Your browser is old and is not supported. Upgrade for better security.

Modern Times

We'd like to formally invite you to the party

Financials

We have financial statements ending December 31 2017. Our cash in hand is $743,164, as of April 2019. Over the three months prior, revenues averaged $2,546,180/month, cost of goods sold has averaged $1,808,083/month, and operational expenses have averaged $738,083/month.

At a Glance

May 1 - Dec 31
$19,234,987
+29%
Revenue
-$1,259,982
-147%
Net Loss
$4,252,583
+76%
Short Term Debt
$0
Raised in 2017
$743,164
+29%
Cash on Hand
Net Margin:
-7%
Gross Margin:
39%
Return on Assets:
-9%
Earnings per Share:
-$1.20
Revenue per Employee:
$85,489
Cash to Assets:
5%
Revenue to Receivables:
1,517%
Debt Ratio:
166%
Modern Times Reviewed FS 2016 Published .pdf Modern Times Audited FS 2017 Published .pdf

THE COMPANY AND ITS BUSINESS
 
Modern Times Overview

Modern Times is an intrepid cadre of brewers, coffee roasters, and culinary wizards that began as a 30bbl production brewery and tasting room in the Point Loma neighborhood of San Diego. Modern Times is named after a beautifully crazy utopian community founded in 1850, and many of our beers are named after real utopian experiments or mythological utopias.

Today, we're distributed throughout California, Arizona, Nevada, and the Pacific Northwest. In addition to our flagship brewery and tasting room in Point Loma, we now have brewery and/or restaurant locations in Los Angeles, Portland, and Encinitas, as well as a tasting room in San Diego’s North Park neighborhood. We intend to open tasting rooms in Santa Barbara and Oakland in 2019, as well as a brewery/restaurant/cafe/swim club megaplex in downtown Anaheim in the near future. As of 2017, we’re also California’s very first employee-owned brewery, which is a fact we’re particularly proud of.

Modern Times was first organized as a limited liability company in California on January 2, 2012 and reorganized as a California corporation on May 1, 2017 in anticipation of becoming an employee-owned brewery.  We brewed our first batch on May 18, 2013; our beer went on tap for the first time on June 24, 2013; we held the soft opening for the Lomaland Fermentorium tasting room on August 9, 2013; and our Grand Opening was September 7, 2013.

Our Philosophy

Our core line-up focuses (non-monogamously) on aroma-driven, complex, flavorful, sessionish beers. We often brew hybrid styles, combining the features we like from established categories to create new, Island-Of-Doctor-Moreau-style mash-ups.

We have an outrageously tasty stable of year-round offerings, monthly special releases, and rotating seasonal beers, as well as tons of special release and one-off batches, from hazy IPAs, to barrel-aged sours, to decadent imperial stouts.

Recent additions to our growing portfolio of beverage-magic include an entire warehouse--appropriately dubbed the Fortress of Raditude--dedicated to barrel-aging & special project beers, as well as fully operational brewing battle-stations in downtown Los Angeles and Portland.

Our tasting rooms are where we test different concepts, from variations on our core beers to experimental pilot batches.  
  
Our Current Products

We offer three categories of beers for year-round, seasonals, and monthly special releases. Our year-round beers include our Fortunate Islands Pale Ale, Black House Oatmeal Coffee Stout, Blazing World IPA, Orderville IPA, Fruitlands Gose, and Ice Lager. For 2019, our seasonal beers include our Booming Rollers IPA, Critical Band IPA, Space Ways IPA, and City of the Sun IPA.

While other breweries lament the death of their flagship beer, Modern Times never set out to have one. No beer in our portfolio has more than a 25% share, insulating Modern Times from changes in consumer preferences. We also do dozens of collaboration brews a year with other breweries and host three festivals in San Diego, sourcing the best of craft beer from across the nation in a perpetual effort to stay on the cutting edge. Our top three products by revenues are Orderville IPA, Seasonal IPA (rotating), and Fruitlands; however we release, 8 to 10 new beers monthly in addition to regular new offerings in coffee, food, and merchandise.

