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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 
10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended                      September 26, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission file number:
1-14092
 
 
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
 
 
MASSACHUSETTS
 
04-3284048
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Design Center Place, Suite 850, Boston, Massachusetts
(Address of principal executive offices)
02210
(Zip Code)
(617)
368-5000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock
.
 
$0.01 par value
 
SAM
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    
Yes
  ☒    No  ☐  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
  
Yes
  ☒    No  ☐  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
 
Large accelerated filer    Accelerated filer  
Non-accelerated filer
     Smaller reporting company  
Emerging growth company
      
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act.)    Yes  ☐    No    
Number of shares outstanding of each of the issuer’s classes of common stock, as of October 16, 2020:
 
Class A Common Stock
, $
.01
par value
9,934,625
Class B Common Stock
, $.
01
par value
    
2,307,983
(Title of each class)
     (Number of shares)
 
 
 

Table of Contents
THE BOSTON BEER COMPANY, INC.
FORM
10-Q
September 26, 2020
TABLE OF CONTENTS
 
PART I.
  
FINANCIAL INFORMATION
  
PAGE
  
Item 1.
   Consolidated Financial Statements (Unaudited)    3
      Consolidated Balance Sheets as of September 26, 2020 and December 28, 2019    3
         4
      Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019    5
         6
      Notes to Consolidated Financial Statements   
7-19
  
Item 2.
   Management’s Discussion and Analysis of Financial Condition and Results of Operations   
19-24
  
Item 3.
   Quantitative and Qualitative Disclosures about Market Risk    25
  
Item 4.
   Controls and Procedures    25
PART II.
  
OTHER INFORMATION
  
  
Item 1.
   Legal Proceedings    25
  
Item 1A.
   Risk Factors    25-26
  
Item 2.
   Unregistered Sales of Equity Securities and Use of Proceeds    26-27
  
Item 3.
   Defaults Upon Senior Securities    27
  
Item 4.
   Mine Safety Disclosures    27
  
Item 5.
   Other Information    27
  
Item 6.
   Exhibits    27-29
  
 
EX-31.1
Section 302 CEO Certification
EX-31.2
Section 302 CFO Certification
EX-32.1
Section 906 CEO Certification
EX-32.2
Section 906 CFO Certification
 
2

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 
    
September 26,
2020
   
December 28,
2019
 
Assets
            
Current Assets:
    
Cash and cash equivalents
   $ 157,130     $ 36,670  
Accounts receivable
     93,809       54,404  
Inventories
     123,831       106,038  
Prepaid expenses and other current assets
     22,214       12,077  
Income tax receivable
     3,041       9,459  
  
 
 
   
 
 
 
Total current assets
     400,025       218,648  
 
 
 
Property, plant and equipment, net
     588,977       541,068  
Operating
right-of-use
assets
     59,991       53,758  
Goodwill
     112,529       112,529  
Intangible assets
     103,994       104,272  
Other assets
     46,820       23,782  
  
 
 
   
 
 
 
Total assets
   $ 1,312,336     $ 1,054,057  
  
 
 
   
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
            
Current Liabilities:
    
Accounts payable
   $ 108,600     $ 76,374  
Accrued expenses and other current liabilities
     115,604       99,107  
Current operating lease liabilities
     7,735       5,168  
  
 
 
   
 
 
 
Total current liabilities
     231,939       180,649  
 
 
 
Deferred income taxes, net
     89,170       75,010  
Non-current
operating lease liabilities
     61,184       53,940  
Other liabilities
     11,513       8,822  
  
 
 
   
 
 
 
Total liabilities
     393,806       318,421  
 
 
 
Commitments and Contingencies
 (See Note K)
   
 
 
 
Stockholders’ Equity:
    
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,868,649 and 9,370,526 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively
     99       94  
Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 2,307,983 and 2,672,983 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively
     23       27  
Additional
paid-in
capital
     594,427       571,784  
Accumulated other comprehensive loss, net of tax
     (562     (1,669
Retained earnings
     324,543       165,400  
  
 
 
   
 
 
 
Total stockholders’ equity
     918,530       735,636  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 1,312,336     $ 1,054,057  
  
 
 
