Craft Brew Alliance Inc

ANDREW J. THOMAS

CHIEF EXECUTIVE OFFICER

J. SCOTT MENNEN

CHIEF OPERATING OFFICER

KENNETH C. KUNZE

CHIEF MARKETING OFFICER

DEREK Y. HAHM

VICE PRESIDENT OF SALES

THE HAWAII BREWERY

THE NEW HAMPSHIRE   

THE WASHINGTON  

74-5612 Pawai Place 

Kailua-Kona, Hawaii 96740 

(808) 334-2739

Kona Pub & Brewery

Koko Marina Pub

Hawaii Kai, Oahu

Both Kona Brewing Branded

BREWERY

1 Redhook Way 

Pease International Tradesport 

Portsmouth, New Hampshire 03801 

(603) 430-8600 

Seattle, Washington 98122 

BREWERY

714 E. Pike Street 

(206) 823-3026

Redhook Brewlab

Redhook Branded

THE OREGON BREWERY

924 N. Russell Street 

Portland, Oregon 97227 

(503) 331-7270

THE CALIFORNIA  

NATIONAL SALES 

OFFICE

315 Culver Boulevard  

Playa del Rey, California 90293

THE NORTH CAROLINA 

BREWERY & CIDERY

THE FLORIDA BREWERY

565 NW 24th St, Miami, FL 33127 

(305) 982-8732

Wynwood Brewing Company

Wynwood Branded

163 Boone Creek Dr,  

Boone, NC 28607 

(828) 263-1111

Appalachian Mountain Brewery

Appalachian Mountain Brewery 

Branded

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CRAFT BREW ALLIANCE, INC.
2018 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

PART I

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Item 6.

Selected Financial Data

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Item 10.

Directors, Executive Officers and Corporate Governance

Item 11.

Executive Compensation

PART III

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

Item 15.

Exhibits and Financial Statement Schedules

Item 16.

Form 10-K Summary

Signatures

PART IV

1

Page

2

14

22

22

22

22

23

25

26

38

39

75

75

78

78

78

78

79

79

79

82

83

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 
2

 
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.

3

•  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 CO2 recovery system 
to  capture  and  repurpose  CO2  naturally  produced  during  the  brewing  process,  eliminating  the  need  to  purchase  and 
transport CO2, 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:

9

•  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 
10

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.

11

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 
12

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 
13

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.

14

 
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.

15

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.

16

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.

17

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.

18

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. 

19

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.

20

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.

21

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
Oregon Brewery
New Hampshire Brewery
Hawaiian Brewery

Square
Footage

185,000
125,000
11,000

Current
Annual 
Capacity

630
215
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.

22

 
 
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
Quarter 1
Quarter 2
Quarter 3
Quarter 4

2018
Quarter 1
Quarter 2
Quarter 3
Quarter 4

High

Low

$

$

$

$

17.25
17.45
18.90
19.80

High

19.90
20.85
21.00
18.55

12.40
12.25
16.75
17.15

Low

17.85
18.25
16.15
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.

23

 
 
 
 
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

S
R
A
L
L
O
D

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

2013

2014

2015

2016

2017

2018

Craft Brew Alliance, Inc.

NASDAQ Composite Index

S&P 500 Beverages Index

Company/Index
Craft Brew Alliance, Inc.
NASDAQ Composite
S&P 500 Beverages Index

Base
Period
12/31/2013
100.00
$
100.00
100.00

12/31/2014
81.24
$
113.40
112.53

12/31/2015
50.97
$
119.89
122.62

Indexed Returns
Year Ended
12/31/2016
102.92
$
128.89
122.63

12/31/2017
116.93
$
165.29
141.95

12/31/2018
87.15
$
158.87
133.64

24

 
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

Statement of Operations Data
Net sales (1)
Cost of sales
Gross profit
Selling, general and administrative expenses(2) (3)
Operating income
Interest expense and other income (expense), net
Income (loss) before provision for income taxes
Income tax provision (benefit)(4)
Net income (loss)
Basic and diluted net income (loss) per share
Shares used in basic per share calculations
Shares used in diluted per share calculations

Balance Sheet Data
Cash, cash equivalents and restricted cash
Working capital
Total assets
Current portion of long-term debt and capital leases
Long-term debt and capital leases, net of current
portion
Other long-term obligations
Shareholders’ equity

$

$
$

$

2018
206,186
137,863
68,323
62,572
5,751
(322)
5,429
1,287
4,142
0.21
19,349
19,557

$

$
$

$

$

Year Ended December 31,
2016
202,507
142,908
59,599
59,224
375
(681)
(306)
14
(320) $
(0.02) $

2017
207,456
142,198
65,258
60,463
4,795
(754)
4,041
(5,482)
9,523
0.49
19,284
19,447

19,225
19,225

2015
204,168
141,972
62,196
57,932
4,264
(546)
3,718
1,500
2,218
0.12
19,152
19,175

