0 million contract settlement fee received from Pabst, as well as a decrease in creative and media spend.

Interest Expense
Information regarding Interest expense was as follows (dollars in thousands):
 
 
Year Ended December 31,
 
Dollar
Change
 
% Change
 
 
2018
 
2017
 
Interest expense
 
$
614

 
$
715

 
$
(101
)
 
(14.1
)%
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Dollar
Change
 
% Change
 
 
2017
 
2016
 
Interest expense
 
$
715

 
$
709

 
$
6

 
0.8
 %

 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Average debt outstanding
 
$
18,664

 
$
27,189

 
$
27,548

Average interest rate
 
2.96
%
 
2.08
%
 
1.51
%

The decrease in Interest expense in 2018 compared to 2017 was primarily due to a decrease in our average debt outstanding, partially offset by an increase in our average interest rate. The decrease in our average debt outstanding was due to principal payments made on our term loan and the payoff of our revolving credit balance following the sale of our Woodinville, Washington brewery in January 2018.

The increase in Interest expense in 2017 compared to 2016 was primarily due to an increase in our average interest rate, partially offset by a decrease in our average debt outstanding. The decrease in our average debt outstanding was due to principal payments made on our term loan and a decrease in the average amount outstanding on our line of credit, which fluctuates with our operating capital needs.

Income Tax Provision (Benefit)
Our effective income tax rate was 23.7% , (135.7)% and 4.6% in 2018 , 2017 and 2016 , respectively. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes, tax credits, and for periods prior to 2018, income excluded from taxation under the domestic production activities exclusion.

Our effective income tax rate in 2018 reflects the benefit of tax legislation, which reduced our federal tax rate from 34% to 21% effective January 1, 2018.

In the second quarter of 2017, we recognized a tax credit of $164,000 for a biofuel project at our New Hampshire brewery. The tax credit was claimed on our 2016 tax return and is based upon a study completed in the second quarter of 2017.

33



In the fourth quarter of 2017, we recognized the impact of enacted tax legislation, which reduced our federal tax rate from 34% to 21% effective January 1, 2018. This reduction resulted in a $6.9 million decrease to our deferred tax liability, which was recognized as a reduction to our income tax provision in the fourth quarter of 2017, the period of enactment. Before consideration of the effects of tax reform, our income tax provision would have been $1.4 million, for an effective income tax rate of 34.9%. Our accounting for the income tax effects of the new tax legislation is complete, and we do not anticipate adjustments to such accounting in future periods.

Liquidity and Capital Resources

We have required capital primarily for the construction and development of our production breweries, to support our expansion and growth plans, including acquisitions, 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 January 1, 2019 , primarily from cash flows generated from operations and borrowing under our line of credit facility as the need arises. Capital resources available to us at December 31, 2018 included $0.7 million of Cash and cash equivalents and $7.9 million available under our line of credit facility.

We had $13.7 million and $38.0 million of working capital and our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 25.8% and 20.3% at December 31, 2018 and 2017 , respectively.

A summary of our cash flow information was as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Net cash provided by operating activities
 
$
13,241

 
$
16,778

 
$
7,444

Net cash used in investing activities
 
(27,124
)
 
(20,348
)
 
(16,572
)
Net cash provided by financing activities
 
14,504

 
3,707

 
8,659

Increase (decrease) in cash, cash equivalents and restricted cash
 
$
621

 
$
137

 
$
(469
)

Cash provided by operating activities of $13.2 million in 2018 resulted from our Net income of $4.1 million , net non-cash expenses of $11.5 million , and changes in our operating assets and liabilities as discussed in more detail below.

Accounts receivable, net, increased $2.2 million to $30.0 million at December 31, 2018 , compared to $27.8 million at December 31, 2017 . This increase was primarily due to a $3.3 million increase in our receivable from A-B to a total of $23.9 million at December 31, 2018 , primarily due to the $6.0 million international distribution agreement fee from ABWI outstanding at December 31, 2018, which was received in January 2019, compared to the $5.0 million fee outstanding at December 31, 2017. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $3.4 million to $17.2 million at December 31, 2018 , compared to $13.8 million at December 31, 2017 . The increase was primarily due to an increase in raw materials as we purchased hops under raw material contracts.

Accounts payable increased $3.3 million to $17.6 million at December 31, 2018 , compared to $14.3 million at December 31, 2017 , primarily due to the timing of payments for capital projects. The portion of our payable to A-B that is included in our Accounts payable totaled $5.1 million at December 31, 2018 , which is slightly higher than the balance at December 31, 2017 , primarily due to the timing of payments related to our contract brewing relationship with ABCS.

As of December 31, 2018 we had the following net operating loss carryforwards (“NOLs”) and federal credit carry forwards available to offset payment of future income taxes:

state NOLs of $10,000 , tax-effected; and
federal alternative minimum tax (“AMT”) credit carry forwards of $170,000 .

The AMT credit carryforward is refundable over the next four years  As such, the carryforward is recognized as a tax receivable on our Consolidated Balance Sheets at December 31, 2018. 

Capital expenditures of $12.8 million in 2018 were primarily directed to beer production capacity and efficiency improvements and Brewpubs remodeling. As of December 31, 2018 , we had an additional $3.1 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to $0.5 million at December 31, 2017 . Beginning in 2015, we invested

34

Index

approximately $10 million in our Oregon Brewery to expand capacity; the project was completed in the fourth quarter of 2017. Also beginning in 2015 through expected completion in 2019, we are investing approximately $20 million in a new Hawaiian Brewery. We anticipate capital expenditures of approximately $15 million to $19 million in 2019 , primarily for our new Kona brewery.


35

Index

Loan Agreement

On October 10, 2018, we executed a First Amendment (the "Amendment") to our Amended and Restated Credit Agreement with Bank of America, N.A. dated November 30, 2015 (as amended, the "Credit Agreement"). The Credit Agreement 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 Amendment were to increase the maximum amount available under the line of credit from $40.0 million to $45.0 million and to extend the maturity date of the line of credit from November 30, 2020 to September 30, 2023, which is also the maturity date of the term loan. The maximum amount of the line of credit is subject to loan commitment reductions in the amount of $750,000 each quarter beginning March 31, 2020. The Amendment also increased the limit on the total amount of investments that we may make in other craft brewers, other than the acquisition of all or substantially all of the assets or controlling ownership interests, from $5.0 million to $10.0 million. We may draw upon the Line of Credit for working capital and general corporate purposes. At December 31, 2018 , we had $37.1 million of borrowings outstanding under the Line of Credit and $8.8 million outstanding under the Term Loan.

As discussed in Note 21 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report, we completed the sale of our Woodinville, Washington brewery on January 12, 2018 for a total selling price of $24.5 million . We used proceeds from the sale to fully pay down our Line of Credit effective January 26, 2018. In the fourth quarter of 2018, we borrowed on the Line of Credit primarily to fund the asset purchase and acquisitions as discussed in Note 5.

Under the Loan Agreement, interest accrues at an annual rate based on the London Inter-Bank Offered Rate (“LIBOR”) Daily Floating Rate plus a marginal rate. The marginal rate varies from 0.75% to 1.75% for the Line of Credit and Term Loan based on our funded debt ratio. At December 31, 2018 , our marginal rate was 1.25% resulting in an annual interest rate of 3.23% .

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 Loan Agreement, with any unpaid principal balance and unpaid accrued interest due and payable on September 30, 2023 .

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

Contractual Commitments and Obligations
 
The following is a summary of our contractual commitments and obligations as of December 31, 2018 (in thousands):
 
 
Payments Due By Period
Contractual Obligations
 
Total
 
2019
 
2020 and 2021
 
2022 and 2023
 
2024 and beyond
Term loan
 
$
8,823

 
$
442

 
$
936

 
$
7,445

 
$

Interest on term loan (1)
 
420

 
97

 
179

 
144

 

Line of credit
 
37,092

 

 

 
37,092

 

Operating leases
 
43,712

 
11,208

 
3,800

 
3,258

 
25,446

Capital leases
 
1,725

 
529

 
599

 
398

 
199

Purchase commitments
 
27,794

 
7,278

 
14,641

 
5,875

 

Sponsorship obligations
 
4,168

 
1,830

 
1,745

 
593

 

Interest rate swap (2)
 
780

 
180

 
332

 
268

 

 
 
$
124,514

 
$
21,564

 
$
22,232

 
$
55,073

 
$
25,645


(1)
The variable interest rate on our Term Loan and Line of Credit was 3.23% at December 31, 2018 .
(2)
The fixed rate on our interest rate swap was 2.86% . We pay interest at the fixed rate and receive interest at the Benchmark Rate, which was 2.46% at December 31, 2018 .

See Notes 9 and 18 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Inflation

We believe that the impact of inflation was minimal on our business in 2018 , 2017 and 2016 .

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.

Goodwill and Other Indefinite-Lived Intangible Assets
We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis, or as indicators of impairment are present. We have an option to first assess certain qualitative factors for indications of impairment in order to determine whether it is necessary to perform the quantitative, two-step impairment test. If we choose not to first perform the qualitative test, or we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we perform the quantitative two-step impairment test.

Our goodwill and other indefinite-lived intangible assets impairment loss calculations contain uncertainties because they require management to make assumptions in the qualitative assessment of relevant events and circumstances and to estimate the fair value of our reporting units and indefinite-lived intangible assets, including estimating future cash flows. These calculations contain uncertainties because they require management to make assumptions and apply judgment to estimate economic factors and the profitability of future business operations and, if necessary, the fair value of a reporting unit’s assets and liabilities. Further, our ability to realize the future cash flows used in our fair value calculations is affected by changes in such factors as our operating performance, our business strategies, our industry and economic conditions.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. Based on the results of our annual impairment test for goodwill and other indefinite-lived intangible assets, no impairment was recorded. We believe, based on our assessment discussed above, that our goodwill and other indefinite-lived intangible assets are not at risk of impairment. However, if actual results are not consistent with our estimates or assumptions or there are significant changes in any of these estimates, projections or assumptions, the fair value of these assets in future measurement periods could be materially affected, resulting in an impairment that could have a material adverse effect on our results of operations.

Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us and are reflected as a component of Property, equipment and leasehold improvements in our Consolidated Balance Sheets at cost and are depreciated over the estimated useful life of the keg. When draft beer is shipped to the wholesaler, we collect a refundable deposit, reflected as a current liability in our Consolidated Balance Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler. When a wholesaler cannot account for some of our kegs for which it is responsible, it pays us a fixed fee and forfeits its deposit for each keg determined to be lost. We have experienced some loss of kegs and anticipate that some loss will occur in future periods due to the significant volume of kegs handled by each wholesaler and retailer, the similarities between kegs owned by most brewers, and the relatively low deposit collected on each keg when compared with the market value of the keg. We believe that this is an industry-wide issue and our loss experience is typical of the industry. In order to estimate forfeited deposits attributable to lost kegs, we periodically use internal records, A-B records, other third-party records, and historical information to estimate the physical count of kegs held by wholesalers and A-B.

These estimates affect the amount recorded as brewery equipment and refundable deposits as of the date of the consolidated financial statements. The actual liability for refundable deposits could differ from estimates.

Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in connection with sales to a member of the A-B wholesale distributor network, when the products are delivered to the member. A member of the A-B wholesale distributor network may be a branch of A-B or an independent wholesale distributor.

We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer.


36

Index

We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event.

We recognize revenue related to non-refundable payments to be received on specified dates throughout a contract term on a straight-line basis over the life of the related contract or contracts.

Deferred Taxes
Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes and from unutilized tax credits and net operating loss carry forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we will record a valuation allowance against deferred tax assets. If we are unable to generate adequate taxable income in future periods or our assessment that it is more likely than not that certain deferred tax assets will be realized is otherwise not accurate, we may incur charges in future periods to record a valuation allowance on our gross deferred tax assets.

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 Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk
We have assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in Cash and cash equivalents and Long-term debt. To mitigate this risk, on January 23, 2014, we entered into an $8.0 million notional amount interest rate swap agreement, which expires September 30, 2023, to hedge the variability of interest payments associated with our variable-rate borrowings on our term loan. On November 25, 2015, we entered into a $9.1 million notional amount interest rate swap agreement effective January 4, 2016, which was set to expire January 1, 2019, to hedge the variability of interest payments associated with our variable-rate borrowings on our line of credit. This swap agreement was terminated effective January 18, 2018 as we paid off our line of credit, and we received interest of $27,000. The notional amount fluctuates based on a predefined schedule based on our anticipated borrowings. 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. The interest rate swap hedges 75% of our total term loan outstanding and reduces our overall interest rate risk. As of December 31, 2018 , we had unhedged variable-rate debt outstanding of $2.2 million on our term loan and $37.1 million on our line of credit. A 10% increase or decrease in the interest rate on our variable-rate debt would not have a material effect on our financial position, results of operations or cash flows.

Due to the nature of our highly liquid Cash and cash equivalents, an increase or decrease in interest rates would not materially affect the fair value of our cash or the related interest income.


37

Index

Item 8.   Financial Statements and Supplementary Data
 
Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2018 is as follows:
2018 (In thousands, except per share data)
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Net sales
 
$
47,487

 
$
61,823

 
$
52,889

 
$
43,987

Cost of sales
 
32,416

 
39,696

 
36,190

 
29,561

Gross profit
 
15,071

 
22,127

 
16,699

 
14,426

Selling, general and administrative expenses (1)
 
14,748

 
15,857

 
16,712

 
15,255

Operating income (loss)
 
323

 
6,270

 
(13
)
 
(829
)
Interest expense and Other expense, net
 
(100
)
 
(86
)
 
(120
)
 
(16
)
Income (loss) before income taxes
 
223

 
6,184

 
(133
)
 
(845
)
Income tax provision (benefit)
 
62

 
1,732

 
(194
)
 
(313
)
Net income (loss)
 
$
161

 
$
4,452

 
$
61

 
$
(532
)
Basic and diluted net income (loss) per share (5)
 
$
0.01

 
$
0.23

 
$

 
$
(0.03
)
Shares used in basic per share calculation
 
19,310

 
19,334

 
19,370

 
19,382

Shares used in diluted per share calculation
 
19,488

 
19,517

 
19,545

 
19,382


2017 (In thousands, except per share data)
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter (5)
Net sales (2)
 
$
44,302

 
$
60,550

 
$
56,638

 
$
45,966

Cost of sales
 
31,633

 
42,221

 
37,254

 
31,090

Gross profit
 
12,669

 
18,329

 
19,384

 
14,876

Selling, general and administrative expenses (3)
 
15,469

 
15,560

 
16,328

 
13,106

Operating income (loss)
 
(2,800
)
 
2,769

 
3,056

 
1,770

Interest expense and Other expense, net
 
(178
)
 
(163
)
 
(238
)
 
(175
)
Income (loss) before income taxes
 
(2,978
)
 
2,606

 
2,818

 
1,595

Income tax provision (benefit) (4)
 
(1,191
)
 
882

 
1,067

 
(6,240
)
Net income (loss)
 
$
(1,787
)
 
$
1,724

 
$
1,751

 
$
7,835

Income (loss) per share: (5)
 
 
 
 
 
 
 
 
Basic
 
$
(0.09
)
 
$
0.09

 
$
0.09

 
$
0.41

Diluted
 
$
(0.09
)
 
$
0.09

 
$
0.09

 
$
0.40

Shares used in basic per share calculation
 
19,261

 
19,278

 
19,296

 
19,302

Shares used in diluted per share calculation
 
19,261

 
19,389

 
19,443

 
19,507


(1) Selling, general and administrative expenses in the first quarter of 2018 includes a gain of $0.5 million related to the sale of the Woodinville brewing and bottling equipment.
(2)
Net sales in the first quarter of 2017 includes a $1.6 million fee, and the fourth quarter of 2017 includes a $1.7 million fee, from Pabst, related to the termination of the brewing agreements.
(3)
Selling, general and administrative expenses in the fourth quarter of 2017 includes the benefit of $1.0 million fee from Pabst, related to the termination of a purchase option agreement, as well as a $0.5 million impairment charge related to the sale of our Woodinville brewery.
(4)
Income tax benefit in the fourth quarter of 2017 includes a $6.9 million benefit related to the effect on our deferred tax assets and liabilities of a change in Federal income tax rates from 34% to 21%.
(5)
Basic and diluted net income (loss) per share may not sum to the full year as presented on the Consolidated Statements of Operations due to rounding.


38

Index

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and the Board of Directors of
Craft Brew Alliance, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Craft Brew Alliance, Inc. (the “Company”) as of December 31, 2018 and 2017 , the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018 , and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework ( 2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2019 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle
As discussed in Note 12 to the consolidated financial statements, in 2018 the Company changed its method of accounting for revenue recognition due to the adoption of Accounting Standards Codification Topic No. 606.

Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.




/s/ Moss Adams LLP

Portland, Oregon
March 6, 2019

We have served as the Company’s auditor since 2004.




39


CRAFT BREW ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
 
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash, cash equivalents and restricted cash
$
1,200

 
$
579

Accounts receivable, net
29,998

 
27,784

Inventory, net
17,216

 
13,844

Assets held for sale

 
22,946

Other current assets
3,121

 
4,335

Total current assets
51,535

 
69,488

Property, equipment and leasehold improvements, net
113,189

 
106,283

Goodwill
21,986

 
12,917

Trademarks
44,289

 
14,429

Intangible, equity method investment and other assets, net
5,048

 
6,520

Total assets
$
236,047

 
$
209,637

Liabilities and Shareholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
17,552

 
$
14,338

Accrued salaries, wages and payroll taxes
5,635

 
5,877

Refundable deposits
4,123

 
4,816

Deferred revenue
6,015

 
3,385

Other accrued expenses
3,618

 
2,368

Current portion of long-term debt and capital lease obligations
919

 
699

Total current liabilities
37,862

 
31,483

Long-term debt and capital lease obligations, net of current portion
46,573

 
32,599

Fair value of derivative financial instruments
116

 
221

Deferred income tax liability, net
12,381

 
12,886

Other liabilities
2,680

 
1,657

Total liabilities
99,612

 
78,846

Commitments and contingencies (Note 18)


 


Common shareholders' equity:
 

 
 

Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 19,382,641 and 19,309,829
97

 
96

Additional paid-in capital
144,013

 
142,196

Accumulated other comprehensive loss
(86
)
 
(164
)
Accumulated deficit
(7,589
)
 
(11,337
)
Total common shareholders' equity
136,435

 
130,791

Total liabilities and common shareholders' equity
$
236,047

 
$
209,637

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


40

Index

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

 
Year Ended December 31,
 
2018
 
2017
 
2016
Sales
$
217,269

 
$
219,547

 
$
215,627

Less excise taxes
11,083

 
12,091

 
13,120

Net sales
206,186

 
207,456

 
202,507

Cost of sales
137,863

 
142,198

 
142,908

Gross profit
68,323

 
65,258

 
59,599

Selling, general and administrative expenses
62,572

 
60,463

 
59,224

Operating income
5,751

 
4,795

 
375

Interest expense
(614
)
 
(715
)
 
(709
)
Other income (expense), net
292

 
(39
)
 
28

Income (loss) before income taxes
5,429

 
4,041

 
(306
)
Income tax provision (benefit)
1,287

 
(5,482
)
 
14

Net income (loss)
$
4,142

 
$
9,523

 
$
(320
)
Basic and diluted net income (loss) per share
$
0.21

 
$
0.49

 
$
(0.02
)
Shares used in basic per share calculations
19,349

 
19,284

 
19,225

Shares used in diluted per share calculations
19,557

 
19,447

 
19,225

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


41

Index

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Net income (loss)
 
$
4,142

 
$
9,523

 
$
(320
)
Unrealized gain on derivative hedge transactions, net of tax
 
78

 
98

 
90

Comprehensive income (loss)
 
$
4,220

 
$
9,621

 
$
(230
)
 
The accompanying notes are an integral part of these financial statements.


42

Index

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(In thousands)

 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
 
 
Total
Common Shareholders' Equity
 
 
Shares
 
Par Value
 
 
 
Accumulated Deficit
 
Balance at December 31, 2015
 
19,179

 
$
96

 
$
139,534

 
$
(352
)
 
$
(20,540
)
 
$
118,738

Issuance of shares under stock plans, net of shares withheld for tax payments
 
20

 

 
172

 

 

 
172

Stock-based compensation, net of shares withheld for tax payments
 
62

 

 
1,087

 

 

 
1,087

Tax benefit related to stock options
 

 

 

 

 

 

Unrealized gains on derivative financial instruments, net of tax benefit of $55
 

 

 

 
90

 

 
90

Tax payments related to stock-based awards
 

 

 
(106
)
 

 

 
(106
)
Net loss
 

 

 

 

 
(320
)
 
(320
)
Balance at December 31, 2016
 
19,261

 
96

 
140,687

 
(262
)
 
(20,860
)
 
119,661

Issuance of shares under stock plans, net of shares withheld for tax payments
 
25

 

 
219

 

 

 
219

Stock-based compensation, net of shares withheld for tax payments
 
24

 

 
1,317

 

 

 
1,317

Unrealized gains on derivative financial instruments, net of tax of $105
 

 

 

 
98

 

 
98

Tax payments related to stock-based awards
 

 

 
(27
)
 

 

 
(27
)
Net income
 

 

 

 

 
9,523

 
9,523

Balance at December 31, 2017
 
19,310

 
96

 
142,196

 
(164
)
 
(11,337
)
 
130,791

Adoption of accounting standards (see Note 12)
 

 

 

 

 
(394
)
 
(394
)
Issuance of shares under stock plans, net of shares withheld for tax payments
 
42

 
0.3

 
427

 

 

 
427

Stock-based compensation, net of shares withheld for tax payments
 
31

 
0.2

 
1,482

 

 

 
1,482

Unrealized gains on derivative financial instruments, net of tax of $27
 

 

 

 
78

 

 
78

Tax payments related to stock-based awards
 

 

 
(92
)
 

 

 
(92
)
Net income
 

 

 

 

 
4,142

 
4,142

Balance at December 31, 2018
 
19,383

 
$
97

 
$
144,013

 
$
(86
)
 
$
(7,589
)
 
$
136,435



43

Index

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
4,142

 
$
9,523

 
$
(320
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

 


Depreciation and amortization
10,612

 
10,457

 
10,862

(Gain) loss on sale or disposal of Property, equipment and leasehold improvements
(567
)
 
428

 
96

Deferred income taxes
(506
)
 
(5,400
)
 
360

Stock-based compensation
1,484

 
1,316

 
1,087

Impairment of assets held for sale

 
493

 

Other
503

 
539

 
654

Changes in operating assets and liabilities:
 

 
 

 


Accounts receivable, net
(2,770
)
 
(3,776
)
 
(5,082
)
Inventories
(2,728
)
 
5,500

 
(1,614
)
Other current assets
466

 
(1,840
)
 
(55
)
Accounts payable, deferred revenue and other accrued expenses
3,488

 
277

 
1,515

Accrued salaries, wages and payroll taxes
(266
)
 
910

 
(501
)
Refundable deposits
(617
)
 
(1,649
)
 
442

Net cash provided by operating activities
13,241

 
16,778

 
7,444

Cash flows from investing activities:
 

 
 

 
 

Expenditures for Property, equipment and leasehold improvements
(12,769
)
 
(18,342
)
 
(15,722
)
Proceeds from sale of Property, equipment and leasehold improvements
23,017

 
95

 
75

Restricted cash from sale of Property, equipment and leasehold improvements
515

 

 

Business combinations and asset acquisitions
(37,887
)
 

 

Expenditures for long-term deposits

 

 
(925
)
Equity method investment

 
(2,101
)
 

Net cash used in investing activities
(27,124
)
 
(20,348
)
 
(16,572
)
Cash flows from financing activities:
 

 
 

 
 

Principal payments on debt and capital lease obligations
(724
)
 
(709
)
 
(605
)
Net borrowings under revolving line of credit
14,893

 
4,224

 
9,198

Proceeds from issuances of common stock
427

 
219

 
172

Tax payments related to stock-based awards
(92
)
 
(27
)
 
(106
)
Net cash provided by financing activities
14,504

 
3,707

 
8,659

Increase (decrease) in Cash, cash equivalents and restricted cash
621

 
137

 
(469
)
Cash, cash equivalents and restricted cash:
 

 
 

 
 

Beginning of period
579

 
442

 
911

End of period
$
1,200

 
$
579

 
$
442

Supplemental disclosure of cash flow information:
 

 
 

 
 

Cash paid for interest
$
576

 
$
716

 
$
667

Cash paid for income taxes, net
1,078

 
1,158

 
587

Supplemental disclosure of non-cash information:
 

 
 

 


Purchases of Property, equipment and leasehold improvements with capital leases
$

 
$
521

 
$
1,173

Purchases of Property, equipment and leasehold improvements included in Accounts payable at end of period
3,061

 
519

 
889

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

44

Index

Note 1. Nature of Operations

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

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 international markets, while remaining deeply rooted in its home of Hawaii.

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

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

We proudly brew and package our craft beers in three company-owned production breweries located in Portland, Oregon; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. In 2018, we continued to leverage our contract brewing agreement with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of Anheuser-Busch, LLC (“A-B”), through which we brew select CBA brands in A-B’s Fort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries in Portland, Oregon; Seattle, Washington; Portsmouth, New Hampshire; Boone North Carolina; and Miami, Florida, which are primarily used for small-batch production and limited-release beers offered primarily in our brewpubs and brands’ home markets.

We distribute our beers to retailers through wholesalers that are aligned with the A-B network. These sales are made pursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B, which extends through 2028. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. As competition puts increasing pressure on craft brands outside of their home markets, we are continuing our efforts to stabilize and strengthen Widmer Brothers and Redhook in the Pacific Northwest, while expanding distribution of Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co. across their respective home markets of North Carolina, New England, and South Miami.

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

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

Basis of Presentation
The consolidated financial statements include the accounts of Craft Brew Alliance, Inc. and our wholly owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.

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

45


Note 2. Significant Accounting Policies

Cash, Cash Equivalents and Restricted Cash
We maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2018 and 2017 , we did not have any cash equivalents.

Under our cash management system, we utilize a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances for accounting purposes. As of December 31, 2018 there were $0.6 million of bank overdrafts. As of December 31, 2017 there were no bank overdrafts. Changes in bank overdrafts from period to period are reported in the Consolidated Statements of Cash Flows as a component of operating activities within Accounts payable and Other accrued expenses.

Cash and cash equivalents that are restricted as to withdrawal or use under terms of certain contractual agreements are recorded in Cash, cash equivalents and restricted cash on our Consolidated Balance Sheets. Restricted cash of  $0.5 million  at  December 31, 2018  represents funds held in an escrow account from the sale of our Woodinville brewery related to a lien; we expect that the lien will be resolved in our favor and the restriction will be removed. We did not have any restricted cash at December 31, 2017.

Accounts Receivable
Accounts receivable primarily consists of trade receivables due from wholesalers and A-B for beer and promotional product sales. Because of state liquor laws and each wholesaler’s agreement with A-B, we do not have collectability issues related to the sale of our beer products. Accordingly, we do not regularly provide an allowance for doubtful accounts for beer sales. We have provided an allowance for promotional merchandise receivables that have been invoiced to the wholesaler, which reflects our best estimate of probable losses inherent in the accounts. We determine the allowance based on historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. The allowance for doubtful accounts was $ 25,000 at both December 31, 2018 and 2017 .

Activity related to our allowance for doubtful accounts was immaterial in 2018 , 2017 and 2016 .

Inventories
Inventories, except for pub food, beverages and supplies, are stated at the lower of standard cost or net realizable value. Pub food, beverages and supplies are stated at the lower of cost or net realizable value.

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

Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in our Consolidated Statements of Operations.

Depreciation and amortization of property, equipment and leasehold improvements is provided on the straight-line method over the following estimated useful lives:
Buildings
30 – 50 years
Brewery equipment
10 – 25 years
Furniture, fixtures and other equipment
2 – 10 years
Vehicles
5 years
Leasehold improvements
The lesser of useful life or term of the lease

Valuation of Long-Lived Assets
We evaluate potential impairment of long-lived assets when facts and circumstances indicate that the carrying values of such assets may be impaired. An evaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscounted cash flows. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss in the current period in our Consolidated Statements of Operations. During 2017, a $0.5 million impairment charge was

46


recorded as a component of Selling, general and administrative expenses related to the sale of our Woodinville brewery. There were no impairments recorded during 2018 or 2016.

Definite-lived intangible assets are amortized using a straight line basis of accounting. Definite-lived intangible assets and their respective estimated lives are as follows:
Distributor agreements
15 years
Non-compete agreements
2 years

Goodwill
Goodwill is not amortized but rather is reviewed for impairment at least annually, or more frequently if an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We first make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we then perform a two-step goodwill impairment test. Under the first step, the fair value of the reporting unit is compared to its carrying value, and, if an indication of goodwill impairment exists in the reporting unit, the second step of the impairment test is performed to measure the amount of any impairment loss. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill as determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. We conduct our annual impairment test as of December 31 of each year and have determined there to be no impairment for any of the periods presented.

Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist primarily of trademarks, domain name and recipes. We evaluate the recoverability of indefinite-lived intangible assets annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, by comparing the carrying amount of the asset to its estimated fair value measured by using discounted cash flows that the asset is expected to generate. We have determined there to be no impairment for any of the periods presented.

Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us and are reflected in our Consolidated Balance Sheets at cost and are depreciated over the estimated useful life of the keg. When draft beer is shipped to the wholesaler, we collect a refundable deposit, presented as a current liability, Refundable deposits, in our Consolidated Balance Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler.