   
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
 
    
Thirteen weeks ended
   
Thirty-nine weeks ended
 
    
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Revenue
   $ 525,249     $ 402,691     $ 1,358,563     $ 1,008,893  
Less excise taxes
     32,457       24,225       83,068       60,369  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net revenue
     492,792       378,466       1,275,495       948,524  
Cost of goods sold
     252,207       190,631       677,313       477,147  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     240,585       187,835       598,182       471,377  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
        
Advertising, promotional and selling expenses
     108,023       96,570       306,250       262,372  
General and administrative expenses
     30,340       31,429       87,054       81,552  
Impairment of assets
     441       —         2,796       243  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     138,804       127,999       396,100       344,167  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
     101,781       59,836       202,082       127,210  
 
 
 
 
 
Other income (expense), net:
        
Interest (expense) income, net
     (20     (138     (169     472  
Other income (expense), net
     190       (764     (222     (818
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other income (expense), net
     170       (902     (391     (346
  
 
 
   
 
 
   
 
 
   
 
 
 
Income before income tax provision
     101,951       58,934       201,691       126,864  
Income tax provision
     21,183       14,205       42,548       30,585  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 80,768     $ 44,729     $ 159,143     $ 96,279  
  
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common
share
 
-
basic
   $ 6.61     $ 3.70     $ 13.05     $ 8.16  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income per common
share
 
-
diluted
   $ 6.51     $ 3.65     $ 12.90     $ 8.07  
  
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average number of common
shares
 
-
 
Class 
 A basic
     9,846       9,136       9,663       8,797  
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average number of common
shares
 
-
 
Class 
 B basic
     2,308       2,862       2,451       2,899  
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average number of common
shares
 
-
 
diluted
     12,333       12,150       12,259       11,823  
  
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
   $ 80,768     $ 44,729     $ 159,143     $ 96,279  
  
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
        
Foreign currency translation adjustment
     61       1       (10     43  
Defined benefit plans liability adjustment
     1,117       —        
1,117
      —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive income, net of tax
     1,178       1       1,107       43  
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
   $ 81,946     $ 44,730     $ 160,250     $ 96,322  
The accompanying notes are an integral part of these consolidated financial statements.
 
4

Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the thirteen and thirty-nineweeks ended September 26, 2020 and September 28, 2019
(in thousands)
(unaudited)
 
    
Class A
Common
Shares
    
Class A
Common
Stock,
Par
    
Class B
Common
Shares
   
Class B
Common
Stock,
 
Par
   
Additional
Paid-in

Capital
    
Accumulated
Other
Comprehensive
Loss, net of tax
   
Retained
Earnings
    
Total
Stockholders’
Equity
 
Balance at December 28, 2019
     9,371      $ 94        2,673     $ 27     $ 571,784      $ (1,669   $ 165,400      $ 735,636  
Net income
                    18,234        18,234  
Stock options exercised and restricted shares activities
     38        —              1,858             1,858  
Stock-based compensation expense
               2,566             2,566  
Conversion from Class B to Class A
     150        2        (150     (2             —    
Currency translation adjustment
                  (58        (58
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Balance at March 28, 2020
     9,559      $ 96        2,523     $ 25     $ 576,208      $ (1,727   $ 183,634      $ 758,236  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
                    60,141        60,141  
Stock options exercised and restricted shares activities
     61        —              4,582             4,582  
Stock-based compensation expense
               4,537             4,537  
Conversion from Class B to Class A
     215        2        (215     (2             —    
Currency translation adjustment
                  (13        (13
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Balance at June 27, 2020
     9,835      $ 98        2,308     $ 23     $ 585,327      $ (1,740   $ 243,775      $ 827,483  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
                    80,768        80,768  
Stock options exercised and restricted shares activities
     34        1            5,468             5,469  
Stock-based compensation expense
               3,632             3,632  
Defined benefit plans liability adjustment, net of tax of $378
                  1,117          1,117  
Currency translation adjustment
                  61          61  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Balance at September 26, 2020
     9,869      $ 99        2,308     $ 23     $ 594,427      $ (562   $ 324,543      $ 918,530  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
    
