10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
For the quarterly period ended March 28, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
For the transition period from
                    
to
                    
Commission file number:
1-14092
 
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
     
MASSACHUSETTS
 
04-3284048
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
 
One Design Center Place, Suite 850, Boston, Massachusetts
(Address of principal executive offices)
02210
(Zip Code)
(617)
368-5000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act.
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Class A Common Stock. $0.01 par value
 
SAM
 
New York Stock Exchange
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated
filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act.)    Yes  
    
No  
Number of shares outstanding of each of the issuer’s classes of common stock, as of April 17, 2020:
         
Class A Common Stock, $.01 par value
 
 
9,655,555
 
Class B Common Stock, $.01 par value
 
 
2,522,983
 
(Title of each class)
 
 
(Number of shares)
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents
THE BOSTON BEER COMPANY, INC.
FORM
10-Q
March 28, 2020
TABLE OF CONTENTS
             
PART I.
 
FINANCIAL INFORMATION
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
 
 
 
 
 
 
 
7
 
 
 
 
 
 
 
 
 
 
 
19
 
 
 
 
 
 
 
 
 
 
 
22
 
 
 
 
 
 
 
 
 
 
 
22
 
 
 
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
23
 
 
 
 
 
 
 
 
 
 
 
23
 
 
 
 
 
 
 
 
 
 
 
24
 
 
 
 
 
 
 
 
 
 
 
24
 
 
 
 
 
 
 
 
 
 
 
24
 
 
 
 
 
 
 
 
 
 
 
24
 
 
 
 
 
 
 
 
 
 
 
25
 
 
 
 
 
 
 
 
26
 
 
EX-31.1
Section 302 CEO Certification
EX-31.2
Section 302 CFO Certification
EX-32.1
Section 906 CEO Certification
EX-32.2
Section 906 CFO Certification
2

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
                 
 
March 28,
 
 
December 28,
 
 
2020
 
 
2019
 
Assets
 
 
 
 
 
 
Current Assets:
   
     
 
Cash and cash equivalents
  $
129,504
    $
36,670
 
Accounts receivable
   
58,253
     
54,404
 
Inventories
   
124,529
     
106,038
 
Prepaid expenses and other current assets
   
14,894
     
12,077
 
Income tax receivable
   
8,823
     
9,459
 
                 
Total current assets
   
336,003
     
218,648
 
Property, plant and equipment, net
   
550,030
     
541,068
 
Operating
right-of-use
assets
   
63,039
     
53,758
 
Goodwill
   
112,529
     
112,529
 
Intangible assets
   
104,209
     
104,272
 
Other assets
   
27,754
     
23,782
 
                 
Total assets
  $
1,193,564
    $
1,054,057
 
                 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Current Liabilities:
   
     
 
Accounts payable
  $
92,247
    $
76,374
 
Accrued expenses and other current liabilities
   
89,078
     
99,107
 
Current operating lease liabilities
   
5,459
     
5,168
 
                 
Total current liabilities
   
186,784
     
180,649
 
Deferred income taxes, net
   
77,389
     
75,010
 
Line of credit
 
 
100,000
 
 
 
 
Non-current operating lease liabilities
   
63,248
     
53,940
 
Other liabilities
   
7,907
     
8,822
 
                 
Total liabilities
   
435,328
     
318,421
 
Commitments and Contingencies (See Note K)
   
     
 
Stockholders’ Equity:
   
     
 
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,559,200 and 9,370,526 issued and outstanding as of March 28, 2020 and December 28, 2019, respectively
   
96
     
94
 
Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 2,522,983 and 2,672,983 issued and outstanding as of March 28, 2020 and December 28, 2019, respectively
   
25
     
27
 
Additional
paid-in
capital
   
576,208
     
571,784
 
Accumulated other comprehensive loss, net of tax
   
(1,727
)    
(1,669
)
Retained earnings
   
183,634
     
165,400
 
                 
Total stockholders’ equity
   
758,236
     
735,636
 
                 
Total liabilities and stockholders’ equity
  $
 
 
 
1,193,564
    $
 
 
 
1,054,057
 
                 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
3

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
                 
 
Thirteen weeks ended
 
 
 
