CRAFT BREW ALLIANCE, INC. This quarterly report on Form 10-Q 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 Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 ("2019 Annual Report"), the risk factor set forth in Part II, Item 1A below, and those described from time to time in our future reports filed with theSecurities and Exchange Commission (the "SEC"). Certain forward-looking statements are subject to the anticipated occurrence and timing of the closing of the merger transaction pursuant to whichAnheuser-Busch Companies, LLC ("ABC"), is expected to acquireCraft Brew Alliance, Inc. (the "ABC Merger" Caution should be taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein, as well as the audited Consolidated Financial Statements and Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Annual Report. The discussion and analysis includes period-to-period comparisons of our financial results. Although period-to-period comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.
Overview
Craft Brew Alliance, Inc. ("CBA") is the eighth largest craft brewing company in theU.S. and a leader in brewing, branding, and bringing to market world-class American craft beers and beverages. Our distinctive portfolio combines the power ofKona Brewing Co. , one of the top craft beer brands in the world, with strong regional breweries and innovative lifestyle brands,Appalachian Mountain Brewery , Cisco Brewers,Omission Brewing Co. ,Redhook Brewery ,Square Mile Cider Co. , Widmer Brothers Brewing, andWynwood 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 ofRedhook 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 ofHawaii . 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 withAppalachian Mountain Brewery , based inBoone, North Carolina ; Cisco Brewers, based inNantucket, Massachusetts ; andWynwood Brewing Co. , based in the heart ofMiami'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. We own and operate three production breweries located inPortland, Oregon ;Portsmouth, New Hampshire ; andKailua-Kona, Hawaii . Through our contract brewing agreement withA-B Commercial Strategies, LLC ("ABCS"), an affiliate ofAnheuser-Busch, LLC ("A-B"), we also brew select CBA brands in A-B'sFort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries inPortland, Oregon ;Seattle, Washington ;Portsmouth, New Hampshire ;Boone, North Carolina ; andMiami, 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.
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.
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OnNovember 11, 2019 , we jointly announced withAnheuser-Busch Companies, LLC ("ABC") an agreement to expand our partnership, withABC agreeing to purchase our remaining shares it does not currently own in the ABC Merger for$16.50 per share, in cash. OnFebruary 25, 2020 , CBA shareholders, not including A-B, voted overwhelmingly in favor of the agreement. The transaction, which represents an exciting next step in a long and successful partnership between the two companies, remains subject to customary closing conditions, including certain regulatory approvals. OnJune 10, 2020 , we announced an update to our pending merger transaction withABC . To expedite the regulatory review process and alleviate any potential regulatory concerns regarding the expanded partnership, CBA andABC have agreed to the purchase of CBA'sKona Brewing operations inHawaii byPV Brewing Partners , a team of investors with decades of combined beer industry expertise. The arrangement which does not include CBA'sKona Brewing business outside ofHawaii , is contingent on the closing of our pending transaction withABC . In earlyMarch 2020 , we began seeing the impact of the COVID-19 pandemic on our business. The impact has remained primarily visible in significantly reduced demand from the on-premise channel and the closure of our brewpubs for on-premise business throughout the second quarter. Despite these challenges, our breweries were able to quickly shift focus to core products in packaging, enabling our sales and marketing teams to continue ensuring our wholesalers had inventory to meet demand from off-premise retailers. 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 five brewpubs, four of which are located adjacent to our Beer Related operations, as well as other merchandise sales, and sales of our beers directly to customers.
Following is a summary of our financial results:
Number of
Six Months Ended June 30, Net sales Net income (loss) barrels sold
2020 $93.3 million $1.0 million 363,300
2019 $107.6 million $(4.8) million 400,000
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):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Sales 106.8 % 105.4 % 105.7 % 105.6 %
Less excise taxes (6.8) (5.4) (5.7) (5.6)
Net sales 100.0 100.0 100.0 100.0
Cost of sales 72.2 61.5 69.0 63.3
Gross profit 27.8 38.5 31.0 36.7
Selling, general and administrative expenses 26.1 32.0 29.3 41.8
Operating income (loss) 1.7 6.4 1.7 (5.1)
Interest expense (0.6) (0.8) (0.6) (0.8)
Other income, net 0.4 0.1 0.2 -
Income (loss) before income taxes 1.5 5.7 1.3 (5.8)
Income tax provision (benefit) 0.6 1.4 0.2 (1.4)
Net income (loss) 0.9 % 4.3 % 1.1 % (4.4) %
(1)Percentages may not add due to rounding.