Class A
Common
Shares
    
Class A
Common
Stock,
Par
    
Class B
Common
Shares
   
Class B
Common
Stock,
 
Par
   
Additional
Paid-in

Capital
    
Accumulated
Other
Comprehensive
Loss, net of tax
   
Retained
Earnings
    
Total
Stockholders’
Equity
 
Balance at December 29, 2018
     8,580      $ 86        2,918     $ 29     $ 405,711      $ (1,197   $ 55,688      $ 460,317  
Net income
                    23,694        23,694  
Stock options exercised and restricted shares activities
     54        —              3,704             3,704  
Stock-based compensation expense
               2,066             2,066  
Currency translation adjustment
                  37          37  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Balance at March 30, 2019
     8,634      $ 86        2,918     $ 29     $ 411,481      $ (1,160   $ 79,382      $ 489,818  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
                    27,856        27,856  
Stock options exercised and restricted shares activities
     21        1            1,377             1,378  
Stock-based compensation expense
               3,744             3,744  
Currency translation adjustment
                  5          5  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Balance at June 29, 2019
     8,655      $ 87        2,918     $ 29     $ 416,602      $ (1,155   $ 107,238      $ 522,801  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
                    44,729        44,729  
Stock options exercised and restricted shares activities
     31        —              3,473             3,473  
Stock-based compensation expense
               3,233             3,233  
Shares issued in connection with Dogfish Head merger
     430        4                        144,739                         144,743  
Conversion from Class B to Class A
     100        1        (100     (1                               —    
Currency translation adjustment
                  1          1  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Balance at September 28, 2019
     9,216      $ 92        2,818     $ 28     $ 568,047      $ (1,154   $ 151,967      $ 718,980  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
    
Thirty-nine weeks ended
 
    
September 26,
2020
   
September 28,
2019
 
Cash flows provided by operating activities:
    
Net income
   $ 159,143     $ 96,279  
Adjustments to reconcile net income to net cash provided by operating activities:
    
Depreciation and amortization
     48,937       41,841  
Impairment of assets
     2,796       243  
(Gain) loss on disposal of property, plant and equipment
     (173     449  
Change in ROU assets
     5,465       2,734  
Credit loss expense
     746       53  
Stock-based compensation expense
     10,735       9,043  
Deferred income taxes
     14,160       14,047  
Changes in operating assets and liabilities:
    
Accounts receivable
     (39,775     (26,532
Inventories
     (23,072     (16,847
Prepaid expenses, income tax receivable and other current assets
     (4,043     (1,173
Other assets
     (17,827     (12,730
Accounts payable
     33,020       22,388  
Accrued expenses and other current liabilities
     18,024       14,949  
Change in operating lease liability
     (1,887     (2,270
Other liabilities
     2,671       207  
  
 
 
   
 
 
 
Net cash provided by operating activities
     208,920       142,681  
  
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Cash flows used in investing activities:
    
Purchases of property, plant and equipment
     (100,341     (66,760
Proceeds from disposal of property, plant and equipment
     72       144  
Investment in Dogfish Head, net of cash acquired
              (165,517
Other investing activities
     392       (10
  
 
 
   
 
 
 
Net cash used in investing activities
     (99,877     (232,143
  
 
 
   
 
 
 
 
 
 
Cash flows provided by financing activities:
    
Proceeds from exercise of stock options and sale of investment shares
     14,015       8,437  
Cash
paid on note payable and finance leases
     (906     (246
Cash borrowed on line of credit
     100,000       97,000  
Cash paid on line of credit
     (100,000     (97,000
Payment of tax withholdings on stock-based payment awards and investment shares
     (1,692     —    
  
 
 
   
 
 
 
Net cash provided by financing activities
     11,417       8,191  
  
 
 
   
 
 
 
Change in cash and cash equivalents
    120,460       (81,271
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at beginning of year
     36,670       108,399  
  
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
   $ 157,130     $ 27,128  
  
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
    
Non cash consideration issued in Dogfish Head Brewery Transaction (Refer to Note C)
   $ —       $ 144,743  
  
 
 
   
 
 
 
Income taxes paid
   $ 17,309     $ 16,759  
  
 
 
   
 
 
 
Cash paid for amounts included in measurement of lease liabilities
    
Operating cash flows from operating leases
   $ 6,949     $ 3,178  
  
 
 
   
 
 
 
Operating cash flows from finance leases
   $ 106     $ 258  
  
 
 
   
 
 
 
Financing cash flows from finance leases
   $ 838     $ 7  
  
 
 
   
 
 
 
Right-of-use
assets obtained in exchange for operating lease obligations
   $ 11,698     $ 41,678  
  
 
 
   
 
 
 