We have experienced some loss of kegs and anticipate that some loss will occur in future periods due to the significant volume of kegs handled by each wholesaler and retailer, the homogeneous nature of kegs owned by most brewers, and the relatively small deposit collected for each keg when compared with its market value. In order to estimate forfeited deposits attributable to lost kegs, we periodically use internal records, records maintained by A-B, records maintained by other third party vendors and historical information to estimate the physical count of kegs held by wholesalers and A-B. These estimates affect the amount recorded as equipment and refundable deposits as of the date of the consolidated financial statements. The actual liability for refundable deposits may differ from estimates. Our Consolidated Balance Sheets included $ 3.9 million and $ 4.5 million at December 31, 2018 and 2017 , respectively, in Refundable deposits on kegs and $9.2 million and $ 10.0 million , respectively, in keg equipment, net of accumulated depreciation, included as a component of Property, equipment and leasehold improvements, net.

Concentrations of Risk
Financial instruments that potentially subject us to credit risk consist principally of Accounts receivable. While wholesalers and A-B account for substantially all Accounts receivable, this concentration risk is limited due to the number of wholesalers, their geographic dispersion and state laws regulating the financial affairs of wholesalers of alcoholic beverages.

Comprehensive Income (Loss)
Comprehensive income (loss) includes changes in the fair value of interest rate derivatives that are designated as cash flow hedges.


47


Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in connection with sales to a member of the A-B wholesale distributor network, when the products are delivered to the member. A member of the A-B wholesale distributor network may be a branch of A-B or an independent wholesale distributor.

We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer.

We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event.

We recognize revenue related to non-refundable payments to be received on specified dates throughout a contract term on a straight-line basis over the life of the related contract or contracts.

See Note 12 for additional information.

Excise Taxes
The federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers producing less than two million barrels of beer per calendar year, the federal excise tax until December 31, 2017, was $7.00 per barrel on the first 60,000 barrels of beer removed for consumption or sale during the calendar year, and $18.00 per barrel for each barrel in excess of 60,000 barrels. Beginning January 1, 2018, as a result of the Tax Cuts and Jobs Act ("TCJA"), our federal excise tax rate on beer decreased from $7.00 per barrel to $3.50 per barrel on the first 60,000 barrels of beer removed for consumption or sale during the calendar year, and from $18.00 per barrel to $16.00 per barrel for each barrel in excess of 60,000 barrels. These lower rates currently expire at the end of 2019. Individual states also impose excise taxes on alcoholic beverages in varying amounts. As presented in our Consolidated Statements of Operations, Sales reflects the amounts invoiced to A-B, wholesalers and other customers. Excise taxes due to federal and state agencies are not collected from our customers, but rather are our responsibility. Net sales, as presented in our Consolidated Statements of Operations, are reduced by applicable federal and state excise taxes.

Taxes Collected from Customers and Remitted to Governmental Authorities
We account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net (reduction of revenue) basis.

Shipping and Handling Costs
Costs incurred to ship our product are included in Cost of sales in our Consolidated Statements of Operations.

Advertising Expenses
Advertising costs, consisting of television, radio, print, outdoor advertising, on-line and social media, sponsorships, trade events, promotions and printed product information, as well as costs to produce these media, are expensed as incurred. The costs associated with point of sale display items and related promotional merchandise are inventoried and charged to expense when first used. For the years ended December 31, 2018 , 2017 and 2016 , we recognized costs for all of these activities totaling $ 16.9 million , $ 14.8 million and $ 14.6 million , respectively, which are reflected as Selling, general and administrative expenses in our Consolidated Statements of Operations.

Advertising expenses frequently involve the local wholesaler sharing in the cost of the program. Reimbursements from wholesalers for advertising and promotion activities are recorded as a reduction to Selling, general and administrative expenses in our Consolidated Statements of Operations. Pricing discounts to wholesalers are recorded as a reduction of Sales in our Consolidated Statements of Operations.

Stock-Based Compensation
The fair value of restricted stock unit awards is determined based on the number of units granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various judgmental assumptions including expected volatility and option life.

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures of stock-based awards based on historical experience and expected future activity.

The estimated fair value of performance-based stock awards is recognized over the service period based on an assessment of the probability that performance goals will be met. We re-measure the probability of achieving the performance goals during each reporting period. In future reporting periods, if we determine that performance goals are not probable of occurrence, no additional compensation expense would be recognized and any previously recognized compensation expense would be reversed.

48



Legal Costs
We are a party to legal proceedings arising in the normal course of business. We accrue for certain legal costs, including attorney fees, as well as potential settlement amounts and other losses related to various legal proceedings that are estimable and probable. If not estimable and probable, legal costs are expensed as incurred as a component of Selling, general and administrative expenses.

Income Taxes
Deferred income taxes are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

We recognize the benefits of tax return positions when it is determined that the positions are “more-likely-than-not” to be sustained by the taxing authority. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred. At December 31, 2018 and 2017 , we did not have any unrecognized tax benefits or any interest and penalties accrued on unrecognized tax benefits.

In the fourth quarter of 2017, we recognized the impact of the TCJA, which reduced our federal tax rate from 34% to 21% effective January 1, 2018. This reduction resulted in a $6.9 million decrease to our deferred tax liability, which was recognized as a reduction to our income tax provision in the fourth quarter of 2017, the period of enactment. Our accounting for the income tax effects of the TCJA is complete, and we do not anticipate adjustments to such accounting in future periods.

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

Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number of shares that were outstanding during the period. Diluted earnings per share include the dilutive effect of common share equivalents calculated under the treasury stock method. Performance-based restricted stock grants are included in basic and diluted earnings per share when the underlying performance metrics have been met.

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under different assumptions or conditions.
                                        
Note 3. Recent Accounting Pronouncements

ASU 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.

49


 
ASU 2018-02
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows entities to reclassify accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the income tax rate change resulting from the TCJA is recognized. The early adoption of ASU 2018-02 on January 1, 2018 did not have a material effect on our financial position, results of operations or cash flows.

ASU 2017-09
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting." ASU 2017-09 provides clarity and is expected to reduce both diversity in practice and the cost and complexity when accounting for a change to the terms of a stock-based award. ASU 2017-09 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, on a prospective basis. The adoption of ASU 2017-09 on January 1, 2018 did not have a material effect on our financial position, results of operations or cash flows.

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

ASU 2016-18
In August 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash." ASU 2016-18 reduces the diversity in practice in the classification and the presentation of restricted cash within an entity's statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The adoption of ASU 2016-18 on January 1, 2018 did not have a material effect on our financial position, results of operations or cash flows.

ASU 2016-15
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 addresses eight specific cash flow issues and how they should be reported on the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The adoption of ASU 2016-15 on January 1, 2018 did not have a material effect on our financial position, results of operations or cash flows.

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

ASU 2016-02, ASU2018-10 and ASU 2018-11
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are currently evaluating the potential impact of the adoption of ASU 2016-02 on our consolidated financial statements. We currently expect the adoption of this standard to result in a material increase to the assets and liabilities on our consolidated balance sheets.


50


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. We are still evaluating the effect of the adoption of ASU 2018-10.

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. We are still evaluating the effect of the adoption of ASU 2018-11.

ASU 2016-01
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10).” ASU 2016-01 enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by addressing certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments simplify certain requirements and also reduce diversity in current practice for other requirements. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 on January 1, 2018 did not have a material effect on our financial position, results of operations or cash flows.

ASU 2014-09, ASU 2016-10 and ASU 2016-12
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09, as amended, affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies aspects of Topic 606 related to identifying performance obligations and the licensing implementation guidance, while retaining the related core principles for those areas. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements in ASU 2014-09.

In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients." ASU 2016-12 clarifies aspects of Topic 606 related to the guidance on assessing collectibility, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications. The effective date and transition requirements for ASU 2016-12 are the same as the effective date and transition requirements in ASU 2014-09.

The standards permit either the retrospective or the modified retrospective (cumulative effect) transition method. On January 1, 2018, we adopted the new accounting standard Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" and all the related amendments to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

See Note 12 for additional information.



51


Note 4. Inventories

Inventories consisted of the following (in thousands):
 
December 31,
 
2018
 
2017
Raw materials
$
7,146

 
$
4,290

Work in process
3,219

 
1,960

Finished goods
4,319

 
5,555

Packaging materials
891

 
410

Promotional merchandise
1,139

 
1,161

Pub food, beverages and supplies
502

 
468

 
$
17,216

 
$
13,844


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

Note 5. Acquisitions and Investments

Acquisitions

Purchase of Intellectual Property of Cisco Brewers, Inc. ("Cisco")
On October 10, 2018, we purchased the intellectual property assets of Cisco relating to its malt beverage products (the "Products"), including all trademarks, logos, and recipes (the "Purchase Transaction"). We paid $23.0 million in cash from existing cash and borrowings on the line of credit (the "Purchase Price"), assumed certain liabilities relating to the acquired assets, and agreed to pay an additional amount as a cash incentive payment based on Product shipments in 2023 in excess of a specified number of barrels. Management determined that a future liability for this contingent payment was both probable and reasonably estimable at the time of the transaction. Based on the facts and circumstances at the transaction date, the amount of this liability was estimated to be $585,000 and was included in the cost of the acquired assets. The Purchase Transaction excluded certain assets owned by Cisco, including intellectual property rights associated with its operation of its brewpub in Nantucket and a taproom in Boston, Massachusetts, as well as our brewpub in Portsmouth, New Hampshire, which Cisco began operating in June 2018. Of the Purchase Price, $690,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the Purchase Transaction.

We also entered into an agreement permitting Cisco to operate up to three initial brewpubs and any number of “pop-up” locations, royalty-free under a non-exclusive license arrangement, using the intellectual property rights associated with the Products acquired by us in the Purchase Transaction. The license agreement permits Cisco to operate additional brewpubs upon the payment of a $50,000 annual royalty per brewpub.

The Purchase Transaction was accounted for as an asset acquisition and certain transaction related costs of $677,000 were included in the cost of the acquired assets.

In evaluating the accounting treatment for the Purchase Transaction we identified a prior agreement as a preexisting relationship, effectively settled through the Purchase Transaction. Under the agreement, we made a payment in 2016 in exchange for Cisco's commitment to produce a minimum of 80% of their overall production at our Portsmouth brewery. At the time, this asset was valued at $0.4 million with amortization recorded based on the terms our master distribution agreement. In our assessment, this agreement ceased to have determinable value following the Purchase Transaction due to our control of materially all Cisco production. Accordingly, the remaining value of the asset of $0.2 million was recorded as a loss during the fourth quarter of 2018, as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.


52


The allocation of the purchase price for the Cisco asset purchase was as follows (in thousands):
Assets
 
 
Useful Life
Other intangible assets
 
 
 
Non-compete agreements
$
43

 
2 years
Recipes
56

 
Indefinite
Trademark
24,163

 
indefinite
Net assets acquired
$
24,262

 
 

Acquisition of Appalachian Mountain Brewery ("AMB")
On November 29, 2018, we acquired substantially all the assets of AMB, which operates a brewery and taproom in Boone, North Carolina, for $8.3 million in total consideration which was comprised of $7.4 million in cash, the extinguishment of $0.6 million of debt, and the settlement of a preexisting liability of $0.3 million . The source of cash consideration paid was from existing cash and borrowings on the line of credit. Of the purchase price, $671,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. The transaction was accounted for under the acquisition method of accounting and all assets acquired and liabilities assumed were recorded at their respective acquisition-date fair values. The excess of total consideration over the net identifiable assets acquired and liabilities assumed was recorded as goodwill. The key factors attributable to the creation of goodwill by the AMB acquisition are the assembled workforce and our assessment of the ability to generate cash flows beyond the lives of the finite-lived intangible assets. The expected income tax effect of the acquired assets and liabilities was also included in the determination of recorded goodwill. The goodwill is expected to be deductible for tax purposes. Given the close proximity of the closing date of the acquisition 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 is preliminary at this time.

The preliminary allocation of the purchase price for the AMB acquisition was as follows (in thousands):
Assets
 
 
Useful Life
Inventory
$
268

 
N/A
Property, equipment and leasehold improvements
1,252

 
3-39 years
Land
360

 
N/A
Goodwill
3,443

 
Indefinite
Other intangible assets
 
 
 
Trademark
1,900

 
Indefinite
Co-exist agreement
650

 
Indefinite
Non-compete agreements
260

 
2 years
Recipes
140

 
Indefinite
 
8,273

 
 
 
 
 
 
Liabilities
 
 
 
Gift cards
2

 
N/A
Net assets acquired
$
8,271

 
 

Transaction costs of $226,000 were expensed as incurred as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.

Increase in Ownership Interest of Wynwood Brewing Company, LLC ("Wynwood")
On July 12, 2017, we purchased a 24.5% interest in Wynwood, which operates a brewery and taproom in Miami, Florida, for $2.1 million in cash. This investment had a carrying value of $2.0 million on October 10, 2018. On October 10, 2018, we increased our ownership interest in Wynwood from 24.5% to 100% for $7.9 million additional consideration which was comprised of $6.8 million in cash and $1.1 million for the fair value of a contingent payment which we agreed to pay as a cash incentive based on product shipments in excess of specified number of barrels in each of 2019, 2020 and 2021. The source of cash consideration paid was from existing cash and borrowings on the line of credit. Of the Purchase Price, $203,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. Prior to becoming a wholly owned subsidiary, we accounted for our investment in Wynwood under the equity

53


method of accounting and recorded it as a component of Intangible, equity method investment and other assets, net on our Consolidated Balance Sheets. Following the completion of the acquisition, Wynwood became a wholly owned subsidiary and its results were fully consolidated beginning on October 10, 2018.

The transaction was accounted for under the acquisition method of accounting as a step acquisition. As required by this method, we remeasured our preexisting 24.5% equity interest to its acquisition-date fair value which was determined to be $2.1 million . As a result of the remeasurement, a net gain of $170,000 was recorded as a component of Other income (expense), net in our Consolidated Statements of Operations during the fourth quarter of 2018. The fair value of the equity interest was determined on a relative basis to the purchase price of the remaining 74.5% acquired by CBA. Given the close proximity of the closing date of the acquisition 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 is preliminary at this time.

All assets acquired and liabilities assumed were recorded at their respective acquisition-date fair values. The excess of total consideration, including the estimated fair value of our previously held equity interest in Wynwood, over the net identifiable assets acquired and liabilities assumed was recorded as goodwill. The key factors attributable to the creation of goodwill by the Wynwood acquisition are the assembled workforce and our assessment regarding the ability to generate cash flows beyond the lives of the finite-lived intangible assets. The expected income tax effect of the acquired assets and liabilities was also included in the determination of recorded goodwill. The goodwill is expected to be deductible for tax purposes.

The preliminary allocation of the purchase price for the Wynwood acquisition was as follows (in thousands):
Assets
 
 
Useful Life
Cash
$
79

 
N/A
Accounts receivable
14

 
N/A
Inventory
103

 
N/A
Prepaid expenses and other
40

 
N/A
Property, equipment and leasehold improvements
310

 
5 - 10 years
Goodwill
5,626

 
Indefinite
Other intangible assets
 
 
 
Recipes
40

 
Indefinite
Non-Compete Agreements
260

 
2 years
Trademark
3,800

 
Indefinite
 
10,272

 
 
Liabilities
 
 
 
Accounts payable
168

 
N/A
Accrued salaries, wages and payroll taxes
24

 
N/A
Refundable deposits
13

 
N/A
Other accrued expenses
3

 
N/A
Current portion of long-term debt
25

 
N/A
 
233

 
 
Net assets acquired
$
10,039

 
 

Transaction costs of $359,000 were expensed as incurred as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.


54


Primary Reasons Behind Transactions
We completed the Cisco, AMB and Wynwood transactions to unlock the full potential of each brand. Over the past several years, our partnerships with North Carolina-based AMB, Massachusetts-based Cisco, and Florida-based Wynwood have bolstered our brand portfolio with strong local brands and breweries in key markets, complementing Kona as the anchor of our portfolio strategy. Further, these partners have supported our strategic brewery evolution by leveraging the capability and location of the Portsmouth, New Hampshire brewery to increase production for partner brands as we rebalance our brewing footprint. We plan to increase marketing spend and resources to fuel each brand's growth and help drive continued innovation and greater levels of support for their local communities.

Financial Information
The acquisitions, both individually and as a whole, are not considered significant and, accordingly, certain results of operations information and pro forma financial information is not presented.

Note 6. Other Current Assets and Other Accrued Expenses

Other current assets consisted of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Prepaid property taxes
 
$
553

 
$
534

Prepaid insurance
 
439

 
518

Income taxes receivable
 
537

 
1,153

Other
 
1,592

 
2,130

 
 
$
3,121

 
$
4,335


Other accrued expenses consisted of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Accrued pricing discounts
 
$
781

 
$
1,011

Other
 
2,837

 
1,357

 
 
$
3,618

 
$
2,368


Note 7. Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements consisted of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Brewery equipment
 
$
99,210

 
$
97,606

Buildings
 
34,525

 
32,925

Land and improvements
 
4,181

 
3,821

Furniture, fixtures and other equipment
 
20,438

 
20,388

Leasehold improvements
 
15,473

 
16,239

Vehicles
 
124

 
106

Construction in progress
 
22,001

 
8,661

 
 
195,952

 
179,746

Less accumulated depreciation and amortization
 
(82,763
)
 
(73,463
)
 
 
$
113,189

 
$
106,283



55


Note 8. Goodwill and Intangible, Equity Method Investment and Other Assets

Goodwill
The rollforward of goodwill was as follows (in thousands):
Balance, December 31, 2015, 2016 and 2017
 
$
12,917

Goodwill acquired related to acquisition of AMB
 
3,443

Goodwill acquired related to acquisition of Wynwood
 
5,626

Balance, December 31, 2018
 
$
21,986


There were no impairment losses netted against the goodwill balance at any date.

Intangible, Equity Method Investment and Other Assets
Intangible, equity method investment and other assets and the related accumulated amortization were as follows (in thousands):
 
 
December 31,
 
 
2018
 
2017
Recipes
 
$
936

 
$
700

Co-Exist Agreement
 
650

 

 
 
 
 
 
Distributor agreements
 
2,200

 
2,200

Accumulated amortization
 
(1,540
)
 
(1,393
)
 
 
660

 
807

 
 
 
 
 
Non-compete agreements
 
563

 

Accumulated amortization
 
(45
)
 

 
 
518

 
 
 
 
 
 
 
Other
 
379

 
348

Accumulated amortization
 
(274
)
 
(255
)

 
105

 
93

Intangible assets, net
 
2,869

 
1,600

 
 
 
 
 
Promotional merchandise
 
185

 
818

Deposits and other
 
1,994

 
2,076

Equity method investment
 

 
2,026

Intangible, equity method investment and other assets, net
 
$
5,048

 
$
6,520


Amortization expense was as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Amortization expense
 
$
394

 
$
260

 
$
199


Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows (in thousands):
2019
$
462

2020
402

2021
165

2022
165

2023
89

Thereafter

 
$
1,283


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Note 9. Debt and Capital Lease Obligations
 
Long-term debt and capital lease obligations consisted of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Term loan, due September 30, 2023
 
$
8,823

 
$
9,244

Line of credit, due September 30, 2023
 
37,092

 
22,199

Capital lease obligations for equipment
 
1,577

 
1,855

 
 
47,492

 
33,298

Less current portion
 
(919
)
 
(699
)
 
 
$
46,573

 
$
32,599

        
Required principal payments on outstanding debt obligations as of December 31, 2018 for the next five years and thereafter are as follows (in thousands):
 
 
Term
 Loan
 
Line of
Credit
 
Capital
Lease
Obligations
2019
 
$
442

 
$

 
$
529

2020
 
459

 

 
333

2021
 
477

 

 
266

2022
 
496

 

 
199

2023
 
6,949

 
37,092

 
199

Thereafter
 


 

 
199

 
 
$
8,823

 
$
37,092

 
1,725

Amount representing interest
 
 
 
 
 
(148
)
 
 
 
 
 
 
$
1,577


Term Loan and Line of Credit
On October 10, 2018, we executed a First Amendment (the "Amendment") to our Amended and Restated Credit Agreement with Bank of America, N.A. dated November 30, 2015 (as amended, the "Credit Agreement"). The Credit Agreement provides for a revolving line of credit (“Line of Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and an originally valued $10.8 million term loan (“Term Loan”). The primary changes effected by the Amendment were to increase the maximum amount available under the line of credit from $40.0 million to $45.0 million and to extend the maturity date of the line of credit from November 30, 2020 to September 30, 2023 , which is also the maturity date of the term loan. The maximum amount of the line of credit is subject to loan commitment reductions in the amount of $750,000 each quarter beginning March 31, 2020. The Amendment also increased the limit on the total amount of investments that we may make in other craft brewers, other than the acquisitions 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. At December 31, 2018 , we had $37.1 million of borrowings outstanding under the Line of Credit and $8.8 million outstanding under the Term Loan.

Under the Loan Agreement, interest accrues at an annual rate based on the London Inter-Bank Offered Rate (“LIBOR”) Daily Floating Rate plus a marginal rate. The marginal rate varies from 0.75% to 1.75% for the Line of Credit and Term Loan based on our funded debt ratio. At December 31, 2018 , our marginal rate was 1.25% resulting in an annual interest rate of 3.23% .

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

Under the Loan Agreement, a quarterly fee on the unused portion of the Line of Credit, including the undrawn amount of the related standby letter of credit, varies from 0.15% to 0.30% based upon our funded debt ratio.


57


At December 31, 2018 , the quarterly fee was 0.15% and the fee totaled the following (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Loan Agreement fee
 
$
52

 
$
37

 
$
36


An annual fee is payable in advance on the notional amount of each standby letter of credit issued and outstanding multiplied by an applicable rate ranging from 0.75% to 1.75% . We had no letters of credit outstanding during 2018 , 2017 or 2016 .

We were in compliance with all applicable contractual financial covenants of the Loan Agreement at December 31, 2018 . These financial covenants under the Loan Agreement are measured on a trailing four-quarter basis. We are required to maintain a funded debt ratio of up to 3.5 to 1 and a fixed charge coverage ratio above 1.20 to 1.

The Loan Agreement is secured by substantially all of our personal property and fixtures and by our Oregon Brewery. In addition, we are permitted to declare or pay dividends, repurchase outstanding common stock or incur additional debt, subject to limitations. We are restricted from entering into any agreement that would result in a change in control.

Note 10. Derivative Financial Instruments

Interest Rate Swap Contracts
Our risk management objectives are to ensure that business and financial exposures to risk that have been identified and measured are minimized using the most effective and efficient methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated risks and management strives to structure proposed transactions to avoid or reduce risk whenever possible.

We have assessed our vulnerability to certain business and financial risks, including interest rate risk associated with our variable-rate long-term debt. To mitigate this risk, effective January 23, 2014, we entered into an interest rate swap contract with BofA for 75% of the Term Loan balance, to hedge the variability of interest payments associated with our variable-rate borrowings under our Term Loan with BofA. The Term Loan contract and the interest rate swap terminate on September 30, 2023 . The Term Loan contract had a total notional value of $6.6 million as of December 31, 2018 . 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 2.46% at December 31, 2018 .

Effective January 4, 2016, we entered into a $9.1 million notional amount interest rate swap contract with BofA, which was set to expire January 1, 2019 , to hedge the variability of interest payments associated with our variable-rate borrowings on our line of credit. The notional amount fluctuated based on a predefined schedule based on our anticipated borrowings. This swap agreement was terminated effective January 18, 2018 as we paid off our line of credit, and we received interest of $27,000 . With the asset purchase and acquisitions of Cisco, AMB, and Wynwood, we began borrowing again on our line of credit in the fourth quarter of 2018. We do not currently have an interest rate swap contract in place to hedge the variability of interest payments associated with our variable-rate borrowings on our line of credit.

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

As of December 31, 2018 , unrealized net losses of $116,000 were recorded in Accumulated other comprehensive loss as a result of these hedges. The effective portion of the gain or loss on the derivatives is reclassified into Interest expense in the same period during which we record Interest expense associated with the related debt. There was no hedge ineffectiveness during 2018 , 2017 or 2016 .


58


The fair value of our derivative instruments was as follows (in thousands):
 
December 31,
 
2018
 
2017
Fair value of interest rate swaps
$
(116
)
 
$
(221
)
 
The effect of our interest rate swap contracts that were accounted for as derivative instruments on our Consolidated Statements of Operations was as follows (in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss)
Recognized in Accumulated OCI (Effective Portion)
 
Location of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
 
Amount of Loss Reclassified from Accumulated OCI into
Income (Effective Portion)
Year Ended
December 31,
 
 
 
 
 
 
2018
 
$
105

 
Interest expense
 
$
27

2017
 
$
203

 
Interest expense
 
$
150

2016
 
$
145

 
Interest expense
 
$
292


See also Note 11.

Note 11. Fair Value Measurements

Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.

The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following tables summarize liabilities measured at fair value on a recurring basis (in thousands):
Fair Value at December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap
 
$

 
$
(116
)
 
$

 
$
(116
)
 
 
 
 
 
 
 
 
 
Fair Value at December 31, 2017
 
 

 
 

 
 

 
 

Interest rate swap
 
$

 
$
(221
)
 
$

 
$
(221
)

We did not have any assets measured at fair value on a recurring basis at December 31, 2018 or December 31, 2017 .

The fair value of our interest rate swap was based on quarterly statements from the issuing bank. There were no changes to our valuation techniques during 2018 , 2017 or 2016 .

We believe the carrying amounts of Cash, cash equivalents and restricted cash, Accounts receivable, Other current assets, Accounts payable, Accrued salaries, wages and payroll taxes, and Other accrued expenses are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.

We had fixed-rate debt outstanding as follows (in thousands):
 
December 31,
 
2018
 
2017
Fixed-rate debt on balance sheet
$
1,577

 
$
1,855

Estimated fair value of fixed-rate debt
$
1,591

 
$
1,915


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.


59


Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Our non-financial assets, such as goodwill, intangible assets and property and equipment, are recorded at fair value when an impairment is recognized or at the time acquired in a business combination. As discussed in Note 5, we acquired substantially all of the assets of AMB and increased our ownership interest in Wynwood from 24.5% to 100% and recorded the acquired assets and liabilities, including goodwill, intangible assets and property and equipment at their estimated fair value. Also, as discussed in Note 5, we purchased the intellectual property assets of Cisco and recorded the intangible assets at their estimated fair value. The determination of the estimated fair value of such assets required the use of significant unobservable inputs which would be considered Level 3 fair value measurements.

Note 12. Revenue Recognition

On January 1, 2018, we adopted the Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" and all the related amendments (the "new revenue standard") for all of our revenue contracts, using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of Accumulated deficit. The adoption of ASC 606 did not have a material impact on our consolidated financial statements at January 1, 2018 or for the year ended December 31, 2018.

The adjustments to our Consolidated Balance Sheets upon adoption of ASC 606, effective January 1, 2018 were as follows (in thousands):
 
 
Balance at December 31, 2017
 
Adjustments due to
ASC 606
 
Balance at January 1, 2018
Assets:
 
 
 
 
 
 
Other current assets
 
$
4,335

 
$
(237
)
 
$
4,098

Intangible, equity method investment and other assets, net
 
20,949

 
(157
)
 
20,792

 
 
 
 
 
 
 
Common shareholders' equity:
 
 
 
 
 
 
Accumulated deficit
 
$
(11,337
)
 
$
(394
)
 
$
(11,731
)

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our Consolidated Balance Sheets and Consolidated Statements of Operations was as follows (in thousands):
 
 
December 31, 2018
 
 
As Reported
 
Balance without
Adoption of ASC 606
 
Effect of Change
Higher (Lower)
Consolidated Balance Sheets
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Other current assets
 
$
3,121

 
$
3,279

 
$
(158
)
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Deferred income tax liability, net
 
12,381

 
12,437

 
(56
)
 
 
 
 
 
 
 
Common shareholders' equity:
 
 
 
 
 
 
Accumulated deficit
 
$
(7,589
)
 
$
(7,803
)
 
$
(214
)


60


 
 
Year Ended December 31, 2018
 
 
As Reported
 
Balance without
Adoption of ASC 606
 
Effect of Change
Higher (Lower)
Consolidated Statements of Operations
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
62,572

 
$
62,809

 
$
(237
)
Income tax provision
 
1,287

 
1,231

 
56

Net income
 
$
4,142

 
$
3,961

 
$
181


The following table disaggregates our Sales by major source (in thousands):
 
 
Year Ended December 31, 2018
 
 
Beer Related (1)
 
Brewpubs
 
Total
Product sold through distributor agreements 2
 
$
176,265

 
$

 
$
176,265

Alternating proprietorship and contract brewing fees
 
10,612

 

 
10,612

International distribution fees
 
3,400

 

 
3,400

Brewpubs 3
 

 
24,023

 
24,023

Other 4
 
2,969

 

 
2,969

 
 
$
193,246

 
$
24,023

 
$
217,269


(1)
Beer Related sales include sales to Anheuser-Busch, LLC ("A-B") subsidiaries including Ambev, Anheuser-Busch Worldwide Investments, LLC (“ABWI”) and Anheuser-Busch Companies, LLC (“ABC”). Sales to wholesalers through the A-B distributor agreement in 2018 represented 77.2% of our Sales.
(2)
Product sold through distributor agreements included domestic and international sales of owned and non-owned brands pursuant to terms in our distributor agreements.
(3)
Brewpub sales include sales of promotional merchandise and sales of beer directly to customers.
(4)
Other sales include sales of beer related merchandise, hops, spent grain and an export manager fee.
 
Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally this occurs when the product arrives at distribution centers or when the wholesaler takes possession. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. We consider customer purchase orders, which in some cases are governed by a master agreement, to be the contract with a customer. For each contract related to the production of beer, we consider the promise to transfer products, each of which is distinct, to be the identified performance obligation. The transaction price for each performance obligation is specifically identified within the contract with our customer and represents the standalone selling price. Discounts are recognized as a reduction to Sales at the time we recognize the revenue. We generally do not grant return privileges, except in limited and specific circumstances.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of accounting pursuant to ASC 606. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined.
 