$
$

$

$
$

2014
200,022
141,312
58,710
53,000
5,710
(611)
5,099
2,022
3,077
0.16
19,038
19,126

2018

2017

December 31,
2016

2015

2014

$

1,200
13,673
236,047
919

46,573
15,177
136,435

$

579
38,005
209,637
699

32,599
14,764
130,791

$

442
13,082
200,405
1,317

27,946
19,844
119,661

$

911
8,933
188,429
507

18,991
19,057
118,738

981
6,380
176,931
1,157

13,720
18,068
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

 
 
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

Following is a summary of our financial results:

2018
2017
2016

Net Sales
$206.2 million
$207.5 million
$202.5 million

Net Income (Loss)
$4.1 million
$9.5 million
$(0.3) million

Number of
Barrels Sold
747,600
748,300
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

 
 
 
 
 
 
 
 
 
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):

Sales
Less excise tax
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income (expense), net
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)

(1)  Percentages may not sum due to rounding.

Year Ended December 31,
2017

2016

2018

105.4%
5.4
100.0
66.9
33.1
30.3
2.8
(0.3)
0.1
2.6
0.6
2.0%

105.8%
5.8
100.0
68.5
31.5
29.1
2.3
(0.3)
—
1.9
(2.6)
4.6%

106.5 %
6.5
100.0
70.6
29.4
29.2
0.2
(0.4)
—
(0.2)
—
(0.2)%

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

Year Ended December 31,

2018
Net sales
Gross profit
Gross margin

2017
Net sales
Gross profit
Gross margin

2016
Net sales
Gross profit
Gross margin

Beer Related
182,163
$
66,958
$

36.8%

$
$

$
$

179,830
63,412

35.3%

173,657
55,667

32.1%

Net Sales by Category
The following tables set forth a comparison of Net sales by category (dollars in thousands):

Sales by Category
A-B and A-B related(1)
Contract brewing and beer related(2)
Excise taxes

Net beer related sales

Brewpubs(3)
Net sales

Year Ended December 31,

2018

2017

$

$

167,638
25,608
(11,083)
182,163
24,023
206,186

$

$

164,491
27,430
(12,091)
179,830
27,626
207,456

28

Brewpubs
24,023
1,365

5.7%

27,626
1,846

6.7%

28,850
3,932
13.6%

$
$

$
$

$
$

Total
206,186
68,323

33.1%

207,456
65,258

31.5%

202,507
59,599

29.4%

Dollar
Change

% Change

3,147
(1,822)
1,008
2,333
(3,603)
(1,270)

1.9 %
(6.6)%
(8.3)%
1.3 %
(13.0)%
(0.6)%

$
$

$
$

$
$

$

$

 
 
 
 
Sales by Category
A-B and A-B related(1)
Contract brewing and beer related(2)
Excise taxes

Net beer related sales

Brewpubs(3)
Net sales

Year Ended December 31,

2017

2016

Dollar
Change

% Change

$

$

164,491
27,430
(12,091)
179,830
27,626
207,456

$

$

167,725
19,052
(13,120)
173,657
28,850
202,507

$

$

(3,234)
8,378
1,029
6,173
(1,224)
4,949

(1.9)%
44.0 %
(7.8)%
3.6 %
(4.2)%
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,

A-B and A-B related(2)
Contract brewing and beer related(3)
Brewpubs
Total

2018
Shipments

2017
Shipments

Increase
(Decrease)

%
Change

Change in
Depletions(1)

653,300
86,700
7,600
747,600

654,200
84,800
9,300
748,300

(900)
1,900
(1,700)
(700)

(0.1)%
2.2 %
(18.3)%
(0.1)%

(2)%

Year Ended December 31,

A-B and A-B related(2)
Contract brewing and beer related(3)
Brewpubs
Total

2017 
Shipments

2016 
Shipments

Increase
(Decrease)

%
Change

Change in
Depletions(1)

654,200
84,800
9,300
748,300

693,300
72,600
9,700
775,600

(39,100)
12,200
(400)
(27,300)

(5.6)%
16.8 %
(4.1)%
(3.5)%

(1)%

(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
Widmer Brothers
Redhook
Omission
All other(1)
Total(2)

456,300
98,700
71,200
44,700
48,500
719,400

424,600
123,300
94,200
44,000
44,500
730,600

31,700
(24,600)
(23,000)
700
4,000
(11,200)

7.5 %
(20.0)%
(24.4)%
1.6 %
9.0 %
(1.5)%

8 %
(19)%
(27)%
— %
12 %
(2)%

Year Ended December 31,

2017 
Shipments

2016 
Shipments

Increase
(Decrease)

%
Change

Change in
Depletions

Kona
Widmer Brothers
Redhook
Omission
All other(1)
Total(2)

424,600
123,300
94,200
44,000
44,500
730,600

397,400
148,100
127,200
42,900
33,300
748,900

27,200
(24,800)
(33,000)
1,100
11,200
(18,300)

6.8 %
(16.7)%
(25.9)%
2.6 %
33.6 %
(2.4)%

10 %
(16)%
(24)%
(2)%
17 %
(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.