March 28,

2020
 
 
March 30,

2019
 
Revenue
  $
352,225
    $
267,559
 
Less excise taxes
   
21,660
     
15,908
 
                 
Net revenue
   
330,565
     
251,651
 
Cost of goods sold
   
182,592
     
127,111
 
                 
Gross profit
   
147,973
     
124,540
 
Operating expenses:
   
     
 
Advertising, promotional and selling expenses
   
97,891
     
71,723
 
General and administrative expenses
   
27,029
     
23,374
 
Impairment of assets
   
1,521
     
 
                 
Total operating expenses
   
126,441
     
95,097
 
                 
Operating income
   
21,532
     
29,443
 
Other (expense) income, net:
   
     
 
Interest income, net
   
63
     
637
 
Other (expense) income, net
   
(360
)    
(252
)
                 
Total other (expense) income, net
   
(297
)    
385
 
                 
Income before income tax provision
   
21,235
     
29,828
 
Income tax provision
   
3,001
     
6,134
 
                 
Net income
  $
18,234
    $
23,694
 
                 
Net income per common share
 -
basic
  $
1.50
    $
2.04
 
                 
Net income per common share
 -
diluted
  $
1.49
    $
2.02
 
                 
Weighted-average number of common shares
 -
Class A basic
   
9,425
     
8,606
 
                 
Weighted-average number of common shares
 -
Class B basic
   
2,645
     
2,918
 
                 
Weighted-average number of common shares
 
-
diluted
   
12,186
     
11,636
 
                 
Net income
  $
18,234
    $
23,694
 
                 
Other comprehensive income:
   
     
 
Foreign currency translation adjustment
   
(58
)    
37
 
                 
Comprehensive income
  $
18,176
    $
23,731
 
                 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
4

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the thirteen weeks ended March 28, 2020 and March 30, 2019
(in thousands)
(unaudited)
                                                                 
 
Class A
Common
Shares
 
 
Class A
Common
Stock, Par
 
 
Class B
Common
Shares
 
 
Class B
Common
Stock, Par
 
 
Additional
Paid-in

Capital
 
 
Accumulated
Other
Comprehensive
Loss, net of tax
 
 
Retained
Earnings
 
 
Total
Stockholders’
Equity
 
Balance at December 28, 2019
   
9,371
    $
94
     
2,673
    $
27
    $
571,784
    $
(1,669
)   $
165,400
    $
735,636
 
Net income
   
     
     
     
     
     
     
18,234
     
18,234
 
Stock options exercised and restricted shares activities
   
38
     
     
     
     
1,858
     
     
     
1,858
 
Stock-based compensation expense
   
     
     
     
     
2,566
     
     
     
2,566
 
Conversion from Class B to Class A
   
150
     
2
     
(150
)    
(2
)    
     
     
     
 
Currency translation adjustment
   
     
     
     
     
     
(58
)    
     
(58
)
                                                                 
Balance at March 
28
, 20
20
   
9,559
    $
96
     
2,523
    $
25
    $
576,208
    $
(1,727
)   $
183,634
    $
758,236
 
                                                                 
   
     
     
     
     
     
     
     
 
 
Class A
Common
Shares
 
 
Class A
Common
Stock, Par
 
 
Class B
Common
Shares
 
 
Class B
Common
Stock, Par
 
 
Additional
Paid-in

Capital
 
 
Accumulated
Other
Comprehensive
Loss, net of tax
 
 
Retained
Earnings
 
 
Total
Stockholders’
Equity
 
Balance at December 29, 2018
   
8,580
    $
86
     
2,918
    $
29
    $
405,711
    $
(1,197
)   $
55,688
    $
460,317
 
Net income
   
     
     
     
     
     
     
23,694
     
23,694
 
Stock options exercised and restricted shares activities
   
54
     
     
     
     
3,704
     
     
     
3,704
 
Stock-based compensation expense
   
     
     
     
     
2,066
     
     
     
2,066
 
Currency translation adjustment
   
     
     
     
     
     
37
     
     
37
 
                                                                 
Balance at March 30, 2019
   
8,634
    $
86
     
2,918
    $
29
    $
411,481
    $
(1,160
)   $
79,382
    $
489,818
 
                                                                 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
5

         
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
                 
 
Thirteen weeks ended
 
 
March 28,
 
 
March 30,
 
 
2020
 
 
2019
 
Cash flows provided by operating activities:
 
