Financial hardship at Brick Brewing – Who knew?

Oktoberfest is over for another year, but the thousands of beer drinkers who descended on Waterloo earlier this month weren’t enough to keep Brick Brewing (BRB:TSX) from the gates of financial hell. Or so we are being led to believe.

A few hours ago, Brick Brewing announced that it had placed $2.5 million of equity (plus a full warrant) with a bunch of large current shareholders and members of the Board of Directors. Price was $0.48/unit, a healthy 14% discount to the close on the 24th.

No broker or Agent was involved, which means the Company’s management likely negotiated the financing with the people who control the votes. With the attached warrants, this financing will hand 51% more of the company over to the investment group; names include Jim Brickman, Peter Schwartz (good guy) and Edward H. Kernaghan.

Here’s the punch line from the press release:

The Corporation does not intend to obtain a valuation or majority of the minority shareholder approval but will instead rely on exemptions from such requirements available under Multilateral Instrument 61-101 (“MI 61-101”) and from the security holder approval requirements of the TSX in Subsection 604(e) of the TSX Company Manual in cases of financial hardship. In this regard, the Corporation’s board of directors, and its independent directors, acting in good faith, have determined that the Corporation faces serious financial difficulty and the proposed transaction has been designed to improve the financial position of the Corporation. As a consequence of relying upon these financial hardship exemptions, the TSX has informed the Corporation that it will, in the ordinary course, commence a delisting review. The Corporation believes that, upon completion of the Offering, it will be in compliance with TSX listing requirements.

Fair enough. But if you looked at the financial statements, you’d have no idea what financial crisis they are referring to. None whatsoever. According to the financial results released just last month:

– Brick had $817k of EBITDA for the first six months of the year, up from $170k in the prior period
– working capital was $2.7 million, also stronger
– debt had been reduced versus 2007
– shareholders’ equity was a whopping $25.6 million
– no mention of a going concern note from their Auditors, KPMG, either in the September quarterly or 2008 annual financial statements
– no discussion of a default under the company’s existing bank loans

Where is the five alarm fire in these key metrics? If the bank loan has been called, the company would have had to issue a press release; so that can’t be it. If KPMG (the company’s auditors) were worried about Brick’s near term solvency, we’d have seen a “going concern note” in the recent financials.

Not a whisper of problems. Just press releases announcing new brands, new trailers to handle the volumes, and increased funds from the Provincial government to help the craft beer industry (see prior post “Ontario Brewers get band-aid, but cure nowhere in sight” September 29-08). This does not sound like the dying words of a financial basketcase:

“In order to compete and grow in the Ontario market it is essential to invest in marketing, to build and strengthen our brands,” said George Croft President and CEO. “This announcement is certainly good news for the Ontario Craft Brewers Association, Brick Brewing Co. Limited and beer drinkers in Ontario,” added Croft.

There may well be financial hardship at the company, but you wouldn’t know it from the financial statements. It seems too well hidden, or perhaps too convenient an excuse, to rely on this stock exchange rule exemption to bring about a precisely-chosen 51% dilutive financing.

MRM