We entered into an International Distribution Agreement ("IDA") with A-B for the rights to serve as our exclusive distributor in international territories defined by the IDA for an approximate 10 -year period. The IDA represents a single international license to all territories defined in the IDA. Revenue is recognized on a straight-line basis over the approximate 10 -year term of the agreement. In accordance with ASC 606, we evaluate the factors used in our estimates of variable consideration to be received under contracts on a quarterly basis. We estimate variable consideration as the most likely amount to which we expect to be entitled. We have evaluated, on a quarterly basis, the qualitative factors, including current market conditions and our relationship with A-B, and we consider receiving $34.0 million over the approximate 10 -year term of the IDA the most likely outcome under the IDA. We believe that the possibility of a significant reversal of cumulative revenue recognized from this agreement under this conclusion is remote. Under the IDA, A-B has the right to issue purchase orders to distribute product in international territories defined by the IDA. Each purchase order placed under the IDA is a distinct performance obligation. The transaction price for each performance obligation is a sales-based royalty, which is recognized as revenue in accordance with the sales-based royalty exception.

61


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 January 1, 2018, Deferred revenue on our Consolidated Balance Sheets included $3.4 million related to the IDA. As of December 31, 2018 , we earned the right to receive an additional $6.0 million pursuant to the IDA, of which we have recognized $3.4 million as Sales, resulting in Deferred revenue of $6.0 million at December 31, 2018 . In the absences of receiving a qualified offer, we expect to earn the right to receive an additional $20.0 million in 2019. We expect to recognize Deferred revenue as Sales in the amounts of $3.2 million in 2019 and $22.7 million thereafter.

Note 13. Segment Results and Concentrations

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

Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
2018
Beer
Related
 
Brewpubs
 
Total
Net sales
$
182,163

 
$
24,023

 
$
206,186

Gross profit
$
66,958

 
$
1,365

 
$
68,323

Gross margin
36.8
%
 
5.7
%
 
33.1
%
 
 
 
 
 
 
2017
 

 
 

 
 

Net sales
$
179,830

 
$
27,626

 
$
207,456

Gross profit
$
63,412

 
$
1,846

 
$
65,258

Gross margin
35.3
%
 
6.7
%
 
31.5
%
 
 
 
 
 
 
2016
 
 
 
 
 
Net sales
$
173,657

 
$
28,850

 
$
202,507

Gross profit
$
55,667

 
$
3,932

 
$
59,599

Gross margin
32.1
%
 
13.6
%
 
29.4
%
 
The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and, therefore, no asset by segment information is provided to our chief operating decision maker.

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

Sales to wholesalers through the A-B Distributor Agreement represented the following percentage of our Sales:
 
Year Ended December 31,
2018
 
2017
 
2016
77.2
%
 
74.9
%
 
77.8
%
 
Receivables from A-B represented the following percentage of our Accounts receivable balance:
 
December 31,
2018
 
2017
79.8
%
 
74.4
%

All of our long-term assets are located in the U.S. and Sales outside of the U.S. are insignificant.

62


Note 14. Stock-Based Plans and Stock-Based Compensation

We maintain several stock incentive plans under which stock-based awards are, or have been, granted to employees and non-employee directors. We issue new shares of common stock upon exercise or settlement of the stock-based awards. All of our stock plans are administered by the Compensation Committee of our Board of Directors, which determines the grantees, the number of shares of common stock for which awards may be exercised or settled and the exercise or grant prices of such shares, among other terms and conditions of stock-based awards under our stock-based plans.

With the approval of the 2014 Stock Incentive Plan (the “2014 Plan”) in May 2014, no further grants of stock-based awards may be made under our 2010 Stock Incentive Plan (the “2010 Plan”). However, the provisions of the 2010 Plan will remain in effect until all outstanding awards are exercised, settled or terminated. Shares subject to terminated awards under the 2010 Plan are not added to the pool of shares available for grant pursuant to the 2014 Plan.

Shares to be issued upon the exercise of stock options and the vesting of stock awards will come from newly issued shares.

2014 Stock Incentive Plan
The 2014 Plan provides for grants of stock options, restricted stock, restricted stock units ("RSUs"), performance awards and stock appreciation rights, as well as other stock-based awards. While incentive stock options may only be granted to employees, awards other than incentive stock options may be granted to employees, non-employee directors and outside consultants. Options granted to our employees are generally subject to a four -year vesting period. Vested options generally remain exercisable for ten years following the date of grant. RSUs generally vest over a period of three years . The exercise price of stock options must be at least equal to the fair market value per share of our common stock on the date of grant. A maximum of 1,000,000 shares of common stock are authorized for issuance under the 2014 Plan. As of December 31, 2018 , there were 430,662 shares available for future awards pursuant to the 2014 Plan.

Terms of awards granted pursuant to the 2010 Plan were similar to the terms of awards granted pursuant to the 2014 Plan.

Stock-Based Compensation
Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Weighted average per share fair value of stock options granted
 
$

 
$

 
$
4.06

Intrinsic value of stock options exercised
 
388

 
265

 
223

Intrinsic value of fully-vested stock awards granted
 
992

 
1,812

 
944


Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Selling, general and administrative expense
$
1,334

 
$
1,197

 
$
1,005

Cost of sales
150

 
119

 
82

Total stock-based compensation expense
$
1,484

 
$
1,316

 
$
1,087


We amortize stock-based compensation expense on a straight-line basis over the vesting period of the individual awards, which is the requisite service period, with estimated forfeitures considered.

At December 31, 2018 , we had total unrecognized stock-based compensation expense of $1.7 million , which will be recognized over the weighted average remaining vesting period of 1.6 years .


63


The following weighted average assumptions were utilized in determining fair value pursuant to the Black-Scholes option pricing model:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Risk-free interest rate
 
%
 
%
 
1.66
%
Dividend yield
 
%
 
%
 
%
Expected life
 

 

 
6.81 years

Volatility
 
%
 
%
 
51.70
%

The risk-free rate used is based on the U.S. Treasury yield curve over the estimated term of the options granted. Expected lives were estimated based on historical exercise data. The expected volatility is calculated based on the historical volatility of our common stock.

Stock-Based Awards Plan Activity

Stock Option Activity
Stock option activity for the year ended December 31, 2018 was as follows:
 
 
Options Outstanding
 
Weighted Average Exercise Price
Outstanding at December 31, 2017
 
359,713

 
$
9.88

Granted
 

 

Exercised
 
(43,734
)
 
10.29

Canceled
 
(9,489
)
 
10.18

Outstanding at December 31, 2018
 
306,490

 
9.82


Certain information regarding options outstanding as of December 31, 2018 was as follows:
 
 
Options
Outstanding
 
Options
Exercisable
Number
 
306,490

 
224,714

Weighted average exercise price
 
$
9.82

 
$
9.92

Aggregate intrinsic value
 
$
1,384,000

 
$
992,000

Weighted average remaining contractual term
 
5.7 years

 
5.4 years


Restricted Stock Unit Activity
In February 2018, we granted a total of 46,785 RSUs with a grant date fair value of $18.25 per share to selected executive officers and other members of our executive and impact leadership teams. The RSUs vest on March 31, 2021 , provided that the participant continues to be employed through that date.

In May 2018, we granted a total of 500 RSUs with a grant date fair value of $18.75 per share to a member of the impact leadership team. The RSUs vest on May 31, 2019 , provided that the participant continues to be employed though that date. In May 2018, we granted a total of 1,080 RSUs with a grant date fair value of $18.75 per share to a member of the impact leadership team. The RSUs vest on March 31, 2021 , provided that the participant continues to be employed though that date.

In June 2018, we granted a total of 12,806 RSUs with a grant date fair value of $19.60 per share to our full-time, non-executive employees, subject to our achievement of EBITDA at a specified target level for the year ended December 31, 2018 . For this grant, 81.6% of the target number of RSUs will vest on May 31, 2019, provided that the participant continues to be employed through that date.

In October 2018, we granted a total of 2,602 RSUs with a grant date fair value of $17.23 per share to new members of our impact leadership team. The RSUs vest on October 10, 2021 , provided that the participant continues to be employed through that date.


64


In February 2017, we granted a total of 59,395 RSUs with a grant date fair value of $15.85 per share to selected executive officers and other members of our executive and impact leadership teams. The RSUs vest on March 31, 2020 , provided that the participant continues to be employed through that date.

In June 2017, we granted a total of 14,526 RSUs with a grant date fair value of $17.45 per share to our full-time, non-executive employees, subject to our achievement of EBITDA at a specified target level for the year ended December 31, 2017 . For this grant, 84% of the target number of RSUs vested on May 31, 2018, provided that the participant continued to be employed through that date.

In November 2017, we granted 4,393 RSUs with a grant date fair value of $19.35 per share to an executive officer. For this grant, 879 RSUs vested on December 31, 2018. The remaining RSUs vest in installments on each of December 31, 2019 and 2020 per a vesting schedule, provided that the participant continues to be employed through that date.

During 2016, we granted a total of 52,503 RSUs with a weighted average grant date fair value of $7.69 per share to selected officers and other members of our leadership teams. The RSUs will vest on March 31, 2019 , provided that the participant continues to be employed through that date.

Performance-Based Stock Awards Activity
We granted performance-based stock awards to selected executives in each of the past eight years. Performance goals for the 2018 awards are tied to target amounts of the compounded-average growth rates of Net Sales and average adjusted EBITDA margin over a three -year performance period. The awards outstanding at December 31, 2018 will vest from zero to 125% of the targeted number of performance shares.

Cumulative activity related to performance-based awards during the year ended December 31, 2018 was as follows (in shares):
 
 
Awards Expected to Vest
 
Weighted Average Grant Date Fair Value Per Share
Awards expected to vest as of January 1, 2018
 
183,721

 
$
10.41

Granted (target amount)
 
41,080

 
18.25

Canceled due to termination of employee
 
(52,628
)
 
11.51

Not expected to vest due to failure to meet performance goals
 
(92,805
)
 
7.69

Awards expected to vest as of December 31, 2018
 
79,368

 
16.85


Stock Grants
On the date of our 2018 Annual Meeting of Shareholders, each non-employee director received an annual grant of fully-vested shares of our common stock with a fair value of $47,500 , except for the chairman whose grant had a fair value of $70,000 . The 2018 grants included 2,534 fully-vested shares of common stock issued to seven of our non-employee directors; the chairman received 3,734 shares, for a total of 21,472 shares.

Note 15. Earnings Per Share

The following table reconciles shares used for basic and diluted earnings per share ("EPS") and provides other information (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Weighted average common shares used for basic EPS
19,349

 
19,284

 
19,225

Dilutive effect of stock-based awards
208

 
163

 

Shares used for diluted EPS
19,557

 
19,447

 
19,225

 
 
 
 
 


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

 
25

 
221



65


Note 16. Income Taxes
 
All of our income is generated in the U.S. The components of income tax provision (benefit) were as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Current federal
 
$
1,222

 
$
(413
)
 
$
(378
)
Current state
 
571

 
331

 
32

 
 
1,793

 
(82
)
 
(346
)
 
 


 


 


Deferred federal
 
(135
)
 
(5,368
)
 
285

Deferred state
 
(371
)
 
(32
)
 
75

 
 
(506
)
 
(5,400
)
 
360

 
 
$
1,287

 
$
(5,482
)
 
$
14


Income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Provision at U.S. statutory rate
 
$
1,140

 
$
1,374

 
$
(104
)
State taxes, net of federal benefit
 
210

 
189

 
49

Effect of tax rate change on deferred tax assets and liabilities
 

 
(6,923
)
 

Permanent differences, primarily meals and entertainment
 
111

 
180

 
264

Stock-based compensation
 
(42
)
 
(11
)
 
(41
)
Domestic production activities deduction
 

 

 
(20
)
Tax credits
 
(132
)
 
(291
)
 
(134
)
 
 
$
1,287

 
$
(5,482
)
 
$
14


Significant components of our deferred tax assets and liabilities were as follows (in thousands):
 
 
 
December 31,
 
 
2018
 
2017
Deferred tax assets
 
 
 
 
Net operating losses and tax credit carryforwards
 
$
11

 
$
982

Accrued salaries and severance
 
1,089

 
1,127

Other
 
1,403

 
1,497

 
 
2,503

 
3,606

Deferred tax liabilities
 
 
 
 
Property, equipment and leasehold improvements
 
(10,783
)
 
(12,287
)
Intangible assets
 
(3,977
)
 
(4,054
)
Other
 
(124
)
 
(151
)
 
 
(14,884
)
 
(16,492
)
 
 
$
(12,381
)
 
$
(12,886
)

As of December 31, 2018 , included in our net operating losses and tax credit carryforwards were State NOLs, tax effected of $10,000 . We also have an AMT credit carryforward of $170,000 which is refundable over the next four years. As such, the carryforward is recognized as a tax receivable on our Consolidated Balance Sheets as of December 31, 2018.

In assessing the realizability of our deferred tax assets, we consider future taxable income expected to be generated by the projected differences between financial statement depreciation and tax depreciation, cumulative earnings generated to date and other evidence available to us. Based upon this consideration, we assessed that all of our deferred taxes are more likely than not to be realized, and, as such, we have not recorded a valuation allowance as of December 31, 2018 or 2017 .


66


There were no unrecognized tax benefits as of December 31, 2018 or 2017 and we do not anticipate significant changes to our unrecognized tax benefits within the next twelve months.

Note 17. Employee Benefit Plans

We sponsor a defined contribution 401(k) plan for all employees 18 years or older. Employee contributions may be made on a before-tax basis, limited by IRS regulations. For the years ended December 31, 2018 , 2017 and 2016 , we matched 50% of the employee’s contributions up to 6% of eligible compensation. Eligibility for the matching contribution in all years began after the participant had worked a minimum of three months. Our matching contributions to the plan vest ratably over five years of service by the employee. During 2018 , 2017 and 2016 , we used approximately $110,000 , $69,000 and $198,000 , respectively, of previously forfeited matching contributions to fund current matching contributions, which decreased expense for the corresponding periods. We recognized expense associated with matching contributions as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
401(k) expense
 
$
786

 
$
805

 
$
882


Note 18. Commitments and Contingencies

General
We are subject to various claims and pending or threatened lawsuits in the normal course of business. We are not currently party to any claims or legal proceedings that management believes are reasonably probable to have a material adverse effect on our financial position, results of operations or cash flows.

Operating Leases
We lease office space, restaurant and production facilities, warehouse and storage space, land and equipment under operating leases that expire at various dates through the year ending December 31, 2064. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. Certain leases require us to pay for insurance, taxes and maintenance applicable to the leased property. Under the terms of the land lease for our New Hampshire Brewery, we hold a first right of refusal to purchase the property should the lessor decide to sell the property.

Minimum aggregate future lease payments under non-cancelable operating leases as of December 31, 2018 are as follows (in thousands):
2019
$
11,208

2020
1,937

2021
1,863

2022
1,793

2023
1,465

Thereafter
25,446

 
$
43,712


Rent expense under all operating leases, including short-term rentals as well as cancelable and noncancelable operating leases, gross, was as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Rent expense
 
$
2,908

 
$
2,869

 
$
2,613



67


We sub-leased corporate office space to an unrelated party pursuant to a 5 -year lease that began in February 2011. In December 2014, the lease agreement was amended to extend the lease through 2025, with an option to cancel in 2020 with 180 days’ written notice and a payment of $150,000 . In December 2017, we entered into an agreement to sell the property where the sub-leased corporate office space was located to an unrelated party. The sale of the property was finalized in January 2018, so we no longer receive rental payments pursuant to this agreement. We recognized rental income related to the sublease, which was recorded as an offset to rent expense in our Consolidated Statements of Operations, as follows (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Rental income
 
$

 
$
406

 
$
369


We lease our headquarters office space, restaurant and storage facilities located in Portland, land and certain equipment from two limited liability companies, both of whose members include our former Board Chair, and his brother, who continues to be employed by us. Lease payments to these lessors were as follows (in thousands) and are included in the Rent expense under all operating leases above:
Year Ended December 31,
2018
 
2017
 
2016
$
164

 
$
136

 
$
120


The lease for the headquarters office space and restaurant facility expires in 2034, with an extension at our option for two 10 -year periods, while the lease for the other facilities, land and equipment expires in 2022 with an extension at our option for an additional 5 -year period. We hold a right to purchase the headquarters office space and restaurant facility at the greater of $2.0 million or the fair market value of the property as determined by a contractually established appraisal method. The right to purchase is not valid in the final year of either renewal term, as applicable. All lease terms are considered to be arm’s-length.

We hold lease and sublease obligations for certain office space and the land underlying the brewery and pub location in Kona, Hawaii, with a company whose owners include a shareholder who owns more than 5% of our common stock. The sublease contracts expire on various dates through 2020 , with an extension at our option for two 5 -year periods. Lease payments to this lessor were as follows (in thousands) and are included in the Rent expense under all operating leases above:
Year Ended December 31,
2018
 
2017
 
2016
$
611

 
$
574

 
$
554


All lease terms are considered to be arm’s-length. In December 2015, related to the execution of the long-term land lease with an unrelated third party for our new Kona brewery, we also paid approximately $100,000 to the lessor described above to acquire its right of first refusal on the land lease from the unrelated third party.

Purchase and Sponsorship Commitments
We periodically enter into commitments to purchase certain raw materials in the normal course of business. Furthermore, we have entered into purchase commitments and commodity contracts to ensure we have the necessary supply of malt and hops to meet future production requirements. Certain of the malt and hop commitments are for crop years through 2022. We believe that malt and hop commitments in excess of future requirements, if any, will not have a material impact on our financial condition or results of operations. We may take delivery of the commodities in excess of our requirements or make payments against the purchase commitments earlier than contractually obligated, which means our cash outlays in any particular year may exceed or be less than the commitment amount disclosed.

In certain cases, we have executed agreements with selected vendors to source our requirements for specific malt and hop varieties for the years ending December 31, 2019, 2020, 2021, 2022 and 2023; however, either the quantity to be delivered or the full price for the commodity has not been established at the present time. To the extent the commitment is not measurable or has not been fixed, that portion of the commitment has been excluded from the table below.

We have entered into multi-year sponsorship and promotional commitments with certain professional sports teams and entertainment companies. Generally, in exchange for our sponsorship consideration, we post signage and provide other promotional materials at the site or the event. The terms of these sponsorship commitments expire at various dates through December 31, 2023.


68


Aggregate future payments under purchase and sponsorship commitments as of December 31, 2018 are as follows (in thousands):
 
 
Purchase
Obligations
 
Sponsorship
Obligations
 
Total
2019
 
$
7,278

 
$
1,830

 
$
9,108

2020
 
7,864

 
1,233

 
9,097

2021
 
6,777

 
512

 
7,289

2022
 
5,875

 
518

 
6,393

2023
 

 
75

 
75

Thereafter
 

 

 

 
 
$
27,794

 
$
4,168

 
$
31,962


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, alleging 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 25, 2018, the Court granted the plaintiffs’ Motion for Class Certification, certifying a class consisting of all persons who purchased six-pack and twelve-pack bottles of Kona Brewing Company beers in California within the relevant statute of limitations period. We have not recorded any liabilities with respect to the claims. We filed a petition for review of the Court's grant of class certification, which was denied on February 1, 2019, with one judge on the three-judge panel dissenting. Our petition filed February 15, 2019, for rehearing en banc by the Ninth Circuit is pending.

Note 19. Related Party Transactions

For additional related party transactions, see Notes 5 and 18.

As of December 31, 2018 and 2017 , A-B owned approximately 31.3% and 31.4% , respectively, of our outstanding common stock.

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

Transactions with A-B, Ambev and ABWI consisted of the following (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Gross sales to A-B and Ambev
 
$
166,534

 
$
163,368

 
$
168,929

International distribution fee earned from ABWI
 
3,400

 
3,400

 
1,216

International distribution fee from ABWI, recorded as deferred revenue
 
5,985

 
3,384

 
1,784

Margin fee paid to A-B, classified as a reduction of Sales
 
2,296

 
2,277

 
2,420

Inventory management and other fees paid to A-B, classified in Cost of sales
 
383

 
384

 
377

Media reimbursement from A-B, classified as a reduction of Selling, general and administrative expenses
 
500

 
290

 
750



69


Amounts due to or from A-B and ABWI were as follows (in thousands):
 
December 31,
 
2018
 
2017
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
$
17,946

 
$
15,663

Amounts due from ABWI and A-B related to international distribution fee and media reimbursement
6,000

 
5,000

Refundable deposits due to A-B
(2,840
)
 
(1,619
)
Amounts due to A-B for services rendered
(5,140
)
 
(4,836
)
Net amount due from A-B and ABWI
$
15,966

 
$
14,208


Agreements with Anheuser-Busch, LLC

Contract Brewing Agreements
On August 23, 2016, we entered into a Contract Brewing Agreement (the “Brewing Agreement”) with A-B Commercial Strategies, LLC (“ABCS”), an affiliate of A-B, pursuant to which ABCS will brew, bottle and package up to 300,000 barrels of our mutually agreed products annually, in facilities owned by ABCS within the United States, for an initial term through December 31, 2026. Under the terms of the Brewing Agreement, we share equally in any cost savings arising from the Brewing Agreement, provided that our cost savings will equal at least $10.00 per barrel on an aggregate basis, following certain adjustments, as set forth in the Brewing Agreement.

The Brewing Agreement provides specified termination rights, including, among other things, the right of either party to terminate the Brewing Agreement if (i) the other party fails to perform any material obligation under the Brewing Agreement, subject to certain cure rights, (ii) the International Distribution Agreement (as defined below) is terminated pursuant to certain specified provisions thereof or (iii) subject to certain conditions, if the A-B Distributor Agreement (as defined below) is terminated pursuant to certain specified provisions thereof.

In addition, ABCS has the right to terminate the Brewing Agreement, upon 90 days’ prior written notice to us, following (i) a "change of control event" (as defined below) that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed, or (ii) the earliest of (x) our rejection of a “qualifying offer” (as defined below), (y) the completion of a transaction implementing a qualifying offer, and (z) our failure to enter into a definitive transaction agreement within 120 days following receipt of a qualifying offer, with certain exceptions.

On January 30, 2018, we also entered into a Contract Brewing Agreement with Anheuser-Busch Companies, LLC (“ABC”), another A-B affiliate, pursuant to which we agreed to brew, package, and palletize certain malt beverage products of A-B's craft breweries at our Portland, Oregon, and Portsmouth, New Hampshire breweries, as selected by ABC. Under the terms of this agreement, ABC 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 agreement, as extended, will expire on December 31, 2019, unless further extended by mutual agreement. The agreement also contains specified termination rights, including, among other things, the right of either party to terminate it if (i) the other party fails to perform any material obligation under the agreement or any other agreement between the parties, subject to certain cure rights, or (ii) the A-B Distributor Agreement is terminated.

Under the terms of each of the Brewing Agreement, the International Distribution Agreement, the A-B Distributor Agreement and the Exchange Agreement (as defined below) (collectively, the “Commercial Arrangements”), a “qualifying offer” is defined to include any offer made by ABCS or one of its affiliate, for the acquisition of all of our outstanding common stock not owned by ABCS or its affiliates, on customary terms and conditions, with certain exceptions, for a specified aggregate value (subject to adjustment for changes in capitalization). From and after August 24, 2018 the specified value for a qualifying offer must be at least $24.50 per share. A “change of control event” includes, with certain exceptions, (i) the acquisition by a person or group of beneficial ownership on a fully diluted basis of 50% or more of our equity securities (or the equity securities of the surviving entity in any merger, consolidation, share exchange or other business combination involving us), (ii) a change in the composition of our board of directors during any consecutive 12-month period such that the incumbent directors cease to constitute at least a majority of the board of directors, or (iii) the completion of a sale, lease, exchange, or other transfer of (A) the Kona brand or (B) 50% or more of our assets based on fair market value.


70


International Distribution Agreement
On August 23, 2016, we also entered into an International Distribution Agreement (the “International Distribution Agreement”) with ABWI pursuant to which ABWI will be the sole and exclusive distributor of our malt beverage products in jurisdictions outside the United States, subject to the terms and conditions of our agreement with our existing international distributor, CraftCan Travel LLC, and certain other limitations, in each case as set forth in the International Distribution Agreement. Under the International Distribution Agreement, following delivery of notice to us, ABWI may also elect to commence brewing outside of the United States some or all of the products to be distributed in the non-U.S. jurisdictions covered by the International Distribution Agreement.

Under the terms of the International Distribution Agreement, with respect to our exported products produced by us, ABWI will pay us our costs of production plus reasonable out-of-pocket expenses relating to export shipment costs. Additionally, ABWI will pay us an international royalty fee based on volume of our products sold by ABWI, equal to either $40 per barrel or $30 per barrel, depending on certain factors described in the International Distribution Agreement, which royalty fee will be subject to escalation annually, beginning in calendar year 2018, on the terms described in the International Distribution Agreement. For calendar years 2016, 2017 and 2018, ABWI has paid us one-time fees of $3.0 million , $5.0 million and $6.0 million in January of 2017, 2018 and 2019, respectively. These amounts are subject to proration if the International Distribution Agreement is terminated early in any given year. The sum of the fees is recognized in Beer Related Net sales on a straight-line basis over the 10 -year contract term, while the fees are collected in the first quarter of the year following the applicable calendar year.

The International Distribution Agreement contains specified termination rights, including, among other things, the right of either party to terminate the International Distribution Agreement if (a) the other party fails to perform any material obligation under the International Distribution Agreement, subject to certain cure rights or (b) the Brewing Agreement is terminated pursuant to certain specified provisions thereof. In addition, ABWI has the right to terminate the International Distribution Agreement upon 90 days’ prior written notice to us following (i) a “change of control event” (as defined above) that occurs or for which a definitive agreement is entered into prior to August 23, 2019, and is subsequently completed, or (ii) the earliest of (x) our rejection of a “qualifying offer” (as defined above), (y) the completion of a transaction implementing a qualifying offer, and (z) our failure to enter into a definitive transaction agreement within 120 days following receipt of a qualifying offer, with certain exceptions (each of the foregoing subclauses (x) through (z), a “qualifying offer lapse”). Following termination of the International Distribution Agreement due to a qualifying offer lapse, or any change of control event, ABWI shall have the right to purchase the international distribution rights for each of our brands then being distributed under the International Distribution Agreement at the fair market value of such rights, and on otherwise customary terms and conditions, as set forth in the International Distribution Agreement.

Under the International Distribution Agreement, ABWI will also be required to make a one-time $20.0 million payment to us on August 23, 2019. The payment is being recognized in Beer Related Net sales on a straight-line basis over the 10 -year contract term. However, ABWI will not (subject to compliance with certain notice requirements) be obligated to make such one-time payment if, prior to that date, (i) a “change of control event” occurs or a definitive agreement for a transaction constituting a change of control event is entered into, (ii) ABWI (or an affiliate thereof) makes a qualifying offer and there is a qualifying offer lapse or (iii) we enter into a definitive agreement with ABWI (or an affiliate thereof) with respect to a qualifying offer but such agreement is subsequently terminated, other than for certain regulatory reasons (in which case the $20.0 million shall remain payable). Unless terminated sooner, the International Distribution Agreement will continue in effect until December 31, 2026.

Amendment to A-B Distributor Agreement
On August 23, 2016, we entered into Amendment No. 3 (“Amendment No. 3”) to the Amended and Restated Master Distributor Agreement with A-B, dated as of May 1, 2011, as amended, between us and A-B (the “A-B Distributor Agreement”). Pursuant to Amendment No. 3, A-B and we agreed to extend the Master Distributor Agreement through December 31, 2028 (the “Term”), and to maintain the existing margin fee structure of $0.25 per case-equivalent in the Master Distributor Agreement through the Term. Without Amendment No. 3, beginning on January 1, 2019, a margin fee of $0.75 per case equivalent would have been payable by us under the Master Distributor Agreement. Amendment No. 3 also provides that, beginning on January 1, 2019, we will reinvest an aggregate amount equal to $0.25 per case equivalent in sales and marketing efforts for our products, subject to specified terms and conditions set forth in Amendment No. 3.

Pursuant to Amendment No. 3, A-B will have the ability to deliver a revocation notice and reinstitute the terms of the Master Distributor Agreement as they existed prior to Amendment No. 3 following (i) a “change of control event” (as defined above) that occurs prior to the third anniversary of Amendment No. 3 or for which a definitive agreement is entered into prior to the third anniversary of Amendment No. 3 and is subsequently consummated or (ii) the earliest to occur of (a) our rejection of a "qualifying offer" (as defined above), (b) the completion of a transaction implementing a qualifying offer, and (c) 120 days following the receipt of a qualifying offer by us, if A-B (or an affiliate thereof) and we are unable to enter into a definitive agreement with respect thereto, notwithstanding A-B’s (or its affiliate’s) and our good faith and reasonable efforts to negotiate such a definitive agreement, subject to certain additional conditions.

71



Contract pricing may not be commensurate with amounts that an independent market participant would pay due to the related party nature of the agreements.

Exchange Agreement
We have also entered into an Amended and Restated Exchange and Recapitalization Agreement (the “Exchange Agreement”) with A-B, pursuant to which we have granted A-B certain contractual rights. The Exchange Agreement originally was entered into in 2004 as part of a recapitalization in which we redeemed preferred shares held by A-B in exchange for cash and the shares of our common stock currently held by A-B. A-B owned 6,069,047 , or approximately 31.3% , of our outstanding shares of common stock at December 31, 2018 .

