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. During the fourth quarter of 2019, the $690,000 in escrow was remitted to the founders of Cisco.

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.

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



Assets			Useful Life
Other intangible assets:
Non-compete agreements	$	43	2 years
Recipes	56		Indefinite
Trademark	24,163		indefinite
Net assets acquired	$	24,262

Acquisition of Appalachian Mountain Brewery ("AMB")On November 29, 2018, we acquired substantially all the assets of AMB, which operates a brewery and taproom in Boone, North Carolina, for $8.3 million in total consideration which was comprised of $7.4 million in cash, the extinguishment of $0.6 million of debt, and the settlement of a preexisting liability of $0.3 million. The source of cash consideration paid was from existing cash and borrowings on the line of credit. Of the purchase price, $671,000 was placed in escrow to cover potential liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. During the fourth quarter of 2019, $668,000 of the $671,000 was remitted to the founder of AMB. The remaining $3,000 was remitted to us for the settlement of 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. During 2019, we recorded immaterial adjustments to the allocation of the purchase price for the AMB acquisition.

The allocation of the purchase price for the AMB acquisition was as follows (in thousands):



Assets			Useful Life
Inventory	$	268	N/A
Property, equipment and leasehold improvements	1,252		3-39 years
Land	360		N/A
Goodwill	3,443		Indefinite
Other intangible assets:
Trademark	1,900		Indefinite
Co-exist agreement	650		Indefinite
Non-compete agreements	260		2 years
Recipes	140		Indefinite
	8,273

Liabilities
Gift cards	2		N/A
Net assets acquired	$	8,271

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

Increase in Ownership Interest of Wynwood Brewing Company, LLC ("Wynwood")

On July 12, 2017, we purchased a 24.5% interest in Wynwood, which operates a brewery and taproom in Miami, Florida, for $2.1 million in cash. This investment had a carrying value of $2.0 million on October 10, 2018. On October 10, 2018, we increased our ownership interest in Wynwood from 24.5% to 100% for $7.9 million additional consideration which was comprised of $6.8 million in cash and $1.1 million for the fair value of a contingent payment which we agreed to pay as a cash incentive based on product shipments in excess of specified number of barrels in each of 2019, 2020 and 2021. As of December 31, 2019, the fair value of our expected payments under this arrangement was $0.7 million. No payment was made for 2019 as the performance threshold was not met. Adjustments of $0.1 million and $0.3 million were made in the first and fourth quarters of 2019, respectively. The first quarter adjustment was recorded as an adjustment to goodwill within the open one-year measurement period for the transaction. The fourth quarter adjustment was recorded to other income.

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. During the fourth quarter of 2019, $172,000 of the $203,000 was remitted to the founder of Wynwood and $29,000 was remitted to us for the settlement of liabilities associated with certain third party and direct claims relating to the assets purchased and liabilities assumed in the acquisition. The remaining $2,000 was remitted to the escrow company for fees. Prior to becoming a wholly owned subsidiary, we accounted for our investment in Wynwood under the equity 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 75.5% acquired by CBA. During 2019, we recorded immaterial adjustments to the allocation of the purchase price for the Wynwood acquisition.

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 allocation of the purchase price for the Wynwood acquisition was as follows (in thousands):



Assets			Useful Life
Cash	$	79	N/A
Accounts receivable	14		N/A
Inventory	103		N/A
Prepaid expenses and other	40		N/A
Property, equipment and leasehold improvements	310		5 - 10 years
Goodwill	5,626		Indefinite
Other intangible assets:
Recipes	40		Indefinite
Non-Compete Agreements	260		2 years
Trademark	3,800		Indefinite
	10,272
Liabilities
Accounts payable	168		N/A
Accrued salaries, wages and payroll taxes	24		N/A
Refundable deposits	13		N/A
Other accrued expenses	3		N/A
Current portion of long-term debt	25		N/A
	233
Net assets acquired	$	10,039

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

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 are continuing 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.