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Segment Information
Net sales, Gross profit and Gross margin information by segment was as follows
(dollars in thousands):
Three Months Ended June 30,
Beer
2020 Related Brewpubs Total
Net sales $ 48,915 $ 463 $ 49,378
Gross profit $ 15,155 $ (1,407) $ 13,748
Gross margin 31.0 % (303.9) % 27.8 %
2019
Net sales $ 54,493 $ 6,066 $ 60,559
Gross profit $ 22,676 $ 611 $ 23,287
Gross margin 41.6 % 10.1 % 38.5 %
Six Months Ended June 30,
Beer
2020 Related Brewpubs Total
Net sales $ 87,682 $ 5,597 $ 93,279
Gross profit $ 30,137 $ (1,206) $ 28,931
Gross margin 34.4 % (21.5) % 31.0 %
2019
Net sales $ 95,282 $ 12,269 $ 107,551
Gross profit $ 38,184 $ 1,286 $ 39,470
Gross margin 40.1 % 10.5 % 36.7 %
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Sales by Category
Sales by category were as follows (dollars in thousands):
Three Months Ended June 30, Dollar
Sales by Category 2020 2019 Change % Change
A-B and A-B related(1) $ 48,031 $ 51,622 $ (3,591) (7.0) %
Contract brewing and beer related(2) 4,263 6,127 (1,864) (30.4) %
Excise taxes (3,379) (3,256) (123) 3.8 %
Net beer related sales 48,915 54,493 (5,578) (10.2) %
Brewpubs(3) 463 6,066 (5,603) (92.4) %
Net sales $ 49,378 $ 60,559 $ (11,181) (18.5) %
Six Months Ended June 30, Dollar
Sales by Category 2020 2019 Change % Change
A-B and A-B related(1) $ 85,262 $ 92,040 $ (6,778) (7.4) %
Contract brewing and beer related(2) 7,723 9,274 (1,551) (16.7) %
Excise taxes (5,303) (6,032) 729 (12.1) %
Net beer related sales 87,682 95,282 (7,600) (8.0) %
Brewpubs(3) 5,597 12,269 (6,672) (54.4) %
Net sales $ 93,279 $ 107,551 $ (14,272) (13.3) %
(1)A-B and A-B related includes domestic and international sales sold through
A-B and Ambev, fees earned pursuant to the Brewing Agreement with Anheuser-Busch
Companies, LLC ("ABC"), and the international distribution fees earned from
ABWI.
(2)Beer related includes international sales and owned brands not sold through
A-B or Ambev.
(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):
Increase % Change in
Three Months Ended June 30, 2020 Shipments 2019 Shipments (Decrease) Change Depletions(1)
A-B and A-B related(2) 184,800 201,500 (16,700) (8.3) % (9) %
Contract brewing and beer related(3) 21,600 27,000 (5,400) (20.0) %
Brewpubs 500 2,000 (1,500) (75.0) %
Total 206,900 230,500 (23,600) (10.2) %
Increase % Change in
Six Months Ended June 30, 2020 Shipments 2019 Shipments (Decrease) Change Depletions(1)
A-B and A-B related(2) 323,000 356,100 (33,100) (9.3) % (8) %
Contract brewing and beer related(3) 38,100 40,100 (2,000) (5.0) %
Brewpubs 2,200 3,800 (1,600) (42.1) %
Total 363,300 400,000 (36,700) (9.2) %
(1)Change in depletions reflects the year-over-year change in barrel volume
sales of beer by wholesalers to retailers.
(2)A-B and A-B related includes domestic and international shipments distributed
through A-B and Ambev, and shipments pursuant to the Brewing Agreement with ABC .
(3)Beer related includes international shipments and shipments of our owned
brands not distributed through A-B or Ambev.