The Exchange Agreement entitles A-B to designate two members of our board of directors. A-B also generally has the right to have a designee on each committee of the board of directors, except where prohibited by law or stock exchange requirements, or with respect to a committee formed to evaluate transactions or proposed transactions between A-B and us. The Exchange Agreement contains limitations on our ability to take certain actions without A-B’s prior consent, including, but not limited to, our ability to issue equity securities or acquire or sell assets or stock, amend our Articles of Incorporation or Bylaws, grant board representation rights, enter into certain transactions with affiliates, distribute our products in the United States other than through A-B or as provided in the A-B Distributor Agreement, or voluntarily terminate our listing on the Nasdaq Stock Market.

On August 23, 2016, we entered into an amendment to the Exchange Agreement with A-B providing it with rights, following a “change of control event” or a “qualifying offer,” similar to those described above under “Amendment to A-B Distributor Agreement.”

Transactions with Wynwood
As of December 31, 2018 , Wynwood was a wholly owned subsidiary and, as of December 31, 2017, we owned a 24.5% interest in Wynwood. See Note 5 for additional information.

Transactions with Wynwood consisted of the following (in thousands):
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Master distributor fee earned
 
$
27

 
$
18

 
$

Royalty fee paid
 

 
94

 

Brewery representative reimbursement, classified as a reduction of Selling, general and administrative expenses
 

 
90

 

Share of loss, classified as a component of Other income (expense), net
 
44

 
75

 

Refund of investment, classified as a reduction in the carrying value of the equity method investment
 
23

 

 


Amounts receivable from or due to Wynwood were as follows (in thousands):
 
December 31,
 
2018
 
2017
Amounts receivable related to raw materials and alternating proprietorship fees (1)
$

 
$
148

Amounts receivable related to Brewery representative reimbursements

 
32

Amounts due related to purchases of beer pursuant to the distributor agreement

 
(116
)
Amounts due related to Royalty fees

 
(4
)
Net amount receivable
$

 
$
60





72


Note 20. Brewing Arrangement and Termination Thereof with Pabst Northwest Brewing Company

On January 8, 2016, we entered into brewing agreements ("the brewing agreements") with Pabst Northwest Brewing Company ("Pabst"), a subsidiary of Pabst Brewing Company, under which Pabst had the ability to brew selected Rainier Brewing Company and other brands at our brewery in Woodinville, Washington under a license agreement and was required to pay us contract brewing volume shortfall fees in each of 2016 and 2017 stemming from brewing volumes below committed levels. In conjunction with the brewing agreements, we granted Pabst an option to purchase the Woodinville brewery and adjacent pub, as well as related assets, at any time prior to termination of the brewing agreements.

Effective May 1, 2017, we reached an agreement with Pabst to terminate the brewing agreements. Pabst's option to purchase the Woodinville brewery and adjacent pub was also terminated. Pabst agreed to pay us $2.7 million in connection with the termination of the brewing agreements and purchase option.

We deferred recognition of the termination payment in our results of operations until the fourth quarter of 2017 due to the potential obligation to pay Pabst up to $2.7 million ,if the Woodinville brewery was sold to a specified party, which did not occur. Of the $2.7 million , $1.7 million was recorded in Sales and $1.0 million was recorded in Selling, general and administrative expenses.

Ceasing Production at our Woodinville, Washington Brewery
We ceased production at our Woodinville, Washington brewery as of July 1, 2017. As a result, we incurred $250,000 in incremental employee and severance related costs and $150,000 to safely and properly prepare the brewing equipment to become idle during the second and third quarters of 2017, respectively. We incurred approximately $100,000 in additional costs during the fourth quarter of 2017 to further prepare the brewing equipment to be idle, which were expensed as incurred. These expenses are recorded in our Consolidated Statements of Operations for the applicable periods.

See Note 21 for a discussion of the classification of the assets related to our Woodinville brewery as assets held for sale.

Note 21. Assets Held for Sale and Sale of Woodinville, Washington Brewery

Assets held for sale at December 31, 2017 represented the assets related to our Woodinville, Washington Brewery, which was designated as held for sale on May 1, 2017 . At the end of 2017, a $493,000 impairment charge was recorded, as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations, related to the sale of our Woodinville brewery, which was sold on January 12, 2018 to assignees of Sound Commercial Investment Holdings, LLC, for a total purchase price of $24.5 million (the "Sale Transaction").

The assets that were sold included the real property, equipment, fixtures, mechanical systems, and certain personal property used in our operation of the brewery and adjacent brewpub. We paid real estate brokerage commissions totaling $0.6 million from the sale proceeds and recorded a gain of $0.5 million during the quarter ended March 31, 2018 related to the Sale Transaction, which was recorded as a component of Selling, general and administrative expenses in our Consolidated Statements of Operations.

In contemplation of the sale of certain brewing and bottling equipment included in the Sale Transaction, $0.5 million of the total purchase price was placed in escrow following the closing. If the purchaser of the equipment had sold it for less than $3.5 million , the shortfall would have been paid to the purchaser up to the amount held in escrow, with the balance, if any, paid to us. The Woodinville brewing and bottling equipment was sold for more than $3.5 million in the first quarter of 2018 and, accordingly, the $0.5 million in escrow was remitted to us.


Assets held for sale were as follows (in thousands):
 
 
December 31,
2017
Brewery equipment
 
$
6,972

Buildings
 
12,562

Land and improvements
 
3,451

Furniture, fixtures and other equipment
 
454

 
 
23,439

Impairment of assets held for sale
 
(493
)
 
 
$
22,946


73


Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Principal Accounting Officer, who has been performing the functions of the Chief Financial Officer since July 16, 2018, 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 Principal Accounting 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 Principal Accounting 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.

Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15(f). Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our published financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
 
As of the end of 2018, our management assessed the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework, issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. In October 2018, we completed the acquisition of the remaining 75.5% of outstanding equity in Wynwood Brewing Company, LLC ("Wynwood"), such that Wynwood was a wholly owned subsidiary of the Company at December 31, 2018. Also, in November 2018, we acquired substantially all the assets of Appalachian Mountain Brewery ("AMB"). Management excluded the AMB assets and Wynwood from our 2018 assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. Together, the acquisitions represented approximately 7.9% of our total assets as of December 31, 2018, and from the respective dates of acquisition, the combined revenues related to the acquisitions totaled approximately 0.5% of our total revenues for the year ended December 31, 2018. These business operations will be included in our assessments of internal control over financial reporting beginning no later than one year following the respective date of acquisition. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2018 .

Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2018 , other than as described below, no changes in our internal control over financial reporting were identified in connection with the 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.

During the first quarter of 2018, we implemented ASC 606, Revenue from Contracts with Customers. Although the new revenue standard is not expected to have a material impact on our ongoing net income, we did implement changes to our processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in the new revenue standard, ongoing assessment of any variable consideration, new training, ongoing contract review requirements, and gathering of information provided for disclosures.


74

Index

During the fourth quarter of 2018, we completed the asset acquisition of Cisco, acquired substantially all the assets of AMB and increased our ownership interest in Wynwood from 24.5% to 100%. We implemented six new internal controls related to the acquisitions, including completely and accurately identifying all related costs, valuation of assets and liabilities acquired including tangible and intangible assets and any required adjustments related to the transactions.


Report of Independent Registered Public Accounting Firm
Moss Adams LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2018 , as stated in their report, which is included herein.

75

Index


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of
Craft Brew Alliance, Inc.

Opinion on Internal Control over Financial Reporting
We have audited Craft Brew Alliance, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of Craft Brew Alliance, Inc. as of December 31, 2018 and 2017 , the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018 , and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 6, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Management’s Report on Internal Control Over Financial Reporting, on October 10, 2018, the Company acquired Wynwood Brewing Co. (“Wynwood”) and Cisco Brewers, Inc. (“Cisco”), and on November 29, 2018, the Company acquired Appalachian Mountain Brewery (“AMB”). For the purposes of assessing internal control over financial reporting, management excluded Wynood, Cisco and AMB, whose combined financial statements constitute 0.9% of the Company’s consolidated total assets (excluding $40.38 million of goodwill and intangible assets, which were integrated into the Company’s control environment) and 0.2% of consolidated net revenues, as of and for the year ended December 31, 2018 . Accordingly, our audit did not include the internal control over financial reporting of Wynwood, Cisco and AMB.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Moss Adams LLP

Portland, Oregon
March 6, 2019

76

Index

Item 9B. Other Information
 
None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance
 
The information required by this Item is contained in part in our definitive proxy statement for our 2019 Annual Meeting of Shareholders to be held on May 14, 2019 (the “ 2019 Proxy Statement”) under the captions “Board of Directors – Nominees for Director,” “Board of Directors – Committees of the Board – Audit Committee,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and the information contained therein is incorporated herein by reference.

Code of Conduct
We adopted a Code of Conduct and Ethics (the “Code”) applicable to all employees, including our principal executive officer, principal financial officer, principal accounting officer and directors. The Code and the charters of each of the Board committees are posted on our website at www.craftbrew.com (select Investor Relations — Governance — Highlights). Copies of these documents are available to any shareholder who requests them. Such requests should be directed to Investor Relations, Craft Brew Alliance, Inc., 929 N. Russell Street, Portland, OR 97227. Any waivers of the Code for our directors or executive officers are required to be approved by our Board of Directors. We will disclose any such waivers on a current report on Form 8-K within four business days after the waiver is approved.

Item 11. Executive Compensation
 
Information required by this Item is contained in our 2019 Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Employment Agreements and Potential Payments Upon Termination or Change-in-Control,” “Director Compensation” and “Board of Directors – Committees of the Board – Compensation Committee” and the information contained therein is incorporated herein by reference.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans
The following is a summary as of December 31, 2018 of all of our plans that provide for the issuance of equity securities as compensation. See Note 14 of Notes to Consolidated Financial Statements in Part II, Item 8 of this report for additional information.
Plan Category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
 
 
 
Weighted average
exercise price of
outstanding options,
warrants and rights (b)
 
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a)) (c)
Equity compensation plans approved by shareholders
 
535,023

(1)
 
 
$
9.82

 
430,662

Equity compensation plans not approved by shareholders
 

 
 
 

 

Total
 
535,023

 
 
 
$
9.82

 
430,662


(1)
Includes a total of 79,368 performance shares that may vest between April 1, 2019 and March 31, 2021 , based on the expected levels of achievement of financial targets over two separate performance periods, and 149,165 RSUs. These shares are excluded from the calculation of weighted average price in column (b) because they have no exercise price.

The remaining information required by this Item is contained in our 2019 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management,” and the information contained therein is incorporated herein by reference.


77

Index

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is contained in our 2019 Proxy Statement under the captions “Transactions with Related Persons” and “Board of Directors – Director Independence” and the information contained therein is incorporated herein by reference.
 
Item 14. Principal Accountant Fees and Services

The information required by this Item is contained in our 2019 Proxy Statement under the caption “Proposal No. 2 — Ratification of Appointment of Independent Registered Public Accounting Firm” and the information contained therein is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules
 
Financial Statements and Schedules
 
Page
Report of Moss Adams LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements

There are no schedules required to be filed herewith.

Exhibits
The following exhibits are filed herewith or incorporated by reference and this list is intended to constitute the exhibit index.


78

Index


Exhibit
Number
 
Description
 
Commercial and Investment Real Estate Purchase and Sale Agreement between Sound Commercial Investment Holdings, LLC, and Craft Brew Alliance, Inc., dated as of November 29, 2017, as amended by an Addendum dated December 29, 2017, and a Second Addendum dated January 5, 2018 (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on January 19, 2018)
 
Restated Articles of Incorporation of the Registrant, dated January 2, 2012 (incorporated by reference from Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011)
 
Amended and Restated Bylaws of the Registrant, dated December 1, 2010 (incorporated by reference from Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010)
 
2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 2017)
 
Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2010 Stock Incentive Plan (incorporated by reference from Exhibit 10.11 to the Registrant’s Form 10-K for the year ended December 31, 2010)
 
Form of Performance Share Award Agreement for Executive Officers for the 2010 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2014)
 
2014 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 27, 2014)
 
Form of Nonqualified Option Agreement for the 2014 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2015)
 
Form of Performance Share Award Agreement for Executive Officers for Awards in 2015 under the 2014 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2015)
 
Form of Performance Share Award Agreement for Executive Officers for Awards in 2016 and 2017 under the 2014 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2017)
 
Form of Restricted Stock Unit Award Agreement for the 2014 Stock Incentive Plan (incorporated by reference from Exhibit 10.7 to the Registrant’s Form 10-K for the year ended December 31, 2016)
 
Employment Agreement between the Registrant and Andrew J. Thomas, dated December 27, 2018
 
Employee Noncompetition and Nonsolicitation Agreement between the Registrant and Andrew J. Thomas, dated January 1, 2019
 
Employment Agreement between the Registrant and J. Scott Mennen, dated December 27, 2018
 
Employee Noncompetition and Nonsolicitation Agreement between the Registrant and J. Scott Mennen, dated January 1, 2019
 
Employment Agreement between the Registrant and Kenneth C. Kunze, dated July 1, 2016 (incorporated by reference from Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2016)
 
Employment Agreement between the Registrant and Derek Hahm, dated June 28, 2016
 
Summary of Compensation Arrangements for Non-Employee Directors as of January 1, 2018 (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2018)
 
Amended and Restated Annual Cash Incentive Plan
 
Sublease between Pease Development Authority as Sublessor and the Registrant as Sublessee, dated May 30, 1995 (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2017)
 
Amended and Restated Credit Agreement, dated November 30, 2015, among the Registrant, its subsidiaries, and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on December 3, 2015)
 
First Amendment dated October 10, 2018 to Amended and Restated Credit Agreement among the Registrant, its subsidiaries, and Bank of America, N.A.



79

Index

Exhibit
Number
 
Description
 
Amended and Restated Security Agreement, dated November 30, 2015, among the Registrant, its subsidiaries, and Bank of America, N.A. (incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 3, 2015)
 
Amended and Restated Continuing and Unconditional Guaranty, dated November 30, 2015, among the Registrant, its subsidiaries, and Bank of America, N.A. (incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on December 3, 2015)
 
Amended and Restated Exchange and Recapitalization Agreement dated as of May 1, 2011 between the Registrant and Anheuser-Busch, LLC (“A-B”)   as successor in interest to Anheuser-Busch, Incorporated (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)
 
Amendment No. 1 to Amended and Restated Exchange and Recapitalization Agreement, dated August 23, 2016, by and between the Registrant and A-B (incorporated by reference from Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on August 24, 2016)
 
Amended and Restated Master Distributor Agreement dated as of May 1, 2011 between the Registrant and A-B (the “A-B Master Distributor Agreement”) (incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)
 
Amendment to A-B Master Distributor Agreement dated May 11, 2012 (incorporated by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012)
 
Amendment to A-B Master Distributor Agreement dated November 20, 2013 (incorporated by reference from Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013)
 
Amendment No. 3 to the A-B Master Distributor Agreement, dated August 23, 2016 (incorporated by reference from Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on August 24, 2016)

 
Contract Brewing Agreement, dated August 23, 2016, by and between the Registrant and A-B Commercial Strategies, LLC (incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on August 24, 2016)
 
Contract Brewing Agreement between Anheuser-Busch Companies, LLC and Craft Brew Alliance, Inc. dated January 30, 2018, as amended February 20, 2019
 
International Distribution Agreement, dated August 23, 2016, by and between the Registrant and Anheuser-Busch Worldwide Investments, LLC (incorporated by reference from Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 24, 2016)
 
Registration Rights Agreement dated as of July 1, 2004 between the Registrant and A‑B (incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on July 2, 2004) (File No. 0-26542)
 
Master Lease Agreement dated as of June 6, 2007 between Banc of America Leasing & Capital, LLC and Widmer Brothers Brewing Company (incorporated by reference from Exhibit 10.2 to the Registrant’s Amendment No. 1 to the Registration Statement on Form S-4, No. 333-149908 filed on May 2, 2008 (“S-4 Amendment No. 1”))
 
Amended and Restated License Agreement dated as of February 28, 1997 between Widmer Brothers Brewing Company and Widmer’s Wine Cellars, Inc. and Canandaigua Wine Company, Inc. (incorporated by reference to Exhibit 10.3 from the S-4 Amendment No. 1)
 
Restated Lease dated as of January 1, 1994 between Smithson & McKay Limited Liability Company and Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
 
Commercial Lease (Restated) dated as of December 18, 2007 between Widmer Brothers LLC and Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.5 from the S-4 Amendment No. 1)
 
Sublease dated as of September 1, 2010 between Manini Holdings, LLC and Kona Brewing Co., LLC. (incorporated by reference from Exhibit 10.41 to the Registrant’s Form 10-K for the year ended December 31, 2010)
 
Amended and Restated Continental Distribution and Licensing Agreement between the Registrant and Kona Brewery LLC dated March 26, 2009 (incorporated by reference from Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
 
Sublease dated as of March 31, 2011 between Manini Holdings, LLC and Kona Brewing Co., LLC (incorporated by reference from Exhibit 10.43 to the Registrant’s Amendment No. 1 to Form 10-K for the year ended December 31, 2010)
 
 
 

80

Index

Exhibit
Number
 
Description
 
Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to the Registrant’s Form 10-K for the year ended December 31, 2010 filed on April 1, 2011)
 
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
 
Power of Attorney – Directors of Craft Brew Alliance, Inc.
 
Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
 
Certification of Principal Accounting Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
 
Certification of Form 10-K for the year ended December 31, 2018 pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
 
Press Release dated March 6, 2019
 
Description of Common Stock
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

*
Denotes a management contract or a compensatory plan or arrangement.
**

The Company has omitted schedules and similar attachments pursuant to Item 601(b)(2) of Regulation S-K and will furnish a copy of any omitted schedule or similar attachment to the United States Securities and Exchange Commission upon request.
+
Document filed with this Form 10-K
Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission.

Item 16. Form 10-K Summary

None.


81

Index

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Portland, Oregon, on March 6, 2019 .
 
Craft Brew Alliance, Inc.
 
By:
/s/  Edwin A. Smith
 
 
Edwin A. Smith
 
 
Corporate Controller and
 
 
Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 6, 2019 .
Signature
 
Title
 
 
 
/s/ Andrew J. Thomas
 
Chief Executive Officer
Andrew J. Thomas
 
(Principal Executive Officer)
 
 
 
/s/ Edwin A. Smith
 
Corporate Controller and Principal Accounting Officer
Edwin A. Smith
 
(Principal Accounting Officer and Acting Principal Financial Officer)
 
 
 
*
 
Chairman of the Board and Director
David R. Lord
 
 
 
 
 
*
 
Director
Timothy P. Boyle
 
 
 
 
 
*
 
Director
Marc J. Cramer
 
 
 
 
 
*
 
Director
Paul D. Davis
 
 
 
 
 
*
 
Director
Matthew E. Gilbertson
 
 
 
 
 
*
 
Director
Kevin R. Kelly
 
 
 
 
 
*
 
Director
Nickolas A. Mills
 
 
 
 
 
*
 
Director
Jacqueline S. Woodward
 
 
*By:   
 /s/ Andrew J. Thomas
 
 
Andrew J. Thomas,
 
 
as attorney in fact
 


82


Exhibit 10.9
CBALOGOA08.JPG
December 27, 2018


Andrew J. Thomas
Craft Brew Alliance, Inc. 929 North Russell Street Portland, Oregon 97227

Re:     Employment Agreement Dear Andy:
This letter amends and supersedes your employment letter dated June 20, 2016, and any prior formal or informal agreement regarding your employment by Craft Brew Alliance, Inc. (the "Company"), with the exception of any confidentiality, noncompetition, and/or nonsolicitation agreement(s) you have entered into with the Company.

This letter constitutes your Employment Agreement (this "Agreement") with the Company, effective January 1, 2019 (the "Effective Date"). You and the Company are collectively referred to in this Agreement as "the Parties" (or individually as a "Party"). This Agreement sets forth the terms and conditions of your continued employment with the Company as its Chief Executive Officer as of the Effective Date. Capitalized terms not otherwise defined in the body of this Agreement have the meanings set forth on Exhibit A.

1.
Term

The term of this Agreement shall be three years, from the Effective Date through December 31, 2021 (the "Contract Term"), subject to Section 3 of this Agreement. In the event that the Company experiences a Change in Control Event, the Contract Term will extend to the later of (a) the first anniversary of the Change in Control Event or (b) the date set forth in the preceding sentence. In the event of a termination by either Party without Cause or Good Reason on or before the end of the Contract Term, the terminating Party shall provide the other Party with at least 60 days' written notice of termination.

2.
Compensation and Benefits

2.1     Base Compensation

As of the Effective Date, your annual base salary rate is $500,000, subject to standard tax withholdings and other payroll deductions. Your base salary level will be reviewed
annually for adjustment by the Compensation Committee of the Company's Board of Directors (the "Board"), with salary adjustments, if any, generally made effective as of January 1st.

2.2     Short-Term Incentive Compensation

You will be eligible for short-term incentive ("STI") compensation under the Company's Annual Cash Incentive Plan. For 2019, your total STI target amount is $375,000. For subsequent years, the performance targets and STI target amounts will be determined annually by the Compensation Committee.

2.3     Long-Term Incentive Compensation

You will also be eligible to participate in the Company's 2014 Stock Incentive Plan (or its successor) as determined by the Compensation Committee.






2.4     Employee Benefits

You are eligible to participate in employee benefit programs made available to the Company's executive officers. You will receive paid time off consistent with the policies for executive officers of the Company.

3.
Termination & Severance

3.1     Termination During Contract Term

Except as provided in Section 3.2, in the event that (a) the Company terminates your employment effective on a date prior to or as of the end of the Contract Term for any reason other than Cause or (b) you terminate your employment prior to or as of the end of the Contract Term due to Good Reason, the Company will continue to pay you your then current base salary for 12 months from your termination date (the "Severance Period"). The severance payments under this paragraph shall not exceed two times the lesser of (y) the sum of your annualized compensation based upon your annual salary in the year preceding the year in which your employment is terminated (adjusted for any increase during that year that was expected to continue indefinitely if your employment had not terminated) and (z) the applicable dollar limit under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), for the calendar year in which your employment is terminated.

In addition, if you become entitled to severance pay under the first paragraph of this Section 3.1, the Company will also make a lump sum payment to you within 45 days of your termination of employment in an amount equal to the amount necessary to pay your COBRA premiums for continuation of group health insurance coverage during the Severance Period based on such premiums in effect on the date of your termination.

3.2     Termination in Connection with a Change in Control Event.

In the event that (a) the Company experiences a Change in Control Event and
(a) either (i) the Company terminates your employment effective on a date prior to the first anniversary of the Change in Control Event for any reason other than Cause or (ii) you terminate your employment prior to the first anniversary of the Change in Control Event due to Good Reason, and (c) in the case of a Change in Control Event described in Paragraph (c) of the definition of Change in Control Event, you represent and warrant that, as of the termination of your employment, you have not entered into any understanding or arrangement with the acquiring individual or entity regarding future employment, the Company will (A) make a lump sum payment to you within 45 days of the termination of your employment equal to the sum of: your then current monthly base salary multiplied by 24; (2) an amount equal to the amount necessary to pay your COBRA premiums for continuation of group health insurance coverage for 24 months based on such premiums in effect on the date of your termination; and (3) your full target STI bonus amount for the year in which your termination of employment occurs and (B) effective immediately prior to your termination of employment: (x) fully vest all Restricted Stock Units; (y) fully vest and cause to become immediately exercisable all outstanding stock options granted to you prior to the Change in Control Event; and (z) pay out, within 45 days following your termination of employment, any applicable outstanding Performance Share Award based, as determined in the reasonable discretion of the Compensation Committee, on the pro rata portion of the performance period that has lapsed and the extent to which progress towards the applicable performance goals has been achieved; provided, however, that each outstanding Performance Share Award shall be treated as earned and vested at no less than 33% of the target amount. The payments and benefits under this Section 3.2 are in lieu of the benefits under Section 3.1, and in no event will you be paid benefits under both Sections 3.1 and 3.2.

Notwithstanding the foregoing, in the event that (A) the Company experiences a Change in Control Event described in Paragraph (c) of the definition of Change in Control Event and (B) prior to the date of payment under this Section 3.2 you accept a position with the acquirer of the Company's assets, which in any other Change in Control Event would not justify a termination for Good Reason under clause (b)(ii) of the preceding paragraph, all benefits under Sections 3.1 and 3.2 will be forfeited.

The Parties agree and acknowledge that their intent is that none of the benefits payable under this Section 3.2 shall constitute an "excess parachute payment" under
Section 280G of the Code that would give rise to an excise tax under Section 4999 of the Code or a loss of deduction under Section 280G of the Code. To give effect to that intent, and notwithstanding any other provision of this Agreement to the contrary, the Parties specifically agree that the aggregate amount of the benefits payable to you or for your benefit that constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code, under this Agreement or any other





agreement or arrangement between you and the Company, shall not exceed 2.99 multiplied by your "base amount," as defined in Section 280G(b)(3) of the Code (the "Maximum Benefit Amount"). The Company shall make all calculations and determinations under this Section 3.2 (including application and interpretation of the Code and related regulatory, administrative and judicial authorities) in good faith, which calculations and determinations shall be binding on you absent manifest error. The Company shall provide you with a reasonable opportunity to review and comment on the Company's calculations. If at any time it is determined that the amount paid to you or for your benefit pursuant to this Agreement or any other agreement or arrangement between you and the Company exceeded the Maximum Benefit Amount, you shall immediately repay the excess to the Company, together with interest from the date of original payment to you at the discount rate applicable under Section 280G(d)(4) of the Code.

3.3     Termination at End of Contract Term

Following the Contract Term, if the Parties have not negotiated a replacement agreement or renewal of this Agreement, this Agreement shall terminate (except with respect to any obligations that expressly extend beyond termination) and employment may continue on an at-will basis with either Party free to end the employment relationship for any reason at any time, with or without Cause, Good Reason or notice, and without severance obligations.

3.4     Release of Claims

The Company will require you to execute an appropriate general release of all claims that you may have relating to your employment with the Company and termination of your employment as a condition to your receipt of any severance payments or other benefits under this Agreement other than those required by law or provided to employees generally. If such general release of claims is not executed within 30 days following the date your employment with the Company is terminated, all severance payments and other benefits payable after such 30-day period will be forfeited, and you agree to repay any severance payments, and the value of other benefits, paid to you during such period.

3.5     Competition During Severance Period

If, during the Severance Period, you become employed or associated with a brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company's business relating to alcoholic beverages, your severance payments and benefits under Section 3.1 will terminate as of the effective date of such employment or association. The foregoing does not supersede or replace any provision of any noncompetition agreement between you and the Company, including without limitation the Employee Noncompetition and Nonsolicitation Agreement described in Section 4.

4.
Noncompetition and Nonsolicitation

You agree to execute and deliver the Employee Noncompetition and Nonsolicitation Agreement attached hereto as Exhibit B prior to the Effective Date. If you fail to execute and deliver the Employee Noncompetition and Nonsolicitation Agreement prior to the Effective Date, this Agreement will be void ab initio .

5.
Nondisclosure

At all times during and after your employment with the Company, you agree that you will not use or disclose any Confidential Information for any purpose, except for the purpose of benefiting the Company consistent with the Company's instructions or intentions during the course of your employment. For purposes of this Agreement, "Confidential Information" shall be broadly construed to mean all of the Company's proprietary or non-public business information and all trade secrets. You agree to use the highest degree of care in safeguarding Confidential Information against loss, theft, inadvertent disclosure or unauthorized access or use. In the event that you receive notice at any time of any legal obligation to disclose any Confidential Information, you agree to notify the Company immediately in order to provide the
Company with an opportunity to protect its interests. You further agree that you will deliver to the Company immediately upon termination of employment or at any time upon the Company's request, all Confidential Information, whether or not written, produced or compiled by you and that you will not maintain access to or possession of Confidential Information following termination of your employment at the Company. This nondisclosure obligation and this Agreement supplement, and do not supersede, any other confidentiality agreement you have entered into at any time with the Company.






6.
Signing and Retention Bonuses

On the Effective Date (or the first business day thereafter following your execution of the Employee Noncompetition and Nonsolicitation Agreement described in Section 4 above), you will receive a signing bonus of $20% of 2019 STI target award. If you remain employed with Company under this Agreement as of the respective dates listed, you will be entitled to retention bonuses as follows: (i) on March 31, 2020, a cash payment equal to 20% of the total STI award paid to Employee under the Company’s Annual Cash Incentive Plan for 2019; provided that such payment will not be more than 20% or less than 12% of the target STI award for 2019; (ii) on March 31, 2021, 30% of the total STI award paid to Employee for 2020; provided that such payment will not be more than 30% or less than 18% of the target STI award for 2020; and on March 31, 2022, 50% of the total STI award paid to Employee for 2021; provided that such payment will not be more than 50% or less than 30% of the target STI award for 2021. If you fail, for any reason, to remain employed with Company through the dates specified, you will not be entitled to the respective retention bonus(es).

7.
Code Section 409A

For purposes of this Agreement, a termination of your employment will be deemed to occur only when or if there has been a "separation from service" as such term is defined in Treasury Regulation Section 1.409A-1(h). The severance payments and other benefits under this Agreement are intended to be exempt from the requirements of Section 409A of the Code by reason of all payments under this Agreement being either "short-term deferrals" within the meaning of Treasury Regulation Section 1.409A-1(b)(4) or separation pay due to involuntary separation from service under Treasury Regulation Section 1.409A-1(b)(9)(iii). All provisions of this Agreement shall be interpreted in a manner consistent with preserving these exemptions.

8.
Severability

In the event that a court of competent jurisdiction determines that a provision of this Agreement is unenforceable or not fully enforceable, the Parties agree that this Agreement is severable and should be enforced to the full extent allowed by law to best effectuate the intentions of the Parties.