 
 
 
 
 
Net income
  $
18,234
    $
23,694
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation and amortization
   
15,945
     
12,863
 
Impairment of assets
   
1,521
     
 
Loss on disposal of property, plant and equipment
   
     
271
 
Change in ROU assets
   
1,807
     
859
 
Credit loss
 expense
   
552
     
 
Stock-based compensation expense
   
2,566
     
2,066
 
Deferred income taxes
   
2,379
     
1,029
 
Changes in operating assets and liabilities:
   
     
 
Accounts receivable
   
(4,436
)    
(20,452
)
Inventories
   
(23,856
)    
(15,353
)
Prepaid expenses, income tax receivable and other assets
   
(884
)    
1,336
 
Accounts payable
   
14,264
     
14,400
 
Accrued expenses and other current liabilities
   
(7,579
)    
(6,465
)
Change in operating lease liability
   
(1,489
)    
(624
)
Other liabilities
   
(100
)    
19
 
                 
Net cash provided by operating activities
   
18,924
     
13,643
 
                 
Cash flows used in investing activities:
 
 
 
 
 
 
Purchases of property, plant and equipment
   
(27,394
)    
(22,080
)
Proceeds from disposal of property, plant and equipment
   
35
     
1
 
Other investing activities
   
96
     
28
 
                 
Net cash used in investing activities
   
(27,263
)    
(22,051
)
                 
Cash flows provided by financing activities:
 
 
 
 
 
 
Proceeds from exercise of stock options and sale of investment shares
   
2,941
     
2,968
 
Net cash paid on note payable and finance leases
   
(209
)    
(72
)
Payment of tax withholdings on stock-based payment awards and investment shares
 
 
(1,559
)
 
 
 
Cash borrowed on line of credit
   
100,000
     
 
                 
Net cash provided by financing activities
   
101,173
     
2,896
 
                 
Change in cash and cash equivalents
   
92,834
     
(5,512
)
Cash and cash equivalents at beginning of year
   
36,670
     
108,399
 
                 
Cash and cash equivalents at end of period
  $
129,504
    $
102,887
 
                 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Income taxes paid
  $
5
    $
207
 
                 
Cash paid for amounts included in measurement of lease liabilities
   
  
     
  
 
Operating cash flows from operating leases
  $
2,097
    $
885
 
                 
Operating cash flows from finance leases
  $
22
    $
8
 
                 
Financing cash flows from finance leases
  $
141
    $
7
 
                 
Right-of-use assets obtained in exchange for operating lease obligations
  $
11,088
    $
27,034
 
                 
Right-of-use assets obtained in exchange for finance lease obligations
 
$
 
 
$
 
3
 
Change in purchase of property, plant and equipment in accounts payable and accrued expenses
 
$
(1,029
  $
118
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
6

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A.
Organization and Basis of Presentation
 
 
 
 
 
 
 
 
 
 
 
 
The Boston Beer Company, Inc. and certain subsidiaries (the “Company”) are engaged in the business of selling alcohol beverages throughout the United States and in selected international markets, under the trade names “The Boston Beer Company
®
”, “Twisted Tea Brewing Company
®
”, “Hard Seltzer Beverage Company”, “Angry Orchard
®
Cider Company”, “Dogfish Head
®
Craft Brewery”, “Angel City
®
Brewing Company”, “Concrete Beach Brewery
®
”, “Coney Island
®
Brewing Company” and “American Fermentation Company”.
The accompanying unaudited consolidated balance sheet as of March 28, 2020, and the consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the interim periods ended March 28, 2020 and March 30, 2019 have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. All intercompany accounts and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019.
In the opinion of the Company’s management, the Company’s unaudited consolidated balance sheet as of March 28, 2020 and the results of its consolidated operations, stockholders’ equity, and cash flows for the interim periods ended March 28, 2020 and March 30, 2019, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
B.
COVID-19
Pandemic
 
 
 
 
 
 
 
 
 
 
 
