San Diego’s Modern Times has turned to crowdfunding in an effort to raise more than $1 million, which it says will be allocated for the continued operation of its business, “minor efficiency projects” and equipment purchases, and continued expansion.
In the process of posting the equity crowd raise via the Wefunder platform, the company has provided future investors and others throughout the beer industry with a peek under the hood of one of the fastest-growing craft breweries in the U.S.
Modern Times — which has valued itself at $264 million prior to the raise — is offering 4,242 shares, at $252.20 per share, with a minimum target of securing $50,187.80 and a maximum of $1,069,832.40.
According to brewery spokesman Dan Reed, Modern Times would give up 0.4 percent ownership in the company if the round is fully funded.
Now ranked by the Brewers Association as the 45th largest craft brewery in the U.S., Modern Times sold 51,468 barrels of beer in 2018 — up from 36,403 barrels the year prior — and grew revenue 59 percent, to $30.5 million, according to the Wefunder filing.
The company also expects to grow sales to 57,246 barrels in 2019, on its way to $37 million in revenue.
But that growth, which coincides with multiple satellite taproom expansion projects, is coming at a cost.
According to a breakdown of Modern Times’ 2018 financials, which were posted to the company’s Wefunder site and not prepared or reviewed by an independent accountant, the brewery recorded a nearly $3 million loss last year.
In an email to Brewbound, Modern Times founder Jacob McKean wrote that losses were “non-operating” and attributable to large capital expenditures as well as the company’s Employee Stock Ownership Plan (ESOP), which requires it to record stock compensation expenses on its profit and loss statement.
The company also carried more than $4.2 million in short-term debt — which is typically repaid over a 12-month period — and nearly $18 million in long-term debt, during its most recent fiscal year-end (2017), according to an SEC filing. At the close of 2018, the company said it had more than $2.1 million in short-term debt.
In other words, Modern Times — which now employs about 250 workers and ships beer to seven states — is somewhat leveraged, with a disclosed debt ratio of 166 percent.
Nevertheless, the company maintains that there are “virtually no opportunities to invest in successful craft breweries,” and that a bet on Modern Times is a worthwhile one because of its rapid success and expansion, coupled with its philosophy of making “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,” the company added, noting the popularity of its hazy IPAs and barrel-aged and sour beers.
In promoting its equity crowdfunding campaign, Modern Times also said it planned to spend $6 million to take over an additional 17,000 sq. ft. and expand its “Point Loma” production brewery in San Diego.
Additionally, Modern Times said via a press release that a “more substantial capital raise” could be around the corner. According to the Wefunder, the company is planning to take on additional debt financing, and solicit additional investment under the SEC’s “Regulation A.”
While the company cannot speculate on potential returns on investments for investors or a time frame for a return, McKean said the company’s ESOP would “most likely” buy back the shares. Other potential, but “less likely” options, he wrote, include issuing dividends, an initial public offering or selling the company, although the last two “are not currently part of the game plan.”
Despite the fact that Modern Times is 30 percent owned by employees, McKean currently owns and will continue to maintain a majority of the business following the raise, the company said.
According to Wefunder, McKean holds 528,582 shares of Modern Times’ stock and 50.5 percent of its voting power, while the company’s employee stock ownership trust, which was established in July 2017, holds 314,292 shares of common stock and 30 percent of the voting power.
Nonetheless, in a promotional video posted to the Wefunder page, McKean said Modern Times’ fast growth has created “a company that would really benefit from a change in ownership structure that gives it some additional support.”
“What a lot of companies would do in our situation is they would bring in money from what’s called a strategic partner, usually a much larger company in the same market that they’re in or a private equity firm or something like that,” McKean said, hinting at the fact that Modern Times could have sold.
“But those are kind of the easy way out,” he added. “So we’re trying this because we want to stay independent, we want to stay accountable to our fans and our employees.”
Other investment risk factors outlined by the company included “significant competition” from other craft breweries. According to the Brewers Association, more than 7,346 U.S. craft breweries are now in operation.
And while Modern Times touted the fact that it had “never spent a dollar on advertising,” it also said it needed to increase brand awareness in order to remain competitive.
“Successfully promoting and positioning our brand, products, and services will depend largely on the effectiveness of our marketing efforts,” the company wrote. “Therefore, we may need to increase our financial commitment to creating and maintaining brand awareness.”
Modern Times expects production to increase to 100,300 barrels in 2021, however, the company only intends to sell 76,629 of those barrels.
“We see a pretty standard 77 percent yield between barrels brewed and barrels sold at the end of the day,” McKean wrote. “That’s loss from the brewhouse, the cellar and dry hopping, filtration, packaging, returned and damaged product, and inventory on hand at the end of the year.
“Some projects in future years will further increase our yield here,” he added.
The company is also projecting its revenue per barrel to increase from $594 in 2018 to $634 in 2019, and up to $682 in 2021.
It’s unclear from the filing if Modern Times would return to profitability over the next 2.5 years, however. The last year that the company recorded a profit was in 2016, with nearly $2.7 million in profits on about $14.9 million in revenue. In 2017, the company recorded about $1.3 million in losses on $19.2 million in revenue.
According to the Wefunder documents, Modern Times arrived at its $264 million valuation by using a similar multiplier ($3,448 per barrel) to the one used for Constellation Brands’ $1 billion purchase of a much larger Ballast Point Brewing Company in 2015. Constellation Brands has since taken two impairment charges on the Ballast Point trademarks of about $200 million, essentially admitting it overpaid for the company.
Asked to explain why it chose that methodology, McKean said a “barrels-sold multiplier is consistent with industry practice.”