9.
Code of Conduct

By your signature below, you agree to comply with the Company's Code of Conduct and Ethics as in effect from time to time, and to be subject to the Company's policies and procedures in effect from time to time for senior executives of the Company.


We appreciate your continued efforts on behalf of the Company and look forward
to having you as a member of our team for years to come.

Sincerely,
/s/ David Lord        
David Lord
Chairman of the Board    



Acknowledged and Agreed:

/s/ Andrew J. Thomas                 Date: 12/28/2018        
Andrew J. Thomas
Attachments: Exhibit A (Definitions)
Exhibit B (Employee Noncompetition and Nonsolicitation Agreement)










EXHIBIT A

Definitions


1. " Cause " shall mean that (a) you have engaged in conduct which has substantially and adversely impaired the interests of the Company, or would be likely to do so if you were to remain employed by the Company; (b) you have engaged in fraud, dishonesty or self-dealing relating to or arising out of your employment with the Company; (c) you have violated any criminal law relating to your employment or to the Company; (d) you have engaged in conduct which constitutes a material violation of a significant Company policy or the Company's Code of Conduct and Ethics as in effect from time to time, including, without limitation, violation of policies relating to discrimination, harassment, use of drugs and alcohol and workplace violence; or (e) you have repeatedly refused to obey lawful directions of the Board.

2. " Change in Control Event " shall mean the occurrence of any of the following events:

(a) Any one person or entity, or more than one person or entity acting as a group (as defined in Treasury Regulation Section 1.409A-3), acquires ownership of stock of the Company that, together with stock previously held by the acquirer, constitutes more than 50 percent of the total fair market value or total voting power of the Company's stock. If any one person or entity, or more than one person or entity acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the Company's stock, the acquisition of additional stock by the same person or entity or persons or entities acting as a group does not cause a Change in Control Event. An increase in the percentage of stock owned by any one person or entity, or persons or entities acting as a group, as a result of a transaction in which the Company acquires its stock in exchange for property, is treated as an acquisition of stock; or

(b) A majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of appointment or election; or

(c) Any one person or entity, or more than one person or entity acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by that person or entity or persons or entities acting as a group) assets from the Company that have a total gross fair market value equal to at least 75 percent of the total gross fair market value of all the Company's assets immediately prior to the acquisition or acquisitions. Gross fair market value means the value of the Company's assets, or the value of the assets being disposed of, without regard to any liabilities associated with these assets.

In determining whether a Change in Control Event has occurred, the attribution rules under Section 318 of the Code will apply to determine stock ownership. The stock underlying a vested option is treated as owned by the individual who holds the vested option, and the stock underlying an unvested option is not treated as owned by the individual who holds the unvested option.

3. " Good Reason " shall mean the occurrence of one or more of the following events without your consent: (a) a material reduction in your base compensation; (b) a material reduction in your authority, duties, or responsibilities as the Company's Chief Executive Officer; (c) a material reduction in the authority, duties, or responsibilities of the person or persons to whom you report (including, if applicable, a requirement that you report to a Company officer or employee instead of reporting directly to the Board); or (d) a relocation of your principal office to a location that is more than 100 miles from Portland, Oregon; provided, however, that "good reason" shall only be deemed to have occurred if: (i) within 90 days after the initial existence of the circumstances constituting "Good Reason," you provide the Company with a written notice describing such circumstances; (ii) the Company fails to cure the circumstances within 30 days after the Company receives your notice; and (iii) you terminate your employment with the Company within 90 days of the date of your notice.













EXHIBIT B


EMPLOYEE NONCOMPETITION AND NONSOLICITATION AGREEMENT

This NONCOMPETITION AND NONSOLICITATION AGREEMENT (“ Agreement ”)
is made as of the 1st day of January, 2019, by and among Craft Brew Alliance, Inc. (the “ Company ”) and Andrew J. Thomas (the “ Employee ”).

WHEREAS, as Chief Executive Officer of the Company, the Employee has and will have access to significant and increased knowledge and experience in the Company’s business and intimate knowledge of its customers, processes, trade secrets and/or other business information; and

WHEREAS, the Company needs to protect its commercial good will, intellectual property, and other assets; and

WHEREAS, the Employee has received a bona fide advancement in his position as a result of increased authority, duties and responsibilities that are expanding in scope and complexity, as well as geographically, in connection with the recent acquisition of three partner breweries located in Massachusetts, North Carolina and Florida, including brands, facilities, employees, assets and liabilities as applicable, depending on the transaction structure; and

WHEREAS, the Company and the Employee are entering into an Employment Agreement of even date herewith (the “Employment Agreement”) that has a term expiring on December 31, 2021, and provides for increased compensation, including enhanced base compensation, a signing bonus, a retention bonus, and additional compensation payable under specified circumstances following termination of employment, in each case as described therein; and

WHEREAS, the effectiveness the Employment Agreement is conditioned upon the execution of this Agreement by Employee;

NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, the parties’ desire to preserve the value inherent in the Company for their mutual benefit, and for other valuable consideration, including but not limited to the Employee’s continued employment by the Company and his bona fide advancement as described above, the Employee, intending to be legally bound hereby, agrees with the Company as follows:

1.
Definitions .

Competing Business ” shall mean any brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company’s business relating to alcoholic beverages.

Person ” shall mean an individual, partnership, corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof.

Protected Territory ” shall mean the United States of America.

2. At-Will Employment . Notwithstanding anything contained in this Agreement, the Employee’s employment by the Company is “at will,” meaning that either the Employee or the Company may terminate the employment relationship at any time, with or without notice, and for any reason or no reason.

3. Noncompetition . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve (12) months following the termination of Employee’s employment by the Company, Employee agrees that Employee will not, singly, jointly, or as a partner, member, employee, agent, officer, director, stockholder (except as a holder of not more than five percent of any class of stock listed on a national securities exchange, or actively traded in a national over-the-counter market), consultant, independent contractor, or joint venturer of any other Person, or in any other capacity, directly or beneficially own, manage, operate, join, control, or participate in the ownership, management, operation or control of, or authorize the use of his name by, or work for, or provide consulting, financial or other assistance to, or provide any beneficial services of any kind to, or be connected in any manner with, a Competing Business within the Protected Territory.






4. Nonsolicitation . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve
(1) months following the termination of Employee’s employment by the Company, Employee agrees not to:

(a) employ, retain or engage (as an employee, consultant, or independent contractor), or induce or attempt to induce to be employed, retained or engaged, any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant or independent contractor of the Company;

(b) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant, or independent contractor of the Company, to terminate such Person’s employment or other relationship with the Company; or

(c) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, a customer or client of the Company, or who otherwise is a contracting party with the Company, to terminate such Person’s relationship with the Company or to do business with any Competing Business.

5. Representations . Employee hereby represents that his at-will employment with the Company and his performance of all the terms of this Agreement will not result in a breach of any agreement with a third party, including the breach of any agreement to keep in confidence proprietary information acquired by the Employee prior to his employment by the Company or to refrain from competing with any third party. Employee represents that he has not entered into, and agrees he will not enter into, any oral or written agreement in conflict with this Agreement.

6. Survival . The Employee’s obligations under this Agreement shall survive the termination of the Employee’s employment with the Company regardless of the manner of, or circumstances surrounding, such termination, and shall be binding upon the Employee’s heirs, executors, administrators and legal representatives.

7. Equitable Remedies . The Employee agrees that the restrictions imposed on Employee in this Agreement are reasonable given the highly competitive nature of the Company’s business and that a breach of any of the provisions of this Agreement by the Employee will cause irreparable harm to the Company, and that in the event of such breach the Company shall have, in addition to any and all remedies at law, the right to an injunction, specific performance or other equitable relief to prevent the violation of the Employee’s obligations hereunder, and that the Company need not post any bond as a condition of seeking any such injunction, specific performance, or any other equitable relief.

8. Waivers and Amendments . The respective rights and obligations of the Company and the Employee under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) or amended only with the written consent of the Employee and a duly authorized representative of the Company.

9. Successors and Assigns . The Company shall have the right to assign the benefits of this Agreement to any entity that acquires the Company’s business whether by merger, purchase of capital stock or purchase of all or substantially all of the assets of the Company.

10. Notification of New Employer . In the event that the Employee’s employment is terminated (either by the Employee or the Company), the Employee hereby authorizes the Company to notify the Employee’s new employer regarding the Employee’s rights and obligations under this Agreement, and any other agreement by which the Employee is bound.

11. Entire Agreement . This Agreement constitutes the full and entire understanding and agreement of the parties with regard to the subjects hereof and supersedes in their entirety all other or prior agreements, whether oral or written, with respect thereto. Notwithstanding the foregoing, this Agreement shall not be interpreted as superseding or replacing any provision of the Employee’s employment letter agreement with the Company, including without limitation any provision terminating severance benefits in the event of competition by the Employee.

12. Partial Invalidity/Severability . The Company and the Employee agree that the covenants set forth in this Agreement shall be enforced to the fullest extent permitted by law. Accordingly if any court or arbitrator shall determine that such covenant is unenforceable for any reason, including, without limitation, because it covers too extensive a geographical area or survives too long a period of time, then the parties intend that such covenant shall be deemed to cover only such maximum





geographical area and maximum period of time, if applicable, and/or shall otherwise be deemed to be limited in such manner, as will permit enforceability by such court or arbitrator. In the event that any one or more of such covenants shall, either by itself or together with other covenants, be adjudged to go beyond what is reasonable in all the circumstances for the protection of the interests of the Company and its shareholders, but would be adjudged reasonable if any particular covenant or covenants or parts thereof were deleted,
restricted, or limited in a particular manner, then the said covenants shall apply with such deletions, restrictions, or limitations, as the case may be. The Company and the Employee further agree that the covenants set forth in this Agreement are reasonable in all circumstances for the protection of the legitimate interests of the Company and its shareholders.

13. Governing Law and Venue . This Agreement shall be governed by and interpreted under and in accordance with the laws of the State of Oregon. Venue for enforcement of any terms of this Agreement shall be in the state or federal courts for the State of Oregon.

The parties have duly executed this Noncompetition and Nonsolicitation Agreement as of the date first above written.

COMPANY:                        EMPLOYEE:

Craft Brew Alliance, Inc.



By:                                                    
Name: David Lord                    Name: Andrew J. Thomas
Title: Chairman of the Board






Exhibit 10.10

EMPLOYEE NONCOMPETITION AND NONSOLICITATION AGREEMENT

This NONCOMPETITION AND NONSOLICITATION AGREEMENT (“ Agreement ”)
is made as of the 1st day of January, 2019, by and among Craft Brew Alliance, Inc. (the “ Company ”) and Andrew J. Thomas (the “ Employee ”).

WHEREAS, as Chief Executive Officer of the Company, the Employee has and will have access to significant and increased knowledge and experience in the Company’s business and intimate knowledge of its customers, processes, trade secrets and/or other business information; and

WHEREAS, the Company needs to protect its commercial good will, intellectual property, and other assets; and

WHEREAS, the Employee has received a bona fide advancement in his position as a result of increased authority, duties and responsibilities that are expanding in scope and complexity, as well as geographically, in connection with the recent acquisition of three partner breweries located in Massachusetts, North Carolina and Florida, including brands, facilities, employees, assets and liabilities as applicable, depending on the transaction structure; and

WHEREAS, the Company and the Employee are entering into an Employment Agreement of even date herewith (the “Employment Agreement”) that has a term expiring on December 31, 2021, and provides for increased compensation, including enhanced base compensation, a signing bonus, a retention bonus, and additional compensation payable under specified circumstances following termination of employment, in each case as described therein; and

WHEREAS, the effectiveness the Employment Agreement is conditioned upon the execution of this Agreement by Employee;

NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, the parties’ desire to preserve the value inherent in the Company for their mutual benefit, and for other valuable consideration, including but not limited to the Employee’s continued employment by the Company and his bona fide advancement as described above, the Employee, intending to be legally bound hereby, agrees with the Company as follows:

1.
Definitions .

Competing Business ” shall mean any brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company’s business relating to alcoholic beverages.

Person ” shall mean an individual, partnership, corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof.

Protected Territory ” shall mean the United States of America.
2. At-Will Employment . Notwithstanding anything contained in this Agreement, the Employee’s employment by the Company is “at will,” meaning that either the Employee or the Company may terminate the employment relationship at any time, with or without notice, and for any reason or no reason.

3. Noncompetition . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve
(12) months following the termination of Employee’s employment by the Company, Employee agrees that Employee will not, singly, jointly, or as a partner, member, employee, agent, officer, director, stockholder (except as a holder of not more than five percent of any class of stock listed on a national securities exchange, or actively traded in a national over-the-counter market), consultant, independent contractor, or joint venturer of any other Person, or in any other capacity, directly or beneficially own, manage, operate, join, control, or participate in the ownership, management, operation or control of, or authorize the use of his name by, or work for, or provide consulting, financial or other assistance to, or provide any beneficial services of any kind to, or be connected in any manner with, a Competing Business within the Protected Territory.






4. Nonsolicitation . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve (12) months following the termination of Employee’s employment by the Company, Employee agrees not to:

(a) employ, retain or engage (as an employee, consultant, or independent contractor), or induce or attempt to induce to be employed, retained or engaged, any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant or independent contractor of the Company;

(b) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant, or independent contractor of the Company, to terminate such Person’s employment or other relationship with the Company; or

(c) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, a customer or client of the Company, or who otherwise is a contracting party with the Company, to terminate such Person’s relationship with the Company or to do business with any Competing Business.

5. Representations . Employee hereby represents that his at-will employment with the Company and his performance of all the terms of this Agreement will not result in a breach of any agreement with a third party, including the breach of any agreement to keep in confidence proprietary information acquired by the Employee prior to his employment by the Company or to refrain from competing with any third party. Employee represents that he has not entered into, and agrees he will not enter into, any oral or written agreement in conflict with this Agreement.

6. Survival . The Employee’s obligations under this Agreement shall survive the termination of the Employee’s employment with the Company regardless of the manner of, or circumstances surrounding, such termination, and shall be binding upon the Employee’s heirs, executors, administrators and legal representatives.

7. Equitable Remedies . The Employee agrees that the restrictions imposed on Employee in this Agreement are reasonable given the highly competitive nature of the Company’s business and that a breach of any of the provisions of this Agreement by the Employee will cause irreparable harm to the Company, and that in the event of such breach the Company shall have, in addition to any and all remedies at law, the right to an injunction, specific performance or other equitable relief to prevent the violation of the Employee’s obligations hereunder, and that the Company need not post any bond as a condition of seeking any such injunction, specific performance, or any other equitable relief.

8. Waivers and Amendments . The respective rights and obligations of the Company and the Employee under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) or amended only with the written consent of the Employee and a duly authorized representative of the Company.

9. Successors and Assigns . The Company shall have the right to assign the benefits of this Agreement to any entity that acquires the Company’s business whether by merger, purchase of capital stock or purchase of all or substantially all of the assets of the Company.

10. Notification of New Employer . In the event that the Employee’s employment is terminated (either by the Employee or the Company), the Employee hereby authorizes the Company to notify the Employee’s new employer regarding the Employee’s rights and obligations under this Agreement, and any other agreement by which the Employee is bound.

11. Entire Agreement . This Agreement constitutes the full and entire understanding and agreement of the parties with regard to the subjects hereof and supersedes in their entirety all other or prior agreements, whether oral or written, with respect thereto. Notwithstanding the foregoing, this Agreement shall not be interpreted as superseding or replacing any provision of the Employee’s employment letter agreement with the Company, including without limitation any provision terminating severance benefits in the event of competition by the Employee.






12. Partial Invalidity/Severability . The Company and the Employee agree that the covenants set forth in this Agreement shall be enforced to the fullest extent permitted by law. Accordingly if any court or arbitrator shall determine that such covenant is unenforceable for any reason, including, without limitation, because it covers too extensive a geographical area or survives too long a period of time, then the parties intend that such covenant shall be deemed to cover only such maximum geographical area and maximum period of time, if applicable, and/or shall otherwise be deemed to be limited in such manner, as will permit enforceability by such court or arbitrator. In the event that any one or more of such covenants shall, either by itself or together with other covenants, be adjudged to go beyond what is reasonable in all the circumstances for the protection of the interests of the Company and its shareholders, but would be adjudged reasonable if any particular covenant or covenants or parts thereof were deleted, restricted, or limited in a particular manner, then the said covenants shall apply with such deletions, restrictions, or limitations, as the case may be. The Company and the Employee further agree that the covenants set forth in this Agreement are reasonable in all circumstances for the protection of the legitimate interests of the Company and its shareholders.

13. Governing Law and Venue. This Agreement shall be governed by and interpreted under and in accordance with the laws of the State of Oregon. Venue for enforcement of any terms of this Agreement shall be in the state or federal courts for the State of Oregon.
The patties have duly executed this Noncompetition and Nonsolicitation Agreement as of the date first above written.


COMPANY:                        EMPLOYEE:

Craft Brew Alliance, Inc.



By: David Lord                          /s/Andrew J. Thomas        
Name: David Lord                    Name: Andrew J. Thomas
Title: Chairman of the Board





Exhibit 10.11
CBALOGOA09.JPG
December 27, 2018


J. Scott Mennen
Craft Brew Alliance, Inc. 929 North Russell Street Portland, Oregon 97227

Re:     Employment Agreement Dear Scott:
This letter amends and supersedes your employment letter dated June 20, 2016, and any prior formal or informal agreement regarding your employment by Craft Brew Alliance, Inc. (the "Company"), with the exception of any confidentiality, noncompetition, and/or nonsolicitation agreement(s) you have entered into with the Company.

This letter constitutes your Employment Agreement (this "Agreement") with the Company, effective January 1, 2019 (the "Effective Date"). You and the Company are collectively referred to in this Agreement as "the Parties" (or individually as a "Party"). This Agreement sets forth the terms and conditions of your continued employment with the Company as its Chief Operating Officer as of the Effective Date. Capitalized terms not otherwise defined in the body of this Agreement have the meanings set forth on Exhibit A.

1.
Term

The term of this Agreement shall be three years, from the Effective Date through December 31, 2021 (the "Contract Term"), subject to Section 3 of this Agreement. In the event that the Company experiences a Change in Control Event, the Contract Term will extend to the later of (a) the first anniversary of the Change in Control Event or (b) the date set forth in the preceding sentence. In the event of a termination by either Party without Cause or Good Reason on or before the end of the Contract Term, the terminating Party shall provide the other Party with at least 60 days' written notice of termination.

2.
Compensation and Benefits

2.1     Base Compensation

As of the Effective Date, your annual base salary rate is $289,976, subject to standard tax withholdings and other payroll deductions. Your base salary level will be reviewed annually for adjustment by the Compensation Committee of the Company's Board of Directors (the "Board"), with salary adjustments, if any, generally made effective as of January 1st.

2.2     Short-Term Incentive Compensation

You will be eligible for short-term incentive ("STI") compensation under the Company's Annual Cash Incentive Plan. For 2019, your total STI target amount is $188,484. For subsequent years, the performance targets and STI target amounts will be determined annually by the Compensation Committee.

2.3     Long-Term Incentive Compensation

You will also be eligible to participate in the Company's 2014 Stock Incentive Plan (or its successor) as determined by the Compensation Committee.






2.4     Employee Benefits

You are eligible to participate in employee benefit programs made available to the Company's executive officers. You will receive paid time off consistent with the policies for executive officers of the Company.

3.
Termination & Severance

3.1     Termination During Contract Term

Except as provided in Section 3.2, in the event that (a) the Company terminates your employment effective on a date prior to or as of the end of the Contract Term for any reason other than Cause or (b) you terminate your employment prior to or as of the end of the Contract Term due to Good Reason, the Company will continue to pay you your then current base salary for 12 months from your termination date (the "Severance Period"). The severance payments under this paragraph shall not exceed two times the lesser of (y) the sum of your annualized compensation based upon your annual salary in the year preceding the year in which your employment is terminated (adjusted for any increase during that year that was expected to continue indefinitely if your employment had not terminated) and (z) the applicable dollar limit under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), for the calendar year in which your employment is terminated.

In addition, if you become entitled to severance pay under the first paragraph of this Section 3.1, the Company will also make a lump sum payment to you within 45 days of your termination of employment in an amount equal to the amount necessary to pay your COBRA premiums for continuation of group health insurance coverage during the Severance Period based on such premiums in effect on the date of your termination.

3.2     Termination in Connection with a Change in Control Event.

In the event that (a) the Company experiences a Change in Control Event and
(a) either (i) the Company terminates your employment effective on a date prior to the first anniversary of the Change in Control Event for any reason other than Cause or (ii) you terminate your employment prior to the first anniversary of the Change in Control Event due to Good Reason, and (c) in the case of a Change in Control Event described in Paragraph (c) of the definition of Change in Control Event, you represent and warrant that, as of the termination of your employment, you have not entered into any understanding or arrangement with the acquiring individual or entity regarding future employment, the Company will (A) make a lump sum payment to you within 45 days of the termination of your employment equal to the sum of: your then current monthly base salary multiplied by 18; (2) an amount equal to the amount necessary to pay your COBRA premiums for continuation of group health insurance coverage for 18 months based on such premiums in effect on the date of your termination; and (3) your full target STI bonus amount for the year in which your termination of employment occurs and
(B) effective immediately prior to your termination of employment: (x) fully vest all Restricted Stock Units; (y) fully vest and cause to become immediately exercisable all outstanding stock options granted to you prior to the Change in Control Event; and (z) pay out, within 45 days following your termination of employment, any applicable outstanding Performance Share Award based, as determined in the reasonable discretion of the Compensation Committee, on the pro rata portion of the performance period that has lapsed and the extent to which progress towards the applicable performance goals has been achieved; provided, however, that each outstanding Performance Share Award shall be treated as earned and vested at no less than 33% of the target amount. The payments and benefits under this Section 3.2 are in lieu of the benefits under Section 3.1, and in no event will you be paid benefits under both Sections 3.1 and 3.2.

Notwithstanding the foregoing, in the event that (A) the Company experiences a Change in Control Event described in Paragraph (c) of the definition of Change in Control Event and (B) prior to the date of payment under this Section 3.2 you accept a position with the acquirer of the Company's assets, which in any other Change in Control Event would not justify a termination for Good Reason under clause (b)(ii) of the preceding paragraph, all benefits under Sections 3.1 and 3.2 will be forfeited.

The Parties agree and acknowledge that their intent is that none of the benefits payable under this Section 3.2 shall constitute an "excess parachute payment" under
Section 280G of the Code that would give rise to an excise tax under Section 4999 of the Code or a loss of deduction under Section 280G of the Code. To give effect to that intent, and notwithstanding any other provision of this





Agreement to the contrary, the Parties specifically agree that the aggregate amount of the benefits payable to you or for your benefit that constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code, under this Agreement or any other agreement or arrangement between you and the Company, shall not exceed 2.99 multiplied by your "base amount," as defined in Section 280G(b)(3) of the Code (the "Maximum Benefit Amount"). The Company shall make all calculations and determinations under this Section 3.2 (including application and interpretation of the Code and related regulatory, administrative and judicial authorities) in good faith, which calculations and determinations shall be binding on you absent manifest error. The Company shall provide you with a reasonable opportunity to review and comment on the Company's calculations. If at any time it is determined that the amount paid to you or for your benefit pursuant to this Agreement or any other agreement or arrangement between you and the Company exceeded the Maximum Benefit Amount, you shall immediately repay the excess to the Company, together with interest from the date of original payment to you at the discount rate applicable under
Section 280G(d)(4) of the Code.

3.3     Termination at End of Contract Term

Following the Contract Term, if the Parties have not negotiated a replacement agreement or renewal of this Agreement, this Agreement shall terminate (except with respect to any obligations that expressly extend beyond termination) and employment may continue on an at-will basis with either Party free to end the employment relationship for any reason at any time, with or without Cause, Good Reason or notice, and without severance obligations.

3.4     Release of Claims

The Company will require you to execute an appropriate general release of all claims that you may have relating to your employment with the Company and termination of your employment as a condition to your receipt of any severance payments or other benefits under this Agreement other than those required by law or provided to employees generally. If such general release of claims is not executed within 30 days following the date your employment with the Company is terminated, all severance payments and other benefits payable after such 30-day period will be forfeited, and you agree to repay any severance payments, and the value of other benefits, paid to you during such period.

3.5     Competition During Severance Period

If, during the Severance Period, you become employed or associated with a brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company's business relating to alcoholic beverages, your severance payments and benefits under Section 3.1 will terminate as of the effective date of such employment or association. The foregoing does not supersede or replace any provision of any noncompetition agreement between you and the Company, including without limitation the Employee Noncompetition and Nonsolicitation Agreement described in Section 4.

4.
Noncompetition and Nonsolicitation

You agree to execute and deliver the Employee Noncompetition and Nonsolicitation Agreement attached hereto as Exhibit B prior to the Effective Date. If you fail to execute and deliver the Employee Noncompetition and Nonsolicitation Agreement prior to the Effective Date, this Agreement will be void ab initio .

5.
Nondisclosure

At all times during and after your employment with the Company, you agree that you will not use or disclose any Confidential Information for any purpose, except for the purpose of benefiting the Company consistent with the Company's instructions or intentions during the course of your employment. For purposes of this Agreement, "Confidential Information" shall be broadly construed to mean all of the Company's proprietary or non-public business information and all trade secrets. You agree to use the highest degree of care in safeguarding Confidential Information against loss, theft, inadvertent disclosure or unauthorized access or use. In the event that you receive notice at any time of any legal obligation to disclose any Confidential Information, you agree to notify the Company immediately in order to provide the Company with an opportunity to protect its interests. You further agree that you will deliver to the Company immediately upon termination of employment or at any time upon the Company's request, all Confidential Information, whether or not written, produced or compiled by you and that you





will not maintain access to or possession of Confidential Information following termination of your employment at the Company. This nondisclosure obligation and this Agreement supplement, and do not supersede, any other confidentiality agreement you have entered into at any time with the Company.

6.
Signing and Retention Bonuses

On the Effective Date (or the first business day thereafter following your execution of the Employee Noncompetition and Nonsolicitation Agreement described in Section 4 above), you will receive a signing bonus of $20% of 2019 STI target award. If you remain employed with Company under this Agreement as of the respective dates listed, you will be entitled to retention bonuses as follows: (i) on March 31, 2020, a cash payment equal to 20% of the total STI award paid to Employee under the Company’s Annual Cash Incentive Plan for 2019; provided that such payment will not be more than 20% or less than 12% of the target STI award for 2019; (ii) on March 31, 2021, 30% of the total STI award paid to Employee for 2020; provided that such payment will not be more than 30% or less than 18% of the target STI award for 2020; and on March 31, 2022, 50% of the total STI award paid to Employee for 2021; provided that such payment will not be more than 50% or less than 30% of the target STI award for 2021. If you fail, for any reason, to remain employed with Company through the dates specified, you will not be entitled to the respective retention bonus(es).

7.
Code Section 409A

For purposes of this Agreement, a termination of your employment will be deemed to occur only when or if there has been a "separation from service" as such term is defined in Treasury Regulation Section 1.409A-1(h). The severance payments and other benefits under this Agreement are intended to be exempt from the requirements of Section 409A of the Code by reason of all payments under this Agreement being either "short-term deferrals" within the meaning of Treasury Regulation Section 1.409A-1(b)(4) or separation pay due to involuntary separation from service under Treasury Regulation Section 1.409A-1(b)(9)(iii). All provisions of this Agreement shall be interpreted in a manner consistent with preserving these exemptions.

8.
Severability

In the event that a court of competent jurisdiction determines that a provision of this Agreement is unenforceable or not fully enforceable, the Parties agree that this Agreement is severable and should be enforced to the full extent allowed by law to best effectuate the intentions of the Parties.

9.
Code of Conduct

By your signature below, you agree to comply with the Company's Code of Conduct and Ethics as in effect from time to time, and to be subject to the Company's policies and procedures in effect from time to time for senior executives of the Company.

We appreciate your continued efforts on behalf of the Company and look forward
to having you as a member of our team for years to come.

Sincerely,
/s/ Andrew J. Thomas    
Andrew J. Thomas
Chief Executive Officer    


Acknowledged and Agreed:

/s/ J. Scott Mennen                     Date: December 28,2018    
J. Scott Mennen    
Attachments: Exhibit A (Definitions)
Exhibit B (Employee Noncompetition and Nonsolicitation Agreement)







EXHIBIT A

Definitions


1. " Cause " shall mean that (a) you have engaged in conduct which has substantially and adversely impaired the interests of the Company, or would be likely to do so if you were to remain employed by the Company; (b) you have engaged in fraud, dishonesty or self-dealing relating to or arising out of your employment with the Company; (c) you have violated any criminal law relating to your employment or to the Company; (d) you have engaged in conduct which constitutes a material violation of a significant Company policy or the Company's Code of Conduct and Ethics as in effect from time to time, including, without limitation, violation of policies relating to discrimination, harassment, use of drugs and alcohol and workplace violence; or (e) you have repeatedly refused to obey lawful directions of the Board.

2. " Change in Control Event " shall mean the occurrence of any of the following events:

(a) Any one person or entity, or more than one person or entity acting as a group (as defined in Treasury Regulation Section 1.409A-3), acquires ownership of stock of the Company that, together with stock previously held by the acquirer, constitutes more than 50 percent of the total fair market value or total voting power of the Company's stock. If any one person or entity, or more than one person or entity acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the Company's stock, the acquisition of additional stock by the same person or entity or persons or entities acting as a group does not cause a Change in Control Event. An increase in the percentage of stock owned by any one person or entity, or persons or entities acting as a group, as a result of a transaction in which the Company acquires its stock in exchange for property, is treated as an acquisition of stock; or

(b) A majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of appointment or election; or

(c) Any one person or entity, or more than one person or entity acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by that person or entity or persons or entities acting as a group) assets from the Company that have a total gross fair market value equal to at least 75 percent of the total gross fair market value of all the Company's assets immediately prior to the acquisition or acquisitions. Gross fair market value means the value of the Company's assets, or the value of the assets being disposed of, without regard to any liabilities associated with these assets.