 
In early March 2020, the Company began seeing the impact of the
COVID-19
pandemic on its business. The impact was primarily shown in significantly reduced keg demand from the
on-premise
channel as well as increased labor and safety related costs at the Company’s breweries. In the first quarter of 2020, the Company recorded
COVID-19
pre-tax
related reductions in net revenue and increases in other costs that total $10.0 million. This amount consists of a $5.8 million reduction in net revenue for estimated keg returns from distributors and retailers and $4.2 million of other
COVID-19
related direct costs, of which $3.6 million are recorded in cost of goods sold and $0.6 
million are recorded in operating expenses. While the duration of the disruption and related impact on the Company’s consolidated financial statements is currently uncertain, the Company expects this matter will continue to negatively impact its results of operations.
C.
Dogfish Head Brewery Transaction
 
 
 
 
 
 
 
 
 
 
 
 
On May 8, 2019, the Company entered into definitive agreements to acquire Dogfish Head Brewery (“Dogfish Head”) and various related operations (the “Transaction”) through the acquisition of all of the equity interests held by certain private entities in
Off-Centered
Way LLC, the parent holding company of the Dogfish Head operations. In accordance with these agreements, the Company made a payment of $158.4 million, which was placed in escrow pending the satisfaction of certain closing conditions. The Transaction closed on July 3, 2019, for total consideration of $336.0 million consisting of $173.0 million in cash and 429,291 shares of restricted Class A Common Stock that had an aggregate market value as of July 3, 2019 of $163.0 million, after taking into account a post-closing cash related adjustment. As required under the definitive agreements, 127,146 of the 429,291 shares of restricted Class A Stock have been placed in escrow and will be released no later than July 3, 2029. These shares had a market value on July 3, 2019 of $48.3 million. The timing of the release of these escrowed shares is primarily related to the continued employment with the Company of Samuel A. Calagione III, one of the two Dogfish Head founders.
7

The fair value of the Transaction is estimated at approximately $317.7 million. The following table summarizes the acquisition date fair value of the tangible assets, intangible assets, liabilities assumed, and related goodwill acquired from Dogfish Head, as well as the allocation of purchase price paid:
         
 
Total (In
 
Thousands)
 
Cash and cash equivalents
  $
7,476
 
Accounts receivable
   
8,081
 
Inventories
   
9,286
 
Prepaid expenses and other current assets
   
847
 
Property, plant and equipment
   
106,964
 
Goodwill
   
108,846
 
Brand
   
98,500
 
Other intangible assets
   
3,800
 
Other assets
   
378
 
         
Total assets acquired
   
344,178
 
         
Accounts payable
   
3,861
 
Accrued expenses and other current liabilities
   
4,085
 
Deferred income taxes
   
18,437
 
Other liabilities
   
59
 
         
Total liabilities assumed
   
26,442
 
         
Net assets acquired
  $
317,736
 
         
Cash consideration
  $
172,993
 
Nominal value of equity issued
   
162,999
 
Fair Value reduction due to liquidity
   
(18,256
)
         
Estimated total purchase price
  $
317,736
 
         
 
 
 
 
 
 
 
 
The Company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of Dogfish Head based on their fair values as of the Transaction closing date. The Company believes that the information available as of the Transaction closing date provides a reasonable basis for estimating the fair values of the assets acquired and liabilities assumed; however, the Company is continuing to finalize these amounts, particularly with respect to income taxes and valuation of inventories, fixed assets, and intangible assets. Thus, the preliminary measurements of fair value reflected are subject to change as additional information becomes available and as additional analysis is performed. The Company expects to finalize the valuation and complete the allocation of the purchase price as soon as practicable, but no later than one year from the closing date of the acquisition, as required.
The fair value of the Dogfish Head brand trade name is estimated at approximately $98.5 million and the fair value of customer relationships is estimated at $3.8 million. The Company estimated the Dogfish Head brand trade name will have an indefinite life and customer relationships will have an estimated useful life of 15 years. The customer relationship intangible asset will be amortized on a straight-line basis over the 15 year estimated useful life. The fair value of the deferred income tax liability assumed is $18.4 million, representing the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. The Company used a preliminary consolidated tax rate to determine the net deferred tax liabilities. The Company will record measurement period adjustments as the Company applies the appropriate tax rate for each legal entity within Dogfish Head. The expectation is that the Dogfish Head deferred income taxes will be subject to the Company’s consolidated rate. The excess of the purchase price paid over the estimated fair values of the assets and liabilities assumed has been recorded as goodwill in the amount of $108.8 million. Goodwill associated with the acquisition is primarily attributable to the future growth opportunities associated with the Transaction, expected synergies and value of the workforce. The Company believes the majority of the goodwill is deductible for tax purposes.
8

