FORM 45-106F2 Offering Memorandum for Non-Qualifying Issuers Amended and Restated
November 24, 2017
The Issuer:
Name: MacMhaol-onfhaidh (‘Macaloney’) Brewers & Distillers Ltd. (the “Corporation” or “MBD”) Head Office: Victoria Caledonian Distillery & Twa Dogs Brewery, 761 Enterprise Crescent, Saanich, B.C., V8Z 6P7 (250) 634 2276; [email protected] Currently listed or quoted? No. These securities do not trade on any exchange or market. Reporting issuer? No. SEDAR filer? No.
The Offering: Securities offered: Units. Each unit (a “Unit”) is composed of: . one common class A share (a “Common Share”); . one quarter of a Common Share purchase warrant exercisable until 19 months from the date of the closing pursuant to which a subscriber purchased their Units (each whole warrant of this kind referred to as an “MBD ‘A’ Warrant”); and . one quarter of a Common Share purchase warrant exercisable until 31 months from the date of the closing pursuant to which a subscriber purchased their Units (each whole warrant of this kind referred to as an “MBD ‘B’ Warrant”). Each whole MBD “A” Warrant entitles the holder to purchase one Common Share at a price per Common Share equivalent to the Unit price and each whole MBD “B” Warrant entitles the holder to purchase one Common Share at a price per Common Share equivalent to the Unit price multiplied by 110%. The subscriber will be granted certain rights (the “Rights”) pursuant to a rights agreement (the “Rights Agreement”) to be entered into between MBD, Dr. Graeme Macaloney and, among others, subscribers under this Offering Memorandum (see Item 5.1.4 – The Rights). No certificates will be issued in respect of the Rights and these Rights cannot be assigned or otherwise transferred. Price per security: The price per Unit is dependent upon the overall amount of your investment and the period in which you make your subscription for Units (see Item 5.3 – Pricing of Units). The price per Unit has been determined by MBD arbitrarily (see Item 8 – Risk Factors). Minimum offering: MBD was required to raise a minimum of $2,800,000 CAD in total share sales before closing under this offering. MBD exceeded this target on September 30, 2014, and conducted an initial closing under this offering. Going forward, there is no minimum offering. Maximum offering: $722,539 CAD Funds available under this Offering may not be sufficient to accomplish the proposed objectives. Minimum subscription: The minimum amount each investor must invest is $10,000.00 CAD Payment terms: By certified cheque or bank draft payable to “Breakwater Law In Trust” with a memo indicating “for investment in MBD”. Funds will be held in trust on the terms described in Item 5.2.1 – Trust Conditions. Proposed closing Closings will occur at the discretion of the Board of Directors until the maximum offering is reached. date(s): Selling agents. Yes. (see Item 7 – Compensation Paid to Sellers and Finders). Resale restrictions - Other than in the specific circumstances described herein, as MBD is not a reporting issuer in any jurisdiction, you will be restricted from selling your securities for an indefinite period (see Item 10 – Resale Restrictions). Purchaser’s rights – You have 2 business days to cancel your agreement to purchase these securities. If there is a misrepresentation in this Offering Memorandum, you have the right to sue either for damages or to cancel the agreement (see Item 11 – Purchaser’s Rights). This offering memorandum constitutes a private offering of these securities only in those jurisdictions where they may be lawfully offered for sale. No securities regulatory authority has assessed the merits of these securities or reviewed this Offering Memorandum. Any representation to the contrary is an offence. This is a risky investment (see Item 8 – Risk Factors). The securities offered hereby have not been and will not be registered under the United States Securities Act of 1933, as amended, and may not be offered or sold within the United States or to United States persons. An investment in the securities offered hereunder should be considered highly speculative and involves certain risk factors which should be taken into consideration. The securities offered hereunder should be purchased only after a full review of this Offering Memorandum. In addition to this Offering, MBD may conduct other offerings on terms that may differ from those contained herein.
Offering Memorandum - November 24, 2017 Page 2 MBD
TABLE OF CONTENTS GLOSSARY ...... 1 1. USE OF AVAILABLE FUNDS ...... 4 1.1 FUNDS ...... 4 1.2 USE OF AVAILABLE FUNDS ...... 5 1.3 REALLOCATION ...... 5 2 BUSINESS OF MBD ...... 6 2.1 STRUCTURE ...... 6 2.2 MBD’S BUSINESS ...... 6 2.3 DEVELOPMENT OF BUSINESS ...... 24 2.4 LONG TERM OBJECTIVES ...... 25 2.5 SHORT TERM OBJECTIVES AND HOW MBD INTENDS TO ACHIEVE THEM ...... 26 2.6 INSUFFICIENT FUNDS ...... 26 2.7 MATERIAL AGREEMENTS ...... 26 3 INTERESTS OF DIRECTORS, MANAGEMENT, PROMOTERS AND PRINCIPAL HOLDERS ...... 29 3.1 COMPENSATION AND SECURITIES HELD ...... 29 3.2 MANAGEMENT EXPERIENCE ...... 30 3.3 PENALTIES, SANCTIONS AND BANKRUPTCY ...... 32 4 CAPITAL STRUCTURE ...... 33 4.1 SHARE CAPITAL ...... 33 4.2 LONG TERM DEBT SECURITIES ...... 34 4.3 PRIOR SALES ...... 34 5 SECURITIES OFFERED ...... 35 5.1 TERMS OF SECURITIES ...... 35 5.2 SUBSCRIPTION PROCEDURE ...... 36 5.3 PRICING OF UNITS ...... 37 6 INCOME TAX CONSEQUENCES AND ELIGIBILITY FOR REGISTERED INVESTMENTS ...... 37 6.1 INCOME TAX CONSEQUENCES ...... 37 6.2 TAX CREDITS UNDER THE INVESTMENT CAPITAL PROGRAM ...... 37 6.3 RRSP, RRIF & TFSA ELIGIBILITY AND LIFETIME CAPITAL GAINS EXEMPTION ...... 39 7 COMPENSATION PAID TO SELLERS AND FINDERS ...... 39 8 RISK FACTORS ...... 39 9 REPORTING OBLIGATIONS ...... 45 10 RESALE RESTRICTIONS ...... 45 10.1 GENERAL STATEMENT ...... 45 10.2 RESTRICTED PERIOD ...... 45 10.3 MANITOBA RESALE RESTRICTIONS ...... 45 10.4 OTHER RESTRICTIONS ...... 45 11 PURCHASERS’ RIGHTS ...... 46 12 FINANCIAL STATEMENTS ...... 47 13 DATE AND CERTIFICATE ...... C-1 14 APPENDIX A ...... A-1 15 APPENDIX B ...... A-5 Offering Memorandum – November 24, 2017 Page F-1 MBD
GLOSSARY
Alcohol by Volume Indicates the percentage of alcohol in a given volume of water. (abv). Angels’ share. The amount of liquid that evaporates from the cask during the period of maturation. Barrel. Round, convex, water-tight, wooden container made by wrapping heated, bent oak staves around flat oak end panels and binding them in a circle with metal hoops. Also called casks.
Beer. The alcoholic product of fermenting wort with yeast. Blended whisky. A mix of malt whiskies and grain whiskies. Bottle. Typically 75 cl (sometimes 70 cL or 50 cL) spirit or whisky calculated at 40% alcohol content, distributed and sold via traditional channels.
Brand or This is the name, term, design, symbol, or any other feature that identifies one seller's goods or branding. services as distinct from those of other sellers. A brand is often a valuable asset of a company. Brand owners or ambassadors manage their brands carefully to create shareholder value. The word "brand" is often used to refer to the company that is strongly identified with a brand. Brand This is a marketing term for a person employed by a company to promote its products or services Ambassador. within the activity known as branding. The key element of brand ambassadors lies in their ability to use promotional strategies that should strengthen the customer-product/service relationship and influence a large audience to buy and consume more. In the context of MBD investors, customers and visitors, they become unofficial (not formally employed) brand ambassadors for the company due to their promotion of the company. Bright Beer Tank A bright beer tank is a dish-bottomed pressure-rated temperature-controlled tank used to hold beer in preparation for packaging. The term “bright” refers to “bright beer,” beer that has been rendered bright (clear) by filtration, centrifugation, fining, and/or maturation. For in-tank carbonation (or adjustments), the bright tank is fitted with a carbonation stone, a device through which carbon dioxide is forced, dispersing fine bubbles into the liquid for fast dissolution. After carbonation, the beer is ready to be bottled or canned or kegged directly from the bright tank.
Custom Casks. Personal whisky cask ordered and manufactured based on customer orders. Delivered after an average of four years of maturing. Can be delivered as a cask depending on local liquor rules, or in about 48 whisky bottles (50 cl). Cask finishing. The practice of using a different cask (such as port, Madeira, French wine or rum casks) for the final period of the whisky’s maturation. Cask strength. Whisky that is bottled straight from the cask.
Column still. A tall metal cylinder filled with horizontal perforated plates over which beer or high wines pass back and forth as they descend the column. Steam rising from the bottom of the column strips out alcohol and congeners as it rises until they pass from the top of the column to a condenser.
Commissioning. The steps that take place after construction, but before start-up. This may include checking operation of motors, valves and instruments. Condenser. A series of tubes that are cooled from the outside to condense vapours from a still into liquid state.
Congener. Any of a broad range of compounds that give whisky its flavours.
Craft beer. Craft beer is an ale or lager made in a traditional or non-mechanized way by a small brewery.
Culture. As a noun, cultivation of living organisms in prepared medium; as a verb, to grow in prepared medium. BOD. Biochemical oxygen demand or BOD is the amount of dissolved oxygen needed by aerobic biological organisms in a body of water to break down organic material present in a given water sample. The term also refers to a chemical procedure for determining the BOD amount which is widely used as an indication of the organic quality of water and as a robust surrogate of the degree of organic pollution of water. Offering Memorandum – November 24, 2017 Page F-2 MBD
Distillation. Separation of individual components of a solution by collecting the vapours after heating the solution to a temperature where some components will vapourize but others will not. Distillery. A place where distillation takes place, including the distillation of alcoholic spirits.
Draff. The remains of the grain after mashing. It can be used as a nutritious animal feed, used either wet or dried and pelletized. Enzyme. A naturally occurring protein that causes specific chemical reactions to occur. In whisky making, enzymes convert starch to sugar by breaking certain chemical bonds in the starch.
First fill cask. Usually a cask that has previously been used to mature Bourbon whiskey and then is re-used to mature single malt, pot still or rye whisk(e)y. A first fill sherry cask will have previously been used to hold sherry. Expression. The term given to a particular whisk(e)y in relation to the whisk(e)y flavour of a particular a distillery. It may refer to the age, as in 12-year-old expression, or to a particular characteristic, such as a cask strength expression.
Fermentation. The process of growing microorganisms (yeast in the case of beer and whisky) for the production of various chemical compounds. Microorganisms are normally incubated under specific conditions in the presence of nutrients (wort in the case of beer and whisky) in large tanks called fermenters. Fermenter. A reactor, traditionally made from Douglas fir or stainless steel, used to conduct fermentation.
Finishing. See Cask Finishing. Grain whisky. Whisky made from wheat or other cheaper grain, but not malted barley.
Grist. Ground grain. Water is added to grist to form mash.
High wines. New distillate high in alcohol content and ready for rectification.
Independent A company that releases bottles of whisk(e)y independently of the official distillery bottlings. They bottler. buy small quantities of casks and bottle the whisky as and when they choose.
Initial public An initial public offering (IPO) or stock market launch is a type of public offering where shares of offering (IPO). stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise expansion capital, to monetize the investments of early private investors, and to become publicly traded enterprises. Kiln. An apparatus used to dry grains including malted barley using warm air. A peat kiln uses peat smoke for the initial drying and then warm air to complete the drying process. Liquidity event. This is the purchase or sale of a corporation or an initial public offering. A liquidity event is a possible exit strategy for an investor of a company, since a liquidity event typically converts the ownership equity held by a company's founders and investors into cash. Malt. Grain, usually barley or occasionally rye, that has been partially sprouted to activate the enzymes that convert its starch to sugars, and then is dried in a kiln.
Mash. As a verb: to mix course-ground grain with water in preparation for converting the starch to sugar. As a noun: a slurry of course-ground grain and water. Mashtun. The vessel in which the grist is mixed with water to convert starch in the grain into sugars, ready for fermentation. The fermentable liquid that results is called wort. Maturation. For New Make Spirit to become whisky it must undergo a period maturation in oak casks. The length of time varies: in Scotland, Ireland and Canada the minimum time is 3 years. In the USA it is a minimum of 2 years. New Make Spirit. The clear spirit that comes from the spirit still. It has a strength of about 70% abv and is diluted to around 62.5% abv before being put into casks for maturation. Offering Memorandum – November 24, 2017 Page F-3 MBD
Peated whisky. This is whisky that has been made from malt that was dried in a kiln using peat as a source of heat. The smoke from the peat imparts smoky, phenolic aromas and taste to the whisky.
Pot still / Still. A large vessel, usually made of copper, in which a fermented product is heated to cause the alcohol and congeners to evaporate so they can be separated from water and undesirable congeners.
Pot ale. The leftover residue in a pot still after the alcohol has been distilled off. Usually rich in proteins and carbohydrates, it may be used to feed animals.
Post-money This is the value of a company after investors have invested in the company. valuation.
Pot still whiskey A style of Irish whiskey made in pot stills but employing a large percentage of unmalted barley in addition to malted barley. Pre-money This is the value of a company before investors have invested in the company. valuation. Process Involves several responsibilities and tasks including initial distillation process trials; production of development. required beer or wash; scale-up; yield improvement, and cost reductions.
Reflux. The process by which heavier alcohols and congeners fall back into the Still rather than passing along to the condenser. By falling back in to the still, these chemicals are re-distilled becoming purer and lighter. Single malt. A malt whisky that is the product of a single distillery. Spent grains. The remains of the grain used to make whisky after the starch and sugar has been removed. Usually rich in yeast and protein, and may be used as animal feed. Spirit still. A type of pot still. The spirit from the wash still is distilled again in a spirit still to produce new make.
Triple distilled. Most batch distillation involves two distillations. Triple distillation is used in most Irish whiskeys and some lowland Scotches whereby the spirit is distilled for a third time making it smoother and more refined.
Vatting Vatting is the process of blending single malt whiskies from more than one distillery to produce vatted malt whisky. It is used as a term distinct from ‘blending’ because the latter commonly denotes the process of blending grain whisky with single malt whiskies to produce blended whisky.
Warrant. The word warrant means to "endow with the right". As a security, it entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants are contractual financial instruments that allow the holder discretionary rights to buy securities. Warrants are frequently attached to stock as a sweetener. Wash. The fermenter liquid that is fed into the wash still, also called beer.
Wash still. A type of pot still. The wash or beer from the fermenters is distilled in the wash still. Whisk(e)y. Whisk(e)y is a generic term for whisky and whiskey. In Canada and Scotland the term whisky is used. In Ireland and the USA the term whiskey is used. Whisk(e)y is made from barley or other grains such as rye or corn which are Fermented using Yeast to produce Wort. This Wort then undergoes two or more Distillations to become New make spirit. This New Make Spirit then undergoes Maturation in oak barrels. In Canada and Scotland it becomes whisky after 3 years Maturation. Wood finish. See Cask finish.
Wort. The liquid made by mixing grist with hot water in a mash tun. Yeast. A single-celled organism that consumes sugar, turning it into alcohol and carbon dioxide. Yeasts also produce many of the desirable congeners in whisky. Offering Memorandum – November 24, 2017 Page F-4 MBD
1. USE OF AVAILABLE FUNDS
1.1 Funds
Assuming minimum Assuming maximum offering(1) offering(2)
A Amount to be raised by this offering N/A $722,539
B Selling commissions and fees N/A $43,352(3)
C Estimated offering costs (e.g., legal, accounting, audit) N/A $42,000
D Net proceeds: D = A - (B+C) N/A $637,187
E Additional sources of funding required N/A N/A
F Estimated Funds to be used from working capital to meet expected operation needs for the remainder of fiscal 2017-18 N/A $235,933
G Total: G = (D+E+F) N/A $873,120
(1) MBD was required to raise a minimum of $2,800,000 CAD in total share sales before closing under this offering. MBD exceeded this target on September 30, 2014, and conducted an initial closing under this offering. Going forward, there is no longer a minimum offering. (2) MBD’s original maximum offering was $6 Million in total equity investment. Since MBD has already raised $5,277,461, excluding share issuance costs, and warrant exercises; in equity investment, MBD may only raise another $722,539 under this offering. (3) MBD is prepared to pay up to six percent (6%) in commission to specific brokers or finders who successfully introduce investors to MBD (please see Item 7 – Compensation paid to Sellers and Finders). This amount represents the maximum commissions that could possibly be paid to reach the maximum offering.
Offering Memorandum – November 24, 2017 Page F-5 MBD
1.2 Use of Available Funds
Description of intended use of available funds listed in Assuming minimum Assuming maximum offering order of priority offering
Estimated Operating cash usage for the fiscal year ending June 30, 2018
N/A $ 733,0001 1. Net Operational Cash Flow Usage (production, selling and admin costs) Estimated Capital Expenses for the remainder of fiscal year ending June 30, 2018 1. Miscellaneous Production Maintenance and Minor Capital N/A items including: $25,000 (a) 100 HL Bright Beer Tank
(b) Pilot brew system $6,500
(c) Peated-Malt Equipment $76,620
(d) Other estimated capital expenditures $32,000
Unallocated funds N/A N/A TOTAL: Equal to G in the Funds table above N/A $873,120
The board of directors provides fiscal governance via meetings held on a regular basis. Among other agenda items, the board monitors and governs the Company’s expenditures, revenues and cash position.
1.3 Reallocation
MBD intends to spend the available funds as stated. MBD may reallocate funds only for sound business reasons.
1 This represents an estimate of operating cash flows for the remainder of fiscal year ended June 30, 2018 (November 1 to June 30, 2018). While the funds to be raised are expected to cover our operational needs, it is possible that additional sources of debt and equity financing may be sought to cover any potential shortfall.
Offering Memorandum – November 24, 2017 Page F-6 MBD
2 BUSINESS OF MBD
2.1 Structure
MBD was incorporated in the province of British Columbia on February 1, 2013 pursuant to the Business Corporations Act, S.B.C. 2002, chapter 57.
2.2 MBD’s Business
2.2.1 The Vision
MBD plans to be an international whisky and local beer and tourism business. It has launched the Victoria Caledonian Distillery & Twa Dogs Brewery, a distillery, brewery, visitor centre and tasting lounge located in Victoria, British Columbia. MBD is producing premium branded whiskies for international sale and distribution, and craft beers for regional sale and distribution, and is hosting tours, events and visitor experiences.
The business plan incorporates:
1. Production of a diversified range of styles of proprietary premium whiskies, including single malts (Scotch-style) and triple distilled pot still (Irish-style) for Canadian, tourism and export sales;
2. Use of processing and maturation technologies to accelerate whisky maturation - reducing working capital required, accelerating speed to market, and ability to respond to market opportunities;
3. Finishing, improvement, bottling and branding of Scotch whiskies from third party whisky makers - for rapid market entry and brand development;
4. Brewing and sale of craft beers in the form of Growlers (1.9 and 0.9L litre refillable jug formats) for on-site direct to customer sales, Bottles (355 mL and 650 mL) for on-site and provincial liquor store sales, Cans (473ml) for on-site and provincial liquor store sales, and Kegs (draught beer format) for pubs and restaurants, provincially. Brewing of craft ales, a high growth product category, employ essentially the same production equipment as whisky up to the point of distillation; Offering Memorandum – November 24, 2017 Page F-7 MBD
5. Sales of personalized, customizable and affordable casks of whisky; for future delivery, delivered as a cask or in bottles - to build a large base of unofficial brand ambassadors;2
6. Tours of the distillery-brewery and on-site events; offering hands-on whisky and craft beer processing experiences where renewable Canadian raw materials (water and grain) are naturally fermented and distilled, then conditioned in oak casks to make a premium connoisseurs’ spirit. Within a few years, tourists (over 40% foreign) and locals are anticipated to generate on-premise sales and build brand-loyalty leading to unofficial brand ambassadors; and
7. Visitor Centre and tasting lounge, and events space on production floor offering on-site sales and tutored tastings of craft beers and spirits, together with a range of whisky and beer related gifts including books, branded glassware, branded clothes, jewelry, etc., and a range of private and corporate events hosted on the production floor.
Value drivers include proprietary processing technologies to accelerate maturation of its whiskies, locating the distillery-brewery in a high tourism city to enhance sales, innovative product development including customized cask sales, an experienced management team of whisky and beer production, product development, tourism, and network connections to whisky writers and distributors. The Victoria Caledonian Distillery is intended, first and foremost, to be a premium whisky and craft beer production facility; second, a destination for tourists to Victoria to experience the provenance of whiskies and beers, to build loyal customers and enthusiastic unofficial brand ambassadors (advocates) when they return home; third, a visitor centre, events space and tasting lounge to extend MBD’s product offerings and leverage its sales and branding, with both local and regional patronage and tourists. The forgoing has been a statement of MBD’s vision. MBD cannot guarantee that its vision for revenue growth in each of its business sectors will fully materialize as stated above or that MBD will achieve market success. At our fiscal year end, June 30, 2017, MBD has distilled single malt spirit and made advanced sales (of $156,322) to customers in the form of 30L cask sales, which are expected to be delivered in 2020-21. Customers can choose between five new make spirit options and ten wood types to customize their own whisky. Purchase into this program provides the customer with a 30L share of full size cask (typically 100-500L). MBD will bottle any mature whisky inventory that remains in a cask should the entire volume of the cask not be sold. MBD has also acquired five guest Scotch whiskies and commenced sales in the form of 750 mL bottles of Prince Dougal’s Dram and Among the Heather vatted malt Scotch whiskies, Islay Twa Cask, Speyside Twa Cask and Highland Twa Casks. MBD also sells seven, core craft beers along with various seasonal beers in 355 mL, and 650 mL bottle and 473 mL can formats which are being sold in over 179 liquor stores and pubs across Vancouver Island, Metro Vancouver and other parts of British Columbia. MBD’s Victoria Caledonian Distillery & Twa Dogs Brewery has opened its Visitor Centre inclusive of a gift shop and lounge bar and commenced sales of guided tours, events, and direct- to-public retail sales of beers, guest Scotch whiskies and other gifts including branded glassware and clothes, beer & whisky-related books, etc., to locals and tourists. A variety pack, called the Dog Pack consisting of 12 x 355 mL bottles with 4 beer styles is also being sold across B.C. and MBD also has plans underway to sell some of its beers in Alberta.
2.2.2 Processing and Maturation Technology Whisky is essentially unhopped beer which has been distilled twice and matured in oak casks. The many similarities in the two processes allows MBD to utilize much of the same equipment for both products. This facet of the business allowed MBD to reduce its capital expenditure proportional to each business pillar. Both beer and whisky usually begin with malted barley which is turned into grist by one of our two grist mills. The grist is then transferred into the mash tun which soaks the grist in water to extract the sugars. The resulting wort destined to be beer moves through the kettle and whirlpool where hops may be added before it is transferred to fermentation vessels where yeast is added and the beer is left for 2-6 weeks to ferment and condition. It is then transferred to the bright beer tank where it is clarified and carbonated, then bottled, canned or kegged. The wort destined to be whisky is transferred directly to a fermenter from the mash
2Liquor regulations in Canada currently prohibit the sale and delivery of bulk alcohol to ordinary customers. As such, MBD may be prevented from delivering whisky to its customers in full-size, ordinary casks. MBD could deliver its cask whisky in bottles, with the cask sold separately, or MBD could explore the option of selling specialized mini-casks that would not be considered a bulk sale.
Offering Memorandum – November 24, 2017 Page F-8 MBD tun. Yeast is then added and the whisky wash spends three days in a fermentation vessel. Finally, the resulting wash is sent to the pot stills where it is distilled twice or three times in order to produce a new make spirit. This spirit is then used to fill casks which must mature for a minimum of three years to be called whisky. MBD’s facility has been designed with capacity well in excess of our immediate and short-term needs. Based on our knowledge of the industry, and discussions with pot still manufacturers, including Forsyth’s, we believe that MBD’s pot stills are among the largest for single malt whisky in North America. As a consequence, we have surplus fermentation and distilling capacity that allow opportunities to conduct contract brewing and distilling.
New Technologies Accelerate Time-to-Market: MBD has commissioned its whisky distilling process and has new- make whisky spirit in a variety of oak casks maturing in its warehouse, which it expects to be matured as a high-quality single malt whisky within 1.5 – 3 years. MBD’s production employs a novel combination of processing technologies intended to reduce the maturation time of its whiskies to 1.5 - 3 years, while preserving and improving quality. Due to slow maturation times, single malt whiskies were previously not marketed in any volume until six to ten years; in fact whiskies in Canada and Scotland cannot be marketed internationally as “whisky” until they have been matured in oak casks for a minimum of three years, although New Make Spirit or partially matured spirit can be sold prior to year three (a limited market).
Within the single malt market, there has been a ‘snob factor’ previously promoted by the major Scotch producers whereby age was associated with quality. As such, some consumers may still believe this to be true, and this could affect MBD’s ability to gain market share. However, major players including Edrington (e.g. Macallan brand), DIAGEO (e.g. Talisker brand), Louis Vuitton Moet Hennessy (e.g. Ardbeg brand) and Rémy Cointreau (e.g. Bruichladdich brand) are increasingly adopting ‘no age statement’ whiskies. Further to this, young single malt whiskies such as Kilchoman, Amrut and Kavalan are out-competing older single malt Scotches by winning high profile international awards that inform retailer and customer opinion. For example, the award winning Kavalan Fino Solist Barrique single malt (Taiwan) and Amrut single malt (India) won international awards after just five years in the case of Amrut and just three years for Kavalan. In blind tastings the latter was awarded the ‘best single malt’ in the 2015 World Whisky Awards3, thereby beating the best single malt Scotches of all ages in this global competition, and its many international awards include a 97 score (100 point scale) and “New World Whisky of the Year” award from Jim Murray’s Whisky Bible. Both Amrut and Kavalan rank in Murray’s top 18 single malt whisky expressions from over 4,500 world-wide whisky expressions4. Kavalan continues to produce award winning whisky’s, being among the winners in of the world’s best Single Cask Single Malt Whisky in 20165 and 20176, in the World Whisky Awards.
