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EX-32.2 - EX-32.2 - Truett-Hurst, Inc.thst-ex322_12.htm
EX-32.1 - EX-32.1 - Truett-Hurst, Inc.thst-ex321_15.htm
EX-31.2 - EX-31.2 - Truett-Hurst, Inc.thst-ex312_13.htm
EX-31.1 - EX-31.1 - Truett-Hurst, Inc.thst-ex311_14.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2017

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                      

Commission File Number: 001-35973

TRUETT-HURST, INC.

 

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

46-1561499

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification number)

 

 

 

125 Foss Creek Circle, Healdsburg, California

 

95448

(Address of principal executive offices)

 

(zip code)

(707) 431-4423

(Registrant’s telephone number, including area code)    

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No  

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes       No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.

 

Class A

 

Number of Shares Outstanding

Common stock, $0.001 par value per share

 

4,460,417

 

Class B

 

Number of Shares Outstanding

Common stock, $0.001 par value per share

 

6

 

 

 

 

 


TRUETT-HURST, INC. AND SUBSIDIARY

FORM 10-Q

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Part I.

 

Financial Information

3

 

Item 1.

Condensed Consolidated Financial Statements

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and June 30, 2017

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2017 and 2016 (both unaudited)

4

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2017 and 2016 (both unaudited)

5

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

25

 

Item 4.

Controls and Procedures

25

Part II.

 

Other Information

26

 

Item 1.

Legal Proceedings

26

 

Item 1A.

Risk Factors

26

 

Item 2.

Unregistered Sales of Equity

26

 

Item 3.

Defaults Upon Senior Securities

26

 

Item 4.

Mine Safety Disclosures

26

 

Item 5.

Other Information

26

 

Item 6.

Exhibits

27

 

Signatures

 

29

 

2


PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TRUETT-HURST, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

September 30, 2017

 

 

June 30, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26

 

 

$

783

 

Accounts receivable

 

 

3,637

 

 

 

1,932

 

Inventories, net

 

 

21,202

 

 

 

20,609

 

Bulk wine deposits

 

 

94

 

 

 

 

Other current assets

 

 

1,177

 

 

 

505

 

Total current assets

 

 

26,136

 

 

 

23,829

 

Property and equipment, net

 

 

5,787

 

 

 

5,426

 

Intangible assets, net

 

 

507

 

 

 

506

 

Other assets, net

 

 

245

 

 

 

277

 

Total assets

 

$

32,675

 

 

$

30,038

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Lines of credit

 

$

7,615

 

 

$

7,290

 

Accounts payable

 

 

4,170

 

 

 

1,994

 

Accrued expenses

 

 

710

 

 

 

546

 

Depletion allowance and accrual for sales returns

 

 

509

 

 

 

495

 

Current maturities of capital lease obligation

 

 

11

 

 

 

11

 

Current maturities of long term debt

 

 

475

 

 

 

491

 

Total current liabilities

 

 

13,490

 

 

 

10,827

 

Long term debt, net of current maturities

 

 

3,208

 

 

 

3,002

 

Capital lease obligation, net of current maturities

 

 

60

 

 

 

63

 

Total liabilities

 

 

16,758

 

 

 

13,892

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value of $0.001 per share, 5,000,000 shares authorized,

   none issued and outstanding at September 30, 2017 and June 30, 2017

 

 

 

 

 

 

Class A common stock, par value of $0.001 per share, 15,000,000

   authorized, 4,460,417 issued and outstanding at September 30,

   2017 and 4,426,789 issued and outstanding at June 30, 2017

 

 

4

 

 

 

4

 

Class B common stock, par value of $0.001 per share, 1,000 authorized,

   6 and 7 issued and outstanding at September 30, 2017 and June 30, 2017,

   respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

16,214

 

 

 

16,082

 

Accumulated deficit

 

 

(5,825

)

 

 

(5,651

)

Total Truett-Hurst, Inc. shareholders' equity

 

 

10,393

 

 

 

10,435

 

Noncontrolling interest

 

 

5,524

 

 

 

5,711

 

Total equity

 

 

15,917

 

 

 

16,146

 

Total liabilities and equity

 

$

32,675

 

 

$

30,038

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


TRUETT-HURST, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

 

2017

 

 

2016

 

Sales

 

$

6,417

 

 

$

6,102

 

Less excise tax

 

 

(227

)

 

 

(216

)

Net sales

 

 

6,190

 

 

 

5,886

 

Cost of sales

 

 

4,145

 

 

 

4,056

 

Gross profit

 

 

2,045

 

 

 

1,830

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,454

 

 

 