30

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,

Draft
Packaged
Total

2018

2017

2016

Shipments

% of Total

Shipments

% of Total

Shipments

% of Total

169,200
550,200
719,400

23.5%
76.5%
100.0%

165,600
565,000
730,600

22.7%
77.3%
100.0%

171,100
577,800
748,900

22.8%
77.2%
100.0%

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

31

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

Information regarding Cost of sales was as follows (dollars in thousands):

Year Ended December 31,

2018

2017

Dollar
Change

Beer Related
Brewpubs
Total

Beer Related
Brewpubs
Total

$

$

$

$

115,205
22,658
137,863

$

$

116,418
25,780
142,198

Year Ended December 31,

2017

2016

116,418
25,780
142,198

$

$

117,990
24,918
142,908

$

$

$

$

(1,213)
(3,122)
(4,335)

% Change

(1.0)%
(12.1)%
(3.0)%

Dollar
Change

(1,572)
862
(710)

% Change

(1.3)%
3.5 %
(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,
2017

2016

2018

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.

32

 
 
 
 
 
 
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,

2018

2017

Dollar
Change

Beer Related
Brewpubs
Total

Beer Related
Brewpubs
Total

$

$

66,958
1,365
68,323

$

$

63,412
1,846
65,258

Year Ended December 31,

2017

2016

$

$

63,412
1,846
65,258

$

$

55,667
3,932
59,599

$

$

$

$

% Change

5.6 %
(26.1)%
4.7 %

3,546
(481)
3,065

Dollar
Change

7,745
(2,086)
5,659

% Change

13.9 %
(53.1)%
9.5 %

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

Year Ended December 31,
2017

2018

2016

Beer Related
Brewpubs
Total

36.8%
5.7%
33.1%

35.3%
6.7%
31.5%

32.1%
13.6%
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.

33

 
 
 
 
 
 
Information regarding SG&A was as follows (dollars in thousands): 

As a % of Net sales

As a % of Net sales

Year Ended December 31,

2018
62,572

$

2017
60,463

$

30.3%

29.1%

Dollar
Change

% Change

$

2,109

3.5%

Year Ended December 31,

2017
60,463

$

2016
59,224

$

29.1%

29.2%

Dollar
Change

% Change

$

1,239

2.1%

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):

Interest expense

Interest expense

Average debt outstanding
Average interest rate

Year Ended December 31,

2018

2017

Dollar
Change

% Change

$

614

$

715

$

(101)

(14.1)%

Year Ended December 31,

2017

2016

Dollar
Change

% Change

$

$

715

$

709

$

6

0.8 %

Year Ended December 31,
2017
27,189

2018
18,664

$

$

2016
27,548

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. 

34

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,
2017

2018

2016

Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities

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

$

$

13,241
(27,124)
14,504
621

$

$

16,778
(20,348)
3,707
137

$

$

7,444
(16,572)
8,659
(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 

35

 
 
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.

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):

Contractual Obligations

Term loan
Interest on term loan(1)
Line of credit
Operating leases
Capital leases
Purchase commitments
Sponsorship obligations
Interest rate swap(2)

Total

8,823
420
37,092
43,712
1,725
27,794
4,168
780
124,514

$

$

$

$

Payments Due By Period
2020 and
2021

2022 and
2023

2019

2024 and
beyond

442
97
—
11,208
529
7,278
1,830
180
21,564

$

$

936
179
—
3,800
599
14,641
1,745
332
22,232

$

$

7,445
144
37,092
3,258
398
5,875
593
268
55,073

$

$

—
—
—
25,446
199
—
—
—
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.

36

 
 
 
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.

37

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.

38

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)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses(1)
Operating income (loss)
Interest expense and Other expense, net
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Basic and diluted net income (loss) per share(5)
Shares used in basic per share calculation
Shares used in diluted per share calculation

2017 (In thousands, except per share data)
Net sales(2)
Cost of sales
Gross profit
Selling, general and administrative expenses(3)
Operating income (loss)
Interest expense and Other expense, net
Income (loss) before income taxes
Income tax provision (benefit)(4)
Net income (loss)
Income (loss) per share:(5)

Basic
Diluted

Shares used in basic per share calculation
Shares used in diluted per share calculation

1st Quarter
47,487
$
32,416
15,071
14,748
323
(100)
223
62
161
0.01
19,310
19,488

$
$

2nd Quarter
61,823
$
39,696
22,127
15,857
6,270
(86)
6,184
1,732
4,452
0.23
19,334
19,517