Modern Times has been roasting coffee since 2013, with beans originally contributing to our coffee-forward Black House Stout. Sensing demand for coffee beyond simply the role it played in beer, we began roasting and bagging coffee in 2014 as well as producing cold brew coffee, which has since become the volume driver of our coffee program. Our cold brew is now distributed across five states with four core SKUs: Black House Blend, Black House Blend on Nitro, a constantly-changing single Origin, and a barrel-aged offering. Though our coffee program has grown by double digits annually since its inception, it represents less than 5% of the company’s revenues.

Our Customers

To date, we have counted our customers in the millions. More practically, however, we have approximately 25 distributors who represent 60% of our revenues today, with Stone Distributing (our home market distributor for the region from the Mexico border to Santa Barbara) accounting for approximately half of our distributor revenues. As we’ve grown the brewery, we have actively worked to expand our distributor network, though the goal has been and will continue to be a “narrow and deep” approach to selling beer by focusing on maximizing sales in our core markets.

Industry Background and Trends

In the aggregate, beer sales in the U.S. for 2017 reached $111.4 billion. Craft beer is a segment of that, which reached 12.7% of the U.S. beer market by volume in 2017, but 23.3% of dollars spent (or approximately $25.9 billion). Retail sales of craft beer increased 8% from 2016 to 2017. While craft beer’s growth trajectory has slowed from the double-digit growth it enjoyed a decade ago, it currently outpaces the national economy as a whole.

One of our biggest jobs as a craft brewer is to stay on or ahead of trends to ensure we remain successful in executing beers consumers want to drink. We’re mindful of the fact that all of our products (food, beer, coffee) are 100% plant-based, which is among the fastest growing trends today, though for us, it’s intrinsic to our company and not simply a trend-following endeavor.

What We Believe Sets Us Apart

Our single greatest strength is the ability to make world-class beers across the spectrum, from barrel-aged imperial stouts to hazy IPAs. Our second greatest strength is the ability to brew these beers on a scale that makes them commercially available. This combination is still rare in the craft brewing industry.

In 2017, the brewery managed 24% volume growth against an average of just 1.3% growth for craft breweries founded in 2013 or earlier. That’s an important distinction, as much of the continued growth happening in craft beer today is from new breweries entering the market and not established players. In the same year, we achieved 70% growth in grocery scans year-over-year. California regional breweries were down collectively 5.3% at grocery in the same time period. This ties back into our core competency of being able to make highly-sought-after products at a scale where they can still be available in the beer aisle at grocery stores.
 
More recently in 2018, we achieved 41% volume growth with the industry as a whole hitting 5% growth. For the data set looking at the last 26 weeks of SoCal Food scan data (through 2/23/19), Modern Times was the #1 % Growth Brand in the Top #20 (Tied with Golden Road, which is owned by AB/InBev); the #1 Dollar Brand in 16oz Can format (4pk or 6pk); the #3 Craft Brand Family in Dollar Change vs Last Year; and the #2 Overall Craft 16oz Can package with our Seasonal IPA. We also hold 4 of the top 10 and 6 of the top 20 spots on that last list.
 
We are also unique because of the direct-to-consumer tastings and sales we’ve prioritized as a brewery. Sixty-seven percent of weekly craft drinkers say they are more likely to buy a brewery’s beer after a visit to a tasting room (Nielsen Craft Beer Insights, June 2017), and Modern Times has seen that lift in its markets surrounding our five retail locations. Each new retail location also becomes a new pickup location for our online specialty beer sales. These physical locations are the glue that holds our three-pronged sales strategy together – wholesale (beer sent to thousands of retailers via our distribution network), retail (our tasting rooms and restaurants), and online sales (our specialty beer sales channel).

While many breweries can claim a dual wholesale/retail model, Modern Times’ specialty product narrows the number of comparable breweries down to only a handful. We put out some of the most sought after beers in the world (as evidenced on platforms such as RateBeer, BeerAdvocate, and Untapped) which are traded by enthusiasts around the country. Every month, we release these beers through an online sale conducted through our own e-commerce store. First access is granted to our bottle club members, dubbed “The League of Partygoers and Elegant People.” Early access is the primary benefit for members, who also enjoy League-only bottles and exclusive perks at tasting rooms and events.

