Broo Limited has announced a major Chinese distribution agreement ahead of a likely share placement to raise much-needed capital.
Beijing Jihua Information Consultant will exclusively market and distribute Broo Premium Lager for a period of seven years, Broo informed the ASX on Monday morning.
The announcement says Jihua has supply and distribution arrangements with various supermarket, convenience store, restaurant and hotel chains across China.
‘Take or pay’ deal
Jihua will purchase Broo beer from the company’s Chinese manufacturer and will fund the marketing and promotional costs associated with the brand in China, the announcement says.
“This agreement is structured to provide Broo with enormous reach and platform to compete with the major international beer brands currently available in China, with minimal implementation overheads,” it says.
“The agreement is binding on a ‘take or pay’ basis for 1.5 billion litres of Broo Premium Lager beer products over the seven year period with Jihua paying a fixed rate per litre.
“Based on the full seven-year term of the distribution arrangement, the aggregate distribution revenue generated for Broo is RMB602 million (approximately AUD $120 million).”
The finer detail of the ‘take or pay’ deal is commercial in confidence, a Broo spokesperson told Brews News.
Such contracts typically stipulate that a company will pay a certain price for any product it buys and a lower penalty price for product it does not take, up to an agreed-upon ceiling.
The release says Jihua has committed significant upfront marketing and advertising funds to expedite the growth volume of Broo in the first three years of the agreement.
“Broo has agreed revenue payments for that term can be accrued and paid upon completion of the third year, with payments continuing on a six monthly basis thereafter,” it says.
Founder and CEO Kent Grogan said Jihua’s distribution reach will see Broo Premium Lager penetrate the Chinese beer market and expand into a major brand over the coming years.
“Our focus is now on continuing discussions in other international markets and domestic expansion,” he said.
Broo shares spiked to a high of 47.5 cents on the back of the announcement. At the time of writing, they are trading at 38.5 cents.
This gives the company a market cap of $234 million, including all shares that are currently held in escrow and cannot be traded.
Auditor raises red flag
However, the China deal is against the backdrop of Broo’s declining cash position, highlighted in its September annual report.
Broo Limited posted a net loss of $3.5 million in 2016-17, which auditor ShineWing Australia said casts doubt on the company’s ability to continue as a going concern.
Broo generated revenue of $980,617 but lost $3,488,544 in the year ended June 30, the annual report says.
The company had cash outflows from operating activities of $4,627,036 and all three of its trading segments racked up losses.
Hospitality, comprising its Mildura venue, lost $299,358, while its Australian brewing operation lost $550,577 and its Chinese brewing operation lost $34,099.
Administrative expenses were the biggest drain however, amounting to $2,382,967, including non-recurring costs associated with its ASX listing of $288,098.
The numbers gave cause for ShineWing Australia to flag “the existence of a material uncertainty that may cast doubt over the group’s ability to continue as a going concern”.
“If the group is unable to continue as a going concern, it may be unable to realise its assets and discharge its liabilities in the normal course of business,” the auditor said.
However, Broo said it had entered into a $1,228,125 loan facility with Manda Capital Holdings Pty Ltd, secured against the Ballarat property it acquired in February this year.
“[Broo Limited] has received an amount $965,389 after future council rates for the property, fees associated with the loan, and prepaid interest have been withheld,” it said.
The company said that this debt financing – together with revenues expected from its recent ventures – have ensured it remains a going concern.
Broo’s Annual General Meeting is scheduled for this Friday November 30, when the company will table a resolution to issue additional shares of up to ten per cent of its issued capital over the following 12 months.
The ‘Additional Placement Capacity’ is in addition to the company’s existing 15 per cent placement capacity already allowable under ASX rules.
As such, if the resolution is approved by shareholders, the company would be able to issue shares of up to 25 per cent of the company’s issued share capital.
Approval seems all but certain, given that Kent Grogan owns 65.57 per cent of Broo Limited.