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The decreases in sales to A-B and A-B related in the three and six-month periods endedJune 30, 2020 compared to the same periods of 2019 were primarily due to decreases in shipment volume, increases in promotional discounting, and an accrual for anticipated keg returns due to COVID-19, partially offset by increases in average unit pricing. The decreases in shipment volume were primarily attributed to the sharp decline in draft sales beginning inMarch 2020 and continuing through the second quarter of 2020 as a result of the closure of most on-premise retail locations across the country. We expect the demand for draft beer to remain low for the third quarter of 2020 and, potentially, into the fourth quarter of 2020. As our shipments further trend towards packaged beer, we expect our average unit pricing to increase as the sales price for packaged beer is greater than draft. The decreases in Contract brewing and beer related sales in the three and six-month periods endedJune 30, 2020 compared to the same periods of 2019 were primarily due to decreases in international shipment volumes, shipments of brands distributed outside the A-B distribution network, and contract brewing shipment volumes, as well as a decrease in sales of beer related merchandise. Brewpubs sales decreased in the three and six-month periods endedJune 30, 2020 compared to the same periods of 2019, primarily due to the closure of our brewpubs to on-premise business that began in mid-March and continuing through the second quarter of 2020 due to the COVID-19 pandemic and public health and government-mandated strict social distancing requirements. During the second quarter of 2020, our brewpubs were operating with a to-go and delivery model or closed entirely. We continue to monitor state and county guidelines, as well as our own safety requirements to establish appropriate reopening plans for our brewpubs. As such, our brewpub inBoone re-opened for dine-in service in mid-June and our Kona and Koko brewpubs re-opened for dine-in service in mid-July. We expect our Brewpub sales to remain low for the third quarter of 2020 and, potentially, into the fourth quarter of 2020.
Shipments by Brand The following table sets forth a comparison of shipments by brand (in barrels):
Increase % Change in
Three Months Ended June 30, 2020 Shipments 2019 Shipments (Decrease) Change Depletions
Kona 139,300 156,700 (17,400) (11.1) % (8) %
Widmer Brothers 21,400 27,400 (6,000) (21.9) % (26) %
Redhook 17,800 17,000 800 4.7 % (4) %
Omission 14,700 11,100 3,600 32.4 % 18 %
All other(1) 13,200 16,100 (2,900) (18.0) % (20) %
Total(2) 206,400 228,300 (21,900) (9.6) % (9) %
% Change in
Six Months Ended June 30, 2020 Shipments 2019 Shipments Decrease Change Depletions
Kona 246,300 265,500 (19,200) (7.2) % (7) %
Widmer Brothers 37,400 49,000 (11,600) (23.7) % (20) %
Redhook 31,000 31,800 (800) (2.5) % (6) %
Omission 23,500 20,200 3,300 16.3 % 13 %
All other(1) 22,600 26,200 (3,600) (13.7) % (12) %
Total(2) 360,800 392,700 (31,900) (8.1) % (8) %
(1)All other includes the shipments and depletions from our Square Mile, AMB,
Cisco Brewers, and Wynwood brand families.
(2)Total shipments by brand include international shipments and exclude
shipments produced under our contract brewing arrangements.
The decreases in our Kona brand shipments in the three and six-month periods
ended June 30, 2020 compared to the same periods of 2019 were primarily led by
decreases in shipments of Big Wave Golden Ale, Longboard Larger, and Hanalei
Island IPA brands, partially offset by increases of our newly released Island
Seltzer and Kona Light , as well as increases in Kona Wave Rider and Island
Hopper variety packs.
The decreases in our Widmer Brothers brand shipments in the three and six-month
periods ended June 30, 2020 compared to the same periods of 2019 were primarily
due to decreases in Hefeweizen brand shipments.