$
$

3rd Quarter
52,889
$
36,190
16,699
16,712
(13)
(120)
(133)
(194)
61
$
— $

$
$

4th Quarter
43,987
$
29,561
14,426
15,255
(829)
(16)
(845)
(313)
(532)
(0.03)
19,382
19,382

19,370
19,545

1st Quarter
44,302
$
31,633
12,669
15,469
(2,800)
(178)
(2,978)
(1,191)
(1,787) $

2nd Quarter
60,550
$
42,221
18,329
15,560
2,769
(163)
2,606
882
1,724

$

3rd Quarter
56,638
$
37,254
19,384
16,328
3,056
(238)
2,818
1,067
1,751

$

4th Quarter(5)
45,966
$
31,090
14,876
13,106
1,770
(175)
1,595
(6,240)
7,835

$

$
$

(0.09) $
(0.09) $

19,261
19,261

$
$

0.09
0.09
19,278
19,389

$
$

0.09
0.09
19,296
19,443

0.41
0.40
19,302
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.

39

 
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.

40

$

$

236,047

$

209,637

17,552

$

14,338

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

$

Accounts receivable, net

Inventory, net

Assets held for sale

Other current assets

Total current assets

Property, equipment and leasehold improvements, net

Goodwill

Trademarks
Intangible, equity method investment and other assets, net

Total assets

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable

Accrued salaries, wages and payroll taxes

Refundable deposits

Deferred revenue

Other accrued expenses

Current portion of long-term debt and capital lease obligations

Total current liabilities

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

Fair value of derivative financial instruments

Deferred income tax liability, net

Other liabilities

Total liabilities

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

Additional paid-in capital

Accumulated other comprehensive loss

Accumulated deficit

Total common shareholders' equity

29,998

17,216

—

3,121

51,535

113,189

21,986

44,289
5,048

5,635

4,123

6,015

3,618

919

37,862

46,573

116

12,381

2,680

99,612

97

144,013
(86)
(7,589)
136,435

Total liabilities and common shareholders' equity

$

236,047

$

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

41

579

27,784

13,844

22,946

4,335

69,488

106,283

12,917

14,429
6,520

5,877

4,816

3,385

2,368

699

31,483

32,599

221

12,886

1,657

78,846

96

142,196
(164)
(11,337)
130,791

209,637

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

Sales

Less excise taxes

Net sales

Cost of sales

Gross profit

Selling, general and administrative expenses

Operating income

Interest expense

Other income (expense), net

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

Basic and diluted net income (loss) per share

Shares used in basic per share calculations

Shares used in diluted per share calculations

Year Ended December 31,

2018

2017

2016

$

217,269

$

219,547

$

11,083

206,186

137,863

68,323

62,572

5,751
(614)
292

5,429

1,287

4,142

0.21

19,349

19,557

$

$

12,091

207,456

142,198

65,258

60,463

4,795
(715)
(39)
4,041
(5,482)
9,523

0.49

19,284

19,447

$

$

$

$

215,627

13,120

202,507

142,908

59,599

59,224

375
(709)
28
(306)
14
(320)
(0.02)
19,225

19,225

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

42

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

Net income (loss)

Unrealized gain on derivative hedge transactions, net of tax

Comprehensive income (loss)

Year Ended December 31,

2018

2017

2016

$

$

4,142

78

4,220

$

$

9,523

98

9,621

$

$

(320)
90
(230)

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

43

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

Common Stock
Par
Value

Shares

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Loss

Accumulated
Deficit

Total
Common
Shareholders'
Equity

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

Stock-based compensation, net of

shares withheld for tax payments
Tax benefit related to stock options

Unrealized gains on derivative

financial instruments, net of tax
benefit of $55

Tax payments related to stock-

based awards

Net loss
Balance at December 31, 2016
Issuance of shares under stock

plans, net of shares withheld for
tax payments

Stock-based compensation, net of

shares withheld for tax payments

Unrealized gains on derivative

financial instruments, net of tax
of $105

Tax payments related to stock-

based awards

Net income
Balance at December 31, 2017
Adoption of accounting standards

(see Note 12)

Issuance of shares under stock

plans, net of shares withheld for
tax payments

Stock-based compensation, net of

shares withheld for tax payments

Unrealized gains on derivative

financial instruments, net of tax
of $27

Tax payments related to stock-

based awards

Net income
Balance at December 31, 2018

20

62

—

—

—
—

19,261

25

24

—

—

—

19,310

—

42

31

—

—

—

19,383

$

—

—

—

—

—
—

96

—

—

—

—

—

96

—

0.3

0.2

—

—

—

97

172

1,087

—

—

(106)
—

140,687

219

1,317

—

(27)
—

142,196

—

427

1,482

—

(92)
—

$ 144,013

$

44

—

—

—

90

—
—
(262)

—

—

98

—

—

—

—

—

—
(320)
(20,860)

—

—

—

—

—
(164)

9,523
(11,337)

172

1,087

—

90

(106)
(320)

119,661

219

1,317

98

(27)