1,224

 

General and administrative

 

 

790

 

 

 

812

 

(Gain) loss on disposal of assets

 

 

(22

)

 

 

17

 

Total operating expenses

 

 

2,222

 

 

 

2,053

 

Net loss from operations

 

 

(177

)

 

 

(223

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(110

)

 

 

(80

)

Gain on lease termination, net

 

 

 

 

 

844

 

Gain on fair value of interest rate swap

 

 

2

 

 

 

23

 

Other expense

 

 

(8

)

 

 

(9

)

Total other (expense) income

 

 

(116

)

 

 

778

 

Net (loss) income before income taxes

 

 

(293

)

 

 

555

 

Income tax expense

 

 

 

 

 

(1

)

Net (loss) income from continuing operations

 

 

(293

)

 

 

554

 

Net (loss) income attributable to Truett-Hurst, Inc. and H.D.D. LLC

 

 

(293

)

 

 

554

 

Net (loss) income attributable to noncontrolling interest: H.D.D. LLC

 

 

(117

)

 

 

237

 

Net (loss) income attributable to Truett-Hurst, Inc.

 

$

(176

)

 

$

317

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

Basic per share

 

$

(0.04

)

 

$

0.07

 

Diluted per share

 

$

(0.04

)

 

$

0.04

 

Weighted average shares used in computing net (loss) income per share:

 

 

 

 

 

 

 

 

Basic weighted average shares

 

 

4,437,998

 

 

 

4,306,609

 

Diluted weighted average shares

 

 

4,437,998

 

 

 

7,675,917

 

 

See accompanying notes to condensed consolidated financial statements.

4


TRUETT-HURST, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(293

)

 

$

554

 

Adjustments to reconcile net (loss) income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

213

 

 

 

200

 

Reserve for assets to be abandoned

 

 

 

 

 

127

 

Stock-based compensation

 

 

62

 

 

 

95

 

Gain on fair value of interest rate swap

 

 

(2

)

 

 

(23

)

Gain on lease termination, net

 

 

 

 

 

(844

)

Proceeds received on lease termination

 

 

 

 

 

955

 

Gain on disposal of assets

 

 

(22

)

 

 

(94

)

Changes in operating assets and liabilities, net

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,705

)

 

 

(1,212

)

Inventories

 

 

(593

)

 

 

(1,748

)

Bulk wine deposits

 

 

(94

)

 

 

271

 

Other current assets

 

 

(670

)

 

 

(90

)

Accounts payable

 

 

2,176

 

 

 

2,704

 

Accrued expenses

 

 

164

 

 

 

179

 

Depletion allowance and accrual for sales returns

 

 

14

 

 

 

(492

)

Due to related parties

 

 

 

 

 

64

 

Net cash (used in) provided by operating activities

 

 

(750

)

 

 

646

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(535

)

 

 

(288

)

Acquisition of intangible and other assets

 

 

(6

)

 

 

(15

)

Proceeds from sale of assets

 

 

22

 

 

 

4

 

Net cash used in investing activities

 

 

(519

)

 

 

(299

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from (payments on) lines of credit

 

 

325

 

 

 

(277

)

Proceeds from long term debt

 

 

327

 

 

 

387

 

Payments on long term debt

 

 

(137

)

 

 

(176

)

Payments on capital lease obligation

 

 

(3

)

 

 

 

Net cash provided by (used in) financing activities

 

 

512

 

 

 

(66

)

Net change in cash and cash equivalents

 

 

(757

)

 

 

281

 

Cash and cash equivalents at beginning of period

 

 

783

 

 

 

4,043

 

Cash and cash equivalents at end of period

 

$

26

 

 

$

4,324

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

110

 

 

$

80

 

Cash paid for income taxes

 

 

 

 

$

1

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited interim condensed consolidated financial statements include the results of Truett-Hurst, Inc. (the “Company”) and its subsidiary H.D.D. LLC (the “LLC”). They have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with general instructions for quarterly reports filed on Form 10-Q and Article 8 of Regulation S-X. The Company consolidates the financial results of the LLC and records a noncontrolling interest representing the portion of equity ownership in the LLC that is not attributable to the Company.

 

The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The accompanying unaudited condensed consolidated financial statements were prepared on the same basis as the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017, and, in the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim period presented are not necessarily indicative of the results expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2017 filed with the Securities and Exchange Commission (“SEC”) on October 13, 2017.

Quantities or results referred to as “to date” or “as of this date” mean as of or to September 30, 2017, unless otherwise specifically noted. References to “FY” or “fiscal year” refer to the fiscal year ending on June 30th of the designated year.