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Redhook brand shipments remained relatively consistent in the three and
six-month periods ended
Omission brand shipments increased in the three and six-month periods ended
The decreases in All other shipments in the three and six-month periods ended
Shipments by Package
The following table sets forth a comparison of our shipments by package,
excluding shipments produced under our contract brewing arrangements (in
barrels):
Three Months Ended June 30,
2020 2019
Shipments % of Total Shipments % of Total
Draft 6,700 3.2 % 51,100 22.4 %
Packaged 199,700 96.8 % 177,200 77.6 %
Total 206,400 100.0 % 228,300 100.0 %
Six Months Ended June 30,
2020 2019
Shipments % of Total Shipments % of Total
Draft 34,900 9.7 % 88,600 22.6 %
Packaged 325,900 90.3 % 304,100 77.4 %
Total 360,800 100.0 % 392,700 100.0 %
The shifts in package mix from draft to packaged in the three and six-month
periods ended June 30, 2020 compared to the same periods of 2019 were primarily
due to widespread closures in the on-premise channel that were caused by the
COVID-19 pandemic and government-mandated strict social distancing requirements.
We expect this trend to continue for the third quarter of 2020 and, potentially,
into the fourth quarter of 2020.
Cost of Sales Cost of sales includes purchased raw and component materials, direct labor, overhead and shipping costs.
Information regarding Cost of sales was as follows (dollars in thousands):
Three Months Ended June 30, Dollar
2020 2019 Change % Change
Beer Related $ 33,760 $ 31,817 $ 1,943 6.1 %
Brewpubs 1,870 5,455 (3,585) (65.7) %
Total $ 35,630 $ 37,272 $ (1,642) (4.4) %
Six Months Ended June 30, Dollar
2020 2019 Change % Change
Beer Related $ 57,545 $ 57,098 $ 447 0.8 %
Brewpubs 6,803 10,983 (4,180) (38.1) %
Total $ 64,348 $ 68,081 $ (3,733) (5.5) %
The increases in Beer Related Cost of sales in the three and six-month periods
ended June 30, 2020 compared to the same periods of 2019 were primarily due to
increases in our Beer Related Cost of sales on a per barrel basis, partially
offset by a decrease in shipment volume. As our shipments shift to packaged beer
our average unit costs increase as the cost to produce packaged beer is greater
than draft.
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The decreases in Brewpubs Cost of sales in the three and six-month periods endedJune 30, 2020 compared to the same periods of 2019 were primarily due to the closure of our brewpubs to on-premise business that began in mid-March and continued through the second quarter of 2020 due to the COVID-19 pandemic and public health and government-mandated strict social distancing requirements. As we begin to re-open our brewpubs we expect Brewpub Cost of sales to increase. Capacity Utilization Capacity utilization is calculated by dividing total shipments by approximate working capacity and was as follows: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Capacity Utilization 65 % 65 % 54 % 56 % Our capacity utilization was flat in the three-month period endedJune 30, 2020 and declined slightly in the six-month period endedJune 30, 2020 compared to the same periods of 2019 due to a smaller percentage of our beer being brewed by ABCS. We also experienced a decrease in our capacity utilization as a result of the decrease in demand for draft beer. Gross Profit Information regarding Gross profit was as follows (dollars in thousands): Three Months Ended June 30, Dollar 2020 2019 Change % Change Beer Related$ 15,155 $ 22,676 $ (7,521) (33.2) % Brewpubs (1,407) 611 (2,018) (330.3) % Total$ 13,748 $ 23,287 $ (9,539) (41.0) % Six Months Ended June 30, Dollar 2020 2019 Change % Change Beer Related$ 30,137 $ 38,184 $ (8,047) (21.1) % Brewpubs (1,206) 1,286 (2,492) (193.8) % Total$ 28,931 $ 39,470 $ (10,539) (26.7) %
Gross profit as a percentage of Net sales, or gross margin, was as follows:
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
Beer Related 31.0 % 41.6 % 34.4 % 40.1 %
Brewpubs (303.9) % 10.1 % (21.5) % 10.5 %
Overall 27.8 % 38.5 % 31.0 % 36.7 %
The decreases in Beer Related Gross profit and gross margin in the three and
six-month periods ended June 30, 2020 , compared to the same periods of 2019 were
primarily due to decreases in shipment volumes, increases in promotional
pricing, and increases in average unit costs on a per barrel basis, partially
offset by increases in average unit pricing.