9,523

130,791

—

—

—

78

—

(394)

(394)

—

—

—

—

427

1,482

78

(92)

—
(86) $

4,142
(7,589) $

4,142

136,435

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Year Ended December 31,
2017

2016

2018

Cash flows from operating activities:

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

Depreciation and amortization
(Gain) loss on sale or disposal of Property, equipment and leasehold
improvements
Deferred income taxes
Stock-based compensation
Impairment of assets held for sale
Other
Changes in operating assets and liabilities:

Accounts receivable, net

Inventories
Other current assets
Accounts payable, deferred revenue and other accrued expenses
Accrued salaries, wages and payroll taxes
Refundable deposits

Net cash provided by operating activities

Cash flows from investing activities:

Expenditures for Property, equipment and leasehold improvements

Proceeds from sale of Property, equipment and leasehold improvements

Restricted cash from sale of Property, equipment and leasehold improvements

Business combinations and asset acquisitions

Expenditures for long-term deposits

Equity method investment

Net cash used in investing activities

Cash flows from financing activities:

Principal payments on debt and capital lease obligations

Net borrowings under revolving line of credit

Proceeds from issuances of common stock
Tax payments related to stock-based awards

Net cash provided by financing activities
Increase (decrease) in Cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash:

Beginning of period
End of period

Supplemental disclosure of cash flow information:

Cash paid for interest
Cash paid for income taxes, net

Supplemental disclosure of non-cash information:

$

4,142

$

9,523

$

(320)

10,612

10,457

10,862

(567)
(506)
1,484
—
503

(2,770)
(2,728)
466
3,488
(266)
(617)
13,241

(12,769)
23,017

515
(37,887)
—

—
(27,124)

(724)
14,893

427
(92)
14,504
621

$

$

579
1,200

576
1,078

$

$

428
(5,400)
1,316
493
539

(3,776)
5,500
(1,840)
277
910
(1,649)
16,778

(18,342)
95

—

—

—
(2,101)
(20,348)

(709)
4,224

219
(27)
3,707
137

442
579

716
1,158

$

$

96
360
1,087
—
654

(5,082)
(1,614)
(55)
1,515
(501)
442
7,444

(15,722)
75

—

—
(925)
—
(16,572)

(605)
9,198

172
(106)
8,659
(469)

911
442

667
587

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

Accounts payable at end of period

— $

521

$

1,173

3,061

519

889

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

45

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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. 

46

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
Brewery equipment
Furniture, fixtures and other equipment
Vehicles
Leasehold improvements

30 – 50 years
10 – 25 years
2 – 10 years
5 years
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 

47

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
Non-compete agreements

15 years
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.

48

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.

49

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. 

50

                                        
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.

51

 
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.

52

Note 4. Inventories 

Inventories consisted of the following (in thousands):

Raw materials
Work in process
Finished goods
Packaging materials
Promotional merchandise
Pub food, beverages and supplies

December 31,

2018

2017

7,146
3,219
4,319
891
1,139
502
17,216

$

$

4,290
1,960
5,555
410
1,161
468
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.

53

 
 
The allocation of the purchase price for the Cisco asset purchase was as follows (in thousands):

Assets

Other intangible assets

Non-compete agreements

Recipes

Trademark

Net assets acquired

Useful Life

43

56

2 years

Indefinite

24,163

indefinite

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

Inventory

$

Property, equipment and leasehold improvements

Land

Goodwill

Other intangible assets

Trademark

Co-exist agreement

Non-compete agreements

Recipes

Liabilities

Gift cards

Net assets acquired

Useful Life

268 N/A

1,252

3-39 years

360 N/A

3,443

Indefinite

1,900

Indefinite

Indefinite

2 years

Indefinite

650

260

140

8,273

2 N/A

$

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 

54

 
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

Cash

Accounts receivable

Inventory

Prepaid expenses and other

$

Property, equipment and leasehold improvements

Goodwill

Other intangible assets

Recipes

Non-Compete Agreements

Trademark

Liabilities

Accounts payable

Accrued salaries, wages and payroll taxes

Refundable deposits

Other accrued expenses

Current portion of long-term debt

Net assets acquired

$

Useful Life

79 N/A

14 N/A

103 N/A

40 N/A

310

5 - 10 years

5,626

Indefinite

40

Indefinite

260

2 years

3,800

Indefinite

10,272

168 N/A

24 N/A

13 N/A

3 N/A

25 N/A

233

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.