This three-pronged model has proven itself time and again over the last several years. Forecasted gaps in one sales channel in any given month can be bolstered by a higher degree of focus/programming in the other two. And ancillary product sales in the form of coffee, food, and merchandise, while only a small fraction of overall revenues, serves to provide even more consistency in revenues month to month. In coming years, we will strive to continue to grow our business segments proportionally.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this offering. Some of the information contained in this discussion and analysis, including information regarding the strategy and plans for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We produce and sell craft beer, cider, and coffee in 7 states. A significant portion of our strategic plan includes operating our own direct-to-consumer establishments, where we are able to induct guests into the culture, aesthetics, and quality of MT. We have 5 tasting rooms in San Diego, LA, and Portland, with 3 more in various stages of construction which will open in 2019. Last year, our revenues were $30M, and we've grown double digits every year since we opened in 2014. 

We've just begun to scratch the surface as to what's possible in our industry and adjacent industries. We're a six-year-old company that's on track for $37M in revenue this year. We have never raised an equity round and never spent a dollar on marketing. Imagine what we can accomplish with thousands of new investors, ambassadors, and owners added to the mix. 

Milestones

Modern Times Drinks, Inc. was incorporated in the State of California in May 2017.

Since then, we have:

  • ~$30.5M in revenue in 2018. Up 59% from 2017.
  • Top-performing beer brand in Stone Distributing portfolio in both dollars and volume.
  • Up 30% YOY in home market of SoCal.
  • Top 1% of craft breweries in the nation by volume.
  • 30% employee-owned. Now opening our ownership up to fans!
  • Never spent a dollar on advertising. 100% of marketing is through social channels and word of mouth.
  • Currently operate 5 tasting rooms, 3 breweries, 2 kitchens, and 1 coffee roastery. Opening 3 new tasting rooms in 2019.

Financial Discussion

We have had prepared audited financial statements for the year-ended December 31, 2017, as well as reviewed financial statements for the year-ended December 31, 2016. Each of the audit and review was conducted by RSM US LLP. The 2018 audit has not yet concluded, and as such, has not been factored into the financial discussion below.  We have noted certain events that have occurred in 2018 that impact whether our historical results and cash flows may no longer be representative of what investors should expect in the future. However, investors should note that any 2018 or 2019 information may require adjustment following our audit.

       Operating Results

Our 2016 net revenues were $14,695,168 compared with 2017 net revenues of $19,038,673, while our gross profit was $6,991,233 (47.5% gross margin) in 2016 and $7,281,930 (38.2% gross margin) in 2017. This represents a 29.5% increase in net revenue and a 4.1% increase in gross profit from 2016 to 2017. While the last several years were heavy in terms of wholesale growth, we are currently undertaking efforts to transition proportionally more of our revenues to direct-to-consumer sales. By doing so, we expect to see an improvement in gross margins over the coming years.

Our gross profits did not increase at the same rate as our net revenues due to increases in our cost of sales. Expenses included in our cost of sales include: raw material costs; packaging costs; costs and income related to deposit activity; purchasing and receiving costs; manufacturing labor and overhead; brewing and processing costs; inspection costs related to quality control; inbound freight charges; depreciation expense related to manufacturing equipment and leasehold improvements; and warehousing costs, which include rent, labor, and overhead costs.

With so many expenses for the production and distribution of our products built into the cost of sales, we have opted to aggregate other expenses of the company into a single line item of “Selling, general and administrative expenses” (“SG&A”). In 2016, our SG&A expenses were $4,332,044, compared to $8,112,263 in 2017. This represents an increase of 87.2% that was driven by opening up additional locations and increased payroll expenses. Our goal is for SG&A expenses to remain proportional or decline as a total percentage of revenues over the coming years.

In 2017, we also incurred an increase in interest expenses on our outstanding loans, from $139,926 in 2016 to $542,472 in 2017, the increase primarily relates to the subordinated notes we entered into during the ESOP transaction, see “Liquidity and Capital Resources – Subordinated Notes” below. As a result of the foregoing, we experienced a net loss in 2017 of $1,259,982, compared to a net profit of $2,690,861 in 2016.