At only 8 months of maturation, MBD’s very own Mac na Braiche, bottled and branded as “single malt spirit” because it is too young to be sold as whisky, scored 87 points by a Malt Maniac whisky reviewer on the Whisky Intelligence web site. This is an equivalent score to Highland Park 12 year old. While other whisky enthusiasts may not share this reviewer’s opinion, MBD is surprised and pleased that its young product was able to score so well with an independent and respected whisky reviewer.
3 Taiwan whisky beats Scotch to top award. The Scotsman. 23 March 2015. 4Jim Murray’s Whisky Bible 2012. 5 http://www.worldwhiskiesawards.com/winner/whisky/2016/worlds-best-single-cask-single-malt-whisky-world-whiskies-awards-2016 6 http://www.worldwhiskiesawards.com/winner/whisky/2017/worlds-best-single-cask-single-malt-world-whiskies-awards-2017 Offering Memorandum – November 24, 2017 Page F-9 MBD
Traditional Scottish copper pot stills at the Victoria Caledonian Brewery & Distillery.
The late Dr. Jim Swan, who assisted Kavalan, Amrut and Kilchoman with his knowledge of rapid maturation technology, consulted MBD (see Item 2.2.7: Management, Board of Directors, and Strategic Advisors). When he, Mr. Nicolson (MBDs consultant Master Distiller; see Item 2.2.7: Management, Board of Directors, and Strategic Advisors), and Dr. Macaloney commissioned the single malt new-make spirit, Dr. Swan commented: “your new-make is the best that I have seen in any distillery at this stage, super fruity". This technology, unpatented and maintained as ‘know-how’ or a trade secret, has been successfully transferred by Dr. Swan to MBD as evidenced by our new-make whisky spirit and his comments regarding its quality. Dr. Swan shared this technology with MBD on a Canadian exclusive basis, thereby preventing other Canadian distillers from learning this technology directly from him. Note that Dr. Swan did consult to a limited number of other international distillers. In time, more distillers, including Canadian distillers, will learn about accelerated maturation and may adopt it. Therefore, any potential advantage in adopting Dr. Swan’s know-how may not be sustained in the long run.
2.2.3 The Market International Whisky Sales: In 2016, Scotch whisky exports were valued at £4 billion [$6.7 billion CAD], increasing 4% from 2015. Of this, single malt Scotch represents just 9% by volume but 26% by value7. Global consumption of single malt Scotch increased by over 10 million bottles in 2016, year over year, to more than 113 million bottles, surpassing more than £1 billion [$1.7 billion CAD ]in global exports for the first time8. Exports of Irish whisky grew to $500 million [$635 million CAD] per annum (2016) - up 11.2% from 2015 (17.6% in the US)9. Unlike these premium products, Canadian blended rye whisky exports have plummeted from $651 million to $365 million10 from 1999 to 2013 under the stewardship of its foreign multinational owners. However, the pure or straight rye sub-category is seeing some premiumization in the USA and also here in Canada in recent years. Current annual rye whisky sales in the USA remain at slightly less than $300 million11 in 2016.
7 Scotch Whisky Association Annual Review 2016-17: http://www.scotch-whisky.org.uk/news-publications/publications/documents/swa-annual- review-2016-17/#.WcKYbsaQxph 8 Scotch Whisky Association Annual Review 2016-17: http://www.scotch-whisky.org.uk/news-publications/publications/documents/swa-annual- review-2016-17/#.WcKYbsaQxph 9 Irish Whiskey Association - Exports and Growth: http://www.abfi.ie/Sectors/ABFI/ABFI.nsf/vPagesWhiskey/Industry_in_Ireland~Whiskey_industry_in_Ireland~exports-and-growth!OpenDocument 10 Personal communication with Monica Treidlinger of Agrculture and Agri-Food Canada. May 2014. 11 https://www.breakthrubev.com/news/rye-whiskey-sales-rise Offering Memorandum – November 24, 2017 Page F-10 MBD
The USA constitutes the largest market for both single malt Scotches and Irish whiskies. Canada is the sixth largest market for single malt Scotches, MBD believes there is a unique opportunity to participate in the rapid growth of artisanal whisky distillers. In the USA there are now more than 1,000 artisanal distilleries compared to 24 in 2001.12,13,14 In addition to the important USA and local Canadian markets, MBD intends to move into major markets for single malt whiskies (France #2, Taiwan #3, UK #4 and Germany #5) 15 with advice from Adrian Walker (global whisky consultant), as well as a business development / sales team for the Americas, Europe and Asia in the future with our own-make spirits. The Local Competition: There are over 150 distilleries in Canada, and more than 44 of them are located in B.C. Only a few of these are large, international distilleries of which most are rye distillers. The only single malt whisky distilleries that are on a similar scale to MBD (5,000-10,000L wash still) are Glenora Distillery (N.S.) and Shelter Point Distillery (B.C.). The majority of Canadian and B.C. distillers do not specialize in single malt whisky and operate stills in the 100-1,000L scale. In the U.S.A., Westland Distillery (WA) claims to have the largest single malt whisky distillery in that country with their 6,560 L wash still (with 5,000L charge which is the same as MBDs charge). Blending and Maturing Third Party Whiskies: The bottling and branding of quality “guest” whiskies (i.e. whisky from third party producers from Scotland) has now been implemented by MBD. This strategy is intended to enable MBD to establish its brand by having whisky for sale to distillery visitors and to build marketing and distribution networks, initially in Canada and possibly internationally, while MBD’s own distilled whisky stocks are maturing. This ‘independent whisky bottler’ business model was successfully implemented by the award winning Compass Box Whisky Co., a company that does not own a distillery. (http://www.compassboxwhisky.com/index.php). The process for creating a guest whisky involved MBD acquiring single malt whiskies from several Scotch distilleries including Caol Ila, Blair Athol, Glenlossie, Benrinnes, MacDuff, Bunnahabhain, Teaninich, Clynelish, Auchroisk and Ardmore distilleries, and having them vatted in Scotland then shipped in bulk to MBD for bottling in the Victoria Caledonian Distillery bonded warehouse. Some of these vatted malt whiskies are re-racked (i.e. re-casked) in oak casks such as Dr. Jim Swan’s re- toasted red wine casks (‘STRs’) for a period of 3 months to 2 years before being bottled by MBD. This process is called finishing, and like vatting, is perceived to add value in terms of creating a superior quality product. The cost to MBD of producing such whiskies derives from proprietary inter-distillery pricing for bulk whisky, the cost of MBD casks that might be used for finishing, and the cost of warehousing, bottling and shipping. The margins on guest whisky are expected to be significantly less than MBD’s own whisky, however, guest whiskies will allow MBD to generate whisky revenues from visitors to its distillery, establish its branding, and build marketing & distribution networks in advance of its own mature single malt whisky being available. Despite the global demand for single malt whisky and constrained inventories of mature product, MBD has successfully negotiated the supply and delivery of five vatted malt Scotch whiskies based upon single malt Scotches mentioned above. These are: • Prince Dougal’s Dram 46% abv comprising single malt Scotches from Blair Athol, Teaninich, Clynelish, and Auchroisk distilleries; • Among the Heather 46% abv comprising single malt Scotches from Caol Ila, Ardmore, Clynelish and Blair Athol distilleries; • Macaloney’s Islay Twa Casks at 46% abv and 56% abv comprising single malt Scotches from Caol Ila & Bunnahabhain distilleries; • Macaloney’s Speyside Twa Casks at 46% abv and 56% abv comprising single malt Scotches from Benrinnes & Glenlossie distilleries; • Macaloney’s Highland Twa Casks at 46% abv and 57% abv comprising single malt Scotches from Blair Athol & MacDuff distilleries.
12 The US Craft Distilling Market: 2011 and beyond. Michael Kinstlick. ADI White Paper: http://www.distilling.com/PDF/white_paper.pdf. 13 The Economist: American Beer and Spirits: Prohibition Hangover. 8th Sept 2012. 14 The Whiskey Wash April 7th, 2016: http://thewhiskeywash.com/american-whiskey/1000-craft-distilleries-counting-now-operating-united-states/ 15 Malt Whisky Yearbook 2017. Offering Memorandum – November 24, 2017 Page F-11 MBD
Bottles of the vatted Scotch whiskies are shown below:
MBD’s bottled single malt spirit, Mac na Braiche, is shown below:
Offering Memorandum – November 24, 2017 Page F-12 MBD
These MBD guest Scotches, and Mac na Braiche single malt spirit, are all for sale in the Visitor Centre. Our whisky Sales Manager / Brand Ambassador, Andrew Campbell Walls (see Item 2.2.7: Management, Board of Directors, and Strategic Advisors) is also using them to secure tasting events in liquor stores in order to promote our whisky cask sales (see below). Feedback on the quality of these vatted malts has been excellent, and may lead to repeat sales from local whisky club members. The main focus of these guest whiskies will be for Canadian sales before possibly moving into international sales. The BC- LDB is currently offering a selection of these whiskies for sale through various BC liquor stores, and selected the Twa Cask Islay 46% abv for launch at its exclusive 2017 Annual Premium Spirit Release. MBD does not expect to have problems continuing to source sufficient volumes of guest whisky. That said, there remains a risk that supply of consistent quality product could prove inadequate. Whereas new entrants to the independent bottler marketplace may have issues sourcing sufficient volumes of quality product, the established independent bottlers continue to source quality product based upon long-term relationships. MBD, through its business development efforts and industry connections, believes it will be able to continue to source an adequate supply of quality guest whisky until such time as the Company’s own-make sprits are available for retail distribution. MBD is working with Alberta Gaming and Licensing Authority to facilitate importation of MBD whiskies in to Alberta, and is also working with one of its early investors, Ed Patrick, to utilize his existing Ontario Agency to facilitate the importation of MBD whiskies in to Ontario and possibly Quebec. While the strategy of maturing bulk guest whisky has worked for other businesses, there is no guarantee that consumers will accept MBD’s guest whisky products, and, in particular, some consumers may equate age with quality, as described in Item 8 – Risk Factors and Item 2.2.2 – Processing and Maturation Technology Sales of Craft Beers in Growler, Bottle, Can and Keg Formats Generate Early Sales and Working Capital: Craft beers have experienced an average of 25% annual growth in BC between 2009 and 2013, whereas multi-national brewers have seen their market share decline16. Such growth rates remain solid for the craft brewery sector in BC as evidenced by the report ‘Summer Sales Soared for BC Craft Beer’, which states that last summer (July-Sept., 2016) BC craft beer sales increased 24.9% 17. However, competition in BC has also increased. Since 2013 the number of craft breweries has increased from 80 to some 150 in 2017. Given that there has been a moratorium on new liquor stores, the consequence of these developments is that there is increased competition for shelf space in liquor stores from in increasing number of craft brewers. In addition, the BC Liquor Distribution Branch (BC-LDB) is introducing a central purchasing process, whereby the BC-LDB will dictate what products individual LDB stores may be allowed to purchase. How this will impact craft beer sales and craft breweries presents some uncertainty. MBD management will continue to monitor these evolving situations and adjust accordingly. Management anticipates that Growler sales (direct to customer sales of draught beer in refillable 0.9L and 1.9L jugs), bottle sales (sold via MBDs on-site Visitor Centre and via third party liquor stores in British Columbia), 473ml can sales (sold via MBDs on-site Visitor Centre and via third party liquor stores in British Columbia), and Keg sales (draught beer sold to pubs and restaurants in B.C.) represent immediate market opportunities for MBD. MBD also plans to sell 473 mL cans in Alberta in the coming year. In that province the new government recently applied a $1.25 extra-provincial importation tax on beers coming from other provinces. This is being challenged in court by a number of industry and free trade advocates18. Notwithstanding this tax, MBD management perceive an opportunity to sell its Twa Dogs beers in Alberta in part because wholesale prices in Alberta are somewhat higher than in BC but also because MBD established its own Agency in Alberta thereby avoiding significant fees that would otherwise be incurred using a third party agent. Under its Twa Dogs brand, MBD has launched seven core craft beers, as well as a few rotating seasonal beers. These core beers include an India Pale Ale (IPA), Pale Ale, Pilsner, Porter, Saison, Red IPA and Belgian Witbier. The seasonal beers, thus far, include an Amber Ale and a Raspberry Kolsch. A cask conditioned Bourbon Barrel Ale was also released for sale in September 2017, with additional varieties planned for brewing in the coming year. Shown below is the branding for the 6 x 355 mL cartons, now available in 270 liquor stores, restaurants and pubs across British Columbia.
16 All Hopped Up. David Jordan. B.C. Business. June 2014. 17 Summer Sales Soared for BC Craft Beer: Sales up 24.9%, Joyce Hayne 19th December 2016, Liquor Retailer: http://liquorretailer.com/2016/12/summer-sales-soared-for-bc-craft-beer/ 18 Saskatchewan government says it's disappointed in Alberta beer tax appeal. Downloaded on 30 Sept 2017 from: http://www.leaderpost.com/business/saskatchewan+disappointed+beer+appeal/14334103/story.html Offering Memorandum – November 24, 2017 Page F-13 MBD
Sales of “futures” (casks of whiskies for future delivery) Generate Working Capital, an Important Source of Cash, and Brand Ambassadors: Whisky cask “futures” contribute to brand loyalty and working capital. MBD is selling customized casks of new-make spirit to customers to capture a larger base of customers than other distilleries. These casks are generally more affordable; yet can also be ordered in many, varied custom expressions. Customized cask sales include optional whisky styles (peated malt vs. mildly or un-peated malt, or triple distilled pot still), matured in casks of a variety of wood types (first use Bourbon, Sherry, Port, and other wines casks). Thus, a customer is able to personalize one or more casks of up to 50 permutations. These futures generate accelerated cash flows as demonstrated by Mackmyra Svensk Whisky AB (Mackmyra) in Sweden (see Competitive Advantage under Item 2.2.6). Under MBD’s Cask Owners program, customers may purchase 30L casks of whisky at a time.19 However, maturation occurs in a full size barrel so as to not over-wood the whisky. Once a customer chooses a given permutation of whisky, MBD will proceed to manufacture without requiring other purchasers to chose the same permutation. The difference in volume between the full-size barrel and the cask order will go towards MBD’s own stock. For detailed information about MBD’s cask sales program, see www.vcaledonian.com/cask-sales/. Please refer to Appendix B for a sample Cask Purchase brochure.
2.2.4 Production
MBD’s distillery is, in effect, a brewery with pot stills. The brewing and distilling equipment includes a 1 tonne mash tun (which processes approximately 1 tonne of milled barley equivalent to 5,000L or wort per batch), 10,000L and 5,000L fermenters, a 5,500L wash still and a 3,600L spirit still. Each batch of beer may be between 3,000L and 10,000L, and each batch of whisky delivers the equivalent of approximately 350 - 400 litres of pure alcohol, depending on yields.
The beer, which takes 2 to 5 weeks to manufacture, is either bottled or kegged. The new make whisky spirit, which only takes 3 days to manufacture, is filled into oak casks and stored in a warehouse for 1.5 - 3 years or more before being bottled. Warehousing is at the distillery but if volumes require, additional off-site warehouses may be utilized.
MBD currently has significant manufacturing capacity with its existing equipment and has no reasonable expectation that consumer demand for beer or whisky will outpace its capacity in the short-run. While certain equipment is used to make both beer and whisky, MBD will be able to make whiskey and beer in parallel as long as there is sufficient manufacturing capacity. Should further capacity be required in the long-run, MBD’s existing plant has room for further expansion.
19 Liquor regulations in Canada currently prohibit the sale and delivery of bulk alcohol to ordinary customers. As such, MBD may be prevented from delivering whisky to its customers in full-size, ordinary casks. MBD could deliver its cask whisky in bottles, with the cask sold separately, or MBD could explore the option of selling specialized mini-casks that would not be considered a bulk sale. Offering Memorandum – November 24, 2017 Page F-14 MBD
The annual production of whisky will vary depending upon the cash position of MBD and the cash flow being generated from beer sales. If cash position is tighter than planned or if cash flow from beer or other sources is slow, then the production of whisky will be slowed down. If the cash position is better than planned or cash flow from beer or other sources is better, then whisky production will increase. The fermenters with their total capacity of 55,000L are capable of making up to approximately 2,640,000 L of beer and/or wash per annum, depending on the duration of the fermentation and how many batches of ale, lager or wash are scheduled in a year. Similarly, the pot stills are capable of processing up to approximately 134,000 litres of pure alcohol per annum from 1,680,000 litres of wash depending on process yields, how many batches are scheduled per shift and assuming one shift per day. It is anticipated to take 10-15 years to reach the maximum capacity of the plant, depending on yields, product mix, and market conditions. This excess pot still capacity was designed to enhance MBDs attractiveness as an acquisition target by larger spirits and beer companies and private equity firms or the public market.
The fiscal 2017-18 production volumes are anticipated to be modest due to the time taken to grow the market. MBD plans to produce approximately 300,000 litres of beer and 5,000 litres of new make whisky by the end of the current fiscal year.
In order to secure top quality oak casks for whisky maturation, Dr. Macaloney joined Dr. Swan on a trip to visit cooperages in Kentucky, USA, Portugal and Spain. This and a visit by Dr. Macaloney to Speyside Cooperage in Scotland resulted in the establishment of relationships with these top quality cooperages and the successful acquisition of several hundred casks including ex-Bourbon, Pedro Ximinez Sherry, Oloroso Sherry, Port, Madeira, Moscatel, virgin American, ex- Islay casks and Dr. Swan’s proprietary recharred red wine casks which have also been used by Kavalan distillery in their ‘world’s best single malt whisky’.
Another area of production which MBD is undertaking in order to generate revenues from its assets is contract manufacturing. Presently, MBD is conducting contract, craft beer, brewing for a local BC brewery. MBD will market and promote contract manufacturing to other brewers and businesses interested in contract whisky distillation. In these contract manufacturing relationships the client provides their recipe, raw materials and dry goods, and MBD provides the labour, equipment, and know-how. The client retains ownership and responsibility for product quality, marketing, distribution and sales. MBDs CEO and founder, Dr. Macaloney, has 12 years of previous fermentation contract manufacture experience from two different organization servicing North American, European and Australian clients prior to establishing MBD.
2.2.5 Sales, Marketing and Distribution
MBD is following the approach of many other small, independent whisky and beer producers in terms of its marketing and sales activities, and the use of distributors. Since beer sales are regional, MBD is relying on its own sales force of 3 individuals, covering specific geographies encompassing Greater Victoria / Vancouver Island, and Vancouver, with the intention of expanding into Alberta soon. MBD is distributing its craft beers via Island Beverage Distributors Ltd. in Victoria and Direct Tap in Vancouver. Sales in Victoria and Vancouver commenced in August of 2016. Alberta bound product will be distributed via Connect Logistics.
For whisky sales, marketing and distribution, MBD is establishing a sales / brand ambassador team of 3-5 individuals including participation of the President. The first recruit to this team is Andrew Campbell Walls who brings experience in liquor store retail sales, bar / restaurant sales, and also as a brand ambassador conducting tutored tastings (see Item 15 – Biographies of Advisors, Staff & Consultants). These Sales Managers / Brand Ambassadors are responsible for identifying provincial and international distributors, initially for guest whiskies. Those distributors who perform well will then be continued as distributors for MBD’s own distilled whiskies. The Sales Managers / Brand Ambassadors provide both a management and supporting role to the various distributors in their geographic area, including staff training, visiting specialty whisky retail liquor stores to conduct tastings and review product placement, inventory and promote MBD’s products, as well as conducting tastings at whisky clubs and whisky festivals in the area. Distributed sales in British Columbia commenced in December 2016. Sales to Alberta have commenced in late 2017, with Ontario, select US, and Asian markets (Taiwan, Singapore, China, South Korea, and Japan) in targeted for fiscal 2018. Europe will also be targeted in fiscal 2018 starting with the UK, France and Germany.
MBD’s pre-sales tax retail prices range from C$64 to C$100 per bottle. Allowing for distributor margins and local taxes, MBD is realizing wholesale prices of C$52 to C$83 per bottle. Of this, the cost of goods is approximately C$50 – C$61 resulting in a gross margin of approximately C$2 to C$22 per bottle. Offering Memorandum – November 24, 2017 Page F-15 MBD
MBD plans to launch its new web site in December 2017. This was designed in collaboration with a web designer, The Number, who have previous experience in designing other successful breweries’ web sites. It describes the Twa Dogs brewery and beers together with Caledonian Distillery and its whiskies, MBD’s people, its Cask Program, Tour products, events, and where to buy MBD products. The web site can be found at: www.VCaledonian.com.
MBD is also active with its social media participation including Twitter ( @VCaledonian and @TwaDogsBeer) and Facebook ( Victoria Caledonian and Twa Dogs).
Scotch and Irish whisk(e)y are protected geographic designations. Therefore, one cannot call MBD’s whisky ‘Scotch’ or ‘Irish’. MBD will, like other international producers of these styles, call them ‘single malt whisky’ and ‘triple distilled pot still whisky’. Each country has specific labeling requirements for the information that must be displayed on the packaging. Therefore, prior to launch of its product in each jurisdiction, MBD intends to seek approval for its labeling from that jurisdiction. Changes in legislation or new health findings could lead to reductions or restrictions in consumption that would impact sales. This is not something that is in MBD’s control, other than redirecting marketing and sales efforts to other geographic jurisdictions. In general, over the last decade there has been heightened awareness of the health impact of over consumption, and a tightening of drink-driving laws.
2.2.6 Competition and Competitive Advantage
Distillery tours are a growth business: Destination tourism, in the form of distillery and brewery tours, is an established and increasingly popular vacation activity. In a ‘Whisky Magazine’ issue, entitled ‘Greatest Distilleries to Visit’20, Canada ranked 4th globally with 5 distilleries worth visiting, after Scotland (with 52 distilleries), the USA (21 distilleries), and Japan (6 distilleries). Locally, in the Greater Victoria area, Craigdarroch Castle stately home and the Butterfly Centre both receive up to 120,000-150,000 visitors annually, despite being 15-25 minutes from Victoria city centre. MBD is promoting and selling tours at its Victoria Caledonian Distillery & Twa Dogs Brewery to build its brands, enhance customer loyalty and generate gift shop and important on-premises sales of its beer and whisky. Tours may be booked via a variety of on-line channels including MBD’s website, Trip Advisor, Expedia, and via Tourism Victoria. In the last fiscal year (16/17) ending June 30th, MBD brought in $44,892 from direct tour and event sales. This number potentially understates the potential of these sales because MBD missed the majority of the 2016 summer tourism season, with its tours only beginning near the end of August 2016, and offering limited events during the first year of operations. During our first year of operations, while we have not specifically tracked the number of visitors to our facility, for the year ended June 30, 2017, we believe a conservative estimate is approximately 5,000 people, inclusive of the various events we’ve hosted. MBD presently has accomplished a five star rating for its tours on TripAdvisor and is ranked 3rd of 30 Food & Drink attractions in Victoria (https://www.tripadvisor.ca/Attraction_Review-g154945-d10916299-Reviews- Victoria_Caledonian_Brewery_Distillery-Victoria_Victoria_Capital_Regional_Distri.html), and has been added to the BC Ale Trail (https://bcaletrail.ca/ale-trails/victoria/). MBD’s tour products are carried by, and bookable, via a number of tourism outlets including Tourism Victoria, CVS Tours, Experience Victoria, Blackball Ferry Line, West Coast Brewery Tours, Canadian Craft Tours, Trip Advisor and Expedia. Uniquely among Victoria and BC breweries and distilleries, the Victoria Caledonian Distillery and Twa Dogs Brewery offers professionally guided, experiential tours of both a brewery and distillery as well as tutored tastings six days per week.
In Scotland, distillery tours in 2015 hosted 1.6 million visitors to 52, often inaccessible, whisky distilleries open to the public; spending an estimated £50 million21. This represented a significant increase since 2010, when the industry drew 1.3 million visitors who spent £42 million22. DIAGEO Plc., the largest global Scotch whisky distiller, reported a 7% increase in visitors in their last fiscal year alone. This brings their mid-2016 to mid-2017 visitor totals to 410,000. In more accessible Edinburgh, 250,000 visitors visited the Scotch Whisky Experience, which does not have a distillery on its premises. 86% of Scotch distillery visitors arrive from outside of Scotland and 62% come from outside of the UK23.
20 100 Greatest Distilleries to Visit. The Whisky Magazine. Mar. 2012. 21 Whisky Tourism at All Time High for Diageo. Scotch Whisky Magazine. 2017 22 Scotch whisky Association 2011. Scotch Whisky & Tourism. 23Scotch whisky Association 2016. Scotch Whisky & Tourism.
Offering Memorandum – November 24, 2017 Page F-16 MBD
Visitor Centre with whisky, beer, books, jewelry, branded clothes and glassware.
In the USA, over 250,000 visitors visit the Jack Daniels distillery each year. Breweries also attract tourists, with over 1 million visitors to the Coors ‘brand home’ visitor centre. In Taiwan, with a population of 23 million, which has rapidly risen to be a top 10 global single malt market, there are over 1 million visitors each year from Taiwan and China to its Kavalan single malt whisky distillery.