55

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):

Prepaid property taxes
Prepaid insurance
Income taxes receivable
Other

Other accrued expenses consisted of the following (in thousands):

Accrued pricing discounts
Other

Note 7. Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements consisted of the following (in thousands):

Brewery equipment
Buildings
Land and improvements
Furniture, fixtures and other equipment
Leasehold improvements
Vehicles
Construction in progress

Less accumulated depreciation and amortization

December 31,

2018

2017

553
439
537
1,592
3,121

$

$

534
518
1,153
2,130
4,335

December 31,

2018

2017

781
2,837
3,618

$

$

1,011
1,357
2,368

December 31,

2018

2017

99,210
34,525
4,181
20,438
15,473
124
22,001
195,952
(82,763)
113,189

$

$

97,606
32,925
3,821
20,388
16,239
106
8,661
179,746
(73,463)
106,283

$

$

$

$

$

$

56

 
 
 
 
 
 
 
 
 
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

Goodwill acquired related to acquisition of AMB

Goodwill acquired related to acquisition of Wynwood
Balance, December 31, 2018

$

$

12,917

3,443

5,626

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):

Recipes
Co-Exist Agreement

Distributor agreements
Accumulated amortization

Non-compete agreements
Accumulated amortization

Other
Accumulated amortization

Intangible assets, net

Promotional merchandise
Deposits and other
Equity method investment
Intangible, equity method investment and other assets, net

Amortization expense was as follows (in thousands):

Amortization expense

December 31,

2018

2017

$

$

936
650

2,200
(1,540)
660

563
(45)
518

379
(274)
105
2,869

185
1,994
—
5,048

$

$

700
—

2,200
(1,393)
807

—
—

348
(255)
93
1,600

818
2,076
2,026
6,520

Year Ended December 31,
2017

2016

2018

$

394

$

260

$

199

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

2019
2020
2021
2022
2023
Thereafter

$

$

462
402
165
165
89
—
1,283

57

Note 9. Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following (in thousands):

Term loan, due September 30, 2023
Line of credit, due September 30, 2023
Capital lease obligations for equipment

Less current portion

December 31,

2018

2017

$

$

8,823
37,092
1,577
47,492
(919)
46,573

$

$

9,244
22,199
1,855
33,298
(699)
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):

2019
2020
2021
2022
2023
Thereafter

Amount representing interest

Term
 Loan

Line of
Credit

Capital
Lease
Obligations

$

$

442
459
477
496
6,949

$

8,823

$

— $
—
—
—
37,092
—
37,092

$

529
333
266
199
199
199
1,725
(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. 

58

 
 
 
 
 
 
 
 
 
 
At December 31, 2018, the quarterly fee was 0.15% and the fee totaled the following (in thousands):

Loan Agreement fee

Year Ended December 31,
2017

2016

2018

$

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.

The fair value of our derivative instruments was as follows (in thousands):

Fair value of interest rate swaps

$

(116) $

(221)

December 31,

2018

2017

59

 
 
 
 
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
Year Ended
December 31,

2018
2017
2016

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)

$
$
$

105
203
145

Interest expense
Interest expense
Interest expense

$
$
$

27
150
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
Interest rate swap

Fair Value at December 31, 2017
Interest rate swap

$

$

Level 1

Level 2

Level 3

Total

— $

(116) $

— $

(116)

— $

(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):

Fixed-rate debt on balance sheet
Estimated fair value of fixed-rate debt

December 31,

2018

2017

$
$

1,577
1,591

$
$

1,855
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.

60

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):

Assets:

Other current assets

Intangible, equity method investment and other assets, net

Common shareholders' equity:

Accumulated deficit

Balance at
December
31, 2017

Adjustments
due to
ASC 606

Balance at
January 1,
2018

$

4,335

$

20,949

(237) $
(157)

4,098

20,792

$

(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):

Consolidated Balance Sheets

Assets:

Other current assets

Liabilities:

Deferred income tax liability, net

Common shareholders' equity:

Accumulated deficit

December 31, 2018

Balance
without
 Adoption of
ASC 606

Effect of
Change
 Higher
(Lower)

As Reported

$

3,121

$

3,279

$

(158)

12,381

12,437

(56)

$

(7,589) $

(7,803) $

(214)

61

Year Ended December 31, 2018
Balance
without
Adoption
of ASC 606

Effect of
Change
Higher
(Lower)

As
Reported

Consolidated Statements of Operations
Selling, general and administrative expenses

Income tax provision

Net income

$ 62,572

1,287

4,142

$

$

$

62,809

1,231

3,961

$

$

(237)
56

181

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

Product sold through distributor agreements2
Alternating proprietorship and contract brewing fees

International distribution fees
Brewpubs3
Other4

Year Ended December 31, 2018
Beer 
Related(1)
176,265
$

Brewpubs

— $

Total

$

176,265

10,612

3,400

—

2,969

—

—

24,023

—

10,612

3,400

24,023

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. 

62

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
Net sales
Gross profit
Gross margin

2017
Net sales
Gross profit
Gross margin

2016
Net sales
Gross profit
Gross margin

Beer
Related

182,163
66,958

36.8%

179,830
63,412

35.3%

173,657
55,667

32.1%

$
$

$
$

$
$

$
$

$
$

$
$

Brewpubs
24,023
1,365

5.7%

27,626
1,846

6.7%

28,850
3,932
13.6%

$
$

$
$

$
$

Total
206,186
68,323

33.1%

207,456
65,258

31.5%

202,507
59,599

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,
2017

2016

2018

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.