The fair value of the brand trade name was determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the trade name and discounted to present value using an appropriate discount rate. The fair value of the property, plant and equipment was determined utilizing the cost and market valuation approaches.
The results of operations from Dogfish Head have been included in the Company’s consolidated statements of comprehensive income since the July 3, 2019 Transaction closing date.
Consistent with prior periods and considering post-merger reporting structures, the Company will continue to report as one operating segment. The combined Company’s brands are predominantly beverages that are manufactured using similar production processes, have comparable alcohol content, generally fall under the same regulatory environment, and are sold to the same types of customers in similar size quantities at similar price points and through the same channels of distribution.
The following unaudited pro forma information has been prepared, as if the Transaction and the related debt financing had occurred as of December 30, 2018, the first day of the Company’s 2019 fiscal year. The pro forma amounts reflect the combined historical operational results for Boston Beer and Dogfish Head, after giving effect to adjustments related to the impact of purchase accounting, transaction costs and financing. The unaudited pro forma financial information is not indicative of the operational results that would have been obtained had the Transaction occurred as of that date, nor is it necessarily indicative of the Company’s future operational results. The following adjustments have been made:
  (i) Depreciation and amortization expenses were updated to reflect the fair value adjustments to Dogfish Head property, plant and equipment and intangible assets beginning December 30, 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (ii) Transaction costs incurred to date have been
re-assigned
to the first period of the comparative fiscal year.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (iii) Interest expense has been included at a rate of approximately 3% which is consistent with the borrowing rate on the Company’s current line of credit.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (iv) The tax effects of the pro forma adjustments at an estimated statutory rate of 23.6%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (v) Earnings per share amounts are calculated using the Company’s historical weighted average shares outstanding plus the 429,291 shares issued in the merger.
                 
 
Thirteen weeks ended
 
 
March 28,
 
 
March 30,
 
 
2020
 
 
2019
 
 
(in thousands)
 
Net revenue
  $
330,565
    $
276,739
 
Net income
  $
18,234
    $
24,664
 
Basic earnings per share
  $
1.50
    $
2.04
 
Diluted earnings per share
  $
1.49
    $
2.02
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
D.
Goodwill and Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
There were no changes in the carrying value of goodwill during the thirteen weeks ended March 28, 2020 and March 30, 2019.
 
 
 
 
 
 
9

The Company’s intangible assets as of March 28, 2020 and December 28, 2019 were as follows:
                                                         
 
 
 
As of March 28, 2020
   
As of December 28, 2019
 
 
Estimated Useful
 
 
Gross Carrying
 
 
Accumulated
 
 
Net Book
 
 
Gross Carrying
 
 
Accumulated
 
 
Net Book
 
 
Life (Years)
 
 
Value
 
 
Amortization
 
 
Value
 
 
Value
 
 
Amortization
 
 
Value
 
 
 
 
 
(in thousands)
 
Custmer Relationships
   
15
    $
3,800
    $
(190
)   $
3,610
    $
3,800
    $
(127
)   $
3,673
 
Trade Names
   
Indefinite
     
100,599
     
—  
     
100,599
     
100,599
     
—  
     
100,599
 
                                                         
Total intangible assets
   
    $
104,399
    $
(190
)   $
104,209
    $
104,399
    $
(127
)   $
104,272
 
                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As disclosed within Note C, the Company acquired intangible assets as part of the Dogfish Head Transaction that consists of $98.5 million for the value of the Dogfish Head brand name and $3.8 million for the value of customer relationships. The customer relationship intangible will be amortized on a straight-line basis over the 15 year useful life. Amortization expense in the thirteen weeks ended March 28, 2020 was approximately $63,000. The Company expects to record amortization expense as follows over the remaining current year and the five subsequent years:
         