Informative, interactive, fun guided tours of the Victoria Caledonian Brewery & Distillery
Multi-national whisky distillers and local brewers are expected to be MBDs primary competition. However, marketing of whisky for artisanal distillers, takes a slightly different slant to that done by the multi-nationals. Multi-nationals invest millions of dollars in brand marketing, especially when launching a new whisky expression. Artisanal distillers and brewers, on the other hand rely on local advertising and promotion, tourism and activities such as brewery / tasting lounge beverages to establish brand recognition. Product quality, recognition by global whisky writers and whisky industry awards, innovative marketing (cask futures) and special finishes or other limited expressions provide competitive advantage versus multi-national distillers24. Key to establishing demand in the single malt and pot still whisky categories, where the demographics of drinkers encompass brand-loyalty, higher income, and age-diversified individuals (who often base their purchases on recommendations or research or distillery visits), will be to influence them by attractive, premium branding supported by prominent whisky writers and awards.
24The business of beer. Part 2: Marketing. Rob Symes. TAPS – the beer magazine. Winter 2011-12. Offering Memorandum – November 24, 2017 Page F-17 MBD
For example, Jim Murray’s Whisky Bible has reached over 330,000 whisky readers. Obtaining favourably high ratings from these writers has been shown to have a substantial impact on sales, as evidenced for example by Old Pulteney which won world whisky of the year in Murray’s Whisky Bible25 and has grown from a sleepy, unknown brand to a prime seller in Liquor Stores, despite its $190 price26. This expression was reported as having sold more bottles in the 24 hours after being announced the world’s best, than it did in the prior 12 months27. Similarly, Murray’s writing was instrumental in keeping Red Breast Irish pot still whisky on the market when Irish Distillers could see no future in the pot still category. MBD has and will continue to present at local and regional festivals including, the Victoria Whisky Festival (considered in the top 3 of global whisky festivals by Jim Murray), the Vancouver HopScotch Whisky, Beer & Spirits Festival, and the Great Canadian Beer Festival in Victoria. With some 12,000 attendees at HopScotch in Vancouver, 500 committed connoisseurs at the Victoria Whisky Festival, and 8,000 attendees at the Great Canadian Beer Festival, these represent valuable local and regional festivals to generate qualified investors, visitors and consumers. At these festivals MBD promotes sampling of its whisky and beer and tours of the distillery-brewery and tasting lounge.
Competitive Advantages. MBD has identified a number of integrated factors which it believes will provide competitive advantages. These include:
1. Accelerated maturation technologies: A key process innovation is the rapid maturation of MBD’s whisky. Maturation rate depends on the environment and relies on careful distillation and selection of quality oak casks. Dr. Jim Swan (the global cask maturation expert, previously with the industry sponsored Scottish Whisky Research Institute) consulted on wood selection and maturation with several award-winning distilleries including Kavalan and Amrut (both award winning examples of 3-5 year old matured whisky), Glenmorangie (Dr. Swan started them on their industry pioneering cask finishing), Kilchoman, Cotswolds and Penderyn. Prior to his recent passing, Dr. Swan consulted with MBD on a Canadian exclusive basis.
MBD’s accelerated maturation technology has been successfully implemented using Dr. Swan’s process know-how, the purchase of high quality oak casks, and on tracking the maturation process to assess the quality of the maturing spirit. Dr. Macaloney, accompanied by Dr. Swan, completed a visit to several Portuguese, Spanish and Kentucky cooperages recommended by Dr. Swan for their consistent, high quality casks. All of these cooperages gave verbal representations that they will supply MBD’s cask requirements, as evidenced by orders which have been supplied to date.
2. Premium branded whisky: Management hopes its distilled whiskies/single malt spirits will, within 1.5-3 years of distillation, have the potential to compete with 10 to 12 year old whiskies in terms of quality and international awards, which could establish globally recognized brands and a quality reputation in the eyes of influential whisky writers, their readers and customers. MBD’s sensory evaluation panel will be selected from Dr. Graeme Macaloney, Master Distiller Mike Nicolson, MBD’s WSET level III sommelier Andrew Campbell Walls, one of the principals from the Victoria Whisky Festival / Victoria Single Malt Club, Mr. Ed Patrick the founder of the International Order of the Companions of the Quaich (The Companions of the Quaich), and other staff who demonstrate a more sensitive, discerning nose for whisky. 3. Branded guest whisky: While MBD’s whisky stock is maturing, MBD is developing local, Canadian, and possibly international sales of finished, blended and MBD-branded guest whiskies to establish its branding, a quality reputation in the eyes of influential whisky writers, and international distribution networks to support the sales of MBD’s own distilled whiskies.
25 Jim Murray’s Whisky Bible 2013 26 B.C. Liquor Stores, 2012. 19 Jim Murray’s Whisky Bible 2013 Offering Memorandum – November 24, 2017 Page F-18 MBD
Traditionally made by Scots: Nicolson, Swan & Macaloney
4. Cask sales for brand development and customer retention: MBD is selling cask futures, which contribute to working capital and build long-term customer loyalty. As at June 30, 2017, MBD has sold 79 30L casks for a total of $156,322. By comparison, Mackmyra in Sweden sold approximately 925 casks per annum when they began distilling, and have sustained this year-on-year to approximately 1,850 casks per year ten years later, primarily in the limited Swedish-Danish market. The large number of cask owners has helped Mackmyra in terms of brand loyalty and creating ambassadors to advocate their products and shows the growth potential for MBD. Following a study of Mackmyra Svenk Distillery, MBD management believes growth in cask sales will derive from greater awareness through advertising and public relations, having a high quality spirit that prospective cask owners can taste, and from networking and social media activities by enthusiastic cask owners who wish to share their experiences in filling their cask, conducting annual cask sampling, bottling and labeling their whisky that they designed and had made by MBD.
5. Regional craft beer sales using same facility and equipment assets: Regional craft beer sales are underway using the same facility and equipment assets used for whisky. These sales are generating revenue and cash flow, and attract a wider, beer-drinking, demographic to the Victoria Caledonian Distillery & Brewery for tours, events and to the tasting lounge.
6. Experienced management, strategic advisors and consultants: MBD founder/CEO, Dr. Graeme Macaloney PEng, MSc, BSc, was formerly employed with two of the world’s largest fermentation-based firms (Pfizer Inc. and Eli Lilly & Company) and has also worked in fermentation development and manufacture with the Alberta Research Council (fermentation pilot plant). He is a regular presenter of whisky tastings on the origins of flavour. Dr. Macaloney has extensive knowledge, experience and industry networks that allowed him to access and assemble a world-class whisky and craft beer manufacturing & marketing team, and gain access to high quality guest vatted Scotches for MBD. He also grew up with Glenskirlie House Restaurant (now Glenskirlie House Restaurant & Castle) while his family established their restaurant and banqueting business (See Item 3.2 – Management Experience). Dr. Macaloney has secured the support and services of a number of industry experienced strategic advisors and consultants including Dr. Jim Swan and Master Distiller Mike Nicolson (who has worked at 18 Scotch distilleries) and Mr. Adrian Walker who previously worked as VP brand development with DIAGEO and Russian Standard Vodka, as well as the Coole Swan cream liqueur start-up company.(see biographies in Appendices- Item 15). Other key managerial staff include Dean McLeod, Production Manager and Masterbrewer, and Andrew Campbell Walls, Sales Manager & Brand Ambassador and Kerri Crema, Sales Manager & Brand Ambassador. MBD has obtained the support and/or future services of a number of industry experienced strategic advisors and consultants. For more detailed biographies see Items 3.2 and 15. Offering Memorandum – November 24, 2017 Page F-19 MBD
2.2.7 Management, Board of Directors and Strategic Advisors
MBD’s Board of Directors has assembled an international team of advisors and consultants from leading whisky, brewery, branding and public relations firms. (see below, and for further information see Item 3.2 – Management Experience and Item 15 – Biographies of Advisors, Staff & Consultants).
Directors
Name Primary Occupation Place of residence
Dr. Graeme Macaloney PEng CEO, MBD Victoria, B.C.
Mr. Art Froehlich BSc Director, AdFarm Calgary, Alberta
Mr. Patrick Michaud CPA., MBA Managing Director, Templar Associates Inc. Oakville, Ontario
Mr. Allan E. Scott PEng., MBA past President EEDC and TELUS Communications Edmonton, Alberta
Strategic Advisors, Consultants and Management
Name Primary Occupation Place of residence
Mr. Edward Patrick President, The Companions of the Quaich Toronto, Ontario
Mr. Adrian Walker Brand development, formerly VP DIAGEO Farnham, England
Mr. J. Mike Nicolson Master Distiller, retired from DIAGEO Plc. Victoria, B.C.
Mr. Dean McLeod MBD Production Manager / Brewmaster Victoria, B.C.
Mr. Andrew Campbell Walls MBD Whisky Sales Manager / Brand Ambassador Victoria, B.C.
Ms. Kerri Crema MBD Whisky Sales Manager / Brand Ambassador Naniamo, B.C.
Mr. John Macaloney Owner of Glenskirlie House & Castle Stirlingshire, Scotland
Mr. Douglas Umscheid Past owner, grain farm Claresholm, Alberta
Mr. Iain Hooey Retired police officer, Marriage Commissioner, Victoria, B.C. Co-founder and vice-president of the Victoria Whisky Festival
Mr. David Cook Founder of Cookeilidh band, past Chairman of the Victoria, B.C. Celtic music festival at the Victoria Highland Games
MBD management believes that the Board of Directors and Strategic Advisors / Consultants provide MBD with a breadth and depth of experience and knowledge in:
. international fermentation process development, bioprocess engineering and manufacturing; . whisky distillation; . whisky maturation; . whisky blending; . whisky branding, marketing and sales; . beer branding, marketing and sales . tourism, public relations, promotions . craft beer brewing; . weddings and musical cultural entertainment; Offering Memorandum – November 24, 2017 Page F-20 MBD
. industry, government and regulatory agency networks and; . the creation, financing and management of entrepreneurial enterprises; . Liquor brand development and international distribution.
With this level of experience and networks, MBD believes it has the ability to implement its business plan, continue to grow sales, and build shareholder value.
2.2.8 Human Resources and Staffing
MBD recruited 14 staff encompassing production, tour operations, sales & marketing, and administration. Management positions include Graeme Macaloney as CEO, Dean McLeod, an experienced Brewery Production Manager / craft ale Brewmaster, and Andrew Campbell Walls, an international Marketing and Sales Manager. Mr. McLeod works with our Master Distiller, Mr. Mike Nicolson on single malt and pot still whisky production and with his Head Brewer and Assistant Brewer on craft beer production. Mr. Walls is focused on Canadian and USA whisky sales, and will assist the CEO in the recruitment of two global brand ambassadors for Asia and Europe. Three craft beer sales representatives are also in place and are actively selling MBD’s initial five craft beers in the Victoria, Vancouver Island, Greater Vancouver and general BC markets. A full time book-keeper and consultant Finance Manager complete the MBD team.
As MBD’s operations continue to grow, MBD will need to hire more brewery and distillery operations staff. In order to manufacture and sell the volume of whisky, craft beer, and guest experiences that MBD expects, within 5 years MBD will likely increase its brewery and distillery operations staff to approximately 25 in number, encompassing tourism, sales, production and administration.
Offering Memorandum – November 24, 2017 Page F-21 MBD
2.2.9 Facility Design & Location
MBD has entered into a long-term lease, with 761 Enterprise Holdings Inc., of a building and land, located at 761 Enterprise Crescent, Saanich, Greater Victoria. This represents a significant capital avoidance strategy for MBD. The facility is located on the Pat Bay Highway 17 between Victoria and the B.C. Ferries Swartz Bay terminal (servicing Vancouver) and is also en-route to the Butchart Gardens and Victoria International Airport.
MBD has placed a billboard with an image of a copper pot still to advertise the distillery on the Pat Bay highway, and advertises with each of Victoria’s main sea ports (International Cruise ships, Clipper ferry from Seattle, and Black Ball ferry from Washington) as well as Victoria hotels. Visitors can book tours and events via the Vitoria Caledonian web site, via Trip Advisor, Expedia and via Tourism Victoria.
Offering Memorandum – November 24, 2017 Page F-22 MBD
The Victoria Caledonian Distillery & Twa Dogs Brewery is on a scale and has a floor plan that would facilitate distillery tourism on a par with other significant Greater Victoria tourist destinations28, and international distillery tourist destinations. The building comprises a total of over 1,560 m2 (17,000 sq. ft.).
The floor plan below provides an overview of the facility layout. The left hand side of the building encompasses the Visitor Centre with a gift store, reception / retail liquor store and lounge bar, the whisky and beer production areas. The distillery’s visitor capacity is designed to accommodate a busload of 56 persons, and guided tours include access to the reception - gift shop, presentation and tasting areas, mash area, fermenter hall area, pot still area, and cask filling area. The production floor between the fermenters and pot stills is also available as a licensed lounge area for the Visitor Centre bar patrons to uniquely enjoy their beer or whisky right in the heart of production, and has been used as a banqueting area for events (MBD & private), parties and corporate functions.
The right hand side of the building (below) includes the plant room housing various utilities, whisky cask maturation warehouse, and a space set aside for a possible floor malting with peat-kiln, and a possible future tasting room which may also host corporate functions.
28 Tourism Victoria Destination Brand Study, July 2011.
Offering Memorandum – November 24, 2017 Page F-23 MBD
2.2.10 Licensing
All necessary zoning and municipal, provincial and federal licenses are in place. These include a manufacturing license from the B.C. Liquor Control & Licensing Branch, along with the associated on-site retail sales ‘lounge license’, as well as a Federal Excise Duty license with Canada Revenue Agency. Re-zoning of the facility to allow on-site liquor sales is also in place. An Agency license is being established with the Alberta Gaming and Licensing Authority (AGLC) so MBD can conduct its own importation in to Alberta. MBD is also working with an early investor, Ed Patrick, to utilize his existing Ontario Agency to import our whiskies there, in the event that we are able to secure approval from the Liquor Control Board of Ontario.
2.2.11 Environmental Stewardship
MBD’s whisky and beer are made from up to four natural, renewable ingredients: water, yeast, grains (typically barley, rye or wheat), and oak. There are no solvents used, nor toxic chemicals used other than small volumes of food-grade cleaning chemicals (citric acid, mild sodium hydroxide). Yeast is self-propagating and therefore a renewable resource. Water usage takes two forms: in-process water and cooling water. The former requires modest volumes of approximately 5,000L or 10,000L per batch yielding up to 9,500L of beer or up to 1,200L of ‘new make’ spirit which is casked at 62.5% abv. The remainder of the water exits the plant either as part of the spent grains (called “draff”) which were mashed using the water which is collected by local cattle farmers for use as high nitrogen cattle feed, or as spent yeast or as pot ale which is the residual liquor left in the pot stills after the ethanol, some water and flavour congeners have been distilled to form New Make Spirit. This pot ale has an ethanol content of less than 1.0%. The leftover liquid in the spirit still is known as “spent lees”. This is a low BOD (approx. 1,500 mg/L) with just 3,600 litres per batch, and together with the spent yeast and pot ale is disposed of through regular waste disposal methods at a waste treatment facility. Significant volumes of water may be used for rinsing but this is low BOD and can be discharged to municipal sewer.
The other water used in the plant is cooling water. This water never comes into direct contact with the process streams and therefore its chemical composition is unaltered. As a coolant, it would contain valuable low-grade heat and therefore the plant has been designed for economical heat recovery via the use of in-process heat exchangers and a cooling tower.
2.2.12 Professional Service Providers
In addition to the aforementioned technical, marketing and public relations consultants, MBD has selected service providers to assist it in its planning and implementation in the areas of legal, accounting, audit, banking and insurance. These include:
Legal Advisors Insurance Contact Breakwater Law Aon Reed Stenhouse Inc. 1177 Fort Street, 6th Floor, 1803 Douglas Street , Victoria, B.C. V8V 3L1 Victoria, B.C. V8T 5C3
Banking RRSP / RRIF / TFSA Trust Company CIBC Commercial Banking Western Pacific Trust Company 1175 Douglas Street 920 – 789 West Pender Street Victoria, B.C. V8W 2E1 Vancouver, B.C. V6C 1H2
Auditor Ernst & Young LLP Pacific Centre 700 West Georgia Street Vancouver, B.C. V7Y 1C7
Offering Memorandum – November 24, 2017 Page F-24 MBD
2.3 Development of Business
Business operations and planning
Between February 1, 2013 and September 30, 2014, MBD was mostly engaged in business planning and fund raising. Since September 30, 2014, the date that MBD successfully met its initial financing conditions and closed its first financing round, MBD acquired production equipment, and in June 2016, began whisky and craft beer production. By August 2016, sales and tours had commenced.
All of the core aspects necessary to operate a single malt whisky distillery, craft brewery and tourist destination / events venue are in place and operational. Sales of a range of guest Scotch whiskies, craft beers and tourist products have commenced. At this stage further funds are required for working capital purposes to finance MBDs growth and to expand beer production capacity, acquire a pilot brewing system to trial and perfect new seasonal or special brews in our Visitor Centre bar, and smoke our own barley for peated whisky production.
During its first partial year of operations, MBD generated $630,092 from sales of beer, whisky, visitor center sales and tours and events, and a net loss of $2,039,387. This revenue target was below our expectation for fiscal year, however this was partially a function of missing the prime 2016 summer sales and tourism season. MBD is hopeful that our sales will continue to improve in-line with industry trends in the coming year, and believe that our operational expenditures have largely stabilized. Cash flows used in operations for the fiscal year ended June 30, 2017 was $1,578,557, and is expected to decline in the upcoming fiscal year as sales improve. In order for the Company to be successful in the long run, additional debt and/or equity financing will be required to cover the cost of operations in the current fiscal year as noted previously in this document.
MBD does not anticipate that its revenues will exceed expenses until at least 2020. Due to the high value nature of this industry, MBD believes gross margins on whisky and craft beers could be very substantial (between 30% to 70%).
In the longer term MBD may upgrade a portion of its warehouse to add additional toilets thereby increasing the building occupancy limit from 90 persons to over 140 persons, and add a grand tasting lounge with bar capable of seating up to 60 guests. This would serve as a full-scale lounge bar or bookable function suite in the off-season and as an additional tasting area to accommodate a wider variety of tutored tastings during the tourist season. Whisky Sales Ambassadors for the U.S.A., Asia and Europe will also be recruited.
Please refer to section 14 for further details of the Company’s financial results.
Fund Raising
MBD has entered into a contribution agreement with Agriculture and Agri-Food Canada (AAFC) for $2,369,400. (For further details about the contribution agreement, including the nature of the security given and repayment terms, see Section 2.7 – Material Agreements.)
As at the date of this Offering Memorandum, MBD has successfully raised a total of $6,256,651 in equity investment (excluding share issuance costs). This total includes both subscriptions under this offering as well as the exercise of warrants.
In addition to raising funds under this Offering, MBD is concurrently reaching out to potential strategic investors to assist financially and perhaps to also assist with sales and/or distribution. Such strategic investment in MBD would be focused on whisky production, sales and distribution, with a view to accelerating this aspect of the business model given that MBD’s single malt whisky spirit has achieved such positive feedback. There are risks associated with this approach. See Issuer Risk under Item 8 - Risk Factors.
Over the long term, MBD may expand by building or buying additional distilleries or by facility expansion, which requires further financing. Investors purchasing pursuant to this Offering Memorandum may participate in certain future equity financings of MBD through the grant of a pre-emptive right (as described in Item 5.1.4 below) which affords investors Offering Memorandum – November 24, 2017 Page F-25 MBD purchasing pursuant to this Offering (and certain other shareholders, including the founders) a first right to participate in certain future financing rounds.
2.4 Long Term Objectives
Description of event that must occur to accomplish long Expected time period each Costs related to the event term objective event is expected to occur from date of this document
Mature whisky sales, produced and matured by MBD. 3 years Cost of goods for the new Whisky, by law must have matured for 3 years in an oak make whisky is cask before it can be called whisky. approximately $20 / bottle – excluding any BC Liquor Distribution Board “BCLDB” fees. (Note, most costs would have been incurred 3 years prior.) New make spirit. Prior to 3 years whisky can be sold as 1 year and 2 years, Cost of goods for the new ‘new make spirit’. MBD plans to sell new make spirit after respectively make spirit is approximately 1 year and 2 years of maturation. $20 / bottle – excluding any BCLDB fees. (Note, most costs would have been incurred 1 and 2 years prior.) Expand sales from the initial Canadian base to select 1.5 to 2 years Approximately $300,000 in markets in the U.S.A., Asia and Europe sales and marketing costs.
Offering Memorandum – November 24, 2017 Page F-26 MBD
Design and fit-out a grand tasting lounge with additional 3-4 years. $100,000 for additional toilets. toilets $69,000 grand tasting lounge fit-out
The timeframes quoted above are based on best estimates by Management, who are actively implementing this project.
In terms of sales, MBD has initially established craft beer sales (growlers, bottles, cans and kegs), plus guest whisky sales and cask whisky sales, and distillery tours, with on-site retail gift shop sales in order to generate cash flow and revenue while MBD’s own distilled new make is maturing. The long-term objectives centre around the launch of sales of MBD’s own distilled whisky stocks once they have sufficiently matured in approximately 1.5-3 years. In anticipation of this, Sales Ambassadors will be recruited in 1 to 2 years to establish distributed sales of MBD’s guest whiskies and new-make spirit to select markets in the U.S.A., Asia and Europe. As tourist sales and events increase, MBD may expand its event spaces by adding extra toilets and a grand tasting lounge, after 3-4 years. 2.5 Short Term Objectives and How MBD Intends to Achieve Them
The main activities during the next 12 months will be focused on brewing beer to support ongoing sales growth, as well as producing batches of our own new-make spirit to meet anticipated future sales.
What MBD must do and how MBD will do it Estimated number Cost to complete of months to complete Working capital for whisky and beer production, and supporting up to 8 months $733,000 operating expenses
Limited capital equipment investment, including Bright Beer 6-8 months $140,120 Tank, Pilot Brewing System, and Peat Smoker.
2.6 Insufficient Funds
Management believe that the funds being raised pursuant to this Offering Memorandum should be sufficient to sustain operations for the near term. However, notwithstanding the thoroughness of this financial planning, the funds available as a result of this offering may not be sufficient to accomplish all of MBD’s proposed long-term objectives and there is no assurance that alternative financing will be available.
2.7 Material Agreements
Secured Loan Agreement
On August 8, 2014, MBD entered into a secured loan agreement (the “Loan”) with one of its shareholders. The Loan functions as a line of credit and has an interest rate of 3.5% above the prime lending rate of the Bank of Nova Scotia in effect from time to time.
The Company may borrow a maximum of $500,000 in principal under the Loan.
MBD can prepay any portion of the loan without penalty and the Loan matures June 30th, 2020.
Interest will be calculated on the Loan at prime plus 3.5% per annum, and accrued interest will be paid semi-annually on June 30 and December 31 until maturity.
MBD has provided a general security agreement over MBD assets to the lender which shall rank pari passu with the landlord under the Lease Agreement (described below) up to the amount outstanding to the lender. The lender has granted priority over such security to the landlord for amounts in excess of the loan. Offering Memorandum – November 24, 2017 Page F-27 MBD
As at the date of this OM, no amounts were utilized under this Loan facility.
Federal Government Contribution Agreement
On January 13, 2015, the Company entered into a repayable contribution agreement with the Government of Canada as represented by the Minister of Agriculture and Agri-Food [“AAFC”] as part of the Government’s Agri-Innovation Program – Enabling Commercialization and Adoption Stream to facilitate the pre-commercial demonstration, commercialization and adoption of innovative agri-based products, technologies, processes or services. The AAFC agreement provided a repayable contribution of $2,369,400 to the Company subject to the terms and conditions of the agreement. The funds provided were used for facility renovations, purchase and installation of whisky making equipment, including as examples, oak casks, and specified administrative costs. MBD is required to repay all funds back in equal monthly payments over seven years commencing March 31, 2020. The contribution agreement bears no interest.
Lease Agreement
On December 1, 2015, the Company entered into a 10-year lease with 761 Enterprise Holdings Inc. for a building and land located at 761 Enterprise Crescent, Victoria, B.C. The building is located in the Royal Oak Business Park and is approximately 17,319 square feet.
Rent in the first four months from February 1, 2016 to May 31, 2016 was nil. Rent for months five through twelve is $17,319 per month. Rent for years two to five of the lease will be $17,319 per month. In addition, the Company is required to pay its share of the operating costs. Accordingly, the Company expects that the total rent will be $18.25 per square foot. In years 6 and 8, rent will be adjusted in proportion to changes in the Consumer Price Index for British Columbia.
MBD has four options to renew the lease, with each option being for a 10-year renewal term. As an inducement, the landlord contributed $150,000 towards leasehold improvements.
To secure the Company’s obligations under the lease, the Company has granted the landlord a general security agreement over MBD’s assets ranking pari passu to the general security agreement granted under the secured loan agreement discussed above. The lender under that loan has granted priority over such security to the landlord for amounts in excess of the loan.
The lease permits the following uses: distillery, brewery, distillery tours, grain storage, malting, kilning, milling, blending, whisky maturation, filling, retail gift store with liquor license to sell beer and liquor products and related retail items and souvenirs, restaurant including rotisserie spit operations, BBQ, events, tours, tastings, programmable event space, auditorium, conferences, weddings and cultural festivities.
Consulting agreement with Michael Nicolson.
MBD has entered into a formal consulting agreement with Michael Nicholson, a highly experienced master distiller. While he is retained by MBD, Mr. Nicholson, has agreed to be available to assist with distillery design and commissioning, training, tours and retail management, maturation, blending and brand ambassadorship.
The Company has agreed to pay Mr. Nicholson at standard hourly rates, for time incurred. Mr. Nicholson is entitled by contract to 1,500 restricted share units annually, however he has verbally declined to accept these restricted shares to date.
Consulting agreement with Adrian Walker.
MBD has entered into a formal consulting agreement with Mr. Adrian Walker. Mr. Adrian Walker is an ex-DIAGEO brand developer of Singleton whisky, Bailey Irish Cream brands with experience having founded and launched Coole Swan whisky cream-liqueur in N. America. He will assist in the marketing and distribution of our Macaloney’s Twa Casks series of malt whiskies and liqueurs as well as developing and implementing a sales strategy for our own distilled single malt whisky. He is uniquely placed to act as an advisor and consultant for the launch of our products.