Critical Accounting Policies and Estimates

There have been no material changes to the critical accounting policies and estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.

Reclassifications

Certain prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. These reclassifications had no effect on the reported condensed consolidated results of continuing operations.

Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606), a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact of this ASU.

 

6


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

In November 2015, the FASB issued ASU No. 2015-17: Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The update sets forth a requirement for companies to classify deferred tax assets and liabilities as non-current amounts on the balance sheet. It is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard and it did not have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842). The standard includes a lessee accounting model that recognizes two types of leases – finance and operating leases. It requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU.

In March 2016, the FASB issued ASU No. 2016-09: Improvements to Employee Share-Based Payment Accounting which amends ASU 718, Compensation – Stock Compensation. The update sets forth an initiative to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard and it did not have a material impact on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15: Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. The update sets forth guidance on eight specific cash flow issues. The amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard and it did not have a material impact on its condensed consolidated financial statements.

In 2015, the FASB issued ASU 2015-11: Inventory (Topic 330) –Topic 330 currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value. The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard and it did not have a material impact on its condensed consolidated financial statements.

 

In 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606), a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact of this ASU.

In 2016, the FASB issued ASU 2016-08: Revenue from Contracts with Customers (Topic 606), which amends the principal-versus-agent implementation guidance set forth in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The Company is currently evaluating the impact of this ASU.

In 2016, the FASB issued ASU 2016-10: Revenue from Contracts with Customers (Topic 606), which amends certain aspects of ASU 2014-09 related to identifying performance obligations and licensing implementation. The Company is currently evaluating the impact of this ASU.

7


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

NOTE 2 – INVENTORIES

Inventories comprise:

 

 

 

September 30, 2017

 

 

June 30, 2017

 

 

 

(in thousands)

 

Grapes and bulk wine

 

$

5,405

 

 

$

5,933

 

Bottled wine

 

 

15,400

 

 

 

14,495

 

Bottling materials and other

 

 

524

 

 

 

268

 

 

 

 

21,329

 

 

 

20,696

 

Less: inventory reserves

 

 

(127

)

 

 

(87

)

Total inventories, net

 

$

21,202

 

 

$

20,609

 

 

See Note 12, Subsequent Events.

 

 

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment, net comprise:

 

 

 

September 30, 2017

 

 

June 30, 2017

 

 

 

(in thousands)

 

Land and land improvements

 

$

3,261

 

 

$

3,260

 

Building and improvements

 

 

1,547

 

 

 

1,420

 

Machinery and equipment

 

 

2,756

 

 

 

2,189

 

Vineyard development

 

 

554

 

 

 

554

 

Vineyard equipment

 

 

53

 

 

 

88

 

Furniture and fixtures

 

 

163

 

 

 

293

 

Leasehold improvements

 

 

45

 

 

 

79

 

Vehicles

 

 

119

 

 

 

113

 

 

 

 

8,498

 

 

 

7,996

 

Less: accumulated depreciation and amortization

 

 

(2,711

)

 

 

(2,570

)

Total property and equipment, net

 

$

5,787

 

 

$

5,426

 

 

In the prior year, the Company recorded a reserve for assets that were abandoned when the Company vacated the Russian River Valley tasting room based on a litigation settlement. See Litigation section of Note 7.

 

Total depreciation and amortization expense for the three months ended September 30, 2017 and September 30, 2016 was $0.2 million.

 

 

NOTE 4 – ACCOUNTS PAYABLE

 

Accounts payable comprises:

 

 

 

September 30, 2017

 

 

June 30, 2017

 

 

 

(in thousands)

 

Grapes

 

$

1,655

 

 

$

583

 

Other production related

 

 

1,514

 

 

 

940

 

Barrels

 

 

184

 

 

 

 

Administrative

 

 

817

 

 

 

471

 

Total accounts payable

 

$

4,170

 

 

$

1,994

 

 

8


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

Accounts payable as of September 30, 2017 reflect the seasonality associated with the 2017 harvest, specifically, grape procurement, barrel purchases, acquisition of new winery equipment for the leased space within the custom crush facility, and increased production activities.

NOTE 5 – BORROWINGS

The Company’s indebtedness is comprised primarily of bank loans including lines of credit and long term debt.

Lines of Credit

On August 17, 2017, the Company completed the renewal process of the revolving line of credit with Bank of the West. The Company chose not to request a new equipment purchase line of credit note from the lender. In addition, the Company chose not to extend the maturity date of the foreign exchange note.