Right-of-use
assets obtained in exchange for finance lease obligations
   $ 2,689     $ 2,837  
  
 
 
   
 
 
 
Interest paid on revolving credit facility
   $ 246     $ 349  
  
 
 
   
 
 
 
Change in purchase of property, plant and equipment in accounts payable and accrued expenses
   $ (3,390   $ (2,076
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
The Boston Beer Company, Inc. and certain subsidiaries (the “Company”) are engaged in the
business of selling alcohol beverages throughout the United States and in selected international markets, under the trade names “The Boston Beer Company
®
”, “Hard Seltzer Beverage Company”, “Twisted Tea Brewing Company
®
”, “Angry Orchard
®
Cider Company”, “Dogfish Head
®
Craft Brewery”, “Angel City
®
Brewing Company”, “Concrete Beach Brewery
®
”, “Coney Island
®
Brewing Company” and “American Fermentation Company”.
The accompanying unaudited consolidated balance sheet as of September 26, 2020, and the
unaudited
 
consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the interim periods ended September 26, 2020 and September 28, 2019 have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. All intercompany accounts and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019.
In the opinion of the Company’s management, the Company’s unaudited consolidated balance sheet as of September 26, 2020 and the results of its consolidated operations, stockholders’ equity, and cash flows for the interim periods ended September 26, 2020 and September 28, 2019, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
 
B.
COVID-19
Pandemic
The Company began seeing the impact of the
COVID-19
pandemic on its business in early March. The direct financial impact of the pandemic has primarily shown in significantly reduced keg demand from the
on-premise
channel and higher labor and safety related costs at the Company’s breweries. For the thirty-nine weeks ended September 26, 2020, the Company recorded
COVID-19
related
pre-tax
reductions in net revenue and increases in other costs that total $14.2 million of which $10.0 million was recorded in the first quarter, $4.1 million was recorded in the second quarter and $0.1 million was recorded in the third quarter. The total amount consists of a $3.4 million reduction in net revenue for estimated keg returns from distributors and retailers and $10.8 million for inventory write-downs for obsolescence, increased costs for health and safety, increased salaries and benefits and other
COVID-19
related direct costs, of which $7.4 million are recorded in cost of goods sold and $3.4 million are recorded in operating expenses. In addition to these direct financial impacts,
COVID-19
related safety measures resulted in a reduction of brewery productivity. This has shifted more volume to third-party breweries, which increased production costs and negatively impacted gross margins. While the duration of the disruption and related impact on the Company’s consolidated financial statements is currently uncertain, the Company expects to continue to incur increased costs related to health and safety for the foreseeable future.
C. Dogfish Head Brewery Transaction
On May 8, 2019, the Company entered into definitive agreements to acquire Dogfish Head Brewery (“Dogfish Head”) and various related operations (the “Transaction”) through the acquisition of all of the equity interests held by certain private entities in
Off-Centered
Way LLC, the parent holding company of the Dogfish Head operations. In accordance with these agreements, the Company made a payment of $158.4 million, which was placed in escrow pending the satisfaction of certain closing conditions. The Transaction closed on July 3, 2019, for total consideration of $336.0 million consisting of $173.0 million in cash and 429,291 shares of restricted Class A Common Stock that had an aggregate market value as of July 3, 2019 of $163.0 million, after taking into account a post-closing cash related adjustment. As required under the definitive agreements, 127,146 of the 429,291 shares of restricted Class A Stock have been placed in escrow and will be released no later than July 3, 2029. These shares had a market value on July 3, 2019 of $48.3 million.
The timing of the release of these escrowed shares is primarily related to the continued employment with the Company of Samuel A. Calagione, III, one of the two Dogfish Head founders. 
 