The Company has agreed to pay Mr. Walker 1,500 restricted share units at the outset of this agreement, 1500 restricted share units annually for each year of service provided, plus an annual retainer of GBP 10,000 [CAD $16,500], plus reasonable expenses. The contract can be terminated with 3 months’ notice.
Alberta Agency agreement. Offering Memorandum – November 24, 2017 Page F-28 MBD
On May 15, 2017, the Company registered extra-provincially in Alberta for the purpose of becoming an Alberta sales agent, thereby expanding sales to Alberta residents and businesses. The Alberta Gaming and Liquor Corporation (“AGLC”) formally approved MBD as an agency on October 17, 2017, for an initial 2-year term. The extra-provincial corporation and agency are considered an extension of the Company’s existing legal structure rather than a separate legal entity owned and controlled by the Company. The Company began selling its products in Alberta effective November 2017.
Agency agreement with KIS Consulting Ltd.
On October 26, 2017, the Company entered into an agreement with KIS Consulting Ltd. (“KIS”), to appoint KIS to act as the Company’s exclusive, sales and marketing agency in the provinces of Alberta and British Columbia, excluding Vancouver Island and the Gulf Islands. The Company retains the right to make direct sales of bottles and casks of whisky to private customers without any commissions owing to KIS. KIS will be entitled to a commission on bottles, but not casks, made to distribution sales channels.
The term of this agreement is for an initial term of 3 years, and automatically renews for 1 year, unless 3 months written notice is given.
MBD will pay KIS a commission of 10% on all sales in the territory, except as described above, through the following distribution channels: Licensed Establishments (restaurants, pubs, etc.), Licensee Retail Stores, and BC Liquor Distribution Branch, based on the current wholesale price at the time of shipment of orders in the territory described above.
Offering Memorandum – November 24, 2017 Page F-29 MBD
3 INTERESTS OF DIRECTORS, MANAGEMENT, PROMOTERS AND PRINCIPAL HOLDERS
3.1 Compensation and Securities Held The table below describes the compensation of and securities held by each director, officer and promoter of the issuer and each person who, directly or indirectly, beneficially owns or controls 10% or more of any class of voting securities of the issuer (a “principal holder”). In addition to the information below, the Board of Directors intends to reserve an aggregate of 400,000 Common Shares prorated to the $6 million maximum offering for issuance in connection with an Incentive Share Ownership Plan, whereby shares in MBD will be issued to Directors, executive management and employees. No shares have been issued pursuant to the Incentive Share Ownership Plan, pending its formal approval at the next Annual General Meeting of the Company’s shareholders in December 2017.
Compensation paid by Number, type and issuer in the most recently percentage of Number, type and completed financial year securities of the percentage of securities Name and Positions held and the and the compensation issuer held after of the issuer held after municipality of date of obtaining that anticipated to be paid in completion of min. completion of max. principal residence position the current financial year offering(1) offering(2) Dr. Graeme Founder, Promoter, • Compensation paid • 637,026 Common • 637,026 Common Macaloney, Chairman & CEO last financial year: shares(4) (34.1%)(5) shares(4) (31.47%)(5) North Saanich, B.C. February 1, 2013 $162,608 • 20 special preferred • 20 special preferred • Anticipated shares (100%) shares (100%) compensation in current financial year: $120,000(7)
Mr. Patrick Guy Director • Compensation paid • 10,000 Common • 10,000 Common shares Michaud February 25, 2013 last financial year: shares (0.54%)(5) (0.49%)(5) Oakville, ON $3,000(3) • Anticipated compensation in current financial year: $3,000 Mr. Arthur Klause Director • Compensation paid • 1,785 Common • 1,785 Common shares Froehlich April 29, 2013 last financial year: shares (0.10%)(5) (0.09%)(5) Calgary, Alberta (3) $4,413 • 446 MBD ‘A’ • 446 MBD ‘A’ Warrants • Anticipated Warrants (0.88%) (0.50%) compensation in • 446 MBD ‘B’ • 446 MBD ‘B’ Warrants current financial year: Warrants (0.63%) (0.41%) $3,000 Mr. Allan Edward Director • Compensation paid • 0 Common shares • 0 Common shares (0%)(5) Scott May 6, 2013 last financial year: (0%)(5) Edmonton, Alberta $4,000(3) • Anticipated compensation in current financial year: $3,000 Mr. Harold Investor, and significant • Compensation paid • 282,475 Common • 282,475 Common Baardsnes shareholder last financial year: Shares (15.13%) Shares (13.96%) Victoria, B.C. $0 • Anticipated compensation in the current fiscal year: $0
Notes: Offering Memorandum – November 24, 2017 Page F-30 MBD
(1) Note that since MBD has already achieved its minimum offering target, this column is calculated using the 1,867,276 Common Shares MBD has issued as of the date of this Offering Memorandum.
(2) The maximum number of Units that could be issued under a Maximum Offering is 156,733. This is calculated as $722,539 (the amount left to be raised to meet the Maximum Offering amount) divided by $4.61 per Unit (the lowest price that could possibly be paid for each Unit). This assumption is made for the purposes of demonstrating the absolute maximum number of Units that can be issued pursuant to a maximum Offering. A Maximum Offering may not proceed in this manner and, as a result, it is possible that fewer Units will be issued under a maximum Offering than noted herein.
(3) Once MBD’s Incentive Share Ownership Plan is approved, each independent Director, other than Dr. Macaloney, is to receive annual Directors’ compensation of 1,500 Common Shares, plus a one-time signing bonus of 1,500 Common Shares. Commencing in the 2015 financial year, each Director, other than Dr. Macaloney, started to receive Directors’ compensation of $1,000 per Board meeting (plus any applicable sales taxes). As reported in Note 8 of the Audited Financial Statements, Directors fees for 2017 amounted to $11,413. Payments made to Directors include per diem compensation plus taxes per Board member, excluding Dr. Macaloney, and also includes travel and accommodation expenses. By agreement with the Directors their compensation only commenced upon closing of the previous Offering Memorandum financing on September 2014.
(4) Of the Common Shares noted, 237,026 Common Shares are held by Dr. Macaloney directly and 200,000 are owned indirectly through Biovation Inc., a private company wholly-owned by Dr. Macaloney. In addition, these figures include Dr. Macaloney’s spouse’s holdings of 200,000 Common Shares.
(5) Dr. Macaloney Founder Dilution. The percentages quoted do not reflect the up to 400,000 Common Shares (maximum offering) or 200,000 Common Shares (minimum offering) to be issued to Directors, executive management and employees in connection with an intended Incentive Share Ownership Plan. They also do not reflect a potential re-issuance of previously expired warrants that MBD management will seek shareholder approval to re-issue to their original holders at their original pricing.
(6) At the behest of MBD’s principal founder, Dr. Macaloney, MBD has provided what it believes is a beneficial set of investor rights, warrants and share prices that may well place Dr. Macaloney in a minority position amongst the shareholders as a whole. On a fully diluted basis it is anticipated that Dr. Macaloney will retain a minority equity holding as described in note 4 above. However, Dr. Macaloney is the key individual who conceptualized this company and its opportunity and together with the Board of Directors, Strategic Advisors and Management will be responsible for implementing the return to investors. In order to maintain the founder’s, management’s and the Board of Directors’ ability to effectively govern and implement the vision and objectives of the Corporation, Dr. Macaloney retains twenty Special Preferred Shares each carrying a voting right equivalent to 200,000 votes. Dr. Macaloney believes that this effectively yields financial gain to investors in return for control to Dr. Macaloney over the vision and implementation of the business. Dr. Macaloney, in his capacity as Chief Executive Officer, receives a salary as determined by the Board of Directors in reference to those Chief Executive Officers of comparable sized companies based upon Towers Watson and similar Canadian salary survey information.
3.2 Management Experience
The following table contains certain information relating to the Directors, senior officers of the Corporation, and its strategic advisors, including, the principal occupations of each person over the past five years.
Name Principal occupation and related experience
Graeme Macaloney, Dr. Graeme Macaloney is a seasoned executive manager having been trained in management in two PhD, PEng, FIChemE of the world’s largest multi-national Fortune 100 firms, and is a repeat entrepreneur having co- founded the Alberta Deal Generator (an investor network), QSV Biologics Ltd., (a contract Chairman and CEO fermentation manufacturer), and now MBD. Dr. Macaloney has significant experience in business building including marketing, strategic alliances, collaborative research and development, licensing and start-up company development and financing. Dr. Macaloney has assisted several other start-up companies and has significant experience recruiting and developing new management and support teams. He has raised over $19 million in equity and debt financings, including the largest venture capital financing in Alberta in 2004. Dr. Macaloney has 32 years of international fermentation industry experience spanning Europe, N. America and Australasia. He is university trained in 3 degrees: BSc and PhD in fermentation at the Strathclyde University Fermentation Centre, Scotland and MSc in bio-chemical engineering at University College London, England. His first (summer student) job was with DIAGEO in the Black & White / Buchanan’s Blend bottling factory, Stepps, Scotland. He honed his production management, fermentation development and capital project management roles in two of the world’s largest fermentation companies, including a 3 million litre fermentation plant where he identified $20 million in savings and oversaw a $300 million high value fermentation campaign (this plant was originally operated by DCL, now DIAGEO PLC, in 1945 on behalf of the UK Ministry of Supply to manufacture the world’s first deep-tank fermented penicillin). He also oversaw capital expenditure programs for fermentation expansions worth over $10 million. Following this, and within the last 5 years, he founded, equity financed, and led his own firm, fermentation-based QSV Biologics which he grew to over $14 million revenues and recruited 125 high tech personnel, and Offering Memorandum – November 24, 2017 Page F-31 MBD
Name Principal occupation and related experience oversaw some $3.6 million in fermentation plant expansions. Subsequently within the last 6 years in another manufacturing company, Redlen Technologies, he oversaw the deployment of $3.6 million in capital expenditures and recruited 33 personnel. Dr. Macaloney is a Professional Engineer (APEGA) and Fellow of the Institution of Chemical Engineers, U.K. (an honour reserved for the top 7% of engineers who have made a substantial contribution to engineering). He is a member or regular presenter at the Companions of the Quaich, Victoria Single Malt whisky club, UVic Faculty Club, several other local whisky clubs, and is known to another 19 whisky clubs. Dr. Macaloney maintains an extensive network of contacts encompassing distilling, brewing, biotech firms, government, “angel” investors, risk capital, debt financing, and other financial organizations in Canada, U.S.A., U.K., Australia and Europe. Dr. Macaloney has been, or still is, involved with several boards/committees: Deal Generator angel network (an Edmonton-based private equity funding mechanism); Genome Prairie (founding member; CEO recruitment and audit committees for this $96 million Genome Canada organization); the Canadian Bioprocessing Initiative Training Committee; and the Victoria Highland Games Association. Dr. Macaloney, through his consulting firm, Biovation Inc., has assisted in the formation of a seed/early stage venture capital fund that was intended to be active in Alberta and Western Canada. He is the founder of MBD. Mr. Arthur Froehlich BSc. is a Director and Past President of AdFarm, one of North America's Arthur Froehlich BSc. largest agri-business and agri-food marketing and communications companies where he has worked Director since 2004 with North American food and agricultural companies to develop international markets for their products. He is also still active in his farming operations in Saskatchewan raising registered Red Angus cattle and producing wheat, malting barley and milling oats. With an undergraduate degree from the University of Saskatchewan (Agriculture) and a graduate of the Advanced Management Program from the University of Pennsylvania’s Wharton School of Business, Mr. Froehlich has spent the last 36 years working in primary food production, agri-business and agri- marketing in Canada, United States, Europe, South America and Asia. Mr. Froehlich has served as the President of Westcan Malting, General Manager of Operations for Alberta Wheat Pool, and the Director of Sales and Marketing at Hoechst Canada. He sits on many corporate boards, including: Olds College, AVAC (Agriculture Value Added Corporation), Richardson International Ltd, Carbon Credit Solutions Inc, Hokanson Capital, Ag West Bio Chair, FBScience Chair, Superior Group of Companies. Previous Board positions include: ATB Financial, Alberta Innovates Bio Solutions, Science Alberta Foundation, Malting Industry Association of Canada and Malting and Brewing Research Institute, Canadian Triticale Bio Refinery Initiative, Western Grain Elevator Association, Demeter Agro Ltd., Prairie Sun Grains Ltd., Alberta Agriculture Research Institute Chair, Agriculture & Food Council Chair, Asia Pacific Foundation, and the Canada Korea/Japan Business Council. In 2005, Mr. Froehlich received the distinguished Agrologist Award from the Alberta Institute of Agrologists and the Alberta Centennial Gold Medal by the Province of Alberta. In 2012, Mr. Froehlich was inducted into the Alberta Bioindustry Hall of Fame and in 2014, he received an Honorary Degree from Olds College. His is also a member of the Agriculture Institute of Canada.
Patrick Michaud Mr. P. Michaud is a 34 year executive with senior operations management, financial services and MBA, BEng, CPA, venture financing experience. Currently he serves as Chief Financial Officer of the Technicore CGA Group of Companies. Technicore is a 100% Canadian owned, vertically integrated group of tunneling construction companies; with capabilities including tunnel and shaft construction, earth- Director moving and logistics, the design and manufacturing of tunnel boring machines, proprietary tunnel machines and equipment, robotically manufactured tunnel support systems, ground freezing, caisson drilling and installation, concrete redi-mix, proprietary cellular grout, heavy steel fabrication, steel transmission pipe manufacturing and proprietary on-site robotic pipe welding. From 2008 to present he has also been Managing Director of Templar Associates Inc., a financial services business providing personalized corporate finance expertise and management leadership to businesses including consulting to secure equity and equity-related capital for emerging growth companies, financial operational assistance to support initial public offerings and other financings for more developed companies. Previously, from 2002 to 2008 Mr. Michaud was Executive Vice President and Chief Financial Officer of Score Media Inc., a national specialty television service providing sports, news, information, highlights and live event programming. Prior to this, Mr. Michaud was Offering Memorandum – November 24, 2017 Page F-32 MBD
Name Principal occupation and related experience Senior Vice President and Chief Financial Officer of GlycoDesign Inc., a clinical stage biopharmaceutical firm. Earlier, Mr. Michaud served for five years as Vice President and Chief Financial Officer of Clairvest Group Inc., a public Canadian merchant bank. Prior to Clairvest, he spent six years as Assistant General Manager, Merchant Banking with CIBC. Mr. Michaud has an MBA from the University of Western Ontario, a BEng in Civil Engineering from the Royal Military College, and is a Chartered Public Accountant. He participates on a number of boards including as Chairman of the International Consortium on Antivirals. It was in this role that he collaborated with Dr. Macaloney when the latter was the founder/CEO of QSV Biologics Ltd, on an $88 million joint venture proposal to the Federal Government and Bill & Melinda Gates Foundation. Mr. Allan E. Scott is currently a Corporate Director. He is a former chair of the Board of Allan Edward Scott Directors of the Art Gallery of Alberta (AGA), where from 2007 to 2010 he played the leading PEng(retired), MBA, role in its $88 million fundraising campaign and served as full time volunteer chair of the Project BScMechEng. Committee which directed the new AGA building construction project. Mr. Scott brings a broad Director range of executive experience in both the public and private sectors. He was most recently President and CEO of Edmonton Economic Development Corporation (EEDC) from 2002 to 2007. EEDC is
a wholly owned subsidiary of the City of Edmonton responsible for promoting business and tourism as well as operating the Edmonton Research Park and the Shaw Conference Centre. While at EEDC he helped launch a number of new initiatives to promote and support the development of start up companies including: the Venture Prize Business Plan Competition, the Edmonton Deal Generator (an angel investor network) and TEC Edmonton (a business accelerator that helps transform technologies into business opportunities.) Mr. Scott also championed a number of initiatives to promote the development of venture capital in the region. Prior to EEDC, Mr. Scott was a partner in Riverview Venture Partners and served as President and Chief Operating Officer of EdTel and then TELUS Communications. Before joining TELUS, he held various executive positions with Canadian Utilities, including Vice President, Finance and Planning. Earlier in his career, Mr. Scott held positions with Foster Research (Economic Consulting), Interprovincial Pipeline Inc., and Ontario Hydro. Mr. Scott has had experience on a number of corporate boards and charitable groups. He has served as a director of Metscan Inc. (Rochester N.Y.), EdTel Inc, AT Plastics (Toronto), Associated Engineering, as well as Chairman of the Luscar Coal Income Fund. Mr. Scott is currently a director of Melcor Developments Ltd., Universe Machine. He is a graduate of the University of Alberta with a BSc in Mechanical Engineering and holds an MBA from York University.
3.3 Penalties, Sanctions and Bankruptcy
Dr. Macaloney was President and Director of QSV Biologics Ltd, a start-up biologics manufacturing company providing specialized contract manufacturing services for the production of novel therapeutics for use in human clinical trials, to the biopharmaceutical industry. The global economy and the international biopharmaceutical industry in particular, encountered a recession during 2007 through to 2009. As a result of slower than anticipated contract manufacturing orders from biopharmaceutical companies, QSV's financial resources were insufficient to sustain continued operations, and consequently the company's board of directors decided to cease operations in February 2009. A receiver manager was subsequently appointed. No penalties, sanctions, cease trade orders, bankruptcy or receivership applied to Dr. Macaloney in his individual capacity.
Other than the above, to the best of the knowledge of the Corporation and its directors, no: (a) director, senior officer or control person of the issuer; or (b) issuer of which a person or company referred to in (a) was a director, senior officer or control person at the time, has been subject to: (i) any penalty or sanction; (ii) any cease trade order that has lasted longer than 30 consecutive days; or Offering Memorandum – November 24, 2017 Page F-33 MBD
(ii) any declaration of bankruptcy, voluntary assignment in bankruptcy, proposal under any bankruptcy or insolvency legislation, proceedings, arrangement or compromise with creditors or appointment of a receiver, receiver manager or trustee to hold assets, that has been in effect during the last 10 years.
4 CAPITAL STRUCTURE
4.1 Share Capital
Description of Number Number issued as at Number issued after Number issued after security authorized to be November 20, 2017 min. offering(1) max. offering(2) issued
Common Class Unlimited 1,867,276 N/A 2,024,009 A Shares
Common Class 40,000,000 0 N/A 0 B Shares(3)
Preferred Unlimited 0 N/A 0 Shares(3)
Special 20 20 N/A 20 Preferred Shares(3)
MBD “A” N/A 263,919 Issued N/A 302,656 Issued Warrants (50,839 Currently (89,576 Outstanding) Potentially Outstanding)
MBD “B” N/A 263,919 Issued N/A 303,102 Issued Warrants (64,711 Currently (103,448 Outstanding) Potentially Outstanding)
Options(4) N/A 0 N/A 0
(1) The minimum offering assumes that no further Units will be sold under this Offering. As at the date of this Offering Memorandum, MBD has raised $5,277,460.85 in subscriptions under this offering, issuing 1,421,810 Units. MBD has also raised $979,190 in warrant exercises, thereby issuing another 198,465 Common Shares pursuant to those warrants.
(2) The maximum number of Units that could be issued under a Maximum Offering is 156,733. This is calculated as $722,539 (the amount left to be raised to meet the Maximum Offering amount) divided by $4.61 per Unit (the lowest price that could possibly be paid for each Unit). This assumption is made for the purposes of demonstrating the absolute maximum number of Units that can be issued pursuant to a maximum Offering. A Maximum Offering may not proceed in this manner and, as a result, it is possible that fewer Units will be issued under a maximum Offering than noted herein.
(3) No Common Class B Shares, Preferred Shares, or Special Preferred Shares are being offered pursuant to this Offering. Pursuant to its Articles, MBD is authorized to issue twenty (20) Special Preferred Shares without nominal or par value, of which, as at the date hereof, all 20 shares have been issued and are outstanding as fully paid and non-assessable. Each Special Preferred Share carries 200,000 votes and is not entitled to any dividends. Pursuant to the rights agreement to be entered by the Subscribers for Units, MBD and Dr. Macaloney, Dr. Macaloney will not be permitted to transfer the Special Preferred Shares (except in the limited circumstances provided for in the rights agreement).
(4) No stock option agreement exists and no options have as yet been granted. However, the Directors of the Corporation may issue restricted share units pursuant to an Incentive Share Ownership Plan, where a minimum of 200,000 Common Shares or 400,000 Common Shares (maximum offering) may be issued to Directors, officers, employees, consultants and advisors. This plan is subject to approval at the next AGM in December 2017. No stock options, restricted share units, or Common Shares have been issued pursuant to the Incentive Share Ownership Plan as of the date of this offering memorandum. Offering Memorandum – November 24, 2017 Page F-34 MBD
For a description of the material terms of the above securities, please refer to “Item 5 – Securities Offered”.
4.2 Long Term Debt Securities
As discussed in detail in Item 2.7 – Material Agreements, MBD has received a repayable contribution agreement with the Canada’s Ministry of Agriculture and Agri-Food (“AAFC”) for $2,369,400, of which $2,359,420 has been received as of June 30, 2017. No further funds are expected to be received under this contribution agreement. The amount drawn under the contribution agreement is interest free, but must be repaid in monthly instalments over seven years commencing March 31, 2020. MBD also has available to it a $500,000 loan facility, that MBD may contemplate borrowing under in 2017-18 if required.
4.3 Prior Sales
Within the last 12 months, MBD has issued the following Common Shares, MBD “A” Warrants, MBD “B” Warrants and Rights:
Date of Type of security Number of securities Price per Unit Total funds issuance issued issued received
December 30, Common Shares 40,000 $4.61 $184,400 2016 MBD “A” Warrants 10,000 MBD “B” Warrants 10,000
February 27, Common Shares 124,818 $4.61 - $6.50 $620,701 2017 MBD “A” Warrants 31,197 MBD “B” Warrants 31,197
February 27, Common Shares 11,628 $5.00 - $5.60 $63,028 2017 (Warrant Exercise
Prices)
June 1, 2017 Common Shares 31,804 $5.35 - $6.50 $195,504 MBD “A” Warrants 7,944 MBD “B” Warrants 7,944
June 1, 2017 Common Shares 32,881 $4.64 - $6.16 $177,078 MBD “A” Warrants (Warrant Exercise Prices) MBD “B” Warrants
October 24, Common Shares 32,295 $5.70 - $6.50 $203,537 2017 MBD “A” Warrants 8,068 MBD “B” Warrants 8,608
October 24, Common Shares 55,446 $4.61 - $5.60 $268,698 2017 MBD “A” Warrants (Warrant Exercise Prices) MBD “B” Warrants
Offering Memorandum – November 24, 2017 Page F-35 MBD
5 SECURITIES OFFERED
5.1 Terms of Securities
5.1.1 Common Shares
Pursuant to its Articles, MBD is authorized to issue an unlimited number of Common Shares without par value, of which, as at the date hereof, 1,867,276 shares are issued and outstanding as fully paid and non-assessable. The holders of the Common Shares are entitled to dividends, if and when declared by the board, and to one vote per share at meetings of the shareholders and, upon liquidation, dissolution or wind-up, to receive such assets of MBD as are distributable to the holders of the Common Shares. The Common Shares do not carry redemption or retraction rights.
5.1.2 MBD “A” Warrants
Each whole MBD “A” Warrant entitles a holder to purchase one Common Share at a price equivalent to the Unit price at any time on or before 19 months from the date of the closing at which the subscriber in question purchased their Units. No fractional Common Shares will be issued in connection with the exercise of an MBD “A” Warrant. The MBD “A” Warrants do not bestow any shareholder rights to their holder (including any right to receive dividends or other distribution to shareholders or to vote at a general meeting of the shareholders of MBD).
Unless extended by MBD, at its sole discretion, the MBD “A” Warrants will expire at the end of the exercise period, and the holders thereof will have no further rights with respect to the MBD “A” Warrants. MBD will reserve a sufficient number of Common Shares to permit the exercise of the MBD “A” Warrants. The exercise price of the MBD “A” Warrants and the number of Common Shares issuable upon exercise of the Warrants will be subject to adjustment to protect against dilution in the event of share dividends, splits, consolidations, subdivisions and reclassifications.
5.1.3 MBD “B” Warrants
Each whole MBD “B” Warrant entitles a holder to purchase one Common Share at a price equivalent to the Unit price multiplied by 110% at any time on or before 31 months from the date of the closing at which the subscriber in question purchased their Units. No fractional Common Shares will be issued in connection with the exercise of an MBD “B” Warrant. The MBD “B” Warrants do not bestow any shareholder rights to their holder (including any right to receive dividends or other distribution to shareholders or to vote at a general meeting of the shareholders of MBD).
Unless extended by MBD, at its sole discretion, the MBD “B” Warrants will expire at the end of the exercise period, and the holders thereof will have no further rights with respect to the MBD “B” Warrants. MBD will reserve a sufficient number of Common Shares to permit the exercise of the MBD “B” Warrants. The exercise price of the MBD “B” Warrants and the number of Common Shares issuable upon exercise of the MBD “B” Warrants will be subject to adjustment to protect against dilution in the event of share dividends, splits, consolidations, subdivisions and reclassifications.
5.1.4 The Rights
Subscribers for Units under this offering are also granted certain contractual rights in the attached Rights Agreement to be entered into between the subscribers for Units (the “Rights Shareholders”), Dr. Graeme Macaloney and MBD. The Rights Agreement and the rights and obligations thereunder terminate by the written agreement of all parties thereto, if all of the Common Shares are sold to a third party or on the date on which MBD completes an initial public offering of its securities.