Fiscal Year
 
Amount
(in thou
sands)
 
Remainder of 2020
  $
190
 
2021
   
253
 
2022
   
253
 
2023
   
253
 
2024
   
253
 
2025
   
253
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
E.
Recent Accounting Pronouncements
 
 
 
 
 
Accounting Pronouncements Recently Adopted
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU
2016-13
is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard in the first quarter of fiscal 2020 and there was no material impact.
In January 2017, the FASB issued ASU No.
 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Prior to ASU No.
 2017-04,
the goodwill impairment test is a
two-step
assessment, if indicators of impairment exist. The first step requires an entity to compare each reporting unit’s carrying value and its fair value. If the reporting unit’s carrying value exceeds the fair value, then the entity must perform the second step, which is to compare the implied fair value of goodwill to its carrying value, and record an impairment charge for any excess of carrying value of goodwill over its implied fair value. An entity also has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU
2017-04
simplifies the goodwill impairment test by eliminating the second step of the test. As such, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. ASU
2017-04
is effective prospectively for the year beginning December 29, 2019. The Company completes its annual goodwill impairment assessment during the third quarter. The Company does not expect the adoption of ASU
2017-04
to have a material impact on its consolidated financial statements.
Accounting Pronouncements Not Yet Effective
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard includes multiple key provisions, including removal of certain exceptions to ASC 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
10

Table of Contents
F.
Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
During the thirteen weeks ended March 28, 2020
and March
30,
 
2019
approximately 96% of the Company’s revenue was from shipments of its products to domestic distributors
,
 3% from shipments to international distributors, primarily located in Canada
 and
 1%
was
from retail beer, cider, and merchandise sales at the Company’s retail locations.
The Company recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met. As of March 28, 2020 and December 28, 2019, the Company has deferred $13.9 million and $7.0 million, respectively in revenue related to product shipped prior to these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
Customer promotional discount programs are entered into by the Company with distributors for certain periods of time. The reimbursements for discounts to distributors are recorded as reductions to net revenue and were $8.2 million and $6.2 million for the thirteen weeks ended March 28, 2020 and March 30, 2019, respectively. The agreed-upon discount rates are applied to certain distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company, however, the amounts could differ from the estimated allowance.
Customer programs and incentives are a common practice in the alcohol beverage industry. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses
,
based on the nature of the expenditure. Customer incentives and other payments made to distributors are primarily based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to
point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen weeks ended March 28, 2020 and March 30, 2019 were $4.2 million and $3.1 million, respectively. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.
The Further Consolidated Appropriations Act, 2020 extends reductions in federal excise taxes as a result of the Tax Cuts and Jobs Act of 2017 through December 31, 2020. The Company benefited from a reduction in federal excise taxes of $2.6 million and $1.7 million for the thirteen weeks ended March 28, 2020 and March 30, 2019, respectively.
Shipment volume for the quarter was significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 28, 2020 when compared to March 30, 2019. The Company believes distributor inventory as of March 28, 2020 averaged approximately 6 weeks on hand and was at an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of Truly and Twisted Tea brands over the summer. The Company expects wholesaler inventory levels in terms of weeks on hand to return to more normal levels of approximately 4 weeks on hand later in the year.
11

G.
Inventories
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventories consist of raw materials, work in process and finished goods. Raw materials, which principally consist of hops
,
 flavorings,
 apple juice, other brewing materials and packaging, are stated at the lower of cost, determined on the
first-in,
first-out
basis, or net realizable value. The Company’s goal is to maintain on hand a supply of at least one year for essential hop varieties, in order to limit the risk of an unexpected reduction in supply. Inventories are generally classified as current assets. The Company classifies hops inventory in excess of two years of forecasted usage in other long-term assets. The cost elements of work in process and finished goods inventory consist of raw materials, direct labor and manufacturing overhead. Inventories consist of the following:
                 
   
March 28,
 
 
December 28,
 
 
2020
 
 
2019
 
 
(in thousands)
 
Current inventory:
   
     
 