The decrease in Brewpubs Gross profit and gross margin in the three and
six-month periods ended June 30, 2020 compared to the same periods of 2019 were
primarily due to the closure of our brewpubs to on-premise business beginning in
mid-March and continuing through the second quarter of 2020 due to the COVID-19
pandemic.
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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.
Information regarding SG&A was as follows (dollars in thousands):
Three Months Ended
June 30, Dollar
2020 2019 Change % Change
Selling, general and administrative expenses $ 12,908 $ 19,381 $ (6,473) (33.4) %
As a % of Net sales 26.1 % 32.0 %
Six Months Ended
June 30, Dollar
2020 2019 Change % Change
Selling, general and administrative expenses $ 27,369 $ 44,946 $ (17,577) (39.1) %
As a % of Net sales 29.3 % 41.8 %
The decrease in SG&A for the three-month period ended June 30, 2020 compared to
the same period of 2019 was primarily due to a decrease in creative and media
spend related to the non-recurring Kona marketing campaign of $1.9 million in
2019 and reduced market spend in an effort to control costs in response to the
COVID-19 pandemic, as well as a decrease in employee related costs, partially
offset by an increase in professional fees related to the ABC merger.
The decreases in SG&A for the six-month period ended June 30, 2020 compared to
the same period of 2019 was primarily due to decreases in creative and media
spend related to the non-recurring Kona marketing campaign of $6.5 million in
2019, reduced market spend in an effort to control costs in response to the
COVID-19 pandemic, and a non-recurring charge related to the settlement of the
Kona class action lawsuit in the first quarter of 2019 of $4.7 million , as well
as a decrease in employee related costs, and a one-time legal settlement benefit
of $1.0 million related to our former Woodinville property received in March
2020 , partially offset by an increase in professional fees related to the ABC
merger.
Interest Expense
Information regarding Interest expense was as follows (dollars in thousands):
Three Months Ended
June 30, Dollar
2020 2019 Change % Change
$ 306 $ 504 $ (198) (39.3) %
Six Months Ended
June 30, Dollar
2020 2019 Change % Change
$ 573 $ 812 $ (239) (29.4) %
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Average debt outstanding $51,023 $50,595 $46,142 $47,439
Average interest rate 2.12 % 3.94 % 2.25 % 3.37 %
The decreases in Interest expense in the three and six-month periods ended
Income Tax Benefit Our effective income tax rate was 12.8% for the first six months of 2020 and 24.0% in the first six months of 2019. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes and tax credits. In the first six months of 2020, we recognized a one-time tax benefit of$0.4 million related to the net operating loss carryback provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 25
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Liquidity and Capital Resources
We have required capital primarily for the construction and development of our production breweries, to support our brewery footprint evolution, 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 beginningJuly 1, 2020 primarily from cash on hand, cash flows generated from operations and borrowing under our line of credit as the need arises. Capital resources available to us atJuly 1, 2020 included$0.1 million of Cash and cash equivalents and$3.9 million available under our revolving credit facility. AtJune 30, 2020 andDecember 31, 2019 , we had$17.8 million and$1.6 million of working capital, respectively, and our debt as a percentage of total capitalization (total debt and common shareholders' equity) was 30.2% and 21.5%, respectively.
A summary of our cash flow information was as follows (in thousands):
Six Months Ended
June 30,
2020 2019
Net cash provided by (used in) operating activities
Net cash used in investing activities (12,653) (9,692)
Net cash provided by financing activities 20,284 5,342
Decrease in Cash and cash equivalents $ (331) $ (230)
Cash used in operating activities of $8.0 million in the first six months of
2020 resulted from our Net income of $1.0 million and net non-cash expenses of
$5.9 million , offset by changes in our operating assets and liabilities as
discussed in more detail below.
Accounts receivable, net, increased $12.7 million to $30.2 million at June 30,
2020 compared to $17.5 million at December 31, 2019 . This increase was primarily
due to the timing of shipments and an increase of $9.4 million in our receivable
from A-B and ABWI, which totaled $20.8 million at June 30, 2020 . Historically,
we have not had collection problems related to our accounts receivable.