Under the Rights Agreement, Rights Shareholders will enjoy a Tag-Along Right and a Pre-emptive Right. Dr. Macaloney will also possess the Pre-emptive Right. Dr. Macaloney will have certain obligations imposed upon him in connection with the Tag-Along Right. Holders of Common Shares or other securities of MBD who purchase their Common Shares or other securities in the future may or may not have these rights. These rights are as set out in the attached Rights Agreement, which must be signed by the subscriber; however, a summary of the Pre-emptive and Tag-Along Rights are as follows:
Pre-emptive Right: Following the last closing under this offering, subject to certain exceptions, in the event that MBD proposes to issue additional Common Shares or securities which are capable of being converted, exercised or exchanged into Common Shares (a “Common Share Security”) for cash consideration to any person, whether directly Offering Memorandum – November 24, 2017 Page F-36 MBD
or indirectly by, including by way of option, warrant, right or privilege (a “Proposed Issuance”), each Rights Shareholder and Dr. Graeme Macaloney will have the right (the “Pre-Emptive Right”) to subscribe for and purchase up to a number of additional Common Share Securities determined by the application of a formula as set out in the Rights Agreement.
There is a process by which and time periods within which MBD must provide notice to the Rights Shareholders and Dr. Macaloney of the Proposed Issuance. There is also a process and time periods within which a Rights Shareholder or Dr. Macaloney must follow if he or she wishes to exercise his or her Pre-Emptive Right. Once the period for exercise of the right has expired, MBD, must within a reasonable time, issue and allot shares to the Rights Shareholders and Dr. Macaloney who have duly subscribed pursuant to his or her Pre-Emptive Right. Following the expiry of the period for acceptance by a Rights Shareholder and Dr. Macaloney, MBD may issue the balance of the Proposed Issuance, however, this must be completed within 60 days from the date of expiry of the period to exercise the Pre-Emptive Rights and such issuance must be for a price and on terms no more favourable than those offered to the Rights Shareholders and Dr. Macaloney.
Tag-along Right: Should Dr. Macaloney seek to enter into a prospective arrangement to sell all or some of his Common Shares to a third party, other than an Affiliate (as that term is defined in the Rights Agreement) which would result in a third party gaining Control (as that term is defined in the Rights Agreement), Dr. Macaloney can only complete such sale if the third party extends an offer to all Rights Shareholders to purchase their Affected Shares then held on the same terms. There are certain timelines and notifications required by each of Dr. Macaloney and each Rights Shareholder who wishes to exercise his or her tag-along right. If a Rights Shareholder provides notice to Dr. Macaloney and the third party that he or she wishes to exercise his or tag-along right, such exercise is irrevocable.
5.2 Subscription Procedure
If you wish to purchase Units, please contact Dr. Macaloney through the information noted on the cover page of this Offering Memorandum, so that the Unit price can be determined. Please complete and deliver the attached Subscription Agreement, including all appendices, to Dr. Macaloney, along with a cheque or bank draft payable to “Breakwater Law in trust for MBD” for the aggregate subscription price of the Units you wish to purchase (the “Subscription Funds”).
5.2.1 Trust Conditions
Breakwater Law undertakes to hold your Subscription Funds in trust on the following conditions:
1. You have the right to cancel your purchase of the Units within two business days after entering into the Subscription Agreement. To exercise this right you must notify either MBD or Breakwater Law, by fax or email, by midnight on the second business day following the date on which you signed the Subscription Agreement. Upon receipt of such notice, Breakwater Law will return your Subscription Funds to you in full without interest or penalty. If you do not provide notice of cancellation within two business days of entering into the Subscription Agreement, you no longer have the right to cancel the Subscription Agreement and the Subscription Funds will continue to be held in trust.
2. If you do not request a refund within two business days, Breakwater Law shall pay your Subscription Funds to MBD upon MBD’s request.
5.2.2 Acceptance of Subscriptions and subsequent closings
MBD may accept your Subscription Agreement in whole or in part, or not at all, and MBD has the unrestricted right to allot to any subscriber less than the amount of Units subscribed for. If MBD rejects your Subscription Agreement in whole, the Subscription Funds delivered to Breakwater Law representing the purchase price for the Units will be promptly returned to you without interest. If MBD rejects your Subscription Agreement in part, MBD will only retain the Subscription Funds delivered to MBD representing the purchase price for the Units accepted for subscription, and the remaining portion of the Subscription Funds will be promptly returned to you without interest.
MBD’s board of directors may conduct closings under this Offering, from time to time, until the maximum subscription amount has been reached. Offering Memorandum – November 24, 2017 Page F-37 MBD
5.3 Pricing of Units Each Unit is comprised of one Common Share, one quarter of one MBD ‘A’ Warrant, and one quarter of one MBD ‘B’ Warrant. MBD will provide an incentive to investors who make a larger investment. The minimum investment is $10,000. Those investors who commit, and are accepted by MBD, to $50,000 to $99,000, $100,000 to $249,999, $250,000 to $499,999, $500,000 to $999,999, or $1 million or more, will benefit from successively less expensive Unit prices as detailed in the following table: Investment size Price per Unit
$1,000,000 or greater $4.61 $500,000 – $999,999 $4.73 $250,000 – $499,999 $4.84 $100,000 – $249,999 $ 5.50 $50,000 – $99,999 $ 6.25 $10,000 – $49,999 $ 7.30
6 INCOME TAX CONSEQUENCES AND ELIGIBILITY FOR REGISTERED INVESTMENTS
6.1 Income Tax Consequences
The following summary of significant income tax consequences of an investment in the Common Shares has been prepared by MBD’s management. The following summary is of a general nature only and is not intended to be a complete analysis of the income tax consequences and should not be interpreted or used as a substitute for legal or tax advice to any particular subscriber. Tax consequences will vary depending on the particular circumstances of each subscriber.
You should consult your own professional advisers to obtain advice on the tax consequences that apply to you.
6.2 Tax Credits Under the Investment Capital Program
Investment Capital Program Summary
The Investment Capital Program is the operating name for the programs operating under the Small Business Venture Capital Act of British Columbia (“SBVC Act”). This program is designed to encourage arm’s length investors to make equity investments in businesses operating in sectors which result in export enhancement or otherwise diversify the economy of British Columbia. Among other things, the SBVC Act permits certain businesses to register as an Eligible Business Corporation (“EBC”). An EBC may receive investments under the Investment Capital Program directly from investors.
Provided that MBD qualifies as an EBC under the SBVC Act, MBD is entitled to apply on behalf of Purchasers of Common Shares who are resident in British Columbia on the date of the purchase for tax credit certificates entitling the Purchasers to a tax credit equal to 30% of the amount paid by the Purchasers for the Common Shares. The issuance of tax credit certificates is contingent on available room in the province’s budget for the tax credit imposed by the SBVC Act. If a tax credit certificate is issued to the Subscriber, it will entitle the Subscriber to a credit against the Subscriber’s provincial income tax payable to the Province of British Columbia for the taxation year. As a condition of receiving the tax credit, the Subscriber will be required to own the Common Shares for 5 years.
MBD has registered as an Eligible Business Corporation (EBC) under the Province of British Columbia’s Investment Capital Program. Learn more at www2.gov.bc.ca/gov/content/employment-business/investment-capital/venture- capital-programs/eligible-business-corporation.
Subscribers who wish to acquire further information on the provisions of the SBVC Act and regulations are advised to consult their own professional advisors or contact the Investment Capital Branch of the Province of B.C. Offering Memorandum – November 24, 2017 Page F-38 MBD
Claiming Tax Credits Under the SBVC Act
MBD will apply on behalf of eligible Subscribers for a tax credit certificate entitling the Subscriber to a tax credit equal to 30% of the amount received by MBD from the Subscriber for the purchase of the Common Shares. Tax credit certificates may only be issued if MBD complies with the requirements and intent of the SBVC Act. MBD has done so in the past and intends to continue to do so, but cannot guarantee compliance into the future.
A Subscriber who is an individual investor must deduct the lesser of his or her tax credit or $60,000 against tax otherwise payable under the Income Tax Act (British Columbia) (“B.C. Tax Act”) for that taxation year. To the extent that the tax credit of the individual exceeds the amount of provincial taxes payable, the individual will be entitled to a refund of the difference between the lesser of $60,000 or his or her tax credit and the tax otherwise payable, after deducting certain other credits available under the B.C. Tax Act.
In administering the refund process, the refund must first apply to offset other amounts payable, including income tax arrears. An individual shareholder may claim a tax credit in respect of the prior taxation year if the Common Shares of an EBC are purchased within the first 60 days of the next ensuing taxation year.
If an individual Subscriber resides in British Columbia at the date of the subscription for shares but resides outside the province at the end of the year, this may affect the individual’s ability to claim the tax credit. Individual Subscribers who plan to move outside of British Columbia before year-end are urged to consult with their professional advisors about their eligibility to claim the tax credit.
A Subscriber that is a corporation must deduct the tax credit earned in the taxation year from tax otherwise payable by the corporation under the B.C. Tax Act; there is no annual limit on the tax credit for corporations. A corporation is not entitled to a refund in respect of a taxation year if the amount of the tax credit exceeds the amount of its tax otherwise payable under the B.C. Tax Act for the taxation year.
A tax credit not so utilized by a corporation may be carried forward for up to four subsequent taxation years and may be utilized to the extent that there is tax otherwise payable under the B.C. Tax Act in such taxation years.
In order for a Subscriber to retain the tax credit, the Subscriber must hold the Common Shares for a period of five years from the date of issuance. If the Subscriber sells, transfers, redeems or otherwise disposes of the Common Shares prior to the expiry of five years, the Subscriber will be liable to repay the tax credit. You should consult your own professional advisers to obtain advice on your eligibility for tax credits. See also Item 8 – Risk Factors.
Investment Capital Authorization
Before an EBC can raise equity capital and issue shares under the program it must have an authorization from the Investment Capital Program to do so. All authorizations granted to EBCs are specific both with respect to the maximum amount of capital the EBC can raise and with respect to the length of time in which this raising of funds can occur. For the 2017 tax-budget year, MBD was granted an authorization allowing it to raise eligible capital of up to a maximum of $3,797,723 on or before December 31, 2017. To date, investors in the Company have claimed $811,502 against this amount, with a further $2,986,221 presently available. There is no assurance that the Investment Capital Program will grant an extension of this authorization for next year, and investors should verify that they are purchasing their shares in an EBC within a duly authorized period of time before they invest.
Furthermore, the SBVC Act limits the total amount of venture capital tax credits that may be issued each year to investors. When the venture capital tax credit budget is reached, the MBD’s equity authorization will be suspended, and further investments in Common Shares will not qualify for tax credits under the SBVC Act.
No tax credits will be issued to Subscribers who purchase shares in an EBC that does not have a valid authorization to raise equity capital or where the authorization has expired or is suspended prior to the Subscriber’s purchase of the Common Shares. MBD cannot guarantee the availability of the EBC tax credits, and the tax credits are available and processed on a first-come, first-served basis within the capital limits of the program. Any investor who wishes to apply for EBC tax credits should contact MBD as soon as practicable in order to process the necessary forms in a timely manner. Offering Memorandum – November 24, 2017 Page F-39 MBD
6.3 RRSP, RRIF & TFSA Eligibility and Lifetime Capital Gains Exemption
Management is of the understanding that the Common Shares may possibly be qualified investments for a trust governed by a self-directed registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), and a Tax Free Saving Account (TFSA) at a particular time, if MBD qualifies as an eligible small business, and if at the particular time, the investor, who is also an annuitant or beneficiary of such plans, meets certain ownership and control restrictions. Ownership and control restrictions are imposed on each investor.
Management believes that MBD may qualify as an eligible small business, which essentially requires it to be a privately held Canadian controlled corporation, for which all, or substantially all, of the fair market value of the total assets is attributable to assets that are used principally in an active business carried on primarily in Canada. Should MBD qualify for the eligible small business corporation status at the time the RRSP, RRIF or TFSA acquires the Common Shares, and the investor, who is also an annuitant or beneficiary of such plans, meet the certain ownership and control restrictions, the Common Shares will continue to be qualified investment irrespective of whether MBD continues to meet the eligible small business corporation status in the future. It will be important to ensure that the annuitant or beneficiary of the RRSP, RRIF or TFSA continues to meet the certain ownership and control restrictions in the future. If such restrictions are not met in the future, adverse tax consequences may result.
MBD has engaged the services of Pacific Western Trust Company to administer self-directed plans such as RRSPs, RRIFs and TFSAs on its investors’ behalf, and to facilitate the transfer of an investors existing RSP funds from the investors existing RSP investments elsewhere, where permissible. Investors who have sought tax advice about their individual circumstances and wish to subscribe for Units through a self-directed plan should contact MBD with this request. MBD will provide the investor with information regarding this process and will assist the investor in preparing an application to Pacific Western Trust Company to establish a self-directed plan.
MBD’s Common Shares may qualify in the future for Canada’s lifetime Capital Gains Exemption. Every Canadian resident individual is eligible for the capital gains exemption under the Income Tax Act (Canada). The shareholder is required to hold their shares for at least 24 months before they can access the capital gains exemption for shares of a qualified small business corporation. This exemption allows an individual to realize up to $835,716 for 2017 (2016: $824,176) of capital gains during their lifetime from dispositions of certain types of property. (Note that this exemption is not available if the shares are held in an RRSP or a corporation. Note also that in the future MBD may not meet the criteria of a qualified small business corporation.)
MBD cannot guarantee that the Common Shares are, or will continue to be, eligible for self-directed RRSP, RRIF or TFSA registrations, or for the lifetime Capital Gains Exemption. Eligibility depends heavily on an individual's and MBD’s circumstances and tax laws are subject to change. Investors should consult their own professional advisers to obtain advice on the RRSP/RRIF/TFSA and capital gains exemption eligibility of the Common Shares.
7 COMPENSATION PAID TO SELLERS AND FINDERS
MBD is willing to pay persons, such as securities dealers and finders, a cash commission for finding subscribers. If such persons introduce MBD to a subscriber for Units, MBD may pay a finder’s fee of up to 6% of the value of the Units sold. Dr. Macaloney will not receive any finders’ fee or commission.
If MBD reaches its maximum offering of $722,539, and pays commissions on all such sales, then the maximum commission MBD will pay is $43,352.
8 RISK FACTORS
This is a highly speculative offering. The purchase of the Units involves a number of significant risk factors. Prospective subscribers should carefully consider each, and the cumulative effect of all, of the risk factors relating to MBD set forth below. The risks and uncertainties described below are not the only ones that MBD may face. Other risks and uncertainties, including those that management does not currently consider material, may impair MBD’s business. The risk factors discussed below may materially adversely affect the business, financial condition, operating results or cash flow of MBD. In addition to matters set forth elsewhere in this Offering Memorandum, subscribers should consider the following risk factors relating to the business of MBD. Such information is presented as of the date hereof and is subject to change, completion or amendment without notice. The industry in which MBD intends to operate is competitive and should be considered only by those who are able to make a long-term commitment, who are Offering Memorandum – November 24, 2017 Page F-40 MBD prepared to rely upon management and who can risk the loss of their entire investment. In short, there is no guarantee that MBD’s business will be successful.
Investment Risk:
Arbitrary Determination of Price
Management set the pricing of the Units in this Offering Memorandum to achieve certain goals, such as providing an incentive to those who invest larger amounts. This pricing scheme was set arbitrarily and the price of the Units may change after the closing of this Offering Memorandum.
Investment Capital Authorizations
No tax credits will be issued to Subscribers who purchase shares in an EBC that does not have a valid authorization to raise equity capital or where the authorization has expired or is suspended prior to the subscriber’s purchase of shares. There is a risk that MBD will not comply with the requirements of the SBVC Act and a Subscriber would not receive a tax credit equal to 30% of the amount paid by the Subscriber for the Units.
Tax-Related
A decision to purchase the Units should be based primarily on an appraisal of the merits of the investment and on a subscriber’s ability to bear a possible loss and not on any tax benefits that may be obtained. Subscribers acquiring the Units with a view to obtaining potential tax advantages from the Units should obtain independent tax advice from a tax advisor who is knowledgeable in the relevant areas of income tax law. Federal and provincial income tax legislation may be amended, or their interpretation changed.
Change in Qualified Investment Status
Units that are a qualified investment for an RRSP, RRIF, or TFSA at the time of acquisition based on MBD’s assets and activities at that time meeting the requirements for a specified small business corporation may become a “prohibited investment” for all such plans if a change in MBD’s assets or activities causes it to cease to meet those requirements. If the Units become a prohibited investment, penalty taxes will be applicable to Holders continuing to hold Units in their RRSP, RRIF or TFSA.
Currency Fluctuations
It is anticipated that MBD will do business with a number of foreign clients and vendors and, as a result, some of its business may be conducted in currencies other than Canadian dollars. Fluctuations in the value of the Canadian dollar against other currencies could cause MBD to incur foreign currency losses.
Risk exposure to exchange rate effects will be limited by conducting most transactions as denominated in Canadian dollars. To the extent that sales are invoiced, or equipment / materials are purchased in a foreign currency, MBD may use currency futures to reduce currency risk. The strategy is to limit trade to a few currencies for controlled flows and, where possible, to take out currency forwards to minimize risk and adapt operations to foreign exchange effects. MBD will also, where appropriate, seek the services of the Export Development Bank of Canada in managing its foreign receivables exposure, via receivables insurance.
Less than Maximum Offering
There can be no assurance that the maximum offering will be sold. If less than the maximum offering is sold pursuant to this offering, then less than the maximum proceeds will be available to MBD. Management believes MBD will be sufficiently capitalized based upon the minimum offering however, factors outside of management’s control could require additional funds and, consequently, the implementation of MBD’s business development plan, and the timing of its implementation, could be adversely affected.
Shareholder Control
Offering Memorandum – November 24, 2017 Page F-41 MBD
Some of MBD’s existing shareholders, in particular Dr. Macaloney, can exert significant control over MBD. If certain shareholders act together, they may be able to influence MBD’s management and affairs and other matters requiring shareholder approval, including the election and appointment of Directors and approval of significant corporate transactions. A concentration of control can facilitate, delay, or prevent a change in control of MBD’s board of directors, and the interests of the controlling shareholders may not always coincide with the interests of all shareholders. However, the board of Directors and Management will prepare annual financial statements compliant with IFRS standards, and will be subject to audit by an independent auditor, for presentation to all shareholders together with a President’s Report. Additionally, an Annual General Meeting will be held each year, to which all shareholders will be invited. MBD’s aim is to provide regular, full and transparent reporting of its progress, with an opportunity for a questions and answers session for all shareholders.
Director Approval to Transfer Shares
Pursuant to the Articles of the Corporation, no shares in the capital of the Corporation may be transferred without the express written consent of a majority of the Directors of the Corporation to be evidenced by a resolution passed by the Directors of the Corporation. However, upon the death of a shareholder, the shareholder’s legal personal representative (i.e. their trustee or executor) shall have the same rights, privileges and obligations as the shareholder.
Issuer Risk:
No Market for the Shares and Warrants, and Pricing and Resale Restrictions
Although the primary strategy of MBD is to grow the enterprise value and provide shareowners the ability to monetize their investment if they wish, no public market currently exists for the Units and there can be no assurance that such a public market will ever develop. The Units may not be resold or otherwise transferred unless the resale restrictions expire, as further described in Item 10 of this Offering Memorandum. Until the restriction on resale expires, investors will not be able to trade the securities unless investors comply with an exemption from the prospectus and registration requirements under applicable securities legislation. Accordingly, there is significant risk that an investor may be unable to liquidate his or her investment in the Units and a subscriber must be prepared to bear the economic risk of the investment for an indefinite period. See Item 10 - Resale Restrictions. Investors cannot obligate MBD to buy back their Units.
Insufficient Funds, the Need for Additional Investment, or the Completion of Alternative Arrangements
In the future, it may be necessary for MBD to obtain additional funds through public or private equity, debt financing and/or collaborative arrangements with companies or other sources. There can be no assurances that these financings or arrangements will be available at all or on acceptable terms to MBD. Additionally, there can be no assurance that funds sufficient for MBD’s needs will be received through the exercise of the MBD ‘A’ or MBD ‘B’ Warrants. If MBD cannot maintain a sufficient level of funds, it may be required to delay, scale-back or eliminate certain or all of its operational programs.
In particular, MBD is actively seeking private equity from a strategic investor. To attract a strategic investor, and the value that such an investor may add, MBD may have to offer shares on terms that are preferential to the terms in this Offering Memorandum. MBD may offer shares at a lower price or offer shares of a different class than offered in this Offering Memorandum. Such actions may lead to dilution and/or devaluation of the Units.
Use of Funds
MBD is committed to building a whisky, craft beer and destination tourism business. To achieve that goal, MBD will have significant discretion as to the use of MBD’s funds, and while MBD currently intends to use the funds available on completion of the Offering as described herein, MBD may decide to alter its current business plan and may decide to expend the funds in a materially different manner in order to build its whisky distillery.
Although MBD has crafted its budget carefully, there can be no guarantee that there will not be cost overruns on capital or operational expenses.
Conflicts of Interest
Certain of MBD’s Directors, officers and members of its Strategic Advisory Board may also be Directors of, employed by, or affiliated with, other corporations, some of which may be in the whisky distilling and brewery/tasting lounge areas. Offering Memorandum – November 24, 2017 Page F-42 MBD
Conflicts of interest may arise between their duties to MBD and their duties to such other corporations. All such conflicts will be dealt with pursuant to the provisions of the applicable corporate legislation.
Limited Sales History
MBD was incorporated in February 2013. MBD has only recently established its brewery & distillery, recruited key management and staff, commissioned whisky and beer production, designed branding for its beers and whiskies, and commenced sales of beers, guest whiskies, casks, and tourism. MBD is in the early stages of marketing its products.
MBD expects that its operating expenses will exceed income in the near term, and consequently, it will need to generate significant revenues to become profitable. Even if MBD does become profitable, it may not be able to sustain or increase profitability on a quarterly or annual basis. MBD cannot guarantee when, if ever, it will be profitable. There can be no assurances that the products and services, including whisky (bottles and casks), craft beer, tours, and gift shop goods, which MBD intends to provide, will be suitable or satisfactory to consumers.
MBD has planned production, marketing and sales campaigns based on what it believes to be strong but reasonable growth in demand as historically seen by other start-up distilleries like Mackmyra and Kilchoman, and local B.C. breweries. MBD’s board and management plan to monitor these on a regular basis. If the marketing and sales campaigns do not lead to increased demand, production can be adapted to slower market growth thereby seeking to mitigate cash consumption. However, should such an eventuality arise, there can be no guarantee that this tactic will be successful.
History of Operating Losses and No Dividends
To date, MBD has recorded $630,092 of revenues and since incorporation MBD has accumulated net losses of approximately $3,287,938 as of June 30, 2017. MBD expects to continue to incur operating losses until such time when sales generate sufficient revenues to fund MBD’s continuing operations.
MBD has never paid a dividend, and does not anticipate paying any dividends in the foreseeable future. Any accumulated profits of MBD will first be used to help continue to develop the operations in a manner consistent with the business plan described herein. To the extent MBD develops available cash, over and above its needs for supporting ongoing operations and debt repayment, the Directors and management intend to distribute such funds to its shareholders in as tax effective a manner as possible. The Directors and management may, following discussions with its tax advisors, offer to repurchase shares or perhaps establish a dividend policy. However, under the Eligible Business Corporations (EBC) program (see Item 6.2 EBC Eligibility) no dividends are permitted by the Corporation until five years have elapsed since the last EBC filing.
Lack of Retail History
MBD has not had an extensive sales history. MBD has only begun selling its products and services within the last fiscal year, and there can be no assurance that MBD can market any products or services in a manner that could assure its acceptance in the wider market place.
It is difficult to calculate the optimal balance between production, size of maturing stocks and marketing efforts because Victoria Caledonian distilled whisky sales are expected to commence three years in the future. Consequently, both overproduction and underproduction pose risks. Overproduction leads to large stocks that substantially tie up capital. Low production in relation to demand could lead to depleted inventory and delivery problems. Inadequate delivery ability can lead to negative goodwill among distributors, dealers and end customers.
Hiring and Retention of Key Personnel
A number of highly skilled personnel will be needed to carry out the distilling, brewing and retail activities at MBD. In some cases, skilled personnel may be limited in number and in high demand. The unexpected loss or departure of any of MBD’s key officers or employees could be detrimental to the future operations of MBD. MBD will seek to mitigate these risks by offering competitive compensation and recognition, and by using outside expert consultants.
Dependence on Key Agreements Offering Memorandum – November 24, 2017 Page F-43 MBD
MBD does not yet have a binding agreement with the cooperages supplying it oak casks for whisky maturation. These casks are typically supplied on an order-by-order basis. To mitigate the risk of any one cooperage not being able to supply casks, MBD has developed relationships, based upon personal visits by Dr. Macaloney, with several cooperages.
MBD does not expect to have problems continuing to source sufficient volumes of guest whisky. That said, there remains a risk that supply of consistent quality product could prove inadequate. Whereas new entrants to the independent bottler marketplace may have issues sourcing sufficient volumes of quality product, the established independent bottlers continue to source quality product based upon long-term relationships. MBD, through its business development efforts and industry connections, including and Mr. Nicolson, believes it will be able to continue to source adequate supply of quality whisky for its purposes.
Management of Growth
MBD’s planned expansion is expected to place a significant strain on its financial, operational and managerial resources. There can be no assurance that MBD will be able to implement and subsequently improve its systems and financial operations successfully and in a timely manner in order to manage its growth. Any inability of MBD to manage its growth successfully could have a materially adverse effect on MBD’s business operations and financial condition.
See Insufficient Funds and the Need for Additional Capital or the Completion of Alternative Arrangements, above, with regard to how management plan to manage the financing of MBD.
Industry Risk:
Government Regulation
Changes in legislation or new health findings could lead to reductions or restrictions in consumption that would impact sales. This is not something that is in MBD’s control, other than redirecting marketing and sales efforts to other geographic jurisdictions. In general, over the last decade there has been heightened awareness of the health impact of over consumption, and a tightening of drink-driving laws.