       Liquidity and Capital Resources

As of December 31, 2017, the company held $701,879 in cash, $2,622,679 in inventory, $1,268,375 in accounts receivable, and $815,498 in other current assets. At that time, we also had $1,486,195 in accounts payable and $2,766,389 in other current liabilities. This is compared with December 31, 2016, where the company held $2,167,017 in cash, $1,284,903 in inventory, $1,014,866 in accounts receivable, and $622,205 in other current assets, with $897,495 in accounts payable and $1,523,799 in other current liabilities.

Included in the current liabilities were amounts owed on notes payable, including to related parties. We have various notes payable with several financial institutions. The notes bear interest at fixed and variable interest rates, and are due at various dates throughout 2017 and 2018, and into the future. The notes are collateralized by the underlying equipment owned by the company. In addition, we have entered into note payable agreements for a special advance credit facility in an amount of up to $10,000,000, as well as a note payable of $3,200,000, the proceeds of which were used to finance an internal loan to our ESOP.

       Subordinated Notes
We have also entered into Senior and Junior Subordinated Notes with our stockholders during the ESOP transaction of June 2017. The Senior notes mature in April 2024, and require quarterly payments of interest at 4 percent per annum, which commenced in June 2017. At December 31, 2017, the Senior notes has an outstanding balance of $2,261,819. The Junior notes mature in June 2027, and require quarterly payments of interest at 6 percent per annum, which includes 3 percent of interest that is payable in kind that commenced in September 2017. At December 31, 2017, the Junior notes had an outstanding balance of $6,686,829.

In addition, we have entered into Subordinated Promissory Notes with certain officers and directors to cover tax liability incurred as part of receiving vesting shares. The notes provide for accruing interest at a rate of 2.25% until December 31, 2018, when the rate increases to either 13.0% or 16.0%. The notes mature on December 31, 2019.

       Lines of Credit and other Debt Facilities
During June 2017, we entered into credit agreements with a commercial bank that provides a line of credit with maximum borrowings of $1,000,000 and debt facilities for up to $10,000,000, and $3,200,000 respectively.
 
As of April 1, 2019, we have refinanced the above referenced lines of credit and debt facilities with two commercial banks, as noted above in the discussion of the material terms of indebtedness. The credit facilities with Live Oak Bank provide up to $5,500,000 in debt financing, with $5,000,000 being an SBA 7(a) term loan, and $500,000 being a conventional term loan. With California Bank & Trust, we have entered into three separate loan facilities, including $7,600,000 on an amortizing term loan, $2,500,000 on an amortizing term loan, and $1,400,000 on a revolving line of credit.

         Trend Information

For craft brewers, the most important metrics we evaluate are barrels produced, barrels sold, and revenue per barrel. These are non-GAAP measurements of our performance and have not been included in our audited financial statements. Instead, they have been prepared internally by management. It is through these figures that we estimate the value of the company. Additionally, we arrived at projected values based on historical growth of our existing locations, along with the projected values from new locations to be opened in Santa Barbara, Oakland, and Anaheim.

In 2016, we produced 40,600 barrels, which increased to 49,600 in 2017, and 68,365 in 2018. We estimate that over 2019, 2020, and 2021 our barrel production will increase to 74,930, 83,300, and 100,300, respectively. Our barrels sold was 29,363 in 2016, 36,403 in 2017, and 51,468 in 2018. We estimate that we will sell 57,246 in 2019, 63,641 in 2020, and 76,629 in 2021.

Our revenues per barrel have increased over this historical time period, and we project that they will continue to increase through 2021. Investors should note, this price per barrel is based on gross revenues, rather than net revenues following deduction of the cost of excise taxes. For instance, in 2016 our revenue per barrel was $506, which increased to $528 in 2017, and $594 in 2018. We estimate that our revenue per barrel will increase to $634 in 2019, $677 in 2020, and $682 in 2021.

We are establishing the valuation of our shares in this offering based on our projected barrels sold in 2021, which is the year in which we anticipate we will have fully utilized the investor funds in this offering. To establish the valuation, we have multiplied our projected barrels sold in 2021 of 76,629 by $3,448, for a valuation of $264,216,729. This valuation methodology of a barrels-sold multiplier is consistent with industry practice, and this specific multiplier was that which was reported during the sale of Ballast Point Brewing for its acquisition by Constellation Brands. As another growth-oriented, regional brewery based in San Diego County, for which public information is available.