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Table of Contents
The Company’s allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Transaction is based on estimated fair values as of July 3, 2019, and was finalized on July 3, 2020. The following table summarizes the acquisition date fair value of the tangible assets, intangible assets, liabilities assumed, and related goodwill acquired from Dogfish Head, as well as the allocation of purchase price paid:
 
 
  
Total
 
(In Thousands)
 
Cash and cash equivalents
   $ 7,476  
Accounts receivable
     8,081  
Inventories
     9,286  
Prepaid expenses and other current assets
     847  
Property, plant and equipment
     106,964  
Goodwill
     108,846  
Brand
     98,500  
Other intangible assets
     3,800  
Other assets
     378  
  
 
 
 
Total assets acquired
     344,178  
Accounts payable
     3,861  
Accrued expenses and other current liabilities
     4,085  
Deferred income taxes
     18,437  
Other liabilities
     59  
  
 
 
 
Total liabilities assumed
     26,442  
  
 
 
 
Net assets acquired
   $ 317,736  
  
 
 
 
Cash consideration
   $ 172,993  
Nominal value of equity issued
     162,999  
Fair Value reduction due to liquidity
     (18,256
  
 
 
 
Estimated total purchase price
   $ 317,736  
  
 
 
 
The Company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of Dogfish Head based on their fair values as of the Transaction closing date.
The fair value of the Dogfish Head brand trade name is estimated at approximately $98.5 million and the fair value of customer relationships is estimated at $3.8 million. The Company estimated the Dogfish Head brand trade name will have an indefinite life and customer relationships will have an estimated useful life of 15 years. The customer relationship intangible asset will be amortized on a straight-line basis over the 15 year estimated useful life. The fair value of the deferred income tax liability assumed is $18.4 million, representing the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. The excess of the purchase price paid over the estimated fair values of the assets and liabilities assumed has been recorded as goodwill in the amount of $108.8 million. Goodwill associated with the acquisition is primarily attributable to the future growth opportunities associated with the Transaction, expected synergies and value of the workforce. The Company believes the majority of the goodwill is deductible for tax purposes.
The fair value of the brand trade name was determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the trade name and discounted to present value using an appropriate discount rate. The fair value of the property, plant and equipment was determined utilizing the cost and market valuation approaches.
The results of operations from Dogfish Head have been included in the Company’s consolidated statements of comprehensive income since the July 3, 2019 Transaction closing date.
Consistent with prior periods and considering post-merger reporting structures, the Company will continue to report as one operating segment. The combined Company’s brands are predominantly beverages that are manufactured using similar production processes, have comparable alcohol content, generally fall under the same regulatory environment, and are sold to the same types of customers in similar size quantities at similar price points and through the same channels of distribution. 
 
 
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Table of Contents
The following unaudited pro forma information has been prepared as if the Transaction and the related debt financing had occurred as of December 30, 2018, the first day of the Company’s 2019 fiscal year. The pro forma amounts reflect the combined historical operational results for Boston Beer and Dogfish Head, after giving effect to adjustments related to the impact of purchase accounting, transaction costs and financing. The unaudited pro forma financial information is not indicative of the operational results that would have been obtained had the Transaction occurred as of that date, nor is it necessarily indicative of the Company’s future operational results. The following adjustments have been made:
 
  (i)
Interest expense has been included at a rate of approximately 3% which is consistent with the borrowing rate on the Company’s current line of credit.
 
  (ii)
The tax effects of the pro forma adjustments at an estimated statutory rate of 25.6%.
 
 
  
Thirteen weeks ended
 
  

Thirty-nine weeks ended
 
 
  
September 28,
2019
 
  
September 28,
2019
 
 
  
(in thousands)
 
 
  
(in thousands)
 
 
Net revenue
  
$
379,205
 
  
$
1,002,959
 
Net income
  
$
46,445
 
  
$
103,105
 
Basic earnings per share
  
$
3.84
 
  
$
8.74
 
Diluted earnings per share
  
$
3.79
 
  
$
8.64
 
D. Goodwill and Intangible Assets
The Company’s intangible assets as of September 26, 2020 and December 28, 2019 were as follows:
 
 
  
 
 
  
As of September 26, 2020
 
 
As of December 28, 2019
 
 
  
Estimated
Useful Life
(Years)
 
  
Gross
Carrying
Value
 
  
Accumulated
Amortization
 
 
Net Book Value
 
 
Gross
Carrying
Value
 
  
Accumulated
Amortization
 
 
Net Book
Value
 
 
  
     
  
     
  
     
 
 
(in thousands
 
     
  
     
 
     
Custmer Relationships
  
 
15
 
  
$
3,800
 
  
$
(316
 
$
3,484
 
 
$
3,800
 
  
$
(127
 
$
3,673
 
Trade Names
  
 
Indefinite
 
  
 
100,510
 
  
 
—  
 
 
 
100,510
 
 
 
100,599
 
  
 
—  
 
 
 
100,599
 
 
  