Risk of International Operations
While MBD intends to conduct most of its operations in Canada, it intends to sell its products internationally. As it builds sales and perhaps operations in countries other than Canada, MBD may be subject to numerous risks, including, expected changes in laws, regulations and government policies, import and export restrictions, tariffs and trade barriers, currency exchange controls, changes in local tax rates or policies of local tax authorities, and political or economic instability. Although MBD cannot predict how and when its international sales and operations will develop, any significant adverse change in any of these factors in countries in which MBD does business could adversely affect its operations or its financial performance.
Unproven Market and Consumer Preferences
MBD believes that the initial market for its products and services will continue to exist and expand. These assumptions may prove to be incorrect for a variety of reasons, including competition from other distillers or breweries, consumer preferences and from other sources.
As with similar businesses, such as wineries, it could take many years of trial and error before MBD crafts a product that a wider market-place will want to buy. There is no guarantee that MBD’s products will be a market success.
MBD believes that it can use innovative technology to produce high-quality whisky within a three-year window. However, some consumers may equate age with quality and MBD may face opposition from such consumers.
Competition
A number of other companies already exist as distillers and breweries. All of these companies have been in business longer and may have greater financial or marketing resources than MBD. In the long run, increased competition may arise from other Canadian whisky brands that might be better received. Offering Memorandum – November 24, 2017 Page F-44 MBD
Although there is industry inertia stemming from traditional practices, in time, more distillers will adopt know-how relating to accelerated maturation. Therefore, any potential advantage in adopting Dr. Swan’s know-how may not be sustained in the long run.
Product Liability Claims and Uninsured Risks
The manufacture of whisky and beer products involves unavoidable risks. The sale of products which MBD manufactures, in whole or in part, may expose MBD to potential liability resulting from the use of such products. Such liability might result from claims made directly by consumers or by regulatory agencies, or others selling the products manufactured by MBD. Other risks include fire, earthquake, tsunami, theft, spoilage or other damage suffered by facilities and/or maturation warehouse. Such risks could cause problems in production and delivery capabilities.
MBD intends to obtain other forms of insurance coverage that is designed for its business (including products liability, property damage, general liability, Directors and Officers liability, etc.) However, there can be no assurance that MBD will be able to obtain such insurance or, if obtained, that such insurance can be acquired in sufficient amounts to protect MBD against all liability or at a reasonable cost. The obligation to pay any liability claim in excess of whatever insurance MBD is able to acquire could have a material adverse effect on the business, financial condition and future prospects of MBD.
MBD intends to construct fire resistant maturation warehouses equipped with high flow fire suppression sprinkler system and MBD plans to ensure that its facilities are in full compliance with fire codes. MBD plans to also evaluate locating additional warehouses in different geographic locations, when finances permit.
Any defects in MBD products could lead to demands for accountability and damages, as well as loss of credibility, which would affect the brand. Long-term profitability can be damaged by rumours, negative reviews, or an early or major launch that does not meet quality standards. Whisky is defined by its perceived quality, and reviews and ratings form an important aspect of customer perceptions. While MBD plans to take great efforts to ensure that its best product is being evaluated by whisky writers and at awards shows, such reviews and ratings are beyond MBD’s control.
MBD intends to also take efforts to assure the consistency of the product quality via the implementation in production, of standard operating procedures and batch record keeping, and also via a rigorous quality control process of individual batch sampling, analysis, and sample retention for future reference. Management plans to regularly review these data to assure consistency and quality. Whisky stocks are planned to be sampled annually and subjected to quality control checks, with an annual review of these results being conducted by management. MBD advisors and consultants and staff intend to form a sensory tasting panel to assure quality. For cask sales, the risk of unmet expectations is lower because the customer is offered a major experience in terms of their design and tracking of their unique customized product. Quality assurance, complaint management and continuous improvement are planned to be integrated in MBD procedures. Despite these measures, there can be no guarantees that MBD will achieve its quality objectives.
Environmental Risk
MBD’s intended manufacturing activities may involve the controlled use of potentially hazardous materials, including cleaning chemicals, waste products and inflammable spirits. MBD will be subject to federal, provincial and local laws that specifically regulate the use, manufacture, storage, handling and disposal of such materials as well as general environmental regulations. Although MBD intends to establish procedures for the safe handling and proper disposal of such materials, in compliance with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, MBD could face court or regulatory proceedings and could face fines or be held liable for any damages or injury. The exposure to such risks could have a material adverse effect on the business, financial condition and future prospects of MBD and the overall liability could exceed MBD’s resources.
MBD intends to operate in an environmentally conscious manner, and with a minimal level of toxicity. However, the operation of a brewery or tasting lounge and distillery is not waste free and involves a fair amount of water consumption, particularly in the cleaning process. MBD is therefore subject to certain risks in this regard, including fluctuations in water costs, and laws that may be passed with respect to waste and water consumption.
Raw Material Supply and Costs
Grains (barley) are the major component of whisky by volume and by cost. In addition, hops and yeast are integral to the production of craft beers. Although MBD thus far has had no issues in securing adequate supplies, there can be no guarantee that MBD will be able to secure sufficient raw materials or at sufficient quality and cost. If global agricultural crops become Offering Memorandum – November 24, 2017 Page F-45 MBD affected by weather, pestilence or some other factor, or if competitive demand further increases, the cost and timeliness of acquiring raw materials could be adversely affected. Any significant adverse change in any of these factors could adversely affect MBD’s operations or its financial performance.
Oak casks are used to mature the whisky. For economic and organoleptic reasons the Canadian whisky industry utilizes used Bourbon casks or used wine casks from the USA and Europe. The oak forests in these regions are being actively managed by those industries to ensure a renewable resource. MBD plans to re-use its casks a number of times by having them re-coopered and rejuvenated prior to each subsequent use. However, there can be no guarantee that MBD will be able to secure sufficient casks or at sufficient quality and cost. If global supply becomes adversely affected, or if competitive demand for casks further increases, the cost and timeliness of acquiring casks could be adversely affected. Any significant change in any of these factors could adversely affect MBD’s operations or its financial performance. To date, MBD has had no issues in securing adequate supplies from cooperages in Kentucky, Portugal and Spain.
9 REPORTING OBLIGATIONS
MBD is not a reporting issuer in any jurisdiction. Shareholders of MBD are entitled to receive annual audited financial statements and notices of shareholder meetings such as the Annual General Meeting (AGM). MBD is not required by law to send you any other documents or reports on an annual or ongoing basis, other than the annual audited financial statements and notices of shareholder meetings.
You may receive other financial information as frequently as quarterly and news releases regarding MBD. Future news releases and other pertinent information should, in the future, be found at MBD’s website www.MacaloneyDistillers.com.
10 RESALE RESTRICTIONS
10.1 General Statement
The Units will be subject to a number of resale restrictions, including a restriction on trading. Until the restriction on trading expires, you will not be able to trade the Units unless you comply with an exemption from the prospectus and registration requirements under securities legislation.
10.2 Restricted Period
Unless permitted under securities legislation, you cannot trade the Units before the date that is 4 months and a day after the date that MBD becomes a reporting issuer in any province or territory of Canada.
10.3 Manitoba Resale Restrictions
For trades in Manitoba, unless permitted under securities legislation, you must not trade Units without the prior written consent of the regulator in Manitoba unless:
(a) MBD has filed a prospectus with the regulator in Manitoba with respect to the Units you have purchased and the regulator in Manitoba has issued a receipt for that prospectus, or
(b) You have held the Units for at least 12 months.
The regulator in Manitoba will consent to your trade if the regulator is of the opinion that to do so is not prejudicial to the public interest.
10.4 Other Restrictions
In addition to the foregoing, pursuant to the Articles of the Corporation, no shares in the capital of the Corporation may be transferred without the express written consent of a majority of the Directors of the Corporation to be evidenced by a resolution passed by the Directors of the Corporation. However, upon the death of a shareholder, the shareholder’s legal personal representative (i.e. their trustee or executor) shall have the same rights, privileges and obligations as the shareholder. Offering Memorandum – November 24, 2017 Page F-46 MBD
Shareholders who registered under the Province of British Columbia EBC Program may not sell their shares within a 5-year period of purchase, without penalty.
11 PURCHASERS’ RIGHTS
If you purchase the Units described in this Offering Memorandum, you will have certain rights, some of which are described below. For information about your rights you should consult a lawyer.
(1) Two Day Cancellation Right
You can cancel your agreement to purchase the Units. To do so, you must send a notice to MBD by midnight on the 2nd business day after you sign the agreement to buy the Units.
(2) Statutory Right of Action in the Event of a Misrepresentation – Residents of Alberta, British Columbia, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, and Yukon
If there is a misrepresentation in this Offering Memorandum, you have a statutory right to sue:
a. MBD to cancel your agreement to buy the Units, or
b. for damages against MBD, the directors of MBD at the date of this Offering Memorandum, and the signatories to Item 14 – Date and Certificate.
This statutory right to sue is available to you whether or not you relied on the misrepresentation. However, there are various defenses available to the persons or companies that you have a right to sue. In particular, they have a defense if you knew of the misrepresentation when you purchased the Units.
The above statutory rights are in addition to any other right or remedy available to you at law
If you intend to rely on the rights described in (a) or (b) above, you must do so within strict time limitations. You must commence your action to cancel the agreement within 180 days after the date of the transaction giving rise to your action. You must commence your action for damages within the earlier of 180 days after learning of the misrepresentation and 3 years after the date of the transaction giving rise to your action.
(3) Statutory Right of Action in the Event of a Misrepresentation – Residents of Manitoba
If there is a misrepresentation in this Offering Memorandum, you have a statutory right to sue:
a. MBD to cancel your agreement to buy the Units, or
b. for damages against MBD, the directors of MBD at the date of this Offering Memorandum, and the signatories to Item 14 – Date and Certificate.
This statutory right to sue is available to you whether or not you relied on the misrepresentation. However, there are various defenses available to the persons or companies that you have a right to sue. In particular, they have a defense if you knew of the misrepresentation when you purchased the Units.
If you intend to rely on the rights described in (a) or (b) above, you must do so within strict time limitations. You must commence your action to cancel the agreement within 180 days after the date of the transaction giving rise to your action. You must commence your action for damages within the earlier of 180 days after learning of the misrepresentation and 2 years after the date of the transaction giving rise to your action.
(4) Statutory Right of Action in the Event of a Misrepresentation – Residents of New Brunswick and Saskatchewan
If there is a misrepresentation in this Offering Memorandum, you have a statutory right to sue:
a. MBD to cancel your agreement to buy the Units, or Offering Memorandum – November 24, 2017 Page F-47 MBD
b. for damages against MBD, the directors of MBD at the date of this Offering Memorandum, and the signatories to Item 14 – Date and Certificate.
This statutory right to sue is available to you whether or not you relied on the misrepresentation. However, there are various defenses available to the persons or companies that you have a right to sue. In particular, they have a defense if you knew of the misrepresentation when you purchased the Units.
If you intend to rely on the rights described in (a) or (b) above, you must do so within strict time limitations. You must commence your action to cancel the agreement within 180 days after the date of the transaction giving rise to your action. You must commence your action for damages within the earlier of 1 year after learning of the misrepresentation and 6 years after the date of the transaction giving rise to your action.
(5) Contractual Right of Action in the Event of a Misrepresentation – Residents of Ontario
If there is a misrepresentation in this Offering Memorandum, you have a contractual right to sue MBD:
(a) to cancel your agreement to buy the Units, or
(b) for damages.
This contractual right to sue is available to you whether or not you relied on the misrepresentation. However, in an action for damages, the amount you may recover will not exceed the price that you paid for the Units and will not include any part of the damages that MBD proves does not represent the depreciation in value of the Units resulting from the misrepresentation. MBD has a defense if it proves that you knew of the misrepresentation when you purchased the Units.
If you intend to rely on the rights described in (a) or (b) above, you must do so within strict time limitations. You must commence your action to cancel the agreement within 180 days after you signed the Subscription Agreement to purchase the Units. You must commence your action for damages within the earlier of 180 days after learning of the misrepresentation and 3 years after you signed the Subscription Agreement to purchase the Units.
12 FINANCIAL STATEMENTS
The Corporation was incorporated on February 1, 2013. The following financial statements cover the years ended June 30th, 2016 and June 30th, 2017. Financial statements
MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd. June 30, 2017
Independent auditors’ report
To the Directors of MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
We have audited the accompanying financial statements of MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd. [the “Company”], which comprise the statements of financial position as at June 30, 2017 and 2016, and the statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of MacMhaol- onfhaidh (“Macaloney”) Brewers & Distillers Ltd. as at June 30, 2017 and 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Emphasis of matter Without qualifying our opinion, we draw attention to note 1 of the financial statements, which indicates that the Company incurred a net loss of $2,039,387 during the year ended June 30, 2017. This condition, along with other matters set forth in note 1, indicates the existence of a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern.
Vancouver, Canada October 26, 2017
A member firm of Ernst & Young Global Limited MacMhaol-onfhaidh ("Macaloney") Brewers & Distillers Ltd.
Statements of financial position [expressed in Canadian dollars]
As at June 30
2017 2016 $ $
Assets Current Cash and cash equivalents 713,533 1,171,744 Accounts receivable 90,959 — Inventories [note 4] 554,960 118,534 Other current assets [note 3] 103,883 408,321 Total current assets 1,463,335 1,698,599 Long-term deposits [note 13] 66,260 66,260 Property and equipment, net [note 5] 4,044,638 4,093,952 5,574,233 5,858,811
Liabilities and shareholders’ equity Current Accounts payable [note 12] 278,862 476,283 Holdbacks payable — 110,786 Current portion of lease liabilities [notes 10 and 13] 27,635 28,969 Accrued and other current liabilities [note 3] 60,043 66,564 Deferred revenue – non-cask sales 28,800 — Deferred revenue – government contribution, current [note 6] 55,167 185,377 Total current liabilities 450,507 867,979 Shareholder benefits payable 94,708 45,470 AAFC contribution payable [note 6] 1,544,994 1,298,764 Deferred revenue – government contribution [note 6] 598,281 550,779 Lease liabilities [notes 10 and 13] 176,341 203,436 Deferred revenue – cask sales 156,322 9,100 Total liabilities 3,021,153 2,975,528 Commitments, contingencies and subsequent events [notes 13, 14 and 15]
Shareholders’ equity Share capital [note 7] Common shares 5,720,445 4,012,190 Special preferred shares 20 20 Contributed surplus 120,553 119,624 Deficit (3,287,938) (1,248,551) Total shareholders’ equity 2,553,080 2,883,283 5,574,233 5,858,811
See accompanying notes
On behalf of the Board:
Director Director MacMhaol-onfhaidh ("Macaloney") Brewers & Distillers Ltd.
Statements of operations and comprehensive loss [expressed in Canadian dollars]
Years ended June 30
2017 2016 $ $
Revenues Beer sales 468,007 — Whisky sales 95,289 — Retail shop sales 21,904 — Tours and event revenues 44,892 — 630,092 —
Cost of sales [notes 4 and 5] Beer cost of sales 390,559 — Whisky cost of sales 61,625 — Retail shop cost of sales 17,617 — Tours and event cost of sales 23,054 — Other cost of sales 242,420 — 735,275 — Gross loss (105,183) —
Expenses General and administrative [note 8] 1,287,479 942,382 Sales and marketing 598,371 125,602 Amortization [note 5] 118,587 4,512 2,004,437 1,072,496 Loss before the following (2,109,620) (1,072,496) AAFC interest-free benefit [note 6] 163,249 127,408 Interest income 1,579 13,322 Interest expense [note 6] (101,323) (29,868) Foreign exchange gain 114 1,702 Gain on sale of assets [note 5] — 1,218 Other miscellaneous income 6,614 — Loss and comprehensive loss for the year (2,039,387) (958,714)
Loss per common share [basic and diluted] (1.28) (0.73) Weighted average number of common shares outstanding 1,588,955 1,321,943
See accompanying notes MacMhaol-onfhaidh ("Macaloney") Brewers & Distillers Ltd.
Statements of changes in shareholders’ equity [expressed in Canadian dollars]
Share Contributed capital surplus Deficit Total $ $ $ $
Balance as at June 30, 2015 3,266,534 — (289,837) 2,976,697 Issuance of share capital [note 7] 745,676 — — 745,676 Accrued restricted shares issuable [note 7[c]] — 165,094 — 165,094 Shareholder benefits payable — (45,470) — (45,470) Loss and comprehensive loss for the year — — (958,714) (958,714) Balance as at June 30, 2016 4,012,210 119,624 (1,248,551) 2,883,283 Issuance of share capital [note 7] 1,708,255 — — 1,708,255 Accrued restricted shares issuable [note 7[c]] — 50,167 — 50,167 Shareholder benefits payable — (49,238) — (49,238) Loss and comprehensive loss for the year — — (2,039,387) (2,039,387) Balance as at June 30, 2017 5,720,465 120,553 (3,287,938) 2,553,080
See accompanying notes MacMhaol-onfhaidh ("Macaloney") Brewers & Distillers Ltd.
Statements of cash flows [expressed in Canadian dollars]
Years ended June 30
2017 2016 $ $ Operating activities Loss for the year (2,039,387) (958,714) Add (deduct) items not affecting cash Amortization 350,368 4,512 AAFC Interest free benefit, net of other adjustments (163,249) (127,408) Interest expense on AAFC contribution 99,811 29,868 Restricted shares issuable 50,167 165,094 Non cash rent and property management fees (21,928) 65,877 315,169 137,943 Changes in non-cash working capital balances related to operations Accounts receivable (90,959) — Inventories (436,426) (118,534) Other current assets, net of share subscriptions receivable 344,442 (252,766) Accounts payable [note 5] 149,217 67,397 Accrued and other current liabilities – excluding shareholder deposits 3,479 33,721 Deferred revenue – non-cask sales 28,800 — Deferred revenue – cask sales 147,222 9,100 Total changes in non-cash operating working capital 145,775 (261,082) Foreign exchange gain (loss) (114) 1,702 Cash used in operating activities (1,578,557) (1,080,151) Investing activities Purchase of property and equipment [net of disposals and holdbacks] [note 5] (758,478) (3,590,091) Deposits for equipment — (27,269) Cash used in investing activities (758,478) (3,617,360) Financing activities AAFC contribution payable 226,960 2,132,460 Capital lease liabilities (6,501) (5,718) Shareholder deposit (10,000) 10,000 Shareholder subscription receivable (40,004) — Issuance of common shares 1,729,413 760,408 Share issuance costs (21,158) (14,732) Cash provided by financing activities 1,878,710 2,882,418
Effect of foreign currency on cash 114 (1,702)
Net decrease in cash and cash equivalents during the year (458,211) (1,816,795) Cash and cash equivalents, beginning of year 1,171,744 2,988,539 Cash and cash equivalents, end of year 713,533 1,171,744
See accompanying notes MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
1. Nature and continuance of operations MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd. [the “Company” or “MBD”] was incorporated in the Province of British Columbia, Canada on February 1, 2013 pursuant to the Business Corporations Act, S.B.C. 2002, chapter 57. The Company plans to be an international whisky business, and has launched a distillery and brewery – the Victoria Caledonian Brewery and Distillery – located in Victoria, British Columbia, and is producing premium branded whiskies for international sale and distribution and craft beers for regional sale and distribution. The Company’s head office is located at 761 Enterprise Crescent, Saanich, Victoria, British Columbia, V8Z 6P7.
During the current fiscal year, the Company has successfully transitioned from the development stage of operations and commenced commercial activities. As at the date of these financial statements, the Company has raised share capital of $5,720,465 through the issuance of common and special preferred shares net of share issuance costs to finance the construction and launch of its whisky and beer business.
The Company incurred losses of $2,039,387 and $958,714 for the years ended June 30, 2017 and 2016, respectively, and has an accumulated deficit of $3,287,938 as at June 30, 2017. In view of these conditions, the ability of the Company to continue as a going concern is dependent upon obtaining further financing and the successful commercialization of its products. These conditions indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. These financial statements are presented on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its liabilities in the normal course of business.
These financial statements were authorized for issue by the Board of Directors on October 25, 2017.
2. Significant accounting policies Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards [“IFRS”] and International Financial Reporting Interpretations Committee [“IFRIC”] interpretations as issued by the International Accounting Standards Board [“IASB”] under the historical cost convention.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements.
Basis of presentation The financial statements include the accounts of the Company and have been prepared in accordance with IFRS and IFRIC interpretations.
The financial statements are presented in Canadian dollars, which is the Company’s functional currency.
1 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
Use of judgments and estimates The preparation of these financial statements in accordance with IFRS and IFRIC interpretations requires management to make judgments, estimates and assumptions that affect the reported amounts and the valuation of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year.
These judgments and estimates are continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. Actual results may differ from the amounts included in the financial statements. Information about such judgments and estimates is contained in the accounting policies and/or the notes to the financial statements.
Cash and cash equivalents The Company considers all highly liquid investment instruments with a maturity of three months or less at the time of purchase to be cash equivalents.
Loss per share Basic loss per share is calculated by dividing the loss for the year available to shareholders by the weighted average number of common shares and special preferred shares outstanding during the year. Diluted loss per share is calculated using the treasury stock method, which assumes that all stock options with exercise prices below the market prices are exercised with the proceeds of exercises used to purchase shares of the Company at the average market price during the year.
Foreign currency translation Transactions in foreign currencies are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are remeasured to the functional currency at the exchange rate at that date. Foreign currency differences arising on re-measurement are recognized through profit or loss.
Government contributions Government contributions are recognized when there is reasonable assurance that the contribution will be received and all attached conditions complied with. When the contribution relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the contribution relates to an asset, it is recognized as income in equal amounts over the expected useful life of the related asset.
Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
2 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease.
Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in interest expense in the statements of operations and comprehensive loss.
A leased asset is amortized over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is amortized over the shorter of the estimated useful life of the asset and the lease term.
An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statements of operations and comprehensive loss on a straight-line basis over the lease term.
Revenue Revenue from the sale of beer, whisky and products is recognized upon delivery of the products to the buyer when the significant risks and benefits are transferred from the seller to the buyer in accordance with the terms of sale. Revenue is recorded after the deduction of good and services taxes and any discounts.
Stock-based compensation The Company has issued restricted share units to its employees, directors and consultants, under an Incentive Share Ownership Plan to be approved by shareholders at next annual general meeting. Share units granted to directors and consultants vest immediately. Share units granted to employees’ vest over a four-year period and the share units are only issued at the end of the vesting period. The fair value of the share units is based on the fair value of recently issued shares. The compensation is measured over the vesting period and recorded in the statements of operations and comprehensive loss.
Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the average cost principle and includes expenditures incurred in acquiring the inventories, production and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
3 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
Finance income and finance costs Finance income comprises interest income, which is recognized as it is earned or accrues through the statements of operations and comprehensive loss, using the effective interest method. Finance costs comprise interest expense incurred on the Agriculture and Agri-Food Canada [“AAFC”] contribution agreement and finance lease liabilities.
Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated amortization and accumulated impairment losses. Cost includes initial and subsequent expenditures that are directly attributable to the acquisition of the related asset. When component parts of an item of property and equipment have different useful lives, they are accounted for as separate items [major components] of property and equipment, where applicable.
Amortization Amortization is recognized in the statements of operations and comprehensive loss on a declining balance basis over the estimated useful lives of each part of an item of property and equipment.
The estimated useful lives of the property and equipment are as follows:
Leasehold improvements 25 years Machinery and equipment 5 to 20 years Casks 3 years Other 3 to 10 years
Amortization methods, useful lives and residual values are reviewed at each financial year end, or more frequently as deemed relevant, and adjusted where appropriate.
Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net, in the statements of operations and comprehensive loss.
Goods and Services Tax [“GST”] Revenues, expenses and assets are recognized net of the amount of GST, except where the amount of GST incurred is not recoverable from the Canada Revenue Agency. In these circumstances, the GST is recognized as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statements of financial position are shown inclusive of GST.
Provisions Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some
4 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statements of operations and comprehensive loss, net of any reimbursement. The increase in the provision due to passage of time is recognized as interest expense.
Income taxes Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the date of the statements of financial position.
Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the date of the statements of financial position between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward of unused tax credits and unused tax losses can be utilized.
The carrying amount of deferred income tax assets is reviewed at each date of the statements of financial position and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each date of the statements of financial position and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, based on tax rates, and tax laws, that have been enacted or substantively enacted at the date of the statements of financial position.
Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the statements of operations and comprehensive loss. Deferred income tax assets and deferred income tax liabilities are offset if, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority.
5 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
Standards issued but not yet effective Future accounting pronouncements The following are new and revised accounting pronouncements that have been issued but are not yet effective:
IFRS 9, Financial Instruments [“IFRS 9”] The IASB issued IFRS 9 in July 2014 and is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. The Company is currently evaluating the impact that the final standard is expected to have on its financial statements.
IFRS 16, Leases [“IFRS 16”] In January 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current IAS 17, Leases [“IAS 17”] standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset as demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of financial position at inception. The accounting treatment for lessors will remain largely the same as under IAS 17.
The standard is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted, but only if the entity is also applying IFRS 15, Revenue from Contracts with Customers [“IFRS 15”]. The Company is required to retrospectively apply IFRS 16 to all existing leases as of the date of transition and has the option to either:
• apply IFRS 16 with full retrospective effect; or • recognize the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application.
As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. The extent of the impact of adoption of the standard has not yet been determined.
IFRS 15, Revenue from Contracts with Customers [“IFRS 15”] IFRS 15 is a new standard on revenue recognition that will supersede IAS 18, Revenue, and IAS 11, Construction Contracts and Related Interpretations. The standard is effective for fiscal periods beginning on or after January 1, 2018. IFRS 15 provides a comprehensive framework for recognition, measurement and disclosure of revenues from contracts with customers, excluding contracts that are within the scope of the standards on leases, insurance contracts and financial instruments.
The standard is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning June 1, 2018. The extent of the impact of adoption of IFRS 15 has not yet been determined.