In determining whether a Change in Control Event has occurred, the attribution rules under Section 318 of the Code will apply to determine stock ownership. The stock underlying a vested option is treated as owned by the individual who holds the vested option, and the stock underlying an unvested option is not treated as owned by the individual who holds the unvested option.

3. " Good Reason " shall mean the occurrence of one or more of the following events without your consent: (a) a material reduction in your base compensation; (b) a material reduction in your authority, duties, or responsibilities as the Company's Chief Operating Officer; (c) a material reduction in the authority, duties, or responsibilities of the person or persons to whom you report (including, if applicable, a requirement that you report to a Company officer or employee instead of reporting directly to the Board); or (d) a relocation of your principal office to a location that is more than 100 miles from Portland, Oregon; provided, however, that "good reason" shall only be deemed to have occurred if: (i) within 90 days after the initial existence of the circumstances constituting "Good Reason," you provide the Company with a written notice describing such circumstances; (ii) the Company fails to cure the circumstances within 30 days after the Company receives your notice; and (iii) you terminate your employment with the Company within 90 days of the date of your notice.









EXHIBIT B


EMPLOYEE NONCOMPETITION AND NONSOLICITATION AGREEMENT

This NONCOMPETITION AND NONSOLICITATION AGREEMENT (“ Agreement ”)
is made as of the 1st day of January, 2019, by and among Craft Brew Alliance, Inc. (the “ Company ”) and J. Scott Mennen (the “ Employee ”).

WHEREAS, as Chief Operating Officer of the Company, the Employee has and will have access to significant and increased knowledge and experience in the Company’s business and intimate knowledge of its customers, processes, trade secrets and/or other business information; and

WHEREAS, the Company needs to protect its commercial good will, intellectual property, and other assets; and

WHEREAS, the Employee has received a bona fide advancement in his position as a result of increased authority, duties and responsibilities that are expanding in scope and complexity, as well as geographically, in connection with the recent acquisition of three partner breweries located in Massachusetts, North Carolina and Florida, including brands, facilities, employees, assets and liabilities as applicable, depending on the transaction structure; and

WHEREAS, the Company and the Employee are entering into an Employment Agreement of even date herewith (the “Employment Agreement”) that has a term expiring on December 31, 2021, and provides for increased compensation, including enhanced base compensation, a signing bonus, a retention bonus, and additional compensation payable under specified circumstances following termination of employment, in each case as described therein; and

WHEREAS, the effectiveness the Employment Agreement is conditioned upon the execution of this Agreement by Employee;

NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, the parties’ desire to preserve the value inherent in the Company for their mutual benefit, and for other valuable consideration, including but not limited to the Employee’s continued employment by the Company and his bona fide advancement as described above, the Employee, intending to be legally bound hereby, agrees with the Company as follows:

1.
Definitions .

Competing Business ” shall mean any brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company’s business relating to alcoholic beverages.

Person ” shall mean an individual, partnership, corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof.

Protected Territory ” shall mean the United States of America.

2. At-Will Employment . Notwithstanding anything contained in this Agreement, the Employee’s employment by the Company is “at will,” meaning that either the Employee or the Company may terminate the employment relationship at any time, with or without notice, and for any reason or no reason.

3. Noncompetition . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve
(12) months following the termination of Employee’s employment by the Company, Employee agrees that Employee will not, singly, jointly, or as a partner, member, employee, agent, officer, director, stockholder (except as a holder of not more than five percent of any class of stock listed on a national securities exchange, or actively traded in a national over-the-counter market), consultant, independent contractor, or joint venturer of any other Person, or in any other capacity, directly or beneficially own, manage, operate, join, control, or participate in the ownership, management,





operation or control of, or authorize the use of his name by, or work for, or provide consulting, financial or other assistance to, or provide any beneficial services of any kind to, or be connected in any manner with, a Competing Business within the Protected Territory.

4. Nonsolicitation . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve
(1) months following the termination of Employee’s employment by the Company, Employee agrees not to:

(a) employ, retain or engage (as an employee, consultant, or independent contractor), or induce or attempt to induce to be employed, retained or engaged, any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant or independent contractor of the Company;

(b) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant, or independent contractor of the Company, to terminate such Person’s employment or other relationship with the Company; or

(c) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, a customer or client of the Company, or who otherwise is a contracting party with the Company, to terminate such Person’s relationship with the Company or to do business with any Competing Business.

5. Representations . Employee hereby represents that his at-will employment with the Company and his performance of all the terms of this Agreement will not result in a breach of any agreement with a third party, including the breach of any agreement to keep in confidence proprietary information acquired by the Employee prior to his employment by the Company or to refrain from competing with any third party. Employee represents that he has not entered into, and agrees he will not enter into, any oral or written agreement in conflict with this Agreement.

6. Survival . The Employee’s obligations under this Agreement shall survive the termination of the Employee’s employment with the Company regardless of the manner of, or circumstances surrounding, such termination, and shall be binding upon the Employee’s heirs, executors, administrators and legal representatives.

7. Equitable Remedies . The Employee agrees that the restrictions imposed on Employee in this Agreement are reasonable given the highly competitive nature of the Company’s business and that a breach of any of the provisions of this Agreement by the Employee will cause irreparable harm to the Company, and that in the event of such breach the Company shall have, in addition to any and all remedies at law, the right to an injunction, specific performance or other equitable relief to prevent the violation of the Employee’s obligations hereunder, and that the Company need not post any bond as a condition of seeking any such injunction, specific performance, or any other equitable relief.

8. Waivers and Amendments . The respective rights and obligations of the Company and the Employee under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) or amended only with the written consent of the Employee and a duly authorized representative of the Company.

9. Successors and Assigns . The Company shall have the right to assign the benefits of this Agreement to any entity that acquires the Company’s business whether by merger, purchase of capital stock or purchase of all or substantially all of the assets of the Company.

10. Notification of New Employer . In the event that the Employee’s employment is terminated (either by the Employee or the Company), the Employee hereby authorizes the Company to notify the Employee’s new employer regarding the Employee’s rights and obligations under this Agreement, and any other agreement by which the Employee is bound.






11. Entire Agreement . This Agreement constitutes the full and entire understanding and agreement of the parties with regard to the subjects hereof and supersedes in their entirety all other or prior agreements, whether oral or written, with respect thereto. Notwithstanding the foregoing, this Agreement shall not be interpreted as superseding or replacing any provision of the Employee’s employment letter agreement with the Company, including without limitation any provision terminating severance benefits in the event of competition by the Employee.

12. Partial Invalidity/Severability . The Company and the Employee agree that the covenants set forth in this Agreement shall be enforced to the fullest extent permitted by law. Accordingly if any court or arbitrator shall determine that such covenant is unenforceable for any reason, including, without limitation, because it covers too extensive a geographical area or survives too long a period of time, then the parties intend that such covenant shall be deemed to cover only such maximum geographical area and maximum period of time, if applicable, and/or shall otherwise be deemed to be limited in such manner, as will permit enforceability by such court or arbitrator. In the event that any one or more of such covenants shall, either by itself or together with other covenants, be adjudged to go beyond what is reasonable in all the circumstances for the protection of the interests of the Company and its shareholders, but would be adjudged reasonable if any particular covenant or covenants or parts thereof were deleted, restricted, or limited in a particular manner, then the said covenants shall apply with such deletions, restrictions, or limitations, as the case may be. The Company and the Employee further agree that the covenants set forth in this Agreement are reasonable in all circumstances for the protection of the legitimate interests of the Company and its shareholders.

13. Governing Law and Venue . This Agreement shall be governed by and interpreted under and in accordance with the laws of the State of Oregon. Venue for enforcement of any terms of this Agreement shall be in the state or federal courts for the State of Oregon.

The parties have duly executed this Noncompetition and Nonsolicitation Agreement as of the date first above written.

COMPANY:                        EMPLOYEE:

Craft Brew Alliance, Inc.



By:                                                    
Name: Andrew J. Thomas                Name: J. Scott Mennen
Title: Chief Executive Officer    







Exhibit 10.12

EMPLOYEE NONCOMPETITION AND NONSOLICITATION AGREEMENT

This NONCOMPETITION AND NONSOLICITATION AGREEMENT (“ Agreement ”)
is made as of the 1st day of January, 2019, by and among Craft Brew Alliance, Inc. (the “ Company ”) and J. Scott Mennen (the “ Employee ”).

WHEREAS, as Chief Operating Officer of the Company, the Employee has and will have access to significant and increased knowledge and experience in the Company’s business and intimate knowledge of its customers, processes, trade secrets and/or other business information; and

WHEREAS, the Company needs to protect its commercial good will, intellectual property, and other assets; and

WHEREAS, the Employee has received a bona fide advancement in his position as a result of increased authority, duties and responsibilities that are expanding in scope and complexity, as well as geographically, in connection with the recent acquisition of three partner breweries located in Massachusetts, North Carolina and Florida, including brands, facilities, employees, assets and liabilities as applicable, depending on the transaction structure; and

WHEREAS, the Company and the Employee are entering into an Employment Agreement of even date herewith (the “Employment Agreement”) that has a term expiring on December 31, 2021, and provides for increased compensation, including enhanced base compensation, a signing bonus, a retention bonus, and additional compensation payable under specified circumstances following termination of employment, in each case as described therein; and

WHEREAS, the effectiveness the Employment Agreement is conditioned upon the execution of this Agreement by Employee;

NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, the parties’ desire to preserve the value inherent in the Company for their mutual benefit, and for other valuable consideration, including but not limited to the Employee’s continued employment by the Company and his bona fide advancement as described above, the Employee, intending to be legally bound hereby, agrees with the Company as follows:

1.
Definitions .

Competing Business ” shall mean any brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company’s business relating to alcoholic beverages.

Person ” shall mean an individual, partnership, corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof.

Protected Territory ” shall mean the United States of America.

2. At-Will Employment . Notwithstanding anything contained in this Agreement, the Employee’s employment by the Company is “at will,” meaning that either the Employee or the Company may terminate the employment relationship at any time, with or without notice, and for any reason or no reason.

3. Noncompetition . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve (12) months following the termination of Employee’s employment by the Company, Employee agrees that Employee will not, singly, jointly, or as a partner, member, employee, agent, officer, director, stockholder (except as a holder of not more than five percent of any class of stock listed on a national securities exchange, or actively traded in a national over-the-counter market), consultant, independent contractor, or joint venturer of any other Person, or in any other capacity, directly or beneficially own, manage, operate, join, control, or participate in the ownership, management, operation or control of, or authorize the use of his name by, or work for, or provide consulting, financial or other assistance to, or provide any beneficial services of any kind to, or be connected in any manner with, a Competing Business within the Protected Territory.






4. Nonsolicitation . During the period of the Employee’s employment by the Company through the end of Employee’s employment for any reason, and for a period of twelve
(1) months following the termination of Employee’s employment by the Company, Employee agrees not to:

(a) employ, retain or engage (as an employee, consultant, or independent contractor), or induce or attempt to induce to be employed, retained or engaged, any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant or independent contractor of the Company;

(b) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, an employee, consultant, or independent contractor of the Company, to terminate such Person’s employment or other relationship with the Company; or

(c) induce or attempt to induce any Person who is or was during the term of the Employee’s employment with the Company, and for a period of one year thereafter, a customer or client of the Company, or who otherwise is a contracting party with the Company, to terminate such Person’s relationship with the Company or to do business with any Competing Business.

5. Representations . Employee hereby represents that his at-will employment with the Company and his performance of all the terms of this Agreement will not result in a breach of any agreement with a third party, including the breach of any agreement to keep in confidence proprietary information acquired by the Employee prior to his employment by the Company or to refrain from competing with any third party. Employee represents that he has not entered into, and agrees he will not enter into, any oral or written agreement in conflict with this Agreement.

6. Survival . The Employee’s obligations under this Agreement shall survive the termination of the Employee’s employment with the Company regardless of the manner of, or circumstances surrounding, such termination, and shall be binding upon the Employee’s heirs, executors, administrators and legal representatives.

7. Equitable Remedies . The Employee agrees that the restrictions imposed on Employee in this Agreement are reasonable given the highly competitive nature of the Company’s business and that a breach of any of the provisions of this Agreement by the Employee will cause irreparable harm to the Company, and that in the event of such breach the Company shall have, in addition to any and all remedies at law, the right to an injunction, specific performance or other equitable relief to prevent the violation of the Employee’s obligations hereunder, and that the Company need not post any bond as a condition of seeking any such injunction, specific performance, or any other equitable relief.

8. Waivers and Amendments . The respective rights and obligations of the Company and the Employee under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) or amended only with the written consent of the Employee and a duly authorized representative of the Company.

9. Successors and Assigns . The Company shall have the right to assign the benefits of this Agreement to any entity that acquires the Company’s business whether by merger, purchase of capital stock or purchase of all or substantially all of the assets of the Company.

10. Notification of New Employer . In the event that the Employee’s employment is terminated (either by the Employee or the Company), the Employee hereby authorizes the Company to notify the Employee’s new employer regarding the Employee’s rights and obligations under this Agreement, and any other agreement by which the Employee is bound.

11. Entire Agreement . This Agreement constitutes the full and entire understanding and agreement of the parties with regard to the subjects hereof and supersedes in their entirety all other or prior agreements, whether oral or written, with respect thereto. Notwithstanding the foregoing, this Agreement shall not be interpreted as superseding or replacing any provision of the Employee’s employment letter agreement with the Company, including without limitation any provision terminating severance benefits in the event of competition by the Employee.

12.     Partial Invalidity/Severability . The Company and the Employee agree that the covenants set forth in this Agreement shall be enforced to the fullest extent permitted by law. Accordingly if any court or arbitrator shall determine that such covenant is unenforceable for any reason, including, without limitation, because it covers too extensive a geographical area or survives too long a period of time, then the parties intend that such covenant shall be deemed to cover only such maximum geographical area and maximum period of time, if applicable, and/or shall otherwise be deemed to be limited in such manner,





as will permit enforceability by such court or arbitrator. In the event that any one or more of such covenants shall, either by itself or together with other covenants, be adjudged to go beyond what is reasonable in all the circumstances for the protection of the interests of the Company and its shareholders, but would be adjudged reasonable if any particular covenant or covenants or parts thereof were deleted, restricted, or limited in a particular manner, then the said covenants shall apply with such deletions, restrictions, or limitations, as the case may be. The Company and the Employee further agree that the covenants set forth in this Agreement are reasonable in all circumstances for the protection of the legitimate interests of the Company and its shareholders.

13.     Governing Law and Venue . This Agreement shall be governed by and interpreted under and in accordance with the laws of the State of Oregon. Venue for enforcement of any terms of this Agreement shall be in the state or federal courts for the State of Oregon.

The parties have duly executed this Noncompetition and Nonsolicitation Agreement as of the date first above written.

COMPANY:                        EMPLOYEE:

Craft Brew Alliance, Inc.



By: /s/Andrew J. Thomas                   /s/ J. Scott Mennen        
Name: Andrew J. Thomas                Name: J. Scott Mennen
Title: Chief Executive Officer    





Exhibit 10.14
CBALOGOA07.JPG


June 20, 2016

Derek Hahm
Craft Brew Alliance, Inc.
929 North Russell Street
Portland, Oregon 97227
Re:     Employment Agreement
Dear Derek:
This letter amends and supersedes any prior formal or informal agreement regarding your employment by Craft Brew Alliance, Inc. (the "Company"), with the exception of any confidentiality, noncompetition, and/or nonsolicitation agreement(s) you have entered into with the Company.
This letter constitutes your Employment Agreement (this "Agreement") with the Company, effective July 1, 2016 (the "Effective Date"). You and the Company are collectively referred to in this Agreement as "the Parties" (or individually as a "Party"). This Agreement sets forth the terms and conditions of your continued employment with the Company as its Vice President, Chief of Staff as of the Effective Date. Capitalized terms not otherwise defined in the body of this Agreement have the meanings set forth on Exhibit A.
1. Term
The term of this Agreement shall be three years, from July 1, 2016, through June 30, 2019 (the "Contract Term"), subject to Section 3 of this Agreement. In the event that the Company experiences a Change in Control Event, the Contract Term will extend to the later of (a) the first anniversary of the Change in Control Event or (b) the date set forth in the preceding sentence. In the event of a termination by either Party without Cause or Good Reason on or before the end of the Contract term, the terminating Party shall provide the other Party with at least 60 days' written notice of termination.
2. Compensation and Benefits
2.1     Base Compensation
As of the Effective Date, your annual base salary rate is $215,000, subject to standard tax withholdings and other payroll deductions. Your base salary level will be reviewed annually for adjustment by the Compensation Committee of the Company's Board of Directors (the "Board"), with salary adjustments, if any, generally made effective as of January 1.
2.2      Short-Term Incentive Compensation
You will be eligible for short-term incentive ("STI") compensation under the Company's Annual Cash Incentive Bonus Plan. For 2016, your total STI target amount is $86,000. For subsequent years, the performance targets and STI target amounts will be determined annually by the Compensation Committee.
2.3     Long-Term Incentive Compensation
You will also be eligible to participate in the Company's 2014 Stock Incentive Plan as determined by the Compensation Committee.
2.4     Employee Benefits
You are eligible to participate in employee benefit programs made available to the Company's executive officers. You will receive paid time off consistent with the policies for executive officers of the Company.





3. Termination & Severance
3.1     Termination During Contract Term
Except as provided in Section 3.2, in the event that (a) the Company terminates your employment effective on a date prior to or as of the end of the Contract Term for any reason other than "Cause" or (b) you terminate your employment prior to or as of the end of the Contract Term due to "Good Reason," the Company will continue to pay you your then current base salary for 12 months from your termination date (the "Severance Period"). The severance payments under this paragraph shall not exceed two times the lesser of (y) the sum of your annualized compensation based upon your annual salary in the year preceding the year in which your employment is terminated (adjusted for any increase during that year that was expected to continue indefinitely if your employment had not terminated) and (z) the applicable dollar limit under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), for the calendar year in which your employment is terminated.
In addition, if you become entitled to severance pay under the first paragraph of this Section 3.1, the Company will also make a lump sum payment to you within 45 days of your termination of employment in an amount equal to the amount necessary to pay your COBRA premiums for continuation of group health insurance coverage during the Severance Period based on such premiums in effect on the date of your termination.
3.2     Termination in Connection with a Change in Control Event.
In the event that (a) the Company experiences a Change in Control Event and (b) either (i) the Company terminates your employment effective on a date prior to the first anniversary of the Change in Control Event for any reason other than "Cause" or (ii) you terminate your employment prior to the first anniversary of the Change in Control Event due to "Good Reason," and (c) in the case of a Change in Control Event described in Paragraph (c) of the definition of Change in Control Event, you represent and warrant that, as of the termination of your employment, you have not entered into any understanding or arrangement with the acquiring individual or entity regarding future employment, the Company will make a lump sum payment to you within 45 days of the termination of your employment equal to the sum of: (A) your then current monthly base salary multiplied by 18; (B) an amount equal to the amount necessary to pay your COBRA premiums for continuation of group health insurance coverage for 18   months based on such premiums in effect on the date of your termination; and (C) your full target STI bonus amount for the year in which your termination of employment occurs. The payments under this Section 3.2 are in lieu of the benefits under Section 3.1, and in no event will you be paid benefits under both Sections 3.1 and 3.2.
Notwithstanding the foregoing, in the event that (A) the Company experiences a Change in Control Event described in Paragraph (c) of the definition of Change in Control Event and (B) prior to the date of payment under this Section 3.2 you accept a position with the acquirer of the Company's assets, which in any other Change in Control Event would not be deemed Good Reason under Section 3.2(b)(ii), all benefits under Sections 3.1 and 3.2 will be forfeited.
The Parties agree and acknowledge that their intent is that none of the benefits payable under this Section 3.2 shall constitute an "excess parachute payment" under Section 280G of the Code that would give rise to an excise tax under Section 4999 of the Code or a loss of deduction under Section 280G of the Code. To give effect to that intent, and notwithstanding any other provision of this Agreement to the contrary, the Parties specifically agree that the aggregate amount of the benefits payable to you or for your benefit that constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code, under this Agreement or any other agreement or arrangement between you and the Company, shall not exceed 2.99 multiplied by your "base amount," as defined in Section 280G(b)(3) of the Code (the "Maximum Benefit Amount"). The Company shall make all calculations and determinations under this Section 3.2 (including application and interpretation of the Code and related regulatory, administrative and judicial authorities) in good faith, which calculations and determinations shall be binding on you absent manifest error. The Company shall provide you with a reasonable opportunity to review and comment on the Company's calculations. If at any time it is determined that the amount paid to you or for your benefit pursuant to this Agreement or any other agreement or arrangement between you and the Company exceeded the Maximum Benefit Amount, you shall immediately repay the excess to the Company, together with interest from the date of original payment to you at the discount rate applicable under Section 280G(d)(4) of the Code.
3.3     Termination at End of Contract Term
Following the Contract Term, if the Parties have not negotiated a replacement agreement or renewal of this Agreement, this Agreement shall terminate (except with respect to any obligations that expressly extend beyond termination) and employment may continue on an at-will basis with either Party free to end the employment relationship for any reason at any time, with or without Cause, Good Reason or notice, and without severance obligations.
3.4     Release of Claims
The Company will require you to execute an appropriate general release of all claims that you may have relating to your employment with the Company and termination of your employment as a condition to your receipt of any





severance payments or other benefits under this Agreement other than those required by law or provided to employees generally. If such general release of claims is not executed within 30 days following the date your employment with the Company is terminated, all severance payments and other benefits payable after such 30‑day period will be forfeited, and you agree to repay any severance payments, and the value of other benefits, paid to you during such period.
3.5     Competition During Severance Period
If, during the Severance Period, you become employed or associated with a brewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or the portion of the Company's business relating to alcoholic beverages, your severance payments and benefits under Section 3.1 will terminate as of the effective date of such employment or association. The foregoing does not supersede or replace any provision of any noncompetition agreement between you and the Company.
4. Code Section 409A
For purposes of this Agreement, a termination of your employment will be deemed to occur only when or if there has been a "separation from service" as such term is defined in Treasury Regulation Section 1.409A-1(h). The severance payments and other benefits under this Agreement are intended to be exempt from the requirements of Section 409A of the Code by reason of all payments under this Agreement being either "short-term deferrals" within the meaning of Treasury Regulation Section 1.409A-1(b)(4) or separation pay due to involuntary separation from service under Treasury Regulation Section 1.409A-1(b)(9)(iii). All provisions of this Agreement shall be interpreted in a manner consistent with preserving these exemptions.
5. Severability
In the event that a court of competent jurisdiction determines that a provision of this Agreement is unenforceable or not fully enforceable, the Parties agree that this Agreement is severable and should be enforced to the full extent allowed by law to best effectuate the intentions of the Parties.
6. Code of Conduct
By your signature below, you agree to comply with the Company's Code of Conduct and Ethics as in effect from time to time, and to be subject to the Company's policies and procedures in effect from time to time for senior executives of the Company.


We appreciate your continued efforts on behalf of the Company and look forward to having you as a member of our team for years to come.
Sincerely,
/s/ Andrew J. Thomas
Andrew J. Thomas
Chief Executive Officer
Acknowledged and Agreed:
/s/ Derek Hahm             Date: June 28, 2016

Derek Hahm


Attachment: Exhibit A (Definitions

 
    






EXHIBIT A
Definitions
1.    " Cause " shall mean that (a) you have engaged in conduct which has substantially and adversely impaired the interests of the Company, or would be likely to do so if you were to remain employed by the Company; (b) you have engaged in fraud, dishonesty or self-dealing relating to or arising out of your employment with the Company; (c) you have violated any criminal law relating to your employment or to the Company; (d) you have engaged in conduct which constitutes a material violation of a significant Company policy or the Company's Code of Conduct and Ethics as in effect from time to time, including, without limitation, violation of policies relating to discrimination, harassment, use of drugs and alcohol and workplace violence; or (e) you have repeatedly refused to obey lawful directions of the Board or the Company's Chief Executive Officer.
2.    " Change in Control Event " shall mean the occurrence of any of the following events:
(a)    Any one person or entity, or more than one person or entity acting as a group (as defined in Treasury Regulation Section 1.409A-3), acquires ownership of stock of the Company that, together with stock previously held by the acquirer, constitutes more than 50 percent of the total fair market value or total voting power of the Company's stock. If any one person or entity, or more than one person or entity acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the Company's stock, the acquisition of additional stock by the same person or entity or persons or entities acting as a group does not cause a Change in Control Event. An increase in the percentage of stock owned by any one person or entity, or persons or entities acting as a group, as a result of a transaction in which the Company acquires its stock in exchange for property, is treated as an acquisition of stock; or
(b)    A majority of the members of the Board is replaced during any 12‑month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of appointment or election; or
(c)    Any one person or entity, or more than one person or entity acting as a group, acquires (or has acquired during the 12‑month period ending on the date of the most recent acquisition by that person or entity or persons or entities acting as a group) assets from the Company that have a total gross fair market value equal to at least 75 percent of the total gross fair market value of all the Company's assets immediately prior to the acquisition or acquisitions. Gross fair market value means the value of the Company's assets, or the value of the assets being disposed of, without regard to any liabilities associated with these assets.
In determining whether a Change in Control Event has occurred, the attribution rules under Section 318 of the Code will apply to determine stock ownership. The stock underlying a vested option is treated as owned by the individual who holds the vested option, and the stock underlying an unvested option is not treated as owned by the individual who holds the unvested option.
3.    " Good Reason " shall mean the occurrence of one or more of the following events without your consent: (a) a material reduction in your base compensation; (b) a material reduction in your authority, duties, or responsibilities as the Company's Vice President, Chief of Staff; (c) a material reduction in the authority, duties, or responsibilities of the person or persons to whom you report (including, if applicable, a requirement that you report to a Company officer or employee instead of reporting directly to the Board); or (d) a relocation of your principal office to a location that is more than 100 miles from Portland, Oregon; provided, however, that "good reason" shall only be deemed to have occurred if: (i) within 90 days after the initial existence of the circumstances constituting "Good Reason," you provide the Company with a written notice describing such circumstances; (ii) the Company fails to cure the circumstances within 30 days after the Company receives your notice; and (iii) you terminate your employment with the Company within 90 days of the date of your notice.






Exhibit 10.16

                            
CRAFT BREW ALLIANCE, INC.
AMENDED AND RESTATED
ANNUAL CASH INCENTIVE PLAN

THIS AMENDED AND RESTATED ANNUAL CASH INCENTIVE PLAN (the "Plan") was initially adopted by Craft Brew Alliance, Inc., a Washington corporation ("Corporation"), effective May 20, 2015, and amended and restated effective February 21, 2019, for awards made in 2019 and thereafter. Capitalized terms that are not otherwise defined herein have the meanings set forth in Section 6.
SECTION 1.
PURPOSE
The purpose of the Plan is to attract and retain capable executives, to motivate selected key employees of the Corporation to attain and maintain high standards of performance, and to encourage executives to achieve specific business goals established by the Corporation.
SECTION 2.
ELIGIBILITY
Any key executive of the Corporation who is designated by the Committee as being eligible to participate in the Plan will be eligible to participate in the Plan.
SECTION 3.
INCENTIVE AWARDS
3.1    Target Award . Each Award opportunity will specify a targeted incentive opportunity (the "Target Award") expressed either as a dollar amount or as a percentage of a Participant's regular annualized base salary.
3.2    Incentive Awards . The amount paid for each Award will be equal to the product of the Total Success Percentage for the Participant for the Plan Year multiplied by the Participant’s Target Award for the Plan Year. However, in no event may an individual Participant's total payment received with respect to Awards for a single Plan Year exceed the lesser of (i) 125 percent of the Participant's Target Award, or (ii) $800,000.
3.3    Performance Goals . The Committee may establish performance Goal(s) applicable to each Award.
3.4    Weighting of Goals . Each Goal will be weighted with a Weighting Percentage so that the total Weighting Percentages for all Goals used to determine a Participant's Award is 100 percent.
3.5    Achievement Percentage . Each Goal will also specify the Achievement Percentages (ranging from 0 to 125 percent) to be used in computing the payment of an Award based upon the extent to which the particular Goal is achieved. Achievement Percentages for a particular Goal may be based on:
(a) An "all or nothing" measure that provides for a specified Achievement Percentage if the Goal is met, and a zero Achievement Percentage if the Goal is not met;
(b) Several levels of performance or achievement (such as a threshold level, a target level, and a maximum level) that each correspond to a specified Achievement Percentage; or
(c) Continuous or numerical measures that define a sliding scale of Achievement Percentages.
3.6    Computation of Awards . As soon as possible after the completion of each Plan Year, a computation will be made for each Participant of:
(d) The extent to which Goals were achieved and the corresponding Achievement Percentages for each Goal:
(e) A Weighted Achievement Percentage for each Goal equal to the product of the Achievement Percentage and the Weighting Percentage for that Goal;
(f) The Total Success Percentage equal to the sum of all the Weighted Achievement Percentages for all the Participant's Goals; and
(g) An Award amount equal to the product of the Total Success Percentage and the Participant's Target Award.
3.7    Right to Receive Award . A Participant must continue Employment with Corporation through the date an Award is paid (the "Payment Date") in order to be entitled to receive the Award. Awards may be subject to such additional requirements regarding length of employment as may be specifically approved by the Committee. If a Participant terminates Employment with Corporation before the Payment Date for a reason other than death or Disability, the Participant will not be





entitled to any Award for the Plan Year. If a Participant terminates Employment with Corporation before the Payment Date due to death or Disability, the Participant or the Participant’s beneficiary or estate may be entitled to receive a prorated Award, as finally determined under the Plan.
3.8    Payment of Awards . Each Participant's Award will be paid in cash in a lump sum within 30 days after the amount of the Award has been determined, and in no case later than the 15th day of the third month following the end of the calendar year in which the Award is no longer subject to substantial risk of forfeiture as that term is defined in Treasury Regulation Section 1.409A-1(d). Payment of any Award may be made subject to such additional restrictions or limitations, in addition to those related to the attainment of performance goals, as may be expressly provided for by the Committee and made applicable to such Award.