63

 
 
 
 
 
 
 
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):

Weighted average per share fair value of stock options granted
Intrinsic value of stock options exercised
Intrinsic value of fully-vested stock awards granted

Year Ended December 31,
2017

2018

2016

$

— $

— $

388
992

265
1,812

4.06
223
944

Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):

Selling, general and administrative expense
Cost of sales
Total stock-based compensation expense

Year Ended December 31,
2017

2018

2016

$

$

1,334
150
1,484

$

$

1,197
119
1,316

$

$

1,005
82
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.

64

 
 
 
 
The following weighted average assumptions were utilized in determining fair value pursuant to the Black-Scholes option pricing 
model:

Risk-free interest rate
Dividend yield
Expected life
Volatility

Year Ended December 31,
2017

2018

—%
—%
—
—%

—%
—%
—
—%

2016

1.66%
—%
6.81 years
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:

Outstanding at December 31, 2017

Granted
Exercised
Canceled

Outstanding at December 31, 2018

Certain information regarding options outstanding as of December 31, 2018 was as follows:

Number
Weighted average exercise price
Aggregate intrinsic value
Weighted average remaining contractual term

Options
Outstanding
359,713
—
(43,734)
(9,489)
306,490

Weighted
Average
Exercise Price
9.88
$
—
10.29
10.18
9.82

Options
Outstanding
306,490
9.82
1,384,000
5.7 years

$
$

$
$

Options
Exercisable

224,714
9.92
992,000
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.

65

 
 
 
 
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 as of January 1, 2018
Granted (target amount)
Canceled due to termination of employee
Not expected to vest due to failure to meet performance goals
Awards expected to vest as of December 31, 2018

Weighted
Average
Grant
Date Fair
Value Per
Share

$

10.41
18.25
11.51
7.69
16.85

Awards
Expected
to Vest
183,721
41,080
(52,628)
(92,805)
79,368

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):

Weighted average common shares used for basic EPS
Dilutive effect of stock-based awards
Shares used for diluted EPS

Year Ended December 31,
2017

2018

2016

19,349
208
19,557

19,284
163
19,447

19,225
—
19,225

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

would be antidilutive

—

25

221

66

 
 
 
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,
2017

2016

2018

Current federal
Current state

Deferred federal
Deferred state

$

$

1,222
571
1,793

(135)
(371)
(506)
1,287

$

$

(413) $
331
(82)

(5,368)
(32)
(5,400)
(5,482) $

(378)
32
(346)

285
75
360
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,
2017

2016

2018

Provision at U.S. statutory rate
State taxes, net of federal benefit
Effect of tax rate change on deferred tax assets and liabilities
Permanent differences, primarily meals and entertainment
Stock-based compensation
Domestic production activities deduction
Tax credits

$

$

1,140
210
—
111
(42)
—
(132)
1,287

$

$

$

1,374
189
(6,923)
180
(11)
—
(291)
(5,482) $

(104)
49
—
264
(41)
(20)
(134)
14

Significant components of our deferred tax assets and liabilities were as follows (in thousands):

Deferred tax assets
Net operating losses and tax credit carryforwards
Accrued salaries and severance
Other

Deferred tax liabilities
Property, equipment and leasehold improvements
Intangible assets
Other

December 31,

2018

2017

$

$

$

11
1,089
1,403
2,503

982
1,127
1,497
3,606

(10,783)
(3,977)
(124)
(14,884)
(12,381) $

(12,287)
(4,054)
(151)
(16,492)
(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.

67

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,
2017

2016

2018

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
2020
2021
2022
2023
Thereafter

$

$

11,208
1,937
1,863
1,793
1,465
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,
2017

2016

2018

Rent expense

$

2,908

$

2,869

$

2,613

68

 
 
 
 
 
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,
2017

2016

2018

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,
2017

2016

2018

$

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,
2017

2016

2018

$

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.

69

 
 
Aggregate future payments under purchase and sponsorship commitments as of December 31, 2018 are as follows (in thousands):

2019
2020
2021
2022
2023
Thereafter

Purchase
Obligations

Sponsorship
Obligations

Total

$

$

7,278
7,864
6,777
5,875
—
—
27,794

$

$

1,830
1,233
512
518
75
—
4,168

$

$

9,108
9,097
7,289
6,393
75
—
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):

Gross sales to A-B and Ambev

International distribution fee earned from ABWI

International distribution fee from ABWI, recorded as deferred revenue

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

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

sales

Media reimbursement from A-B, classified as a reduction of Selling,

general and administrative expenses

Year Ended December 31,
2017

2018

2016

$

166,534

$

163,368

$

168,929

3,400

5,985

2,296

383

500

3,400

3,384

2,277

384

290

1,216

1,784

2,420

377

750

70

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

Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement

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

reimbursement

Refundable deposits due to A-B
Amounts due to A-B for services rendered
Net amount due from A-B and ABWI

Agreements with Anheuser-Busch, LLC

December 31,

2018

2017

17,946

$

15,663

6,000
(2,840)
(5,140)
15,966

$

5,000
(1,619)
(4,836)
14,208

$

$

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.