6 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
3. Other current assets and liabilities 2017 2016 $ $
Other current assets GST receivable 21,497 226,127 Shareholder subscriptions receivable [note 7[a][iv]] 40,004 — Deposits 17,716 29,075 Prepaid expenses 24,666 3,119 Lease incentive receivable — 150,000 Total other current assets 103,883 408,321
2017 2016 $ $
Accrued and other current liabilities Accrued liabilities 34,239 41,577 Payroll liabilities 23,695 14,987 Sales taxes payable 2,109 — Shareholder deposit for shares — 10,000 Total accrued and other current liabilities 60,043 66,564
4. Inventories 2017 2016 $ $
Finished goods 165,978 9,192 Work in progress 96,491 5,110 Raw materials 292,491 104,232 554,960 118,534
Included in work in process inventory are barrels of maturing whisky of $68,698 [2016 – nil] that are expected to be utilized after more than one year. All other inventory is expected to be utilized within the next fiscal year.
The cost of inventories recognized as an expense and included in cost of sales during the year ended June 30, 2017 was $418,955 [2016 – nil]. During the year ended June 30, 2017, there were $17,132 [2016 – $570] of inventory costs recognized through the statement of operations and comprehensive loss, as a result of net realizable value being lower than cost resulting from the production process. A further $63,074 of inventory costs was recognized through the statement of operations and comprehensive loss related to the write off of batches of beer, shrinkage and breakage. No inventory write-downs, recognized in previous years, were reversed.
7 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
In accordance with IAS 2, Inventory, the cost of inventory is required to include a systematic allocation of fixed and variable production overhead. During the year ended June 30, 2017, the Company absorbed $58,068 of non-cash amortization expense into inventory and the cost of inventory sold. A further $162,213 of non-cash amortization on production equipment has been included in other cost of sales as the Company produced less than expected normal capacity during the initial year of production. Excluding this non-cash adjustment, the Company would have earned a gross profit on sales of $57,030 for the year ended June 30, 2017.
5. Property and equipment 2016 Additions Disposals Amortization 2017 $ $ $ $ $
Cost Leasehold improvements 941,822 108,009 — — 1,049,831 Machinery and equipment 2,956,659 112,377 — — 3,069,036 Casks 177,508 3,605 — — 181,113 Other 22,580 77,063 — — 99,643 Total costs 4,098,569 301,054 — — 4,399,623 Accumulated amortization Leasehold improvements (3,403) — — (40,123) (43,526) Machinery and equipment (1,214) — — (246,511) (247,725) Casks — — — (53,687) (53,687) Other — — — (10,047) (10,047) Total accumulated amortization (4,617) — — (350,368) (354,985) Property, plant and equipment, net 4,093,952 301,054 — (350,368) 4,044,638
8 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
2015 Additions Disposals Amortization 2016 $ $ $ $ $
Cost Leasehold improvements — 941,822 — — 941,822 Machinery and equipment 206 2,956,453 — — 2,956,659 Casks — 195,744 (18,236) — 177,508 Other — 22,580 — — 22,580 Total costs 206 4,116,599 (18,236) — 4,098,569 Accumulated amortization Leasehold improvements — — — (3,403) (3,403) Machinery and equipment (105) — — (1,109) (1,214) Casks — — — — — Other — — — — — Total accumulated amortization (105) — — (4,512) (4,617) Property, plant and equipment, net 101 4,116,599 (18,236) (4,512) 4,093,952
During the year ended June 30, 2016, the Company purchased and resold 80 casks for gross proceeds of $19,454. The cost associated with these casks was $18,236, with the resulting gain on sale of $1,218 recognized in the statements of operations and comprehensive loss. No sales of assets occurred during the year ended June 30, 2017.
The cost and carrying value of machinery and equipment held under finance leases as at June 30, 2017 was $27,964 and $21,776, respectively [2016 – $27,964 and $27,187, respectively].
Included in cash flows for the year ended June 30, 2017 used to purchase property, plant and equipment is $346,639 that was included in accounts payable at June 30, 2016.
6. Loan agreements On August 8, 2014, the Company entered into a loan agreement with a shareholder in which the shareholder will lend the Company up to $500,000. The loan is contingent upon the Company raising $4,000,000, whether such funds are raised by debt, equity or some combination thereof, which had been accomplished as of the date of these financial statements.
Interest will be calculated at prime plus 3.5% per annum compounded monthly, and accrued interest will be paid semi-annually on June 30 and December 31 from 2015 to 2019. As at June 30, 2017, no amounts were utilized under this facility [2016 – nil]. The Company has provided a general security agreement over its assets to the lender, which shall rank pari passu with the landlord up to the amounts outstanding to the lender. The lender has granted priority over such security to the landlord for amounts in excess of the loan [note 13[b]].
9 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
On January 13, 2015, the Company entered into a repayable contribution agreement with the Government of Canada as represented by the Minister of Agriculture and Agri-Food [“AAFC”] as part of the Government’s AgriInnovation Program – Enabling Commercialization and Adoption Stream to facilitate the pre-commercial demonstration, commercialization and adoption of innovative agri-based products, technologies, processes or services. The AAFC agreement provides for a repayable contribution of up to $2,369,400 to the Company subject to the terms and conditions of the agreement. The funds provided must be used for facility renovations, purchase and installation of whisky making equipment, including as examples, malting and/or kilning operations, cooperage and oak casks, and specified administrative costs until the commissioning of equipment. In order to access the funds pursuant to the AAFC agreement, the Company was obligated to provide matching funds from its capital, provide progress and performance monitoring and reporting, and to expend these matching funds for qualified expenditures on or before March 31, 2017. The Company is obligated to repay all funds provided under the AAFC agreement to the Government of Canada in equal monthly payments for seven years commencing March 31, 2020. The loan bears no interest.
In accordance with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, government loans offered at a below market rate of interest must be accounted for as though they had been issued with a market rate of interest. The difference between the fair value of the loan with that market rate of interest and the amount borrowed is recognized as a benefit or government contribution to the Company through profit and loss, in a manner consistent with the incurrence of costs the loan was intended to compensate.
As at, June 30, 2017, $2,359,420 [2016 – $2,132,460] had been received from the Government of Canada. Using a market rate of interest of 7%, the Company assessed the fair value of the funds received from the Government of Canada to be $1,416,014 [2016 – $1,268,896], based on the loan repayment terms described above and the when the funds were received.
[a] AAFC contribution payable 2017 2016 $ $
Fair value of funds received from Agriculture Canada 1,416,014 1,268,896 Accrued interest payable 128,980 29,868 1,544,994 1,298,764
During the year ended June 30, 2017, the Company accrued $99,112 [2016 – $29,868] of interest expense in accordance with IAS 39.
10 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
[b] Deferred revenue – government contribution As a result of fair valuing the AAFC loan aggregate, deferred government contribution income totaling $943,407 [2016 – $863,564] was recognized as deferred revenue, which will be recognized as income as follows:
$
Deferred revenue – government contribution opening balance 863,564 Recognized as revenue in the year ended June 30, 2016 (127,408) 736,156 Additions to deferred revenue – on funds received during the year ended June 30, 2017 79,843 Other adjustments to deferred revenue during the year ended June 30, 2017 698 Recognized as revenue in the year ended June 30, 2017 (163,249) 653,448 Less: to be recognized during the year ended June 30, 2018 55,167 Long-term portion of deferred revenue – government contribution 598,281
7. Share capital [a] Share capital Authorized 20 Special Preferred shares [i] Unlimited Class A common shares – no par value 40,000,000 Class B common shares – no par value Unlimited Preferred shares, net of share issue costs
Issued 2017 2016 $ $
20 Special Preferred shares [i] 20 20 1,779,535 Class A common shares [2016 – 1,450,313] 5,720,445 4,012,190 5,720,465 4,012,210
11 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
Details of capital stock transactions are as follows:
Amount credited to Number of shares issued capital Special Class A Special Class A Preferred common Preferred common $ $ $ $
Balance, June 30, 2015 [i] 20 1,297,852 20 3,266,514 Equity issuance net of share issuance costs [ii] — 53,951 — 275,290 Warrant exercise [iii] — 98,510 — 470,386 Balance, June 30, 2016 20 1,450,313 20 4,012,190 Equity issuance net of share issuance costs [iv] — 284,713 — 1,468,149 Warrant exercise [v] — 44,509 — 240,106 Balance, June 30, 2017 20 1,779,535 20 5,720,445
[i] In order to maintain the founder’s, management’s, and Board of Directors’ ability to effectively govern and implement the vision and objective of the Company, Graeme Macaloney [CEO] will retain 20 special preferred shares carrying total voting rights equivalent to four million votes.
[ii] The Company received subscriptions under the amended and restated offering memorandum [“AROM”], and on March 15, 2016, the Company completed the issuance of 1,785 Units, comprising 1,785 Class A common shares and 446 “A” Warrants and 446 “B” Warrants, to investors of the Company at price of $5.60 per Class A common share and nil for the “A” and “B” Warrants, for total gross proceeds of $9,996. On March 24, 2016, the Company completed the issuance of 52,166 Units, comprising 52,166 Class A common shares and 13,038 “A” Warrants and 13,038 “B” Warrants, to investors of the Company at prices between $5.10 and $5.60 per Class A common share and nil for the “A” and “B” Warrants, for total gross proceeds of $280,026. The Company incurred share issuance costs of $14,732 in connection with these issuances. These have been netted against the gross proceeds.
[iii] On March 15, 2016, warrant holders exercised 20,087 common share purchase warrants comprising 14,901 Class A warrants, with exercise prices between $5.00 and $5.39, and 5,186 Class B warrants with exercise prices between $5.50 and $5.93. The Company received $103,787 in gross proceeds in connection with these exercises. On June 13, 2016, warrant holders exercised 78,423 common share purchase warrants comprising 51,719 Class A warrants, with exercise prices between $4.22 and $5.00, and 26,704 Class B warrants with exercise prices between $4.64 and $5.50. The Company received $359,727 in gross proceeds in connection with these exercises, along with $6,872 held in trust as at June 30, 2016. This amount held in trust was received by the Company on September 26, 2016.
[iv] The Company received subscriptions under the AROM, and on September 23, 2016, the Company completed the issuance of 88,091 Units, comprising 88,091 Class A common shares and 22,013 “A” Warrants and 22,013 “B” Warrants, to investors of the Company at prices between $5.35 and $5.60 per Class A common
12 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
share and nil for the “A” and “B” Warrants, for total gross proceeds of $488,702. On December 30, 2016, the Company completed the issuance of 40,000 Units, comprising 40,000 Class A common shares and 10,000 “A” Warrants and 10,000 “B” Warrants, to investors of the Company at a price of $4.61 per Class A common share and nil for the “A” and “B” Warrants, for total gross proceeds of $184,400. On February 27, 2017, the Company completed the issuance of 124,818 Units, comprising 124,818 Class A common shares and 31,197 “A” Warrants and 31,197 “B” Warrants, to investors of the Company at prices between $4.61 and $6.50 per Class A common share and nil for the “A” and “B” Warrants, for total gross proceeds of $620,701. On June 1, 2017, the Company completed the issuance of 31,804 Units, comprising 31,804 Class A common shares and 7,944 “A” Warrants and 7,944 “B” Warrants, to investors of the Company at prices between $5.35 and $6.50 per Class A common share and nil for the “A” and “B” Warrants, for total gross proceeds of $155,500, along with $40,004 [note 3] held in trust as at June 30, 2017. This balance held was received on July 10, 2017. The Company incurred share issuance costs of $21,158 in connection with these issuances.
[v] On February 27, 2017, warrant holders exercised 11,628 common share purchase warrants comprising 2,429 Class A warrants, with exercise prices between $5.00 and $5.60, and 9,199 Class B warrants with exercise prices between $5.28 and $5.50. The Company received $63,028 in gross proceeds in connection with these exercises. On June 1, 2017, warrant holders exercised 32,881 common share purchase warrants comprising 446 Class A warrants, with an exercise price of $5.50, and 32,435 Class B warrants with exercise prices between $4.64 and $6.16. The Company received $167,453 in gross proceeds in connection with these exercises, along with $9,625 held in trust as at June 30, 2017. This amount held in trust was received by the Company on July 10, 2017.
Each whole “A” Warrant entitles a holder to purchase one Class A common share at a price equivalent to the Unit price at which the Class A common shares were issued, at any time as at or before 19 months from the date of the closing at which the subscriber in question purchased their Units. No fractional common shares will be issued in connection with the exercise of an “A” Warrant. The “A” Warrants do not bestow any shareholder rights to their holder [including any right to receive dividends or other distribution to shareholders or to vote at a general meeting of the shareholders of the Company].
Each whole “B” Warrant entitles a holder to purchase one common share at a price equivalent to the Unit price multiplied by 110% at any time as at or before 31 months from the date of the closing at which the subscriber in question purchased their Units. No fractional common shares will be issued in connection with the exercise of a “B” Warrant. The “B” Warrants do not bestow any shareholder rights to their holder [including any right to receive dividends or other distribution to shareholders or to vote at a general meeting of the shareholders of the Company].
13 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
[b] Share purchase warrants Total issued and Type of warrants Exercise price Expiry date outstanding A 82,809 Warrants $5.60 October 15, 2017 446 Warrants $5.10–$5.60 October 24, 2017 12,592 Warrants $5.35–$5.60 April 23, 2018 20,630 Warrants $4.61 July 30, 2018 10,000 Warrants $4.61–$6.50 September 27, 2018 31,197 Warrants $5.35–$6.50 January 1, 2019 7,944
Total issued and Type of warrants Exercise price Expiry date outstanding B 90,046 Warrants $5.50 October 30, 2017 5,190 Warrants $5.93 October 31, 2017 2,139 Warrants $6.16 October 15, 2018 66 Warrants $5.61–$6.16 October 24, 2018 12,989 Warrants $5.89–$6.16 April 23, 2019 20,521 Warrants $5.07 July 30, 2019 10,000 Warrants $5.07–$7.15 September 27, 2019 31,197 Warrants $5.89–$7.15 January 1, 2020 7,944
During the year ended June 30, 2017, 4,653 Class A warrants expired unexercised. 92,281 Class B warrants expired unexercised. No amounts have been recorded in share capital in connection with these expiries.
[c] Restricted share units During the year ended June 30, 2017, the Company accrued $80,885 [2016 – $165,094] for the purpose of issuing 19,700 [2016 – 44,100] restricted share units to eligible employees, directors and selected consultants in connection with the Company’s Incentive Share Ownership Plan [“ISOP”]. Restricted units to employees vest over a four-year period, whereas awards to directors and consultants are awarded immediately. Service costs are expensed over the course of the service period. These costs have been included in contributed surplus pending the formal issuance of these units upon the approval of the ISOP plan at the Company’s next annual general meeting. $718 of accrued costs have been reversed, associated with 5,100 unvested restricted units, that were forfeited during the year. A further $30,000 of historic costs was reversed in fiscal 2017, associated with 6,000 restricted units that were declined by a consultant [note 13[a]]. The net compensation cost associated with these restricted units for the year ended June 30, 2017 was $50,167 [2016 – $165,094].
14 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
8. General and administrative expenses The administrative expenses are broken down as follows:
2017 2016 $ $
Accounting expenses 56,239 48,542 Bank charges 7,129 4,030 Consulting 88,954 208,887 Directors’ fees 11,413 10,050 Legal expenses 14,213 18,461 Occupancy 373,041 116,757 Office expenses 116,214 67,067 Restricted shares issuable 50,167 165,094 Salaries and benefits 570,109 303,494 1,287,479 942,382
9. Management of capital The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern in order to pursue the development of its whisky and beer business. The Company considers as capital its shareholders’ equity.
To maintain or adjust the capital structure, the Company may attempt to issue new shares. There are no external restrictions on management of capital.
As discussed in note 1, the Company has raised equity to finance the launch of its whisky and beer business.
10. Financial instruments The Company is exposed to various financial instrument risks and assesses the impact and likelihood of this exposure. These risks include liquidity risk, credit risk, interest rate risk and market risk. Where material these risks are reviewed and monitored by the Board of Directors.
Capital risk management The Company manages its capital to safeguard its ability to continue as a going concern, to provide adequate returns to shareholders and benefits to other stakeholders, and to have sufficient funds on hand for business opportunities as they arise.
15 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
The Company considers the items included in shareholders’ equity as capital. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue shares through private placements, sell assets, incur debt, or return capital to shareholders. As at June 30, 2017, the Company has debt of $2,359,420 payable to Agriculture Canada discussed in note 6 and has finance lease liabilities of $203,976.
Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has appropriate liquidity to meet its operating and growth objectives. The Company’s cash is invested in business accounts with a Canadian Chartered Bank, is available on demand for the Company’s programs, and is not invested in any asset-backed commercial paper. The Company does have access to a shareholder loan facility of $500,000 as disclosed in note 6. However, the Company may require additional funding in the future to continue with its business plan. Accordingly, there is a risk that the Company may not be able to secure adequate funding on the reasonable terms, or at all.
Credit risk Credit risk is the risk of potential loss to the Company if the counterparty to a financial instrument fails to meet its contractual obligations. The Company’s credit risk is primarily attributable to its liquid financial assets including cash. The Company limits exposure to credit risk on liquid financial assets through maintaining its cash with a Canadian Chartered Bank.
Interest rate risk The Company’s exposure to interest rate risk arises from the interest rate impact on its cash. There is a minimal risk that the Company would recognize any loss as a result of a decrease in fair value as its cash is held with a large financial institution. As at June 30, 2017, with all variables unchanged, a one percentage point change in interest rates would not have a significant impact on the Company’s loss and comprehensive loss for the year.
Financial instruments fair value hierarchy The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, lease liabilities and the AAFC contribution payable. The carrying values of amounts receivable and accounts payable approximate their fair values due to the short periods until settlement. Lease liabilities approximate fair value as the interest rates are considered to be market rates. The loan payable to Agriculture Canada has been accounted for at its fair value, using the effective-interest rate method, in accordance with IFRS 39, Financial Instruments and IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices [unadjusted] in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability [for example, interest rate and
16 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
yield curves observable at commonly quoted intervals, forwarding pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts], or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable [supported by little or no market activity]. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
The Company’s cash and cash equivalents are classified as Level 1 financial instruments.
11. Income taxes The Company incurred losses of $2,039,387, $958,714, and $193,144 during the years ended June 30, 2017, 2016 and 2015. The losses for tax purposes are expected to be consistent with these amounts, resulting in loss carryforwards of approximately $3,192,088, which expire 20 years after they were incurred. Tax loss carryforwards can be used to reduce future taxable income. No deferred tax assets related to the loss carryforwards have been recognized as the Company has had a history of losses.
12. Related party transactions During the year ended June 30, 2017, the CEO, a significant shareholder, earned salary compensation of $162,608 [2016 – $183,381]. Another employee and significant shareholder earned salary compensation of $38,393 [2016 – $5,694]. Included in accounts payable is an amount of $68,988 due to a director and founder of the Company for expenses and assets paid by the director, on behalf of the Company, during the year.
During the year ended June 30, 2017, a relative of a member of the Board of Directors provided accounting consulting services to the Company for $40,725 in compensation. $4,000 of the balance is included in accounts payable at June 30, 2017 and has been paid subsequent to year-end.
13. Commitments The Company has entered into a number of agreements with certain key advisors. The terms of these agreements are described below:
[a] On March 5, 2013, the Company signed a consulting agreement with a consultant. In exchange for offering their distilling expertise, the Company has agreed to issue the consultant 1,500 restricted shares units on closing with an exercise price fixed at the same price as the offering memorandum the Company intends to issue. An additional 1,500 restricted shares units are to be granted to the consultant for each year of service they provide, in addition to the fees payable at hourly rates, which must be preapproved. As at June 30, 2017, this contract remains in effect; however, the consultant has declined all restricted share units associated with this agreement [note 7[c]].
[b] On December 1, 2015, the Company entered into a 10-year lease with 761 Enterprise Holdings Inc. for a building located at 761 Enterprise Crescent, Victoria, British Columbia. The building is located in the Royal Oak Business Park and is approximately 17,319 square feet. Rent in the first four months from February 1, 2016 to May 31, 2016 was nil. Rent for months five through twelve was $17,319 per month. Rent for years two to five of the lease will be $17,319 per month. In addition, the Company is required to pay its share of the
17 MacMhaol-onfhaidh (“Macaloney”) Brewers & Distillers Ltd.
Notes to financial statements [Expressed in Canadian dollars]
June 30, 2017 and 2016
operating costs. Accordingly, the Company expects that the total rent will be $18.25 per square foot. In years six and eight, rent will be adjusted in proportion to changes in the Consumer Price Index for British Columbia. MBD has four options to renew the lease, with each option being for a 10-year renewal term.
As an inducement, the landlord contributed $150,000 towards leasehold improvements. This inducement was received by the Company on September 27, 2016. To secure the Company’s obligations under the lease, the Company has granted the landlord a general security agreement over MBD’s assets ranking pari passu to the general security agreement granted to the lender up to the amount outstanding to the lender. The lender has granted priority over such security to the landlord for amounts in excess of the loans payable [note 6]. As at June 30, 2017, the Company has a deposit of $66,260, prepaid to the landlord to remediate the property at the end of the lease.
Total lease payments recognized as an expense during the year amounted to $185,900 [2016 – $77,459]. Future minimum payments for the next five years and thereafter are as follows:
$
2018 207,828 2019 207,828 2020 207,828 2021 207,828 2022 207,828 Thereafter 744,717
14. Contingencies The Company may from time to time be subject to legal claims in the normal course of business. As at June 30, 2017, no material claims exist.
15. Subsequent events On August 30, 2017 and October 13, 2017, the Company received deposits of $126,775 and $139,425 for the exercise of 27,500 Class A share warrants and 27,500 Class B share warrants. These warrants were exercised at $4.61 and $5.07 per Class A and B share warrant, respectively. These warrants remain issued, outstanding and unexercised as at the date of these financial statements. In addition to these deposits, $60,426 is currently being held in trust by the Company’s legal firm with a further $145,634 held by Western Pacific Trust, pending the completion of a future equity offering.
18 Offering Memorandum – November 20, 2017 Page C-1 MBD
13 DATE AND CERTIFICATE
Dated November 24, 2017
This Offering Memorandum does not contain a misrepresentation.
MacMhaol-onfhaidh (‘Macaloney’) Brewers & Distillers Ltd.
On behalf of the Board of Directors:
______November 24, 2017 ______November 24, 2017 DR. GRAEME MACALONEY Date ART FROEHLICH Date Director and CEO Director
______November 24, 2017 ______November 24, 2017 PATRICK MICHAUD Date ALLAN E. SCOTT Date Director Director Offering Memorandum - November 24, 2017 Page A-1 MBD
14 APPENDIX A
Consultant, Senior Staff, and Advisor Biographies
Name Principal occupation and related experience
Edward Patrick Edward Patrick is a veteran journalist and communicator with a 40-year career in daily and weekly Co-founder & newspapers and business publications in Scotland, England and Canada. As Editor of the Glasgow Advisor Eastern Standard, he was the youngest editor of a British weekly newspaper in the annals of the National Union of Journalists; Assistant Editor of the Scottish Licensed Trade News; Senior News Sub-Editor, Scottish Daily Record & Sunday Mail, and the Scottish Daily Express, Glasgow. He held a similar position with the Daily Express in Fleet Street, London. Emigrating to Toronto in 1968, he was a News Sub-Editor at the Toronto Star and later at the National Post and Financial Post; Associate Editor of Marketing magazine and editor of other business publications at Maclean-Hunter; Senior Sub-Editor and Editorial Supervisor of the Ontario Hansard; a founding partner of Business Relations Associates, a Toronto public relations and advertising company. He is a Life Member of the Toronto Press & Media Club and is still the club’s longest-serving President. In 2000, he founded The Companions of The Quaich, Canada’s premier malt whisky appreciation society with over 1,000 members in 20 chapters in Ontario, Alberta and British Columbia. He collaborated on a 60-minute documentary on one of the Companions’ tours of Scotland, entitled The Whisky Trail, for the CTV network. He is a regular speaker and contributor on whisky to magazines, newspapers, radio and TV; a Master Class presenter at the Victoria Whisky Festival and exhibitor at many whisky shows in Canada. He was at various times the Ontario agent for several Scottish distilleries and independent bottlers, including the Vintage Malt Whisky Co., Bruichladdich, Murray McDavid, Douglas Laing, Signatory Vintage, James MacArthur, and A.D. Rattray. He graduated top of the class at the Bruichladdich Whisky Academy and regularly leads groups of Canadian whisky enthusiasts on special tours of distilleries in Scotland and Ireland.
J. Michael Nicolson J. Michael Nicolson, Master Distiller and past Distillery Manager, DIAGEO plc., is one of the Advisor & world’s most experienced distillers having worked in 18 Scotch whisky distilleries and a Canadian Consultant malt whisky distillery over a 36 year period. Mr. Nicolson is a third generation distiller and former manager of five of Scotland’s premier distilleries including Lagavulin, Royal Lochnagar, Blair Athol, Glenkinchie and Caol Ila. He also worked at Glen Ord, Teaninich, Glentauchers, Glen Albyn, Aultmore, Dallas Dhu, Benromach, Cardhu, Rosebank, Linkwood, North Port, Glenesk and Millburn distilleries in Scotland and Shelter Point Distillery in Canada, where he commissioned the distillery and set up their distillation process. At Blair Athol distillery he managed their visitor centre which received 100,000 visitors per annum. In addition to being one of DIAGEO’s most accomplished whisky makers, Mr. Nicolson is a consummate communicator. He was the first host-contributor of DIAGEO’s ground breaking ‘Malt Advocate Course’ held at Royal Lochnagar Distillery. This ‘Malt Advocate Course’ is run for employees of DIAGEO from around the world, and industry leaders and opinion formers in the industry, demystifying single malt whiskies and celebrating the mysteries of the whiskies produced by DIAGEO’s Scottish distilleries. As such Mr. Nicolson has communicated with industry professionals, journalists, trade press and media, and knowledge seekers from around the globe on the true in-depth meaning of single malt whisky. Mr. Nicolson is also a regular whisky presenter at whisky festivals and educational events. He lives with his wife Ann in North Saanich, outside Victoria. Mr. Nicolson has indicated that he will be available to assist with distillery design and commissioning, training, tours and retail management, maturation, blending and brand ambassadorship.