SECTION 4.
ADMINSTRATION
The Plan will be administered by the Committee. Subject to the terms and conditions of the Plan, the Committee is authorized, in its sole discretion, to: select Employees who will be granted Awards; approve the Target Awards for all Participants; approve Goals and Achievement Percentages for the Goals; construe and interpret the Plan and any Award; and make any other determinations that it believes necessary or advisable for the administration of the Plan.
SECTION 4.
MISCELLANEOUS
5.1    Nonassignability of Benefits . A Participant's benefits under the Plan cannot be sold, transferred, anticipated, assigned, pledged, hypothecated, seized by legal process, subjected to claims of creditors in any way, or otherwise disposed of.
5.2    No Right of Continued Employment . Nothing in the Plan will confer upon any Participant the right to continued Employment with Corporation or interfere in any way with the right of Corporation to terminate the person's Employment at any time.
5.3    Withholding . The Corporation may withhold from any payment under the Plan any amount required to satisfy applicable tax and other legally or contractually required withholdings.
5.4    Code Section 409A. This Plan is intended to be exempt from the requirements of Section 409A of the Code by reason of all payments under this Plan being "short-term deferrals" within the meaning of Treasury Regulation Section 1.409A-1(b)(4), and all provisions of this Plan shall be interpreted in a manner consistent with preserving this exemption.
5.5    Clawback . In the event that there is a subsequent change in the Corporation's audited financial statements that affects the extent to which Goals were satisfied, a Participant will be required to repay to the Corporation any amount that was previously paid to the Participant to the extent that a given Achievement Percentage previously determined by the Committee was not, after such change, achieved. Compensation paid to a Participant pursuant to an Award under this Plan will also be subject to recoupment, to the extent the amount to be recovered would be greater, in accordance with any clawback policy of the Corporation in effect from time to time, as well as any similar requirement of applicable law, including without limitation the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002, and rules adopted by a governmental agency or applicable securities exchange under any such law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to resign for "good reason" or "constructive termination" (or similar term) under any agreement with Corporation or an affiliate.
5.6    Governing Law . Except with respect to references to the Code or federal securities laws, the Plan and all actions taken thereunder will be governed by and construed in accordance with the laws of the state of Washington, without regard to principles of conflict of laws.
5.7    Amendments and Termination . The Committee has the power to terminate or to amend this Plan at any time and in any manner that it may deem advisable, provided that the termination or amendment of the Plan will not adversely affect the rights of a Participant under an Award granted under the Plan.

SECTION 6
DEFINITIONS
For purposes of this Plan, the following terms have the meanings set forth in this
Section 6:
" Achievement Percentage " means a percentage (from 0 to 125 percent) corresponding to a specified level of achievement or performance of a particular Goal, as provided in Section 3.5.
" Award " means an incentive award under the Plan.
" Code " means the Internal Revenue Code of 1986, as amended.





" Committee " means the Compensation Committee of the Board.
" Corporation " means Craft Brew Alliance, Inc., a Washington corporation.
" Disability " means the condition of being permanently unable to perform Participant's duties for Corporation by reason of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of at least 12 months.
" Employee and Employment " both refer to service by Participant as a full-time or part-time employee of Corporation, and include periods of illness or other leaves of absence authorized by Corporation.
" Goal " means an element of performance used to determine Awards under the Plan as provided in Section 3.3.
" Participant " means an eligible employee selected to participate in the Plan for all or a portion of a Plan Year.
" Plan Year " means a calendar year.
" Target Award " means the targeted incentive award for a Participant for a Plan Year as provided in Section 3.1.
" Total Success Percentage " means the sum of the Weighted Achievement Percentages for all of the Goals for an Award.
" Weighted Achievement Percentage " means the product of the Achievement Percentage and the Weighting Percentage for a Goal as provided in Section 3.6.
" Weighting Percentage " means a percentage (from 0 to 100 percent) applied to weight a Goal as provided in Section 3.4.





EXHIBIT 10.19
EXECUTION VERSION


FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this “ Amendment ”), dated as of October 10, 2018, 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.

W I T N E S S E T H

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 (a) increase the Revolving Commitment to $45,000,000, (b) extend the Maturity Date with respect to the Revolving Facility and (c) amend certain other provisions of the Credit Agreement; and

WHEREAS , the Borrower proposes to acquire (a) all of the remaining membership interests of Wynwood Brewing Company LLC, a Florida limited liability company, pursuant to that certain Membership Interest Purchase Agreement to be dated on or about October 10, 2018 (the “ Wynwood Acquisition ”), (b) substantially all of the assets of Appalachian Mountain Brewery, Inc., a Florida corporation, FarmtoFlame, LLC, a North Carolina limited liability company, Appalachian Mountain Brewery, LLC, North Carolina limited liability company, Appalachian Mountain Brewery, LLC, North Carolina limited liability company Appalachian Mountain Brewery Marketing, LLC, North Carolina limited liability company, pursuant to that certain Asset Purchase Agreement to be dated on or about October 10, 2018 (the “ ABM Acquisition ”), and (c) substantially all of the assets of Cisco Brewers, Inc., a Massachusetts corporation, related to the Cisco Brewers brands, pursuant to that certain Asset Purchase Agreement to be dated on or about October 10, 2018 (the “ Cisco Acquisition ”, and, collectively with the Wynwood Acquisition and the ABM Acquisition, the “ ABM Acquisition ”) (the “ Specified Acquisitions ”); and

WHEREAS , the Lender is willing to (i) make such amendments to the Credit Agreement and (ii) consent to the Specified Acquisitions, in each case 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:

Beneficial Ownership Certification ” means a certification regarding beneficial ownership required by the Beneficial Ownership Regulation.

Beneficial Ownership Regulation ” means 31 C.F.R. § 1010.230.

Benefit Plan ” means any of (a) an “employee benefit plan” (as defined in ERISA) that is subject to Title I of ERISA, (b) a “plan” as defined in Section 4975 of the Code or (c) any Person whose assets include (for purposes of ERISA Section 3(42) or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) the assets of any such “employee benefit plan” or “plan”.






Cisco Acquisition ” means the acquisition of certain of the assets of Cisco Brewers, Inc., a Massachusetts corporation, related to the Cisco Brewers brands, pursuant to that certain Asset Purchase Agreement to be dated on or about October 10, 2018.

First Amendment Date ” means October 10, 2018.

Flood Insurance Laws ” means, collectively, (a) the National Flood Insurance Act of 1968, (b) the Flood Disaster Protection Act of 1973, and (c) the National Flood Insurance Reform Act of 1994, and any regulations promulgated pursuant thereto, each as amended and together with any successor law of such type.

1.2     Amendment to Defined Terms. The following defined terms set forth in Section 1.01 of the Credit Agreement are hereby amended and restated in their entirety to read as follows:

ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

Maturity Date ” means (a) with respect to the Revolving Facility, September 30, 2023 and (b) with respect to the Term Loan, September 30, 2023; provided , however , that, in each case, if such date is not a Business Day, the Maturity Date shall be the next preceding Business Day.

Revolving Commitment ” means the Lender’s obligation to (a) make Revolving Loans to the Borrower pursuant to Section 2.01(b) and (b) issue Letters of Credit for the account of the Borrower pursuant to Section 2.03 . The Revolving Commitment on the Closing Date shall be
$45,000,000.

1.3     Amendment to definition of “Permitted Acquisition” . The definition of “Permitted Acquisition” set forth in Section 1.01 of the Credit Agreement is hereby amended by adding the following new paragraph to the end of such definition to read in its entirety as follows:

“Subject to the satisfaction of clauses (a) through (f) above, the Cisco Acquisition shall be deemed to be a “Permitted Acquisition” hereunder.”

1.4     Amendment to Section 2.05(d) . Clause (d) of Section 2.05 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“(d) Reducing Revolving Commitments . On the last day of each fiscal quarter commencing with the first full fiscal quarter after the first anniversary of the First Amendment Date, the Revolving Facility shall, in each instance, be reduced by $750,000.”

1.5     Amendment to Article V . Article V of the Credit Agreement is hereby amended by adding a new Section 5.21 thereto to read in its entirety as follows:
5.21      Beneficial Ownership Certification .

As of the First Amendment Date, the information included in the Beneficial Ownership Certification, if applicable, is true and correct in all respects.”

1.6     Amendment to Section 6.07 .     Section 6.07(a) of the Credit Agreement is hereby amended by amending clause (ii) thereof to read as follows:

“(ii) if at any time any portion of any structure on the Russell Street Property is insurable against casualty by flood and is located in a Special Flood Hazard Area under the Flood Insurance Laws, as amended, a flood insurance policy on the structure and the personal property owned by the Borrower or other applicable Loan Party located within the structure and acting as collateral under this Agreement, in form and amount acceptable to the Lender but in no amount less than the amount sufficient to meet the requirements of the Flood Insurance Laws as such requirements may from time to time be in effect.”






1.7     Amendment to Article VI . Article VI of the Credit Agreement is hereby amended by adding a new Section 6.21 thereto to read in its entirety as follows:

“6.21      Beneficial Ownership Certification

Promptly following any request therefor, provide information and documentation reasonably requested by the Lender for purposes of compliance with applicable “know your customer” and anti-money-laundering rules and regulations, including, without limitation, the PATRIOT Act and the Beneficial Ownership Regulation.”

1.8     Amendment to Section 7.03(e) . Clause (e) of Section 7.03 of the Credit Agreement is hereby amended by deleting the reference to “on the date hereof” and replacing with “on the First Amendment Date”.

1.9     Amendment to Section 7.03(g) . Section 7.03 of the Credit Agreement is hereby amended and restated to read in its entirety as follows:

“(g) so long as no Default exists or would result therefrom, Investments (other than an Acquisition) in other craft brewers in an aggregate amount not to exceed $10,000,000 at any time outstanding; and”

1.10     Amendment to Section 7.11(a) . Section 7.11(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“(a) Consolidated Leverage Ratio . Permit the Consolidated Leverage Ratio at any time during any Measurement Period ending as of the end of any fiscal quarter of the Borrower to be greater than 3.50:1.00.”

1.11     Amendment to Article VII . Article VII of the Credit Agreement is hereby amended by adding a new Section 7.17 thereto to read in its entirety as follows:

7.17      ERISA .

The Borrower represents and warrants as of the First Amendment Date that the Borrower is not and will not be using “plan assets” (within the meaning of 29 CFR § 2510.3-101, as modified by Section 3(42) of ERISA) of one or more Benefit Plans in connection with the Loans, the Letters of Credit or the Commitments.”

1.12     Amendment to Schedule 1.01(b) . Schedule 1.01(b) of the Credit Agreement is hereby amended by replacing it with Schedule 1.01(b) of the Credit Agreement attached hereto as Annex A .

1.13     Amendment to Schedule 7.03(e). Schedule 7.03(e) of the Credit Agreement is hereby amended by replacing it with Schedule 7.03(e) of the Credit Agreement attached hereto as Annex B .

ARTICLE II CONSENT

2.1     Consent to Specified Acquisitions . Each of the Specified Acquisitions shall be deemed to be a Permitted Acquisition pursuant to, and in accordance with, the Credit Agreement so long as, with respect to each such Specified Acquisition:

(a)
no Default shall then exist or would exist after giving effect thereto;

(b) the Loan Parties shall demonstrate to the reasonable satisfaction of the Lender that, after giving effect to such Specified Acquisition on a Pro Forma Basis, the Loan Parties are in Pro Forma Compliance;

(c) the Lender shall have received (or shall receive in connection with the closing of such Specified Acquisition) a first priority perfected security interest in all property (including, without limitation, Equity Interests) acquired with respect to the Target in accordance with the terms of Section 6.13 of the Credit Agreement and the Target, if a Person, shall have executed a Guaranty Joinder and a Security Agreement Joinder in accordance with the terms of Section 6.13 of the Credit Agreement;

(d) such Acquisition shall not be a “hostile” Acquisition and shall have been approved by the board of directors (or equivalent) and/or shareholders (or equivalent) of the applicable Loan Party and the Target; and






(e) after giving effect to such Specified Acquisition and any Borrowings made in connection therewith, the aggregate principal amount of Revolving Loans available to be borrowed under Section 2.01(b) of the Credit Agreement shall be at least $5,000,000.

ARTICLE III CONDITIONS TO EFFECTIVENESS

3.1     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) Officer’s Certificate . The Lender shall have received a certificate of a Responsible Officer of each Loan Party dated the Amendment Effective Date, (i) certifying as to the Organization Documents of such Loan Party (which, to the extent filed with a Governmental Authority, shall be certified as of a recent date by such Governmental Authority), (ii) the
resolutions of the governing body of such Loan Party, (iii) the good standing, existence or its equivalent of such Loan Party and (iv) of the incumbency (including specimen signatures) of the Responsible Officers of such Loan Party.

(c) Legal Opinion . The Lender shall have received an opinion or opinions of counsel for the Loan Parties (including, if requested by the Lender, local counsel opinions), dated the Amendment Effective Date and addressed to the Lender which shall be in form and substance satisfactory to the Lender.

(d)
KYC Information .

(i) Upon the reasonable request of the Lender made at least five (5) days prior to the Amendment Effective Date, the Borrower shall have provided to the Lender, and the Lender shall be reasonably satisfied with, the documentation and other information so requested in connection with applicable “know your customer” and anti- money-laundering rules and regulations, including, without limitation, the PATRIOT Act, in each case at least two (2) days prior to the First Amendment Date.

(ii) At least two (2) days prior to the Amendment Effective Date, any Borrower that qualifies as a “legal entity customer” under the Beneficial Ownership Regulation shall deliver, to the Lender that so requests, a Beneficial Ownership Certification in relation to such Borrower.

(e)
Real Property Collateral .

(i) The Lender shall have received, in form and substance satisfactory to the Lender, a modification to the Russell Street Property Mortgage.

(ii) To the extent not previously delivered, the Lender shall have received, in form and substance satisfactory to the Lender, completed “Life-of-Loan” Federal Emergency Management Agency Standard Flood Hazard Determination with respect to the Russell Street Property (together with a notice about special flood hazard area status and flood disaster assistance duly executed by each Loan Party relating thereto.

(f) 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.

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

(h) 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 IV MISCELLANEOUS

4.1     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.

4.2     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 6.01(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.

(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.

(h) Each of the Specified Acquisitions complies with the requirements set forth in Section 2.1 of this Amendment.

4.3     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.

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

4.5     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.

4.6     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.






4.7     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.

4.8     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.

4.9     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.

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

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

4.12     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]






























IN WI1NESS 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 BREWING CO., LLC, as a Guarantor
By:     /s/ Andrew J. Thomas    
Name:     Andrew J. Thomas
Title:    Manager

KONA BREWERY LLC, as a Guarantor
By:     /s/ Andrew J. Thomas    
Name: Andrew J. Thomas
Title:    Manager
                        
CRAFT VENTURES, LLC, as a Guarantor
By:      /s/ Andrew J. Thomas    
Name: Andrew J. Thomas
Title: Chief Executive Officer

WYNWOOD BREWING COMPANY, as a Guarantor
By:      /s/ Andrew J. Thomas    
Name: Andrew J. Thomas
Title: Manager
























Craft Brew Alliance, Inc.
First Amendment to Amended and Restated Credit Agreement
Signature Page







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


















































Craft Brew Alliance, Inc.
First Amendment to Amended and Restated Credit Agreement
Signature Page







Annex A

Schedule 1.01(b)

Andrew J. Thomas, Chief Executive Officer
Marcus H. Reed, Secretary
Edwin A. Smith, Corporate Controller and Principal Accounting Officer
Shannon Grosse, Senior Director of Financial Planning and Analysis





























Annex B

Schedule 7.03(e)

None.




Exhibit 10.29

February 12, 2019
J. Scott Mennen
Chief Operating Officer
Craft Brew Alliance, Inc.
929 N. Russell Street
Portland, Oregon 97227
Re: Contract Brewing Agreement between Anheuser-Busch Companies, LLC ("ABC") and Craft Brew Alliance, Inc. ("CBA") dated as of January 30, 2018 ("Contract Brewing Agreement")
Dear Scott:
The Contract Brewing Agreement expired by its terms on December 31, 2018. The parties have agreed to renew the Contract Brewing Agreement effective as of January 1, 2019 for a term of one calendar year. All other terms and conditions of the Contract Brewing Agreement shall remain in full force and effect.
Please indicate your agreement to the foregoing by executing and delivering this letter agreement.
Very truly yours,

/s/ Nick Mills

Nick Mills
Vice President, Supply,
The High End


Craft Brew Alliance, Inc. hereby agrees to the foregoing.


/s/J. Scott Mennen                 
Chief Operating Officer
Craft Brew Alliance, Inc.















CONTRACT BREWING AGREEMENT



This Contract Brewing Agreement (this "Agreement") is entered into by and between Anheuser-Busch Companies, LLC ("ABC") and Craft Brew Alliance, Inc. ("CBA"), as of this 30th day of January, 2018.
WHEREAS, ABC is the parent of a number of craft breweries ("Subsidiaries") which brew a variety of malt beverage products.
WHEREAS, CBA owns and operates breweries in Portland, Oregon and Portsmouth, New Hampshire (the "Breweries").
WHEREAS, CBA utilizes an off-site warehouse located in Portsmouth, New Hampshire (the "Warehouse") from time to time to store products.
WHEREAS, the Subsidiaries do not have adequate brewing capacity to brew certain of their products and in some circumstances ABC has determined that use of an Anheuser-Busch brewery to brew such products would be inefficient.
WHEREAS, CBA has agreed to brew malt beverage products of the Subsidiaries at its Breweries pursuant to the terms and conditions hereof.
WHEREAS, as a result of ABC's brewing of CBA products, the parties are familiar with each other's brewing practices and this familiarity would expedite CBA's brewing of products for ABC.
WHEREAS, ABC and CBA have agreed that CBA will brew certain products during 2018 and after such period the parties shall review the arrangement to determine whether it is mutually beneficial and whether it would be advantageous for CBA to continue to brew products of the Subsidiaries.
NOW THEREFORE, for the mutual promises set forth herein, the parties hereto agree as follows:
1.
Brewing of Products .
(a) "Product" means a malt beverage of a Subsidiary brewed pursuant to a specific recipe and packaged pursuant to ABC's specifications pursuant to the terms hereof.
(b) Pursuant to the terms and conditions of this Agreement, CBA agrees to brew the Products and provide such other services as are described in this Agreement.
(c) ABC will deliver to CBA the recipes and specifications for each Product; the anticipated annual volume of each Product it desires to have brewed by CBA; and the Brewery at which it desires the brewing thereof.
(d) CBA will deliver to ABC its good faith statement as to (i) the actual per barrel costs to be incurred by it in brewing each Product ("Actual Cost"), provided that such statement will reflect only such costs as would not be incurred by CBA if CBA did not brew such Product and are incremental to the existing operations of the Brewery, (ii) any capital costs reasonably required of CBA to brew a Product ("Required Capital"), and (iii) any costs incurred by CBA in connection with creation or modification of graphics and labels for the cans and bottles for the Products as requested by ABC.
(e) At the request of ABC, CBA shall provide reasonable verification, with reasonable detail for its statement of the Actual Costs and Required Capital and shall engage in reasonable discussions with ABC concerning such amounts.

2




(f) The definitive price per barrel per Product to be paid by ABC to CBA for providing the services hereunder with respect to any Product that is not a Small Batch Product shall be (i) the Actual Cost as determined prior to production plus $* if the annual volume of such Product is less than 50,000 barrels; (ii) the Actual Cost as determined prior to production plus $*, if the annual volume of such Product is 50,000 barrels or more but less than 75,000 barrels; and (iii) the Actual Cost as determined prior to production plus $* if the annual volume of such Product is 75,000 barrels or more.
(g) The definitive price per barrel per Product to be paid by ABC to CBA for providing the services hereunder with respect to any Small Batch Product shall be (i) the Actual Cost plus $* if the annual volume of such Product is less than 50,000 barrels; (ii) the Actual Cost plus $*, if the annual volume of such Product is 50,000 barrels or more but less than 75,000 barrels; and (iii) the Actual Cost plus $ * if the annual volume of such Product is 75,000 barrels or more.
(h) A Product shall be considered to be a "Small Batch Product" if annual production of the Product is not expected to exceed the output produced using only one fermenting tank of such Product.
2. Orders and Delivery of the Products .
(a) ABC may from time to time issue orders for any Product. Each such order shall specify the quantity of such Product, the SKU for such Product, and the date the Product is to be delivered. The quantity to be brewed pursuant to any order shall be an integral multiple of the output of one fermenting tank, and the date on which the Product is to be delivered shall not be less than eight weeks after the order is received by CBA.
(b) CBA shall brew, package and palletize the Product, make the Product available at the Brewery docks or the Warehouse and, at least five business days prior to the date on which the Product will be made available, notify ABC of the date and time at which the Product will be available at such location. ABC will pick up the Product at the Brewery docks or Warehouse not later than five business days after the date the Product is made available. CBA will provide reasonable assistance to ABC in its pick up of the Product. Pursuant to procedures agreed between the parties, ABC shall provide adequate cooperage (and pallets therefor) to be used by CBA for providing Products to ABC.
(c) Title to the Products and risk of loss with respect thereto will pass from CBA to ABC when the Products are made available at the Brewery's docks or the Warehouse.






















3




* Confidential information has been omitted and confidential treatment has been requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
3. Payment .
(a) The preliminary price to be paid to CBA for each Product shall be based on the assumption that the annual volume of such Product will be as specified pursuant to Section 1(c). If the actual annual volume of any Product is not consistent with such specification, within 30 days after the end of the term hereof the price to be paid by ABC will be adjusted to reflect the actual annual volume and ABC shall pay CBA, or CBA shall pay to ABC, as appropriate, the difference between the definitive price and the preliminary price. Any payments due pursuant to this Section shall be paid by the applicable party within 30 days after the difference has been agreed to by the parties.
(b) CBA shall pay all federal excise taxes applicable to the Product with respect to each order of Product and such payment is reflected in the price to be paid by ABC as described above.
(c) ABC shall reimburse CBA for any costs incurred by CBA for Required Capital. ABC shall reimburse CBA for any costs incurred by CBA in connection with creation or modification of graphics and labels for the cans and bottles for the Products as requested by ABC.
(d) Upon making Products available to ABC, CBA will invoice ABC for such Product. CBA will include any Required Capital in the invoice for the Products to which the Required Capital relates.
(e) ABC will pay each invoice submitted by CBA within 30 days of ABC's receipt thereof.
4. Grant of License . Upon the terms and conditions hereinafter set forth, ABC hereby grants to CBA, on behalf of itself and the Subsidiaries, a non-exclusive, non-transferable license to use all intellectual property related to the brewing and packaging of the Products ("Intellectual Property"), but solely for the purposes of complying with its obligations hereunder. CBA shall not use the Intellectual Property in connection with any other purpose without ABC's prior written consent or as otherwise previously agreed between the parties. CBA acknowledges that its use of the Intellectual Property hereunder shall not create any right, title, or interest in or to the Intellectual Property other than as specified in this Section. All goodwill accruing as a result of the use of the Intellectual Property will inure to the benefit of ABC and the Subsidiaries.
5. Raw Materials . Subject to the following sentence, CBA shall obtain all raw materials required for the brewing of the Product, and the price to be paid by ABC hereunder reflects the cost of such raw materials. If brewing of any Product requires use of any raw material not used by CBA in the ordinary course of business, ABC will provide such raw material to CBA pursuant to procedures agreed upon between the parties.
6. Cancellation of a Product . ABC must promptly notify CBA in writing if, for the remainder of the term of this Agreement, ABC will not submit any additional orders for a certain Product to CBA. Upon receipt of such notice, CBA shall offer to ABC to purchase any materials acquired by CBA solely in order to produce such Product, the price for such purchase being the price paid by CBA therefor. If, within thirty days after such offer, ABC does not agree to purchase such materials, CBA is authorized to (a) destroy any such materials and (b) submit an invoice to ABC for the actual cost to CBA for such materials and the destruction thereof. ABC shall not be required to pay for any materials in excess of the materials reasonably required to produce the estimated annual volume of Products provided by ABC pursuant to Section 1(c) hereof.

4




7. Quality Control .
(a) CBA covenants that each Product (i) will be brewed in accordance with its recipe; (ii) will be free from defects in materials and workmanship and in compliance in all material respects with applicable federal and state laws and regulations; (iii) will be free from microbiological and any other contamination in accordance with the recipes and specifications and packaging for such Product; (iv) will be labelled in accordance with ABC's instructions; (v) will not be adulterated within the meaning of the Federal Food, Drug and Cosmetic Act as amended, and will comply in all material respects with the applicable provisions of the Code of Federal Regulations, as amended; and (vi) will be properly handled, stored and shipped if applicable until picked up by ABC The physical and sensory characteristics of each Product will be the same in all material respects throughout the term hereof.
(b) Prior to commercial production of any Product, CBA shall brew the Product for the purposes of sampling and testing by each of ABC and CBA. No Product shall be delivered unless each of ABC and CBA are satisfied with the quality of the Product and compliance with its recipe. ABC shall pay to CBA a fee of $5,000 for the brewing of each batch of a Product described in this subsection.
(c) ABC will provide CBA with assistance reasonably requested by CBA in connection with obtaining necessary governmental approvals and permits in connection with the brewing of the Products.
8. Term .
(a) The term of this Agreement will commence on the date first written above and, unless sooner terminated pursuant to the provisions of this Agreement, will continue in effect until December 31, 2018.
(b) Either party may terminate this Agreement immediately upon written notice, without prejudice to any other legal rights to which such terminating party may be entitled, upon the occurrence and during the continuance of any one or more of the following:
(i) material default by the other party in the performance of any of the provisions of this Agreement or any other agreement between the parties, which default is not cured within 30 days after written notice of default;
(ii) the making by the other party of an assignment for the benefit of creditors; or the commencement by the other party of a voluntary case or proceeding or the other party's consent to or acquiescence in the entry of an order for relief against such other party in an involuntary case or proceeding under any bankruptcy, reorganization, insolvency or similar law;
(iii) the appointment of a trustee or receiver or similar officer of any court for the other party or for a substantial part of the property of the other party, whether with or without the consent of the other party, which is not terminated within 60 days from the date of appointment thereof;
(iv) the institution of bankruptcy, reorganization, insolvency or liquidation proceedings by or against the other party without such proceedings being dismissed within 90 days from the date of the institution thereof; or
(v) The termination of the Master Distributor Agreement between CBA and Anheuser-Busch, LLC dated as of May 1, 2011, as amended.
(c) Upon expiration or termination of this Agreement, CBA shall complete production of all Products in process of the date of termination. ABC must purchase such Products at the price specified herein and must purchase from CBA any raw materials purchased by CBA solely for the purpose of complying with its obligations hereunder at the price paid by CBA therefor. Except as provided in this subsection, upon expiration or any termination of this Agreement all rights granted to CBA hereunder with respect to Intellectual Property will terminate and CBA will cease all use of the Intellectual Property.
9. Indemnification .
(a) ABC shall indemnify and hold harmless CBA, its affiliates and their officers, directors and employers harmless from and against any and all third party charges, actions and proceedings (including reasonable attorneys' fees) arising out of (i) a breach of ABC's obligations hereunder, (ii) any claim that the use of the Intellectual Property as contemplated hereby violates the intellectual property rights of any

5




other party and (iii) the negligence or willful misconduct of ABC or its officers, employees or agents in connection with the transactions contemplated hereby.
(b) CBA shall indemnify and hold harmless ABC, its affiliates, the Subsidiaries and their officers, directors and employers harmless from and against any and all third party charges, actions and proceedings (including reasonable attorneys' fees) arising out of (i) a breach of CBA's obligations hereunder or (ii) the negligence or willful misconduct of CBA or its officers, employees or agents in connection with the transactions contemplated hereby.
10. Confidentiality .
(a) Each party shall treat and shall cause its respective employees, officers, directors, advisors, representatives, subsidiaries, affiliates, assigns, subcontractors and any and all persons or business entities acting under one or any of them, to treat, as confidential property and not disclose to any other person or use in any manner, except as is necessary to perform this Agreement (and then only on a confidential basis satisfactory to both parties), any information regarding the other party's prices, plans, programs, processes, products, costs, equipment, operations or customers ("Confidential Information") which may come within the knowledge of such party, its officers, employees or advisors in the performance of this Agreement, without in each instance securing the prior written consent of the other party.
(b) Nothing above, however, shall prevent either ABC or CBA from disclosing to any other Person or using in any manner, information that such party can show:
(i) has been published or has become part of the public domain without any breach of this Agreement;
(ii) has been furnished or has been made known to such party by third parties (other than those acting directly or indirectly for or on behalf of the disclosing party) as a matter of legal right without restrictions on its disclosure;
(iii) was in such party's lawful possession prior to the disclosure thereof by the other party;
(iv) is later independently developed by the receiving party; or
(v) has been required to be disclosed by law, court order, or government order or regulation.
(c) If any party is required by law, court order or government order or regulation to disclose Confidential Information, such party shall provide notice thereof to the other party and undertake reasonable steps to provide the other party with an opportunity to object to such disclosure.
(d) These obligations with respect to the Confidential Information shall survive the termination or expiration of this Agreement.
11. Insurance . Each party shall keep in force at all times during the term hereof general liability insurance with both "products" and "contractual" coverage for aggregated claims in the minimum amount of $10,000,000, and shall furnish the other party a certificate from a financially responsible insurance company evidencing that such insurance is in force, naming the other party as an additional insured and providing that such coverage may not be cancelled or materially changed without 30 days prior written notice to the other party. Any such policy of insurance shall contain a waiver of subrogation.
12. Notices . Any notice, request or demand to be given or made under this Agreement shall be in writing and shall be deemed to have been duly given or made upon delivery, if delivered by hand and addressed to the party for whom intended at the address listed below, (ii) ten days after deposit in the mails, if sent certified or registered mail (if available) with return receipt requested, or five days after deposit if deposited for delivery with a reputable courier service, and in each case addressed to the party for whom intended at the address listed below.