In July 2017, the Company’s capital equipment line of credit matured and automatically converted into a $0.3 million term loan with a 36-month amortization schedule and a 4.25% interest rate. In July 2016, the Company’s capital equipment line of credit from matured and automatically converted into a $0.3 million term loan with a 48-month amortization schedule and a 3.95% interest rate.

The credit facility, which matures on July 31, 2018, consists of a revolving line of credit with a maximum commitment of $10.0 million which accrues interest at 2.25% above the London Interbank Offered Rate (“LIBOR”). In the fiscal year 2016, the credit facility also included (a) a capital equipment line with a maximum commitment of $0.5 million which carried an interest rate of 2.25% above floating One-Month LIBOR, and (b) a foreign exchange facility with a maximum commitment of $0.1 million which allowed the Company’s bank to enter into any spot or forward transaction to purchase or sell a foreign currency. The Company did not use the foreign exchange facility during the three months ended September 30, 2017 and September 30, 2016.

The credit facility is secured by a pledge of substantially all of the Company’s assets with guarantees from the LLC members. The bank borrowings contain usual and customary covenants, including, among others, limitations on incurrence of senior indebtedness, the making of loans and advances, investments, acquisitions, and capital expenditures, the incurrence of liens, and the consummation of mergers and asset sales. The credit facility maintains the minimum current assets to current liabilities ratio covenant (measured quarterly) and the maximum debt to effective tangible net worth ratio covenant (measured quarterly). When the line of credit was renewed on August 17, 2017, the previous debt service coverage ratio (measured quarterly on a trailing twelve-month basis) was replaced with a minimum quarterly EBITDA covenant. The Company was out of compliance with the minimum EBITDA covenant on its revolving line of credit for the quarter ended September 30, 2017, but received a waiver in October 2017 for that period from the Company’s lender. If the Company was unable to obtain the necessary waivers and the debt was accelerated, it would have a material adverse effect on the financial condition and future operating performance, and the Company may be required to limit activities. The Company was in compliance with all other covenants at September 30, 2017.

In July 2016, the previous minimum EBITDA covenant was replaced with a minimum debt service coverage ratio (measured quarterly on a trailing twelve-month basis). The Company was out of compliance with the debt service coverage ratio for the quarters ended June 30, 2017, March 31, 2017, and December 31, 2016, but received waivers for those periods from the Company’s lender. The Company was in compliance with all other covenants during those prior year periods.

9


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

Long Term Debt

Long term debt comprises:

 

 

 

 

 

 

 

September 30, 2017

 

 

June 30, 2017

 

 

 

 

 

 

 

(in thousands except

payment information)

 

Long term debt:

 

 

 

 

 

 

 

 

 

 

 

 

Note 1

 

 

(1

)

 

$

2,683

 

 

$

2,716

 

Note 2

 

 

(2

)

 

 

26

 

 

 

45

 

Note 3

 

 

(3

)

 

 

136

 

 

 

158

 

Note 4

 

 

(4

)

 

 

239

 

 

 

270

 

Note 5

 

 

(5

)

 

 

280

 

 

 

304

 

Note 6

 

 

(6

)

 

 

319

 

 

 

 

Total notes payable

 

 

 

 

 

 

3,683

 

 

 

3,493

 

Less: current maturities

 

 

 

 

 

 

(475

)

 

 

(491

)

Total long term debt

 

 

 

 

 

$

3,208

 

 

$

3,002

 

 

 

(1)

Note payable to a bank, secured by a deed of trust on property, payable monthly with principal payments of $11,270 plus interest, matures May 31, 2022, variable interest of 2.25% above LIBOR.

 

(2)

Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $6,535, matures November 1, 2018, at 3.75% interest.

 

(3)

Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $7,783, matures March 15, 2019, at 3.75% interest.

 

(4)

Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $11,267, matures July 1, 2019, at 3.90% interest.

 

(5)

Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $8,729, matures July 1, 2020, at 3.95% interest.

 

(6)

Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $9,701, matures August 15, 2020, at 4.25% interest.

 

Future principal and interest payments for the long term debt as of September 30, 2017 are as follows:

 

Years ending June 30,

 

(in thousands)

 

2018 (remaining nine months)

 

$

440

 

2019

 

 

543

 

2020

 

 

362

 

2021

 

 

163

 

2022

 

 

2,175

 

 

 

 

3,683

 

Add: estimated interest payments

 

 

493

 

Total

 

$

4,176

 

 

Capital Lease

In June 2017, the Company entered into a $0.06 million, 72-month capital lease related to wine production equipment. The future lease commitments are approximately $0.015 million per year for fiscal years 2018 through 2023.