Risks

1
Risks Relating to the Company and Its Business

We have a limited operating history.

We have only been in business since 2013. While in that time we have gone from brewing our first batch to opening five locations and distributing throughout California, Nevada, and the Pacific Northwest, our operating history is limited and there can be no assurance that we will be able to undertake our business plan for the long term, or that we would become consistently profitable, or that our results so far are indicative of the results that we may be ablde to achieve in the future.

2

We depend on the efforts of our small management team.

We were founded by, and are currently still led by, Jacob McKean, our CEO. Our success is heavily dependent upon the continued involvement of Jacob McKean as well as other key personnel, such as Chris Sarette, our COO. Loss of the services of either of these individuals, or any other key personnel, could have a material adverse effect upon our business, financial condition or results of operations. Additionally, our success depends on our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees in our industry is intense, and the loss of any of such persons - or an inability to attract, retain, and motivate any additional highly skilled employees required for our activities - could have a materially adverse effect on the company.

3

Our accountant identified significant deficiencies regarding internal controls.

During the course of our 2017 audit, our accountant identified significant deficiencies in our internal controls. The deficiencies were with regard to our year-end transactions as they relate to lease accounting and super-user access to the general ledger and journal entries. The nature of these deficiencies do not cause a material weakness, and procedures have been put in place to mitigate the potential for any future deficiencies. 


Other Disclosures

The Board of Directors

Director Occupation Joined
Chris Sarette COO @ Modern Times Drinks, Inc. 2017
Jacob McKean Founder/CEO @ Modern Times Drinks Inc. 2017
David Israel General Counsel @ Modern Times Drinks, Inc. 2018
Amy Krone Director of Art @ Modern Times Drinks, Inc. 2018

Officers

Officer Title Joined
Chris Sarette COO 2017
Jacob McKean CEO   2017

Voting Power

Holder Securities Held Voting
Jacob McKean 528,582 Common Stock 50.5%
Employee Stock Ownership Trust 314,292 Common Stock 30.0%

Past Fundraises

Date Security Amount
05/2019 Priced Round $154,850
05/2019 Priced Round $1,069,832
04/2019 Loan $1,400,000
04/2019 Loan $500,000
04/2019 Loan $5,000,000
04/2019 Loan $7,600,000
04/2019 Loan $2,500,000

Outstanding Debts

Issued Lender Outstanding
04/02/2019 Live Oak Bank
$738,646
04/02/2019 Live Oak Bank
$278,702
04/02/2019 California Bank & Trust
$1,400,000
04/02/2019 California Bank & Trust
$7,600,000
04/02/2019 California Bank & Trust
$2,500,000

Related Party Transactions

Use of Funds

$50,188 62.5% towards uncommitted funds to be used for business operations as necessary such as payroll, overhead, production expenses, location acquisitions, and buildouts; 30% towards offering expenses; 7.5% towards platform fees.

$250,000 20% towards minor efficiency projects/equipment; 66.5% towards uncommitted funds to be used for business operations as necessary such as payroll, overhead, production expenses, location acquisitions, and buildouts; 6% towards offering expenses; 7.5% towards platform fees.

$500,000 15% towards minor efficiency projects/equipment; 74.5% towards uncommitted funds to be used for business operations as necessary such as payroll, overhead, production expenses, location acquisitions, and buildouts; 3% towards offering expenses; 7.5% towards platform fees.

$1,069,832 9.3% towards minor efficiency projects/equipment; 81.8% towards uncommitted funds to be used for business operations as necessary such as payroll, overhead, production expenses, location acquisitions, and buildouts; 1.4% towards offering expenses; 7.5% towards platform fees.

Capital Structure

Class of Security Securities
(or Amount)
Authorized
Securities
(or Amount)
Outstanding
Common Stock B 3,000,000 0
Common Stock A 3,000,000 1,047,640

Form C Filing on EDGAR

The Securities and Exchange Commission hosts the official Form C on their EDGAR web site.

Details