Raw materials
 
$
73,267
    $
61,522
 
Work in process
   
14,775
     
12,631
 
Finished goods
   
36,487
     
31,885
 
                 
Total current inventory
   
124,529
     
106,038
 
Long term inventory
   
15,413
     
10,048
 
                 
Total inventory
  $
139,942
    $
116,086
 
                 
 
 
 
 
 
 
H.
Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company has various lease agreements in place for facilities and equipment. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2034. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of the lease payments. ROU assets and lease liabilities commencing after December 30, 2018 are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. As of March 
28
, 2020, and December 28, 2019 total ROU assets and lease liabilities were as follows:
 
                     
 
 
Classification
 
Leases
 
 
 
 
 
March 28,
 
 
December 28,
 
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
Right-of-use
assets
 
 
 
 
 
 
 
Operating lease assets
 
Operating
right-of-use
assets
  $
 
63,039
    $
53,758
 
Finance lease assets
 
Property, plant and equipment, net
   
2,398
     
2,531
 
Lease Liabilities
 
 
 
 
 
 
 
Current
 
   
     
 
Operating lease liabilities
 
Current operating lease liabilities
   
5,459
     
5,168
 
Finance lease liabilities
 
Accrued expenses and other current liabilities
   
551
     
546
 
Non-current
 
   
     
 
Operating lease liabilities
 
Non-current
operating lease liabilities
   
63,248
     
53,940
 
Finance lease liabilities
 
Other liabilities
   
1,896
     
2,042
 
 
 
 
 
 
 
The gross value and accumulated depreciation of ROU assets related to finance leases as of March 28, 2020 and December 28, 2019 were as follows:
                 
 
Finance Leases
 
   
March 28,
 
 
December 28,
 
 
2020
 
 
2019
 
 
(in thousands)
 
Gross value
  $
2,837
    $
2,837
 
Accumulated amortization
   
(439
)    
(306
)
                 
Carrying value
  $
2,398
    $
2,531
 
                 
 
 
 
 
12

Components of lease cost for the thirteen weeks ended March 28, 2020 and March 30, 2019 were as follows:
                 
 
Lease Cost
 
   
March 28,
 
 
March 30,
 
 
2020
 
 
2019
 
 
(in thousands)
 
Operating lease cost
  $
2,415
   
$
1,128
 
Variable lease costs not included in liability
    485
      199
 
Finance lease cost:
   
     
 
Amortization of
right-of-use
asset
   
133
     
  
 
Interest on lease liabilities
   
22
     
—  
 
                 
Total finance lease cost
  $
155
    $
 
 
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturities of lease liabilities as of March 28, 2020 were as follows:
                                 
 
Operating
Leases
 
 
Capital
Leases
 
 
Weighted-Average
 
Remaining Term in
 
Years
 
Operating
 
Leases
 
 
Capital
 
Leases
 
 
(in thousands)
 
 
 
 
 
2020
  $
3,962
    $
464
     
     
 
2021
   
9,816
     
626
     
     
 
2022
   
9,695
     
626
     
     
 
2023
   
9,694
     
626
     
     
 
2024
   
9,470
     
265
     
     
 
Thereafter
   
39,524
     
23
     
     
 
                                 
Total lease payments
   
82,161
     
2,630
     
     
 
Less imputed interest (based on 3.5% weighted-average discount rate)
   
(13,454
)    
(183
)    
     
 
                                 
Present value of lease liability
  $
68,707
    $
2,447
     
9.4
     
4.5
 
                                 
 
 
 
 
 
 
 
 
 
The Company has additional lease liabilities of $3.9 million which have not yet commenced as of March 28, 2020, and as such, have not been recognized on the Company’s Consolidated balance sheet. These leases are expected to commence during the second quarter of 2020 with a term of three years.
 