Adrian N. Walker Adrian Walker has over 30 years’ global spirits industry executive and management experience based MIChemE.,MSc.,BSc. in Europe & North America and encompassing: global strategy; international brand marketing; brand Advisor & innovation and development; and company creation. Adrian’s drinks experience began with Diageo Consultant PLC, the world’s largest spirits company, and has also included Russian Standard-Roust International and The Scion Spirits Company. Presently, he is an independent consultant Brand Development Consultant and a Non-Executive Director of Scion Spirits, an Irish spirits start-up Offering Memorandum - November 24, 2017 Page A-2 MBD
company which he co-founded in 2006 and he successfully developed and launched Coole Swan® - the first ‘premium-plus’ Irish Whiskey Cream Liqueur which has gained international acclaim and multiple awards, including winning Best Liqueur and Double Gold at the 2009 World Spirit Competition in San Francisco. In addition to his Board role for Scion Spirits, Adrian was Chief Design and Innovation Officer at Russian Standard-Roust International, the privately owned spirits & wine business, for 4 years from 2012 to 2016 reporting directly to the Company owner. Prior to founding Scion Spirits and launching Coole Swan®, he was a Senior Consultant for Clear Ideas (part of M&C Saatchi) Europe’s fastest growing marketing and innovation consultancy where his clients included Bacardi, Scottish & Newcastle, and Interbrew. Previously at Diageo PLC (formerly GrandMet/IDV), Adrian spent 18 years in a variety of brand development/innovation and marketing roles including as Senior Vice President for Brand Development and Innovation (leading Group Innovation in North America & Latin America responsible for all spirits and beer brand extensions and new-to-the-world brand developments) and Senior Vice President of Global Innovation Strategy and Portfolio Development. In this role he established innovation as a key growth driver for Diageo, more than doubling its contribution to the corporation’s global revenues (up to 14%), and headed a strategic portfolio review of brand ‘Premiumisation’ and ‘Accessibility’ leading to a company-wide re-alignment of marketing, sales & development resources and the setting up of the Reserve Brands super-premium division. His innovations include the development and launch of some of the most significant brands in Diageo’s portfolio such as Cîroc vodka, Smirnoff Ice, Smirnoff Black and Flavour range in the US and Tanqueray No Ten gin. During his career with Diageo and its forerunners, he also managed international brand development for Baileys Irish Cream liqueur, Bombay Sapphire gin, Malibu rum, and Smirnoff vodka including overseeing the implementation of the first fully global Smirnoff packaging redesign. During this period Adrian was also instrumental in the launch of The Singleton Malt Whisky and Guinness Draught in Bottle. Prior to Diageo, Adrian was a Graduate Management Trainee and Biochemical Process Engineer with the international biotechnology design firm, John Brown Engineers (Trafalgar House). He has an MSc in Biochemical Engineering (UCL) and BSc in Biochemistry (University of Birmingham) and is a Member of the Institution of Chemical Engineers.
Andrew Michaud Mr. Michaud is a Chartered Professional Accountant in good standing, having qualified as a CPA, CA, BA – Chartered Accountant in 2009. Mr. Michaud has 10 years of public and professional accounting Economics experience. Prior to joining MBD, Mr. Michaud provided accounting and consulting services for Consultant Finance several companies, including assisting with the adoption of IFRS, technical accounting guidance, and Manager implementing strong controls over financial reporting processes. Earlier in his career, Mr. Michaud worked at KPMG in Toronto for 6 years, and was involved with a number of high profile clients, leading teams in excess of 20 cross-functional members. In addition to his professional accreditations, Mr. Michaud has a BA, Economics from the University of Western Ontario. John Macaloney John Macaloney, owner of Glenskirlie House & Castle is an entrepreneur and classically trained Chef Advisor in French Haute Cuisine, with 48 years’ experience. He worked as an apprentice in British Transport Hotels, mostly in the Central Hotel, Glasgow, which at the time boasted the only five star dining experiences in the country. After his apprenticeship, Mr. Macaloney worked at some of the finest restaurants in Glasgow including Rogano’s. After this he revitalized the Gartcosh Club restaurant where he worked for 7 years whilst researching and locating his own restaurant. Eventually, he bought Glenskirlie House, a large private residence, and converted it into a restaurant in 1982. The restaurant quickly built a reputation for its fine cuisine and excellent, friendly service and rapidly became financially successful. In 1986 he extended the restaurant to include 56 seat restaurant with a bar and coffee lounge. The restaurant continued to be successful and in 1998 he built a £1 million banqueting suite catering to weddings, corporate functions and Christmas functions. Revenues grew to £1.4 million by 2004. In 2006, Mr. Macaloney and his son, Colin, built the first Scottish Castle in the 21st Century. This was purposed as a second function suite for weddings, etc., but also included 15 guest rooms, bar and dining room, separate to the function suite, at a cost of £2.2 million. These combined facilities (the original restaurant and two parallel function suites, have been very successful and now cater for in excess of 250 weddings or other functions, annually.
Iain Hooey Iain Hooey is a native Victorian and a retired police officer from the former Esquimalt Police Advisor Department. At present his talents are utilized as a Marriage Commissioner of the Province of British Offering Memorandum - November 24, 2017 Page A-3 MBD
Columbia. For the last 30 years, Iain has contributed to the community through event planning and fundraising for various non-profit organizations. He has been the Vice President of the David Foster Foundation, President of the Victoria Jazz Society and currently holds positions on three Boards. He is also the Past President of the Victoria Single Malt Club and is the Vice-President co-founder of the Victoria Whisky Festival which has received accolades as being one of the premier whisky events in the world. Iain has considerable experience in liquor permitting for public and private events.
Douglas Umscheid Consultant, Doug Umscheid – retired grain farmer and businessman, is the owner of Doug Umscheid Advisor Farms Ltd. He comes from a family with approximately 150 years of farming history. He attended Olds College in Alberta, which is renowned for it’s agricultural program, from 1969 through 1971. Mr. Umscheid was invited back to instruct at the college and did so for 4 years. At that time he chose to return to his roots in Milo, Alberta where he proceeded to own and expand his mixed grain farming operation for the next 30 years. At the time of his retirement he owned a 3,000 acre mixed grain farm including brewers barley production contracted to Anheuser-Busch. Mr. Umscheid, brings ‘hands- on’ experience in grain quality assessment, handling, transportation, and storage.
Offering Memorandum - November 24, 2017 Page A-4 MBD
Dean McLeod BSc. Dean McLeod is an Australian brewer with an undergraduate degree in Biological Science, as well Employee: Brew- as a post-graduate brewing degree, and twenty years of craft brewery experience. Most recently he Master & worked in a top 7, award winning B.C. brewery with over $6 million revenues per annum, Lighthouse Production Brewery. Mr. McLeod has worked in 10 international breweries encompassing the range from small Manager brewpub operations, to large scale production breweries, including the craft arm of the multi-national brewer, Kirin Breweries. He has designed and built green-field production-scale breweries as well as several brewery expansions and/or relocations. As Production Manager & Brew-Master at Lighthouse Brewery, he managed a staff of 12 production operators, fillers and delivery staff. He is one of the few Canadian brewers who is regularly invited to judge the World Beer Cup (USA) and also the Great American Beer Festival, the biggest beer festival in the world, held in Denver, USA. The English pub chain, Whetherspoon’s, invited Mr. McLeod alongside 9 other international brewers to brew an ale in the UK as part of their annual Weatherspoon’s International Real Ale Festival.
Andrew Campbell Andrew Campbell Walls is a Scot who at the age of 18 began his whisky career with The Whisky Walls Shop in Inverness, Scotland. Since moving to Canada, Andrew has worked as the Manager for Grapes Employee: Sales & Grains liquor store (Liquor Depot) in Edmonton. Here, in addition to regular liquor store profit & Manager & Brand loss, staff and inventory management responsibilities, he built up a notable single malt whisky tasting Ambassador program whereby he conducted regular tutored tasting through invited speakers from Scottish distilleries or as a highly knowledgeable and entertaining presenter himself. After Grapes & Grains, he helped open and became the Beverage, Training and Events Manager at ‘The Bothy’ whisky bars in Edmonton. These were a first of their kind in that city and were popular both as a specialty whisky bar and also a venue for tutored whisky tastings. In addition to this, Andrew was a co-founder, executive, and whisky ambassador of the Alberta Scotch Society trading as the Alberta Whisky Society (AWS). The AWS has over 200 members and is the largest whisky club in Alberta. In recognition of his services to the AWS, and for his regular dynamic, informative and entertaining tutored tastings, the AWS awarded Andrew a Life Time Brand Ambassador Award. Andrew is also a qualified sommelier to Level 3 with the Wine and Spirit Education Trust (WSET).
Kerri Crema Kerri Crema has been in the alcohol industry in BC for 18 years with the majority of that time selling Employee: Sales craft beer on Vancouver Island, with firms including Granville Island Brewing, Vincor, and Molson Manager & Brand Coors Canada. Even with the explosion of craft breweries her sales numbers have always led the Ambassador industry due to her competitive and professional sales approach. She has a diploma in business with a major in marketing from Vancouver Island University and has obtained a number of craft beer certificates as part of her continued learning.
Offering Memorandum - November 24, 2017 Page A-5 MBD
15 APPENDIX B
Victoria Caledonian Brewery & Distillery Premium Single Malt Whiskies - Traditionally Distilled & Matured, by Scots -
Cask Purchase Offer & Agreement 2017
MacMhaol-onfhaidh (‘Macaloney’) Brewers & Distillers Victoria Caledonian Brewery & Distillery 761 Enterprise Crescent, Victoria, B.C., V8Z 6P7 CANADA VICTORIA CALEDONIAN
DESIGN YOUR OWN 30L CASK WHISKY TO TAKE HOME
It is with great pleasure that we at the Victoria Caledonian invite you to own a wee piece of the magic, the oaken- casked art that we call whisky. The Victoria Caledonian spirit and passion is offered to you now in our exclusive 30L custom designed Cask Owners program whereby you are invited to select your favourite combination of single malt spirit and oak casks, leading to the finest, custom bottled whisky or a 30L cask with brass tap to take home and pour a wee dram for friends and family.
Only a small handful of world class distilleries offer cask release purchases, and this offer is ofen only for a limited time during the first year or two of production. Our offer is unique, and not only from the rarity of offering and quality of whisky, it is unique for we are the only distillery that lets you get ‘hand’s on’ to custom design your own whisky from 5 new make options and 10 cask options; designed by you, and crafed by our very own Scotch Master Distiller Mike Nicolson, and Scottish Cask Master, Dr. Jim Swan.
With this cask purchase you are not only taking home the magic and this legacy, but you will also experience the delights of malting, brewing and distilling first hand when you come to visit your slumbering cask or participate in our Caley Academy.
TRADITIONALLY MALTED, DISTILLED & CASK MATURED, BY SCOTS
Our passionate Founder-President and Scotsman, Dr. Graeme Macaloney, started his career in the Black & White whisky factory, going on to become a PhD qualified fermentation engineer. With the Victoria Caledonian, Graeme has gathered the finest available ingredients, equipment and Scotch whisky makers; our oak is carefully selected from Kentucky, Portugal & Spain; all to assure the future quality of your whisky.
Master Distiller Mike Nicolson’s family have tended the stills of Scotland’s distilleries for almost 100 years. The magic and arts of the still house shaping his young life and drew him in to continue the tradition himself with 36 years spent crafing Scotch whisky with Diageo, the world’s leading Scotch whisky company, creating memories and lifelong friends in 18 of the most sought afer Scottish distilleries. We could not have found a more talented or experienced Master Distiller to work with!
Scotland’s leading whisky maturation expert spent decades honing the science woven into the myths and art of whisky making, and cultivating relationships with the very best cooperages. Our Cask Master, the late, great Dr. Jim Swan, had a wood maturation PhD and received ‘The Malt Advocate Innovator of the Year’.
His unique processes have seen client whiskies collect accolades such as the “World’s Best Single Malt Whisky” at the World Whisky Awards; the only spirit ever to score a perfect 100 at the Beverage Testing Institute; a 97-point rating in Jim Murray’s Whisky Bible and yet these whiskies were just 3, 4 or 5 years old. Through Dr. Swan you now have access to the world’s best oak, cooperages and principles.
Come visit your cask during its gentle slumber; sample yearly, learn about the evolution from new make to mature whisky; until it is ready to take home as a 30L cask, or in custom labeled bottles, in just 3 to 4 years.
Ceud Mile Failte gu an Clan- hundred thousand welcomes to the family, Slàinte. Page 2
Custom Design Your Own Cask
The standard price per cask if purchased in British Columbia through the distillery is $2,371.98, this includes G.S.T. & P.S.T., and the basic deposit of $1,750. The following additions to the standard price apply to your custom design options and are added to the basic deposit at time of order. Please refer to ‘The Legal’ for full conditions.
Options on the Spirit: Select One ◦ Single malt (un-peated) no extra charge ◦ Light peated single malt add $100 ◦ Medium peated single malt add $200 ◦ Heavily peated single malt add $300 ◦ Pot Still (Irish Style) - triple distilled no extra charge
Options on the Cask (dependant upon supply): Select One ◦ 1st use Kentucky ex-Bourbon cask no extra charge ◦ Proprietary Dr. Jim Swan STR cask (used in World Whisky Awards 2015 World’s Best Single Malt) - Swan’s Toasted wine barrique Reserve add $200 ◦ Virgin wood American cask (not recommended for use with lighter spirits) add $240 ◦ Canadian Ice Wine cask add $240 ◦ Ex- Islay cask add $260 ◦ Port cask add $260 ◦ Madeira cask add $260 ◦ Moscatel sweet wine cask add $260 ◦ Oloroso sherry cask add $300 ◦ Pedro Ximinez sherry cask add $300 _
The Fun The Options on the Spirit: Select up to Two
◦ 3 to 4 years modern conditions, per Dr. Jim Swan proprietary process and included maturation used in world award winning whiskies ◦ Each additional one year add $100
Options on the label: Select One
◦ Victoria Caledonian Standard Private Cask Label included ◦ Victoria Caledonian customizable Collectors Edition Private Cask Label starting at $100
*All prices are based upon British Columbia liquor taxes and may be subject to change
For any details on 30L cask ownership, 200L cask ownership or product sales please contact Andrew at [email protected] or 780 245 6930
Page 3 Cask Offer The Legal Terms and Conditions The Angel’s share, Devil’s share and maturation outcome: The price cask does not include: o cask ffThis er includes: proportionally fewer bottles, though willallow for retainment of more natural oils inthe whisky. expectation for the final volume of product might bearound 45bottles be exact about how many bottles you willreceive, but afer 3yearsand filled in750mlbottles at 40%a.b.v. an absorbedwhisky into the breathing inthe cask firstyearof maturation. the As angel’s &devil’s share varies we cannot estimated to beup to 6%per annum for modern maturation techniques. The Devil’s share isthe small amount of The Angel’s share isthe amount that of whisky evaporates from the and cask islost to the heavens. Angel share is BC liquor taxes, federal excise, and G.S.T P.S.T. are included. the amount paid for the cask. availability of stock. Inno willour case liability to the purchaser begreater than reasonable e toff provideorts acomparable from adiff whisky erent subject cask, to theIf during maturation aserious problem leakage, we withcask arises will Bonding, auditing costs,quality monitoring and insurance 3 to 4yearsmodern maturation. yearsmay Extra bepurchased in1yearintervals. an upgrade or older to re-cooper fresh oak overpowers as ifle whisky f to mature in asmaller Custom cask). labels are available as Bottling costs &standard labels OR re-coopering (Victoria of&brass tap 30Lcask Caledonian willuse only 3rd filloak are added to the basic deposit price at time of purchase. The options to change maturation spirit, and cask maturation time are available additions as to the standard price and details. deposit). out Extra of province taxes &shipping vary, please contact Andrew at The standard price, ifpurchased Columbia inBritish at the distillery, is$2,371.98 (includes alltaxes and the $1,750 maturation canbeachieved inonly 3to 4years. be transferred to bottles OR a30Lcask un-peated ‘new make’ spirit filled at strength cask ina1stuse, ex-bourbon, standard which 200Lwhite oakcask, can 30 litres (pre angel share) of MacMhaol-onfhaidh (‘Macaloney’) Brewers &Distillers Ltd., Victoria Caledonian distillery Shipping ofor cask bottled spirit. Non BCProvincial taxes, or anyother applicable taxes at time of bottling. , though must comply withlabeling regulations. upon reaching Using maturity. Dr. Swan’s proprietary modern method, “And fillthem upwithgenerous juice, As generous As as your mind, Page 4 And pledge to me inthe generous toast . ‘The whole of ‘The humankind!”
. Bottlings at 46% orstrength cask willresult in use [email protected]
Robert 1788 Burns for Cask Offer The Legal Terms and Conditions responsibilities: By purchasing and evidenced acask as byyour signature on the Purchase Cask Agreement you accept the following Responsibilities: OffCask er privileges &The Caley Academy rights and conditions encompass: quality we require the condition that our whiskies must only be bottled on our bottling line withour labels. We at Victoria Caledonian are extremely proud of our wee, world class distillery whiskies and to ensure consistent 48hours following your deposit, refunds to the customer are not permissible. holder. However, ifyou choose, you may of or allof gifpart theto another whisky person of legal age. drinking PurchaseThe Cask Agreement isnon-assignable bythe purchaser, meaning that the purchaser must remain the title Under Canadian law the entire batch must beentirely bottled, or entirely le f inacask. jurisdiction, withevidence of such to beshown, upo The purchaser represents they are above the Columbia, inBritish legal age drinking Canada or in your home to how many days of your allotted Academy time that you chose to enjoy. The Academy is5fully packed days of lore, learningand sampling (please 9for seepage details). Itisyour decision as may begifed to others Academy credits cannot betraded, or reimbursed, although excess credits that would accrue toward a2 multiple Your years. Academy visitneeds to bepre-booked and fall withinthe yearly Academy Academy experience canbeenjoyed on asingle anyyearof your visitduring stay casks but cannot besplit across Our Caley Academy isexclusive only to distillery ‘Founder Owner’ investors, ‘multiple owners cask’ and tradeff . sta Caledonian Gif shop (excluding alcohol) your during stay. casks Purchase ofallows 2casks through April. passionateff when sta your isready. cask Tasting venue bookings for thispurpose must beinadvance and for November Access venue to our tasting for your Maturation casks and Personal Party Tasting Event hosted byour expert and distillery tour discussed above. as There are additional charges for extra people per visitor extra visitsper year. Includes rights tasting us. Must bebooked inadvance withwarehouse sampling and only bottling occurring inNovember &April. Complimentary distillery tour and cask between you. Alternatively, 8credits in5yearsallows 2people to attend the Caley Academy withup to credits 3cash purchasable purchases. credits are Cash purchasable for $350. credits. Each owner cask may purchase up to credit 1cash without the cask, remaining 3credits are to befrom 3cask hands-on brewing and distillingCaley Academy ($1,500 value, 8) seepage With the purchase ofinone 4casks 5yearperiod, one owner cask complimentary earns attendance to the 5-day full at the same price and on the same terms initially as offered to Victoria Caledonian. Victoria Caledonian refuses such offer, the Purchaser may sell theto another Whisky person provided that such sale is Purchaser wishes to sell the Whisky, Purchaser must firstoffer to sell theback Whisky to Victoria Caledonian. If orin casks bottles (theisfor "Whisky"), personal consumption and not for acommercial purpose. Inthe event that the The Purchaser represents and that agrees thepurchased whisky under thisAgreement, or anyportion thereof, whether
from your of cask up to 28mlper annually, cask thisisto beclaimed your during complimentary . Credits toward The Caley Academy willexpire 5yearsafer date of initial purchase. cask 25% off a‘ Victoria Caledonian Cask Owners Jacket’ visitation for you and one guest per calendar your yearduring stay casks with “As bees“As n request, before anysampling or collection takes place. The minutes their wing'd pleasure: waywi' Kings mayKings be blest, but Tam glorious, was -Robert 17 Burns a'theO'er ills life o' victorious!” Page 5 flee
hame
. Attendance canalsobeachieved with4 wi' lades wi' treasure, o'
and a10% discount inThe Victoria
season. 90 nd Academy visit
The Cask Offer The Legal Terms and Conditions Security of the whiskyqualitySecurity cask, and the gauger’s way: bring frae“But aScotchman hishill,
circumstance beyond Macaloney Distillers Ltd., control. market con strike,flict, lockout, blockade, or other obstacle to work, fire, flood, accident or other comparable tsunami impact zone) import or restrictions, export authority actions or omissions, new or amended legislation, labour attacks, political disturbances, tsunami (at over 165f above sealevel, we believe Victoria Caledonian that isincurred inconnection Force withthis. majeure isunderstood to mean, among other war, things, terrorist the owner cask for long as the as obstacle Owner The lasts. Cask shall not beentitled to compensation for anydamage consequence of force majeure, Macaloney Distillers Ltd., shall be considered to bereleased from itscommitments to commitments under these terms and conditions are prevented or their performance issignificantly hindered a as If MacMhaol-onfhaidh (‘Macaloney’) Brewers &Distillers Ltd., (known hereaf er Macaloney as Distillers Ltd.) some other catastrophe, you willbeentitled to arefund of your deposit out of the company’s insurance proceeds. and cannot bedefeated bythe company’s lenders or owners. Inthe event that your spirits are destroyed byfire or that the company business, ceases or ifthe company changes ownership, your ownership over the spirit ispreserved make spirit (subject to Angel’s &Devil’s Share losses) and are protected bythe Once your Offer Cask down payment has been received, you become the fulllegal owner of that 30Lportion of new- thistimeduring the owner cask wishes to claim the owner whisky, cask must pay accrued warehousing costs ownership to MacMhaol-onfhaidh (‘Macaloney’) Brewers &Distillers Ltd. withno compensation to owner. cask If orAny casks bottled not whisky collected or confirmed two yearsafer end of maturation agreed willrevert in of theremains whisky intact. willnotwhisky suffer anyprotein or emulsified oils loss, ensuring the fullbreadth and depth of thefl avour and texture filtration, nature ensuring theisas whisky intended. means This that although ahaze cansometimes develop, the willnotThe whisky haveficial anyarti caramel colouring, nor willitbesubjected to chill- taxes may change from time to time. the canleave whisky the bonded warehouse and must bepaid upon collection. Applicable strengthcask of 58%and filled inapproximately 30-31 x75cl bottles approximately 37-40 x75cl bottles, or $68per bottle pre G.S.T./P.S.T. when bottled at 43-45 x75cl bottles, $53per bottle pre G.S.T./P.S.T. when bottled at 46%and filled in or $48per bottle pre G.S.T./P.S.T. when bottled at 40%and filled inapproximately Offer of un-peated single matured malt whisky infirst-llKentucky Bourbon cask, afer 3to 4yearsmodern maturation is$2,371.98 per for cask the standard Cask province and country. upon Based Columbia British taxes the expected total price The gauger, oralways tax-man gets hiscut. Federal and provincial taxes vary by production. maturation expert Dr. JimSwan to ensure the highest quality at alllevels of works withrenowned Scottish Master Distiller Mike Nicolson and Scottish cask Victoria Caledonian uses world leading Forsyth stillsfrom Rothes, Scotland and yourconfirming order a stockfi certi cate specifying the number cask willbesent and type, cask to you Upon receiving your completed order form and deposit, areceipted invoice with Clap inhischeek aHighland gill, Till, whereTill, yesiton craps o’heather, . Freedom gang thegither an’whisky !” -Robert 1786 Burns Page 6 . The tax isdue before. The tax
Sale of GoodsAct. In the unlikely event to beabove the . The Cask Purchase Agreement An exclusive offer to purchase your own cask from Macaloney Distillers Victoria Caledonian Distillery
Please complete and fill out a separate Cask Purchase Agreement for each cask desired.
I have read and understood the Terms & Conditions contained in the Cask Owner Offer which form part of this Cask Purchase Agreement.
Signature: Date:
Buyers Details
Title and name Please give full name and title
Address
City Prov. Country Postal Code
Tel(home) Tel(cell)
Cask Label Name
Referral
Please print and fill in Page 2 and Page 6, then scan or photograph to email, alternatively fax or mail with your cheque. Your desired options should be added to page 2 and the costs added to Page 6 to calculate your total deposit.
Basic Deposit $1,750
Spirit option & cost $
Cask option & cost $
Total deposit paid $
For office use:Total received$ Deposit payment amount confirmed Final payment upon collection $
Please print, fill in, scan and email this page as well as an interac e-Tranfer via interac.ca to [email protected]; or print, fill in & mail this page along with a cheque or postal order made out to Macaloney Distillers Ltd. Also accepted - cash, interac or cheque payment at the distillery, or during Ambassadorial or Sales Manager visits. Please contact Andrew at [email protected] or 780 245 6930 with any questions on Cask Ownership, product sales, or payment options Page 7 The Caley Academy An Exclusive 5 Day Brewing, Distillation & Maturation MasterClass at
Victoria Caledonian Brewery & Distillery
CURRICULUM:
Theory 101 (mornings): malting, brewing, distilling, maturation
Practical hands-on (afernoons, depending on production schedule): Turning the malt floor, milling the grist, mashing for wort, extracting the hops, fermenting, cutting the spirit, filling the wood
‘Quality control tastings’: valinch cask sampling, tutored tastings (beers & whiskies), blending
Graduation party Caley Academy Diploma presentation
KEY FACULTY:
Master Distiller,Mike Nicolson: 3rd generation Scottish distiller, 18 Scotch distilleries
Brewmaster, Dean McLeod: 10 international breweries, BSc in Brewing, international beer festival judge
MacMhaol-onfhaidh (‘Macaloney’) Brewers & Distillers Victoria Caledonian Brewery & Distillery 761 Enterprise Crescent, Victoria, B.C., V8Z 6P7 CANADA