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Business Acquisitions

12 Months Ended

Dec. 31, 2019

4. Business Acquisitions

During the fiscal year 2019, the Company completed the following acquisitions:

Craft Canning + Bottling

On January 11, 2019, the Company completed the acquisition of Craft Canning + Bottling, LLC (“Craft Canning”), a Portland, Oregon-based provider of bottling and canning services. The Company’s consolidated financial statements for the year ended December 31, 2019 include Craft Canning’s results of operations from the acquisition date of January 11, 2019 through December 31, 2019. The Company’s consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date.

The following allocation of the purchase price is as follows:

Consideration given:
338,212 shares of common stock valued at $6.10 per share	$	2,080,004
Cash		2,003,200
Notes payable		761,678
Total value of acquisition	$	4,844,882

Assets and liabilities acquired:
Cash	$	553,283
Trade receivables, net		625,717
Inventories, net		154,824
Prepaid expenses and current assets		250
Property and equipment, net		1,839,486
Right-of-use assets		232,884
Intangible assets - customer list		2,895,318
Other assets		26,600
Accounts payable		(231,613	)
Accrued liabilities		(74,389	)
Deferred revenue		(52,000	)
Lease liabilities		(256,375	)
Notes payable		(869,103	)
Total	$	4,844,882

Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the customer list intangible asset was determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earning methods. The major assumptions used in arriving at the estimated identifiable intangible asset value included management’s estimates of future cash flows, discounted at an appropriate rate of return which is based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the tangible assets that are expected to contribute directly or indirectly to future cash flows. The customer relationships estimated useful life is seven years.

The Company incurred Craft Canning-related acquisition costs of $0.1 million during the year ended December 31, 2019 that have been recorded in general and administrative expenses on the consolidated statements of operations. The results of the Craft Canning acquisition are included in our consolidated financial statements from the date of acquisition through December 31, 2019. The sales and net income (including transaction costs) of Craft Canning operations included in our consolidated statements of operations were $7.1 million and $0.4 million, for the period from January 11, 2019 through December 31, 2019.

Azuñia Tequila

On September 12, 2019, the Company completed the acquisition of the Azuñia Tequila brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor of tequila and related products. The Company’s consolidated financial statements as of and for the year ended December 31, 2019 include the Azuñia Tequila assets and results of operations. For the year ended December 31, 2019, the Azuñia Tequila results of operations are included from the acquisition date of September 12, 2019 through December 31, 2019.

The acquisition was structured as an all-stock transaction, provided that the Company may, at its election, pay a portion of the consideration in cash or by executing a three-year promissory note if the issuance of stock would require the Company to hold a vote of its stockholders under the applicable Nasdaq rules. Subject to compliance with applicable Nasdaq rules, the initial consideration, will be payable approximately 18 months following the closing and will consist of 850,000 shares of the Company’s common stock at a stipulated value of $6.00 per share, 350,000 shares of the Company’s common stock based on the Company’s stock price twelve months after the close of the transaction, and additional shares based on the Azuñia business achieving certain revenue targets and the Company’s stock price 18 months after the close of the transaction. The Company has also agreed to issue additional stock consideration (subject to compliance with applicable Nasdaq rules) of up to $1.5 million upon the Azuñia business achieving revenue of at least $9.45 million in the period commencing on the 13th month following the closing and ending on the 24th month following the closing.

The Company’s consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired based upon their estimated fair values on the acquisition date. The Company estimated the purchase price based on weighted probabilities of future results and recorded deferred consideration payable of $12.8 million on the acquisition date that will be remeasured to fair value at each reporting date until the contingencies are resolved, with the changes in fair value recognized in earnings. The Company remeasured the deferred consideration payable for the period ended December 31, 2019 and increased the liability by $2.7 million to a balance of $15.5 million.

The following allocation of the purchase price is as follows:

Consideration given:
Deferred consideration payable	$	12,781,092
Total value of acquisition	$	12,781,092

Assets acquired:
Inventories, net	$	836,026
Intangible assets - brand		11,945,066
Total	$	12,781,092

Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the brand intangible asset was determined through the use of the market approach. The major assumptions used in arriving at the estimated identifiable intangible asset value included category averages for comparable acquisitions, including multiples of annual sales and dollars per case sold. The Company used an estimated brand useful life of seven years for these accounting purposes.

The Company incurred Azuñia Tequila-related acquisition costs of $0.2 million during the year ended December 31, 2019 that have been recorded in general and administrative expenses on the consolidated statements of operations. The results of the Azuñia Tequila asset acquisition are included in our consolidated financial statements from the date of acquisition through December 31, 2019. The sales of Azuñia Tequila products included in our consolidated statements of operations were $1.1 million for the period from September 12, 2019 through December 31, 2019.

Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the years ended December 31, 2019 and 2018 assume that both acquisitions of Craft Canning + Bottling and Azuñia Tequila were completed on January 1, 2018:

	2019			2018
Pro forma sales	$	19,868,484		$	16,088,104
Pro forma net loss		(20,350,193	)		(10,868,474	)
Pro forma basic and diluted net loss per share	$	(2.19	)	$	(1.69	)

Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. The share and per share data have been retroactively reflected for the acquisitions.