     
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total intangible assets
  
     
  
$
104,310
 
  
$
(316
 
$
103,994
 
 
$
104,399
 
  
$
(127
 
$
104,272
 
 
  
     
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
As disclosed within Note C, the Company acquired intangible assets as part of the Dogfish Head transaction that
consist
of $98.5 million for the value of the Dogfish Head brand name and $3.8 million for the value of customer relationships. The customer relationship intangible will be amortized on a straight-line basis over the 15 year useful life. Amortization expense in the thirteen and thirty-nine weeks ended September 26, 2020 was approximately $63,000 and $190,000, respectively. The Company expects to record amortization expense as follows over the remaining current year and the five subsequent years:
 
Fiscal Year
    
Amount (in thousands)
 
Remainder of 2020
     $ 63  
2021
       253  
2022
       253  
2023
       253  
2024
       253  
2025
       253  
E. Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
 
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Table of Contents
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard in the first quarter of fiscal 2020 and there was no material impact.
In January 2017, the FASB issued ASU
No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Prior to ASU
No. 2017-04,
the goodwill impairment test is a
two-step
assessment, if indicators of impairment exist. The first step requires an entity to compare each reporting unit’s carrying value and its fair value. If the reporting unit’s carrying value exceeds the fair value, then the entity must perform the second step, which is to compare the implied fair value of goodwill to its carrying value, and record an impairment charge for any excess of carrying value of goodwill over its implied fair value. An entity also has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU
2017-04
simplifies the goodwill impairment test by eliminating the second step of the test. As such, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. ASU
2017-04
is effective prospectively for the year beginning December 29, 2019. The Company adopted the standard in the third quarter of 2020 during the annual goodwill impairment assessment and there was no material impact.
Accounting Pronouncements Not Yet Effective
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard includes multiple key provisions, including removal of certain exceptions to ASC 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
F. Revenue Recognition
During the thirty-nine weeks ended September 26, 2020 and September 28, 2019 approximately 95% of the Company’s revenue was from shipments of its products to domestic distributors, 4% from shipments to international distributors, primarily located in Canada and 1% was from retail beer, cider, and merchandise sales at the Company’s retail locations.
The Company recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met. As of September 26, 2020 and December 28, 2019, the Company has deferred $11.5 million and $7.0 million, respectively in revenue related to product shipped prior to these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
Customer promotional discount programs are entered into by the Company with distributors for certain periods of time. The reimbursements for discounts to distributors are recorded as reductions to net revenue and were $19.0 million and $47.6 million for the thirteen and thirty-nine weeks ended September 26, 2020, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue and were $14.8 million and $34.5 million for the thirteen and thirty-nine weeks ended September 28, 2019, respectively. The agreed-upon discount rates are applied to certain distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company, however, the amounts could differ from the estimated allowance.
Customer programs and incentives are a common practice in the alcohol beverage industry. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses
,
based on the nature of the expenditure. Customer incentives and other payments made to distributors are primarily based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities
 
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Table of Contents
promoting the Company’s products may include, but are not limited to
point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs for the thirteen and thirty-nine weeks ended September 26, 2020 were $7.5 million and $16.9 million, respectively. For the thirteen and thirty-nine weeks ended September 26, 2020, the Company recorded certain of these costs in the total amount of $6.9 million and $15.9 million, respectively as reductions to net revenue. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen and thirty-nine weeks ended September 28, 2019 were $7.8 million and $17.8 million, respectively. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen and thirty-nine weeks ended September 2
8
, 2019 were $6.2 million and $13.0 million, respectively. Costs recognized in net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets. These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at the period end. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.
The Further Consolidation Appropriations Act, 2020 extended reductions in federal excise taxes as a result of the Tax Cuts and Jobs Act of 2017 through December 31, 2020. The Company benefited from a reduction in federal excise taxes of $4.0 million and $2.8 million for the thirteen weeks ended September 26, 2020 and September 28, 2019, respectively. The Company benefited from a reduction in federal excise taxes of $9.8 million and $6.6 million for the thirty-nine weeks ended September 26, 2020 and September 28, 2019 respectively.
On March 31, 2020, The Alcohol and Tobacco Tax and Trade Bureaus (“TTB”) released TTB Industry Circular
2020-2,
which postponed all Federal excise tax payments for ninety days on sales of wine, beer and distilled spirits between March 1, 2020 and July 1, 2020. As a September 26, 2020, the Company had accrued federal excise taxes of $8.6 million in accrued expenses and other current liabilities,
 