71

 
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.

72

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,
2017

2018

2016

Master distributor fee earned
Royalty fee paid

$

Brewery representative reimbursement, classified as a reduction of

Selling, general and administrative expenses

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

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

the equity method investment

Amounts receivable from or due to Wynwood were as follows (in thousands):

Amounts receivable related to raw materials and alternating proprietorship fees(1)
Amounts receivable related to Brewery representative reimbursements

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

Net amount receivable

27
—

—

44

23

$

$

$

$

18
94

90

75

—

December 31,

2018

2017

— $
—
—
—

— $

—
—

—

—

—

148
32
(116)
(4)
60

73

 
 
 
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):

Brewery equipment

Buildings

Land and improvements

Furniture, fixtures and other equipment

Impairment of assets held for sale

December 31,
2017

$

$

6,972

12,562

3,451

454

23,439

(493)

22,946

74

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.

75

 
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.

76

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

77

Item 9B. Other Information

None.

Item 10.  Directors, Executive Officers and Corporate Governance

PART III

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.

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)

535,023 (1)

—

535,023

$

$

9.82

—

9.82

430,662

—

430,662

Plan Category
Equity compensation
plans approved by
shareholders

Equity compensation
plans not approved by
shareholders

Total

(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.

78

 
 
 
 
 
 
 
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.

Item 15.  Exhibits and Financial Statement Schedules

Financial Statements and Schedules

PART IV

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

Page
40
41
42
43
44
45
46

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.

79

 
 
Exhibit
Number
2.1**

3.1

3.2

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*+

10.10*+

10.11*+

10.12*+

10.13*

10.14*+

10.15*

10.16*+

10.17

10.18

10.19+

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.

80

 
 
 
 
 
 
 
 
 
 
 
 
Exhibit
Number
10.20

10.21

10.22

10.23

10.24

10.25

10.26

10.27

10.28†

10.29+†

10.30†

10.31

10.32

10.33

10.34

10.35

10.36

10.37†

10.38

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)

81

Exhibit
Number
21.1+

23.1+

24.1+

31.1+

31.2+

32.1+

99.1+

99.2+

101.INS

101.SCH

101.CAL

101.DEF
101.LAB

101.PRE

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

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document

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.

82

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
Andrew J. Thomas

/s/ Edwin A. Smith
Edwin A. Smith

*
David R. Lord

*
Timothy P. Boyle

*
Marc J. Cramer

*
Paul D. Davis

*
Matthew E. Gilbertson

*
Kevin R. Kelly

*
Nickolas A. Mills

*
Jacqueline S. Woodward

*By:   

 /s/ Andrew J. Thomas
Andrew J. Thomas,
as attorney in fact

Chief Executive Officer
(Principal Executive Officer)

Corporate Controller and Principal Accounting Officer
(Principal Accounting Officer and Acting Principal Financial Officer)

Chairman of the Board and Director

Director

Director

Director

Director

Director

Director

Director

83

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANDREW J. THOMAS
CHIEF EXECUTIVE OFFICER

J. SCOTT MENNEN
CHIEF OPERATING OFFICER

KENNETH C. KUNZE
CHIEF MARKETING OFFICER

DEREK Y. HAHM
VICE PRESIDENT OF SALES

THE HAWAII BREWERY
74-5612 Pawai Place 
Kailua-Kona, Hawaii 96740 
(808) 334-2739

Kona Pub & Brewery

Koko Marina Pub

Hawaii Kai, Oahu

Both Kona Brewing Branded

THE NEW HAMPSHIRE  
BREWERY
1 Redhook Way 
Pease International Tradesport 
Portsmouth, New Hampshire 03801 
(603) 430-8600 

THE WASHINGTON   
BREWERY
714 E. Pike Street 
Seattle, Washington 98122 
(206) 823-3026
Redhook Brewlab
Redhook Branded

THE OREGON BREWERY
924 N. Russell Street 
Portland, Oregon 97227 
(503) 331-7270

THE CALIFORNIA   
NATIONAL SALES 
OFFICE
315 Culver Boulevard  
Playa del Rey, California 90293

THE NORTH CAROLINA 
BREWERY & CIDERY
163 Boone Creek Dr,  
Boone, NC 28607 
(828) 263-1111
Appalachian Mountain Brewery
Appalachian Mountain Brewery 
Branded

THE FLORIDA BREWERY
565 NW 24th St, Miami, FL 33127 
(305) 982-8732
Wynwood Brewing Company
Wynwood Branded