Three years after acquiring Seattle Cider Company and Two Beers Brewing Company, French agri-business cooperative Agrial Group is suing the beer and cider maker’s founder, Joel VandenBrink, for breach of contract and fiduciary duties for allegedly falsifying sales to increase a payout by $6.8 million. The Seattle Times first reported the story on Friday.
The lawsuit, filed on August 21 in the U.S. District Court for the Western District of Washington, alleges that VandenBrink, who continued as CEO after the sale, realized in mid-2018 that Seattle Cider’s sales wouldn’t be enough to trigger a higher earn-out payment and devised a scheme to “game the numbers” in order to receive a payment of more than $6.8 million.
According to court records, Agrial agreed to pay $12.375 million at the close of the August 2016 transaction. However, Agrial agreed to make additional minimum payments of $2 million and $6 million at the end of 2018 and 2020, respectively. Those numbers could increase though if the Seattle Cider’s EBITDA for 2018 and 2020 exceeded $3 million and $4 million, respectively.
VandenBrink projected more than $17 million in sales and EBITDA of $5.77 million in 2018, according to the lawsuit. Seattle Cider’s sales, however, did not meet those projections. The company’s EBITDA in 2017 was less than $1.9 million. Seattle Cider’s sales by the end of 2018 were below $10 million and its EBITDA projected at $2.5 million, more than $500,000 below the threshold to trigger an increased payment for VandenBrink.
As part of the alleged scheme, VandenBrink struck a deal with Seattle Cider’s largest wholesaler, who is not named in the lawsuit, to take “roughly triple the normal shipments” at the end of 2018 in order to inflate sales for the fiscal year and goose 2018 EBITDA by about $800,000, to $3.3 million, thus activating a payment of around $8.8 million.
Agrial alleges that VandenBrink submitted a falsified financial report in January 2019 overstating the company’s EBITDA for 2018. In the report, VandenBrink wrote that “cider had another great month” and “cider carried the load for the company.”
“In truth, cider sales were flat in December and in the previous months and the seeming sales growth was entirely attributable to VandenBrink’s secret side deal with the distributor,” the lawsuit stated.
The alleged scheme fell apart in April after the wholesaler refused to take additional shipments after accepting shipments through the first three months of 2019, the lawsuit stated. In a message to VandenBrink, an unnamed employee of the wholesaler said the purchasing department would no longer take Seattle Cider or Two Beers products until the excess inventory was addressed.
“We spoke in February about the fact that we already had nine months of inventory and yet you still shipped 10 more loads in March and one in April,” the employee wrote “We have 493 days of supply of semi-sweet. This is far beyond any agreement we made. When we spoke about this last October, we agreed to take up to four months of inventory to help you hit your number and get your paycheck. I need you to find a solution to take us back to a reasonable DOH [Days on Hand] immediately that will result in zero cost to [us]. I want to be very clear that [my boss] is absolutely beside himself on this issue and we’re looking for IMMEDIATE resolution.”
“I promise that the issue will be resolved at no cost to [you],” VandenBrink replied. “That’s always been my agreement and my word.”
According to the lawsuit, VandenBrink continued to submit projections for growth and profits, all the while knowing that sales would “dramatically decline” in 2019 due to its largest wholesaler having more than a year of product in its warehouse.
Relying on the inflated projections, Agrial wired $8.4 million to PNW Holdco, a holding company VandenBrink holds a 70% stake in. The company said the actual payment should have been $2 million, minus adjustments. Court records say VandenBrink pocketed about $5.8 million of the payment.
Two days after the payment was received, Seattle Cider’s wholesaler returned two full trucks of cider at a cost of $133,000 and destroyed $34,000 worth of product.
VandenBrink’s projections for Seattle Cider sales in May were $1.3 million. Actual sales were $347,000, “the worst performance of any month since Agrial had purchased Seattle Cider,” the lawsuit said.
“Because VandenBrink put his own pecuniary interest above that of Seattle Cider, Seattle Cider’s EBITDA in 2019 has plummeted,” the lawsuit added.
Additionally, Agrial said an opportunity to sell Seattle Cider this year fell apart due to “the sudden collapse of Seattle Cider’s revenue” following the scheme.
Agrial is seeking a jury trial to recoup the excess payment as well as damages.
VandenBrink, who is no longer Seattle Cider’s CEO, declined to comment. He directed Brewbound to his attorney, James Shore, of Stoel Rives LLP.
In a statement, Shore told Brewbound that VandenBrink “very much looks forward to having his say about the matter in court.
“We will be filing a responsive pleading, including potential counter-claims against Agrial and the other plaintiffs,” Shore added.
Shore also shared a statement from VandenBrink. In six bullet points, VandenBrink said he thought he had a great working relationship with Agrial and the allegations were “a surprise.”
According to VandenBrink, the earn out was independently audited by PWC, approved by Agrial and paid out. He added that the books were also audited by PWC for fiscal year 2018.
“No false financial statements were ever submitted to anyone,” he added.
According to VandenBrink’s statement, he worked with Agrial on the budget.
“I worked with Agrial USA to achieve a budget that I was requested and told I needed to achieve,” he said in the statement. “Now the company is looking for a way to not pay the final financial obligation to myself and my investment group. And this was the lever they chose to pull.”