which will be fully paid during the fourth quarter of 2020.
The Company believes distributor inventory as of September 26, 2020 averaged approximately 2 weeks on hand and was lower than prior year levels due to depletions outpacing supply constrained shipments. The Company expects wholesaler inventory levels in terms of weeks on hand to remain between 1 and 4 weeks for the
remainder
of the year.
G. Inventories
Inventories consist of raw materials, work in process and finished goods. Raw materials, which principally consist of hops, flavorings, apple juice, other brewing materials and packaging, are stated at the lower of cost, determined on the
first-in,
first-out
basis, or net realizable value. The Company’s goal is to maintain on hand a supply of at least one year for essential hop varieties, in order to limit the risk of an unexpected reduction in supply. Inventories are generally classified as current assets. The Company classifies hops inventory in excess of two years of forecasted usage in other long-term assets. The cost elements of work in process and finished goods inventory consist of raw materials, direct labor and manufacturing overhead. Inventories consist of the following:
 
    
September 26,
    
December 28,
 
    
2020
 
  
2019
 
    
(in thousands)
 
Current inventory:
     
Raw materials
   $ 61,705      $ 61,522  
Work in process
     14,287        12,631  
Finished goods
     47,839        31,885  
  
 
 
    
 
 
 
Total current inventory
     123,831        106,038  
Long term inventory
     15,327        10,048  
  
 
 
    
 
 
 
Total inventory
   $ 139,158      $ 116,086  
  
 
 
    
 
 
 

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Table of Contents
H. Leases
The Company has various lease agreements in place for facilities and equipment. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2034. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of the lease payments. ROU assets and lease liabilities commencing after December 30, 2018 are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. As of September 26, 2020, and December 28, 2019 total ROU assets and lease liabilities were as follows:
 
    
Classification
  
Leases
 
         
September 26,

2020
    
December 28,

2019
 
 
  
 
  
 
 
  
 
 
         
(in thousands)
 
Right-of-use
assets
        
Operating lease assets    Operating
right-of-use
assets
   $ 59,991      $ 53,758  
Finance lease assets    Property, plant and equipment, net      4,389        2,531  
Lease Liabilities
        
Current         
Operating lease liabilities
   Current operating lease liabilities      7,735        5,168  
Finance lease liabilities
   Accrued expenses and other current liabilities      1,441        546  
Non-current
        
Operating lease liabilities
  
Non-current
operating lease liabilities
     61,184        53,940  
Finance lease liabilities
   Other liabilities      2,997        2,042  
The gross value and accumulated depreciation of ROU assets related to finance leases as of September 26, 2020 and December 28, 2019 were as follows:
 
    
Finance Leases
 
    
September 26,
    
December 28,
 
    
2020
    
2019
 
    
(in thousands)
 
Gross value
   $ 5,525      $ 2,837  
Accumulated amortization
     (1,136      (306
  
 
 
    
 
 
 
Carrying value
   $ 4,389      $ 2,531  
  
 
 
    
 
 
 
Components of lease cost for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019 were as follows:
 
    
Lease Cost
 
    
Thirteen weeks ended
    
Thirty-nine weeks ended
 
    
September 26,
    
September 28,
    
September 26,
    
September 28,
 
    
2020
    
2019
    
2020
    
2019
 
    
(in thousands)
    
(in thousands)
 
Operating lease cost
   $ 2,425      $ 1,375      $ 7,277      $ 3,680  
Variable lease costs not included in liability
     349        171        1,321        643  
Finance lease cost:
               
Amortization of
right-of-use
asset
     257        131        830        174  
Interest on lease liabilities
     31        206        106        258  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total finance lease cost
   $ 288      $ 337      $ 936      $ 432  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
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Table of Contents
Maturities of lease liabilities as of September 26, 2020 were as follows:
 
    
Operating
Leases
    
Finance
Leases
    
Weighted-Average Remaining Term in Years
 
    
Operating Leases
    
Finance Leases
 
    
(in thousands)
               
2020
   $ 2,464      $ 391        
2021
     10,094        1,572        
2022
     9,908        1,572        
2023
     9,737        863        
2024
     9,470        265        
Thereafter