I.
Net Income per Share
 
 
 
 
 
 
 
 
The Company calculates net income per share using the
two-class
method, which requires the Company to allocate net income to its Class A Common Shares, Class B Common Shares and unvested share-based payment awards that participate in dividends with common stock, in the calculation of net income per share.
The Class A Common Stock has no voting rights, except (1) as required by law, (2) for the election of Class A Directors, and (3) that the approval of the holders of the Class A Common Stock is required for (a) certain future authorizations or issuances of additional securities which have rights senior to Class A Common Stock, (b) certain alterations of rights or terms of the Class A or Class B Common Stock as set forth in the Articles of Organization of the Company, (c) other amendments of the Articles of Organization of the Company, (d) certain mergers or consolidations with, or acquisitions of, other entities, and (e) sales or dispositions of any significant portion of the Company’s assets.
The Class B Common Stock has full voting rights, including the right to (1) elect a majority of the members of the Company’s Board of Directors and (2) approve all (a) amendments to the Company’s Articles of Organization, (b) mergers or consolidations with, or acquisitions of, other entities, (c) sales or dispositions of any significant portion of the Company’s assets, and (d) equity-based and other executive compensation and other significant corporate matters. The Company’s Class B Common Stock is not listed for trading. Each share of the Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of the respective Class B holder, and participates equally in dividends.
13

The Company’s unvested share-based payment awards include unvested shares (1) issued under the Company’s investment share program, which permits employees who have been with the Company for at least one year to purchase shares of Class A Common Stock and to purchase those shares at a discount ranging from 20% to 40% below market value based on years of employment starting after two years of employment, and (2) awarded as restricted stock awards at the discretion of the Company’s Board of Directors. The investment shares and restricted stock awards generally vest over five years in equal number of shares. The unvested shares participate equally in dividends. See Note O for a discussion of the current year unvested stock awards and issuances.
Included in the computation of net income per diluted common share are dilutive outstanding stock options and restricted stock that are vested or expected to vest. At its discretion, the Board of Directors grants stock options and restricted stock to senior management and certain key employees. The terms of the employee stock options are determined by the Board of Directors at the time of grant. To date, stock options granted to employees vest over various service periods and/or based on the attainment of certain performance criteria and generally expire after ten years. In December 2018, the Employee Equity Incentive Plan was amended to permit the grant of restricted stock units. The restricted stock units generally vest over four years in equal number of shares. Each restricted stock unit represents an unfunded and unsecured right to receive one share of Class A Stock upon satisfaction of the vesting criteria. The unvested shares participate equally in dividends and are forfeitable. Prior to March 1, 2019, the Company granted restricted stock awards, generally vesting over five years in equal number of shares. The Company also grants stock options to its
non-employee
directors upon election or
re-election
to the Board of Directors. The number of option shares granted to
non-employee
directors is calculated based on a defined formula and these stock options vest immediately upon grant and expire after ten years.
Net Income per Common Share
 -
Basic
The following table sets forth the computation of basic net income per share using the
two-class
method:
                 
 
Thirteen weeks ended
 
 
March 28,
 
 
March 30,
 
 
2020
 
 
2019
 
 
(in thousands, except per share data)
 
Net income
  $
18,234
    $
23,694
 
                 
Allocation of net income for basic:
   
     
 
Class A Common Stock
  $
14,136
    $
17,525
 
Class B Common Stock
   
3,967
     
5,942
 
Unvested participating shares
   
131
     
227
 
                 
 
  $
18,234
    $
23,694
 
Weighted average number of shares for basic:
   
     
 
Class A Common Stock
   
9,425
     
8,606
 
Class B Common Stock*
   
2,645
     
2,918
 
Unvested participating shares
   
87
     
111
 
                 
 
12,157
 
 
11,635
 
Net income per share for basic:
   
     
 
Class A Common Stock
  $
1.50
    $
2.04
 
                 
Class B Common Stock
  $
1.50
    $
2.04
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Change in Class B Common Stock resulted from the conversion of 100,000 shares to Class A Common Stock on August 8, 2019, 145,000 shares to Class A Common Stock on December 13, 2019 and 150,000 shares to Class A Common Stock on March 6, 2020 with the ending number of shares reflecting the weighted average for the period.
 
 
 
 
 
 
 
 
14

Table of Contents
Net Income per Common Share
 -
Diluted
The Company calculates diluted net income per share for common stock using the more dilutive of (1) the treasury stock method, or (2) the
two-class
method, which assumes the participating securities are not exercised.
The following table sets forth the computation of diluted net income per share, assuming the conversion of all Class B Common Stock into Class A Common Stock and using the
two-class
method for unvested participating shares:
                                                 
 
Thirteen weeks ended