Inventories increased $2.8 million to $21.9 million at June 30, 2020 compared to
$19.1 million at December 31, 2019 . The increase was primarily due to an
increase in packaging materials and finished goods as a result of the timing of
shipments in the fourth quarter of 2019 and second quarter of 2020, seasonality
and the forecasted demand for our beer.
Accounts payable increased
Capital expenditures of$12.7 million in the first six months of 2020 were primarily directed to beer production capacity and efficiency improvements. As ofJune 30, 2020 , we had an additional$0.1 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to$1.6 million atDecember 31, 2019 . We anticipate capital expenditures will not exceed a total of$13.5 million in 2020, primarily for our new Kona brewery and enterprise resource planning software. Credit Agreement Our Amended and Restated Credit Agreement withBank of America, N.A . ("BofA") datedNovember 30, 2015 (as amended, the "Credit Agreement") provides for a revolving line of credit ("Line of Credit") of up to$45.0 million , 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 maturity date of the Line of Credit and the Term Loan isSeptember 30, 2023 . We entered into a Fifth Amendment to the Credit Agreement onJune 3, 2020 , which changed the date as of which the maximum amount of the Line of Credit is subject to loan commitment reductions of$750,000 per quarter toMarch 31, 2021 , rather thanMarch 31, 2020 . The Fifth Amendment also revised the definitions of Eurodollar Fixed Rate and Eurodollar Floating Rate contained in Section 1.01 of the Credit Agreement to provide that such rates may not be less than 0.75% at any time. As ofJune 30, 2020 , we had$3.9 million in funds available to be drawn from our Line of Credit and$41.1 million of borrowings outstanding. AtJune 30, 2020 ,$8.2 million was outstanding under the Term Loan. 26
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Under the Credit Agreement as in effect atJune 30, 2020 , 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 2.00% for the Line of Credit and Term Loan based on our funded debt ratio. AtJune 30, 2020 , our marginal rate was 1.75%, resulting in an annual interest rate of 1.42%. It is likely that LIBOR will no longer be used as a reference rate by most, if not all, financial institutions before year-end 2021.
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 Credit Agreement, with any unpaid principal balance
and unpaid accrued interest due and payable on
The Credit Agreement authorizes acquisitions within the same line of business as long as we remain in compliance with the financial covenants of the Credit Agreement and there is at least$5.0 million of availability remaining on the Line of Credit following the acquisition. With respect to investments in other craft brewers, other than acquisitions of all or substantially all of the assets or controlling ownership interests, the Credit Agreement limits each investment to$10.0 million . We may draw upon the Line of Credit for working capital and general corporate purposes. The Credit Agreement requires us to satisfy the following financial covenants: (i) on or after the earliest to occur ofJuly 1, 2020 or the termination of the ABC Merger transaction, a Consolidated Leverage Ratio of 3.50 to 1.00; (ii) on or after the earliest to occur ofJuly 1, 2020 or the termination of theABC Merger transaction, a Fixed Charge Coverage Ratio of 1.20 to 1.00; and (iii) on a trailing four-quarter basis at each ofMarch 31, 2020 andJune 30, 2020 , a minimum Consolidated EBITDA of$3.0 million . Failure to maintain compliance with these covenants is an event of default and would giveBofA the right to declare the entire outstanding loan balance immediately due and payable. AtJune 30, 2020 , we were in compliance with all applicable contractual financial covenants of the Credit Agreement. Secured Borrowing OnJune 20, 2019 we executed an agreement withBofA , pursuant to our Master Lease Agreement, for$5.2 million in cash in exchange for a secured interest in our previously installed can line at ourPortland brewing facility. The maturity date of the secured borrowing isJune 21, 2026 . We used the funds to pay down our Line of Credit. AtJune 30, 2020 ,$4.5 million was outstanding at an interest rate of 4.54%.
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. Our critical accounting policies, as described in our 2019 Annual Report, relate to goodwill, indefinite-lived intangible assets, long-lived assets, refundable deposits on kegs, revenue recognition, deferred taxes and leases. There have been no changes to our critical accounting policies sinceDecember 31, 2019 .
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.
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 2 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
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