6




If to CBA:
Craft Brew Alliance, Inc.
929 N. Russell Street
Portland, Oregon 97227
Attn: John Glick
With a copy to:
Craft Brew Alliance, Inc.
929 N. Russell Street
Portland, Oregon 97222
Attn: Legal
If to ABC, to:
Anheuser-Busch Companies, LLC
125 W. 24th Street
New York, New York 10011
Attn: Vice President, Mergers & Acquisitions
The parties agree to send notices to such other address as may be substituted by notice given as herein provided.
13.
Miscellaneous .
(a) This Agreement does not make either party the employee, agent, or legal representative of the other party for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party. In fulfilling its obligations pursuant to this Agreement each party shall be acting as an independent contractor.
(b) Neither party may assign, sublicense, subcontract, or otherwise transfer its rights and obligations under this Agreement except with the prior written consent of the other party. The terms of this Agreement shall be binding upon and inure to the benefit of the parties, their respective successors, permitted assignees, sublicensees, and subcontractors.
(c) This Agreement constitutes the entire agreement among the parties hereto and supersedes any prior understandings, agreements, or representations by or among the parties hereto, written or oral, to the extent they are related in any way to the subject matter hereof.
(d) This Agreement shall not be deemed or construed to be modified, amended, rescinded, canceled, or waived, in whole or in part, except by written amendment signed by the parties hereto.
(e) If any one or more of the provisions contained in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceablity of any such provision or provisions in every other respect and the remaining provisions of this Agreement shall not be in any way impaired.
(f) This Agreement may be executed in counterparts, which together will constitute one agreement. E-mail transmission of any signed original document, and retransmission of any e-mail transmission, will be deemed equivalent to delivery of an original.
(g) Headings and subheadings in this Agreement are not intended to and do not have any substantive content whatsoever.
(h) No failure by either party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right.

7




(i) If any suit or action is brought to enforce or interpret any term of this Agreement, the prevailing party will be entitled to recover from the other party all reasonable costs and expenses (including reasonable attorneys' fees and legal expenses) incurred in connection therewith, including at trial, on appeal, and on any petition for review.
(j) Neither party shall be liable to the other party for any delay or default in performing its obligations if such default or delay is caused by any event beyond the reasonable control of such party, including, but not limited to, acts of nature, terrorism, war, or insurrection, civil commotion, damage or destruction of production facilities or materials by earthquake, fire, storm, or flood, or disturbances or strikes, epidemic, materials shortages, equipment malfunction, unavailability of raw materials, or other similar event. The party suffering such cause shall immediately notify the other party of the cause and the expected duration of such cause. If either party's performance is delayed by more than 60 days pursuant to this subsection, the other party may immediately terminate this Agreement by written notice given before the affected party resumes performance.
(k) This Agreement shall be governed by the laws of the State of Missouri, without regards to the principles of conflicts of laws thereof.

[ Remainder of page intentionally left blank .]






















8





The parties have executed this Agreement as of the date first set forth above.
CRAFT BREW ALLIANCE, INC.
By: /s/ Joe Vanderstelt    
Name: Joe Vanderstelt          
Title: CFO                        
ANHEUSER-BUSCH COMPANIES, LLC

By: /s/ Nickolas A Mills         
Name: Nickolas A Mills              
Title: VP of Supply, High End   
 

By: /s/ Thomas Larson   
Name: Thomas Larson        
Title: Secretary                    
 
 





Exhibit 21.1
Subsidiaries of Craft Brewers Alliance, Inc. (the Registrant)
As of December 31, 2018

Name of Entity
 
State of Incorporation
 
Name under which subsidiary is doing business
 
 
 
 
 
1) Kona Brewery LLC
 
Hawaii
 
Kona Brewing Company
2) Kona Brewery LLC
 
Hawaii
 
Kona Brewing Company
3) Craft Ventures, LLC
 
Delaware
 
Craft Ventures
4) Wynwood Brewing Company, LLC
 
Florida
 
Wynwood Brewing Company





 
EXHIBIT 23.1 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-219638, and Form S-8 Nos. 333-90524, 333-18945, 333-197251, and 333-171372) of Craft Brew Alliance, Inc. of our reports dated March 6, 2019 , relating to the consolidated financial statements of Craft Brew Alliance, Inc., and the effectiveness of internal control over financial reporting of Craft Brew Alliance, Inc., appearing in this Annual Report (Form 10-K) for the year ended December 31, 2018 .

Our report on the consolidated financial statements includes an explanatory paragraph relating to the adoption of Accounting Standard Codification Topic 606, Revenue from Contracts with Customers.

/s/ Moss Adams LLP

Portland, Oregon
March 6, 2019





 
EXHIBIT 24.1 

POWER OF ATTORNEY

Each person below designates and appoints ANDREW J. THOMAS and EDWIN A. SMITH his or her true and lawful attorney-in-fact and agent, with full power of substitution, to sign the Annual Report on Form 10-K for the year ended December 31, 2018 , of Craft Brew Alliance, Inc., a Washington corporation, and any amendments thereto, and to file said report and amendments, with all exhibits thereto, in such form as they or either of them may approve with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Each of such attorneys-in-fact is appointed with full power to act without the other.
IN WITNESS WHEREOF, this power of attorney has been executed by each of the undersigned as of March 6, 2019 .

Signature
 
Title
 
 
 
 
 
 /s/ David R. Lord
 
Chairman of the Board and Director
 
      David R. Lord
 
 
 
 
 
 
 
 /s/ Timothy P. Boyle
 
Director
 
      Timothy P. Boyle
 
 
 
 
 
 
 
 /s/ Marc J. Cramer
 
Director
 
      Marc J. Cramer
 
 
 
 
 
 
 
 /s/ Paul D. Davis
 
Director
 
      Paul D. Davis
 
 
 
 
 
 
 
 /s/ Matthew E. Gilbertson
 
Director
 
      Matthew E. Gilbertson
 
 
 
 
 
 
 
 /s/ Kevin R. Kelly
 
Director
 
      Kevin R. Kelly
 
 
 
 
 
 
 
 /s/ Nickolas A. Mills
 
Director
 
      Nickolas A. Mills
 
 
 
 
 
 
 
 /s/Jacqueline S. Woodward
 
Director
 
     Jacqueline S. Woodward
 
 
 








 
EXHIBIT 31.1 
CERTIFICATION
 
I, Andrew J. Thomas, certify that:

1. I have reviewed this annual report on Form 10−K 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:
March 6, 2019
 
 
 
 
By:
/s/ Andrew J. Thomas
 
 
Andrew J. Thomas
 
 
Chief Executive Officer
 

 




 
EXHIBIT 31.2
 
CERTIFICATION

I, Edwin A. Smith, certify that, in the course of performing the functions of Chief Financial Officer:

1.
I have reviewed this annual report on Form 10−K 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:
March 6, 2019
 
 
 
 
By:
/s/ Edwin A. Smith
 
 
Edwin A. Smith
 
 
Corporate Controller and
Principal Accounting 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 Annual Report of Craft Brew Alliance, Inc. (the “Registrant”) on Form 10-K for the year ended December 31, 2018 , as filed with the Securities and Exchange Commission on March 6, 2019 (the “Report”), Andrew J. Thomas, the Chief Executive Officer of the Registrant, and Edwin A. Smith, the Corporate Controller and Principal Accounting 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 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:
March 6, 2019
 
 
 
 
BY:
/s/ Andrew J. Thomas
 
 
Andrew J. Thomas
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
BY:
/s/ Edwin A. Smith
 
 
Edwin A. Smith
 
 
Corporate Controller
 
 
(Principal Financial Officer)
 
 
 
 




 
EXHIBIT 99.1 


  CBAPRA02.JPG
 
FOR IMMEDIATE RELEASE

CRAFT BREW ALLIANCE ANNOUNCES 2018 RESULTS WITH RECORD BEER PERFORMANCE LED BY 11% DEPLETION GROWTH FOR KONA IN Q4

Accelerated depletion growth for Kona, highest-ever beer revenue and beer gross margin, and strategic portfolio transformation contribute to another record year for CBA

CBA delivers on tightened 2018 guidance and prepares to increase Kona momentum and drive further topline growth in 2019, supported by new pH Experiment unit

Portland, Ore. (March 6, 2019) -  Craft Brew Alliance, Inc.  (“CBA”) (Nasdaq: BREW), a leading craft brewing company, reported strong financial results for the fourth quarter and year ended December 31, 2018. We continued to accelerate Kona’s momentum in 2018, which grew depletions by 11% in the fourth quarter to drive an 8% increase - representing approximately 30,000 incremental barrels - in full-year depletions. We also delivered our highest-ever total company gross margin, which expanded 160 basis points to 33.1%, and beer gross margin, which reached a record high of 36.8% for the year. These achievements reflect our continued improvements in brewery performance and footprint optimization, as well as strong pricing discipline, which drove another record with our highest company beer revenue per barrel.

2018 results were in line with tightened guidance, including shipment volumes, gross margin, and SG&A expense. Capital expenditures were below our guidance range due to a shift in costs related to construction of the new Kona brewery to 2019.

In 2019, we will look to increase topline growth, continuing to accelerate Kona’s momentum and unlock the full potential of our newly acquired brands, while building on our strong foundation. We will also leverage CBA’s new pH Experiment business unit to anticipate market trends and quickly bring innovative new products to market, as announced March 5, 2019.

Accelerating Kona’s Growth by 11% in Q4
As one of the largest craft beer brands in the U.S. and a leading American craft beer export, Kona continued to accelerate in 2018, delivering 11% depletions growth in the fourth quarter that drove an 8% increase for the full year. Kona’s 2018 volume growth alone is more than the total volume of 80% of today’s U.S. craft brewers, and combined with 2016 and 2017 growth, the brand has added over 125,000 incremental barrels in the last three years alone. Kona’s increasing popularity as a global lifestyle brand is led by its award-winning flagship, Big Wave Golden Ale, which posted a 30% increase in fourth quarter depletions, driving a 26% increase in depletions for the full year. Kona also expanded its national portfolio of island-inspired craft beers during the year with the launch of Kanaha Blonde Ale, a refreshing 99-calorie ale that was the seventh largest new craft brand as measured by Nielsen.

Leveraging A-B Partnership to Drive Distribution, Cost Savings and Kona’s Global Expansion
We continued to drive value through our enhanced agreements with Anheuser-Busch (“A-B”) in 2018. As part of our brewing agreement, through which we leverage A-B’s Fort Collins, Colorado brewery to brew up to 300,000 barrels a year at a savings of $10 per barrel, we came closer to fully unlocking the estimated $3 million in annual cost savings in 2018. Additionally, we expanded on our contract brewing arrangement, producing Goose Island and Virtue Cider in our Portsmouth and Portland breweries. As part of our enhanced commercial agreement, Kona was included in key wholesaler incentive programs and planning calendars. In 2019, we will look to build on this success and increase participation with additional wholesalers throughout the U.S. Through our international agreement, we expanded on a successful test pilot with Kona in Brazil, launching a significant commercial investment and cross-brewing arrangement to support Kona’s growth in the world’s third largest beer market.



Achieving Record Financial and Operational Results
2018 was a record year for CBA both financially and operationally, with beer revenue, total company gross margin, and beer gross margins each reaching historic levels. Through strong revenue and cost management, we delivered a 2.6% increase in total revenue per barrel, which led to a 5.6% improvement in beer gross profit and record full-year beer gross margin of 36.8%. Our strong 150-basis point expansion in beer gross margin drove a 160-basis point increase in total company gross margin, which reached an all-time high of 33.1% for the year. These achievements, which reflect our progress in driving cost reductions, improving supply chain execution, and stabilizing our inventory levels, are even more impressive when compared to 2017. As a reminder, our 2017 financial results included $4.4 million in Pabst brewing shortfall and contract termination fees, which benefitted various sections of our income statement.

Building our Portfolio for Tomorrow
2018 was another transformational year for CBA, where we expanded our brand family, our footprint, and our understanding of the changing consumer landscape. On October 10, 2018, we announced the acquisition of our three partner brands, Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Co., fundamentally reshaping our Kona Plus portfolio and adding new home markets and innovation breweries to our footprint.

We also initiated two complementary research projects with the Yale Center for Consumer Insights and global consultancy Prophet to broaden our view of the consumer market. Additionally, we launched our own test-and-learn beverage initiative called the pH Experiment. Earlier this week, we cemented our commitment to being at the forefront of anticipating and meeting consumer needs with the launch of the pH Experiment as a separate growth unit. Collectively, these efforts and changes make us stronger, nimbler, and better equipped to capitalize on potential growth opportunities.

“2018 was a banner year for CBA across many dimensions,” said Andy Thomas, CEO of CBA. “Strategically, we accelerated Kona’s growth and continued our portfolio transformation by taking the next step and acquiring our craft partners. Operationally, we delivered record financial performance, despite absorbing partner acquisition costs and lapping $4.4 million in 2017 Pabst contract brewing fees. We are now in our strongest position ever to explore new frontiers of growth.”

Select results for the full year 2018:
As planned, our 2018 shipments and depletions trends continued to converge throughout the year, and total shipments were in line with updated guidance, reflecting continued progress in harmonizing our supply chain and supporting optimum wholesaler inventory levels .
Kona shipments increased by 7.5% for the full year, and depletions grew by 8%.
Total shipments were relatively flat, and depletions decreased by 2%, compared to 2017.
Beer net sales were $182.2 million, a 1.3% increase over 2017, primarily due to pricing.
Total net sales were $206.2 million, a 1% decrease from last year, which primarily represents $3.4 million in contract brewing shortfall fees received from Pabst in 2017 that did not recur in 2018. Our total net sales decrease also reflects lower 2018 pub sales, mainly attributable to the absence of our Woodinville pub, which closed at the end of 2017 as part of our brewery footprint optimization.
Beer gross margin expanded by 150 basis points to a record 36.8%, from 35.3% in 2017.
Total company gross margin expanded 160 basis points to 33.1%, compared to 31.5% in 2017, which was in line with tightened guidance.
Our pub gross margin decreased 100 basis points to 5.7%, primarily reflecting the gross profit impact of the closure of our Woodinville brewpub at the end of 2017 as noted above.
Selling, general and administrative expense (“SG&A”) increased by $2.1 million to $62.6 million, or 30.3% of net sales, in line with updated guidance. The increase reflects additional investments to expand consumer and trade marketing programming and drive topline growth, as well as professional fees related to the partner acquisitions and consumer research initiatives.
EPS was $0.21, compared to $0.49 last year, primarily reflecting the effect of federal tax legislation on 2017 results.
Due to the change in federal tax law, we adjusted our deferred tax liabilities in 2017, resulting in a favorable non-cash income tax adjustment of $6.9 million, or $0.35 per share.
As a result, CBA’s adjusted EPS for 2017 was $0.14.
Capital expenditures were approximately $12.8 million, compared to $18.3 million in 2017. The decrease from planned expenditures was due to a shift in timing of certain progress payments related to construction of the new Kona brewery that will now be paid in 2019.








Select results for the fourth quarter 2018:
Kona depletions increased by 11% in the fourth quarter, and total CBA depletions decreased 1% from the same period a year ago.
Kona shipments increased by 8% in the fourth quarter, and total CBA shipments decreased 1% compared to the same period last year.
Beer net sales were $38.2 million, a decrease of $1.2 million from beer net sales in the fourth quarter of 2017, primarily due to the $1.7 million Pabst contract brewing shortfall fee received in the fourth quarter of 2017 that did not recur in the fourth quarter of 2018.
Total company net sales were approximately $44.0 million, a 4% decrease compared to the fourth quarter in 2017.
Beer gross margin for the fourth quarter was 36.7%, a 90-basis point decline from 37.6% beer gross margin in the fourth quarter of 2017. Our fourth quarter 2017 beer gross margin included a 260-basis point benefit related to the Pabst contract brewing shortfall fees.
Total company gross margin increased by 40 basis points to 32.8% over the fourth quarter last year.
SG&A increased by $2.1 million to $15.3 million, or 34.7% of net sales. The fourth quarter increase reflects investments behind our brands, as well as a $1.0 million credit for Pabst termination fees received in the fourth quarter of 2017 that did not recur in the fourth quarter of 2018.
We reported a loss per share for the quarter of ($0.03), compared to $0.40 earnings per share in the fourth quarter of 2017, reflecting the impact of federal tax legislation in 2017.
Due to the change in federal tax law, we adjusted our deferred tax liabilities in the fourth quarter of 2017, resulting in a favorable non-cash income tax adjustment of $6.9 million, or $0.35 per share.
As a result, CBA’s adjusted EPS for the fourth quarter of 2017 was $0.05.

Anticipated financial highlights for 2019:
Depletions and shipments each ranging between an increase of 5% to an increase of 8%, reflecting a significant increase in commercial investments and insights from our consumer research.
Average price increases of 1% to 2%, reflecting improved revenue management capabilities.
Gross margin rate of 34.5% to 36.5%, reflecting increases in net revenue per barrel, continued improvements in brewery operations, lower fixed overhead, and ongoing efforts to stabilize our pub operations.
SG&A ranging from $70 million to $74 million, primarily reflecting reinvestment of cost savings into our sales and marketing infrastructure, as well as expanded consumer and trade programming.
Capital expenditures of approximately $15 million to $19 million, including expenses related our new Kona brewery going online in 2019.
Effective tax rate of 27%.

Forward-Looking Statements
Statements made in this press release that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, including depletions and shipments, price increases, and gross margin rate improvement, the level and effect of SG&A expense and business development, anticipated capital spending, effective tax rate, and the benefits or improvements to be realized from strategic initiatives and capital projects, are forward-looking statements. It is important to note that the Company’s actual results may differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the Company’s SEC filings, including, but not limited to, the Company’s report on Form 10-K for the year ended December 31, 2018. Copies of these documents may be found on the Company’s website, www.craftbrew.com, or obtained by contacting the Company or the SEC.
About Craft Brew Alliance
CBA is an independent 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 brandsAppalachian 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 Craft Brew Alliance, Inc.
(503) 331-7248
jenny.mclean@craftbrew.com




Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
December 31,
 
Twelve Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
Sales
$
46,292

 
$
48,537

 
$
217,269

 
$
219,547

Less excise taxes
2,305

 
2,571

 
11,083

 
12,091

Net sales
43,987

 
45,966

 
206,186

 
207,456

Cost of sales
29,561

 
31,090

 
137,863

 
142,198

Gross profit
14,426

 
14,876

 
68,323

 
65,258

As percentage of net sales
32.8
 %
 
32.4
 %
 
33.1
 %
 
31.5
 %
Selling, general and administrative expenses
15,255

 
13,106

 
62,572

 
60,463

Operating income (loss)
(829
)
 
1,770

 
5,751

 
4,795

Interest expense
(266
)
 
(182
)
 
(614
)
 
(715
)
Other income (expense), net
250

 
7

 
292

 
(39
)
Income (loss) before income taxes
(845
)
 
1,595

 
5,429

 
4,041

Income tax provision (benefit)
(313
)
 
(6,240
)
 
1,287

 
(5,482
)
Net income (loss)
$
(532
)
 
$
7,835

 
$
4,142

 
$
9,523

Income (loss) per share:
 

 
 

 
 
 
 
Basic
$
(0.03
)
 
$
0.41

 
$
0.21

 
$
0.49

Diluted
$
(0.03
)
 
$
0.40

 
$
0.21

 
$
0.49

Weighted average shares outstanding:
 

 
 

 
 
 
 
Basic
19,382

 
19,302

 
19,349

 
19,284

Diluted
19,382

 
19,507

 
19,557

 
19,447

Total shipments (in barrels):
 

 
 

 
 
 
 
Core Brands
153,300

 
158,000

 
719,400

 
730,600

Contract Brewing
6,900

 
4,000

 
28,200

 
17,700

Total shipments
160,200

 
162,000

 
747,600

 
748,300

Change in depletions (1)
(1
)%
 
(3
)%
 
(2
)%
 
(1
)%

(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)

 
December 31,
 
2018
 
2017
Current assets:
 
 
 
Cash, cash equivalents and restricted cash
$
1,200

 
$
579

Accounts receivable, net
29,998

 
27,784

Inventory, net
17,216

 
13,844

Assets held for sale

 
22,946

Other current assets
3,121

 
4,335

Total current assets
51,535

 
69,488

Property, equipment and leasehold improvements, net
113,189

 
106,283

Goodwill
21,986

 
12,917

Trademarks
44,289

 
14,429

Intangible, equity method investment and other assets, net
5,048

 
6,520

Total assets
$
236,047

 
$
209,637

Current liabilities:
 

 
 

Accounts payable
$
17,552

 
$
14,338

Accrued salaries, wages and payroll taxes
5,635

 
5,877

Refundable deposits
4,123

 
4,816

Deferred revenue
6,015

 
3,385

Other accrued expenses
3,618

 
2,368

Current portion of long-term debt and capital lease obligations
919

 
699

Total current liabilities
37,862

 
31,483

Long-term debt and capital lease obligations, net of current portion
46,573

 
32,599

Other long-term liabilities
15,177

 
14,764

Total common shareholders' equity
136,435

 
130,791

Total liabilities and common shareholders' equity
$
236,047

 
$
209,637






Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Twelve Months Ended December 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
4,142

 
$
9,523

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
10,612

 
10,457

(Gain) loss on sale or disposal of Property, equipment and leasehold improvements
(567
)
 
428

Deferred income taxes
(506
)
 
(5,400
)
Other, including stock-based compensation and impairment of assets held for sale
1,987

 
2,348

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(2,770
)
 
(3,776
)
Inventories
(2,728
)
 
5,500

Other current assets
466

 
(1,840
)
Accounts payable, deferred revenue and other accrued expenses
3,488

 
277

Accrued salaries, wages and payroll taxes
(266
)
 
910

Refundable deposits
(617
)
 
(1,649
)
Net cash provided by operating activities
13,241

 
16,778

Cash flows from investing activities:
 

 
 

Expenditures for Property, equipment and leasehold improvements
(12,769
)
 
(18,342
)
Proceeds from sale of Property, equipment and leasehold improvements
23,017

 
95

Restricted cash from sale of Property, equipment and leasehold improvements
515

 

Business combinations and asset acquisitions
(37,887
)
 

Equity method investment

 
(2,101
)
Net cash used in investing activities
(27,124
)
 
(20,348
)
Cash Flows from Financing Activities:
 

 
 

Principal payments on debt and capital lease obligations
(724
)
 
(709
)
Net borrowings under revolving line of credit
14,893

 
4,224

Proceeds from issuances of common stock
427

 
219

Tax payments related to stock-based awards
(92
)
 
(27
)
Net cash provided by financing activities
14,504

 
3,707

Increase in Cash, cash equivalents and restricted cash
621

 
137

Cash, cash equivalents and restricted cash, beginning of period
579

 
442

Cash, cash equivalents and restricted cash, end of period
$
1,200

 
$
579






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
December 31,
 
Twelve Months Ended
December 31,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(532
)
 
$
7,835

 
$
4,142

 
$
9,523

Interest expense
266

 
182

 
614

 
715

Income tax provision (benefit)
(313
)
 
(6,240
)
 
1,287

 
(5,482
)
Depreciation expense
2,504

 
2,488

 
10,218

 
10,197

Amortization expense
123

 
65

 
394

 
260

Stock-based compensation
426

 
371

 
1,484

 
1,316

Loss on impairment of assets

 
493

 

 
493

(Gain) loss on disposal of assets
(29
)
 
264

 
(578
)
 
428

Adjusted EBITDA
$
2,445

 
$
5,458

 
$
17,561

 
$
17,450


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 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 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).






EXHIBIT 99.2

DESCRIPTION OF COMMON STOCK
Craft Brew Alliance, Inc., a Washington corporation (the "Company"), is authorized to issue up to 50,000,000 shares of Common Stock, par value $0.005 per share ("Common Stock"). All shares of Common Stock, when duly issued and outstanding, are fully paid and nonassessable.
Voting Rights
Each outstanding share of Common Stock entitles the holder to one vote, either in person or by proxy, on all matters submitted to a vote of shareholders, except with respect to the election of directors in certain circumstances.
The vote of shareholders required to approve an amendment to the Company's Restated Articles of Incorporation (the "Articles"), a plan of merger or share exchange, the sale, lease, exchange, or other disposition of all or substantially all of the Company's assets outside the usual and regular course of business, or dissolution of the Company, is the affirmative vote of a majority of all the votes entitled to be cast with respect to such matter. All other matters, except the election of directors, generally will be approved if the votes cast favoring the action exceed the votes cast opposing the action.
Shareholders of the Company have the right to cumulate votes with respect to all elections of directors held while the Company is subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), if, prior to the record date for the shareholder meeting at which such election is to be held, the Company or a shareholder of the Company publicly announces that such shareholder, together with its affiliates, beneficially owns at least 30% of the Company's outstanding Common Stock, or the Company has received any notice or information from a shareholder indicating that it has such beneficial ownership and neither the Company nor the shareholder has publicly announced that it has ceased to have such beneficial ownership. As of March 1, 2019, Anheuser-Busch, LLC, was the beneficial owner of in excess of 30% of the Company's outstanding Common Stock. Therefore, cumulative voting will apply to the election of directors until there is a change in circumstances making it no longer applicable. Shareholders of the Company would also have the right to cumulate votes in the election of directors at any time that the Company is not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act.
Dividends
Holders of Common Stock are entitled to dividends when, as and if declared by the Company's Board of Directors (the "Board") out of funds legally available therefor. Any holders of Preferred Stock would have a priority right to distributions and dividend payments over the holders of Common Stock. In the event of a liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company remaining after provision for payment of amounts owed to creditors and liquidation preferences applicable to any outstanding shares of Preferred Stock.
Preemptive Rights
The Articles provide that no shareholder will have any preemptive or preferential rights or subscription rights with respect to any shares of capital stock which may be issued or to any securities or obligations convertible into capital stock, or any warrant or option for the purchase of capital stock, except (i) to the extent provided by resolutions of the Board establishing a series of Preferred Stock, or (ii) by written agreement between such holder and the Company.
Preferred Stock
The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of any outstanding shares of Preferred Stock.
The Board is authorized to issue up to 7,467,271 shares of Preferred Stock, par value $0.005 per share, in one or more series, without shareholder approval. As of March 1, 2019, no shares of Preferred Stock were outstanding.
The Board is authorized to determine, with respect to each series of Preferred Stock: (i) distinctive designations of such series and the number of shares which shall constitute such series; (ii) the annual dividend rate for such series, and the date or dates from which dividends shall begin to accrue; (iii) the price at which, and the terms and conditions on which, the shares of such series may be redeemable; (iv) the purchase or sinking fund provisions, if any, for the purchase or redemption of shares of such series; (v) the preferential amount or amounts payable on shares of such series in the event of the liquidation, dissolution or winding up of the Company; (vi) the voting rights, if any, of shares of such series; (vii) the terms and conditions, if any, upon





which shares of such series may be converted and the securities into which such shares may be converted; (viii) the relative seniority, parity or junior rank of such series as to dividends or assets; and (ix) such other terms, qualifications, privileges, limitations, options, restrictions and special or relative rights and preferences, if any, of shares of such series as the Board may, at the time of such resolution, lawfully fix and determine.
Each share of each series of Preferred Stock will be identical in all respects with all other shares of the same series. Preferred Stock does not have preemptive rights except as provided by written agreement between the holder and the Company or as provided by resolution of the Board establishing a series of Preferred Stock.
Article and Bylaw Provisions with Possible Anti-Takeover Effects
As described above, the Board is authorized to designate and issue shares of Preferred Stock in series and define all rights, preferences and privileges applicable to such series. This authority may be used to make it more difficult or less economically beneficial to acquire or seek to acquire the Company.
The Board has the power to amend the Company's Bylaws, which may also be amended by the shareholders.
Special meetings of the shareholders may be called by the Board, by the Chairman of the Board, by the President or, at any time while the Company is subject to the reporting requirements of Section 13 of the Exchange Act, by one or more shareholders holding at least 25% of all the shares entitled to be cast on any issue proposed to be considered at that meeting.
The shareholders may, at a special shareholders meeting called for the purpose of removing directors, remove the entire Board or any lesser number of directors, with or without cause. If a director has been elected by one or more voting groups, only those voting groups may participate in the vote as to removal. Also, as long as cumulative voting is authorized, a director may not be removed if a number of votes sufficient to elect such director under cumulative voting (computed on the basis of the number of votes actually cast at the meeting on the question of removal) is cast against such director’s removal.
Proposals of shareholders that are not eligible for inclusion in the proxy statement and proxy for the Company's annual meeting of shareholders, or that concern one or more nominations for election as directors at the annual meeting, must comply with the procedures contained in the Company's Bylaws, including providing written notice of the nomination or proposal to the Company's Secretary, generally at least 120 days prior to the first anniversary of the date of the initial release to shareholders of the Company's proxy materials for the previous year's annual meeting.