10


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

NOTE 6 – DEPLETION ALLOWANCE AND ACCRUAL FOR SALES RETURNS

The depletion allowance was $0.5 million as of September 30, 2017 and June 30, 2017.

In a prior year, the accrual for sales returns was established for the return of product that had oxidized. The initial accrual amount was $0.5 million. In June 2016, a final settlement was reached between the Company and the last distributor with remaining material financial exposure associated with the oxidized products. As of September 30, 2017, approximately $0.03 million of case goods remain to be shipped.

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Leases

The Company leases wine production space within a custom crush facility located in Santa Rosa, California. The lease commenced on April 15, 2017 and ends on June 15, 2018. The initial 14-month term may be renewed for additional periods as agreed to by both parties. See Litigation section below.

The Company has two lease agreements for administrative office space. Both are three-year leases with an end date of October 31, 2019. One of these leases contains three one-year renewal options with adjustment to market rates.

Lease payments for these facilities were $0.1 million and $0.08 million for the three months ended September 30, 2017 and September 30, 2016, respectively.

Future lease commitments are:

 

Years ending June 30,

 

(in thousands)

 

2018 (remaining nine months)

 

$

214

 

2019

 

 

90

 

2020

 

 

31

 

Total future rent payments

 

$

335

 

 

Supply Contracts

The Company enters into short and long term contracts with third-parties and related party growers to supply a portion of its future grape and bulk wine inventory requirements. The grape commitments for the fiscal year 2018 were received in the first and second quarters of fiscal year 2018. In fiscal year 2017, the Company did not extend a large contract for the purchase of bulk wine to future years. Future minimum grape and bulk wine inventory purchase commitments are as follows:

 

Years Ending June 30,

 

Third-Parties

 

 

Related Parties

 

 

Total

 

 

 

(in thousands)

 

2018

 

$

4,671

 

 

$

57

 

 

$

4,728

 

2019

 

 

2,552

 

 

 

 

 

 

2,552

 

2020

 

 

1,927

 

 

 

 

 

 

1,927

 

2021

 

 

50

 

 

 

 

 

 

50

 

2022

 

 

51

 

 

 

 

 

 

51

 

Total

 

$

9,251

 

 

$

57

 

 

$

9,308

 

 

At September 30, 2017, total future purchase commitments for finished goods were approximately $4.9 million and are expected to be fulfilled during fiscal years 2018 through 2020.

11


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

Production & Storage

The Company enters into various contracts with third-party service providers for grape crushing, wine storage and bottling. The costs are recorded in the period for which the service is provided. The actual costs related to custom crush services are based on volume. The Company’s current contracts for custom crush services cover the 2017 harvest. The current bottling contract requires a minimum of 120,000 cases at $2.85 per case to be bottled in a one year period. For the three months ended September 30, 2017, the monthly average percentage of the Company’s bulk wine stored at a related-party storage facility was 45%.

Litigation

From time to time, the Company may be subject to various litigation matters arising in the ordinary course of business. Other than discussed below, the Company is not aware of any current pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on the Company’s condensed consolidated financial position, results of operations, or cash flows.

In January 2016, Mendocino Wine Group (“MWG”) filed a complaint against Phil Hurst and the LLC. The complaint alleges that, prior to January 2012, Phil Hurst and the LLC aided and abetted Paul Dolan in his alleged breach of fiduciary duties to MWG and that they interfered with Paul Dolan’s contract with Thornhill Management Company (the manager of MWG), and aided and abetted Paul Dolan’s interference with MWG’s economic advantage. Phil Hurst and the LLC denied the claims, denied all wrongdoing, and denied that they caused any harm to MWG. In November 2016, the Sonoma County Superior Court granted MWG’s Motion to Consolidate the Hurst/LLC case with a second complaint MWG filed against a law firm for legal malpractice and breach of fiduciary duty. The Court ruled the cases were sufficiently related and should be tried together. No amount had been recorded in the condensed consolidated financial statements related to this suit. In October 2017, the Sonoma County Superior Court granted the Company’s summary judgement motion and dismissed the case against Phil Hurst and the LLC. The plaintiff, MWG, has 60 days to appeal the Court’s decision. If such an appeal is filed, the process may take 9 to 18 months to obtain a final resolution.

In June 2016, the Company settled outstanding litigation with the Hambrecht Wine Group, L.P. related to the lease of one of its tasting rooms and a winery production facility located at 4035 Westside Road, Healdsburg, California, in exchange for payment of $1.0 million to the LLC, quitclaimed certain rights, and modified its lease such that the Company vacated the tasting room portion of the property prior to December 31, 2016, and vacated the winery production portion prior to May 31, 2017. The Company received a series of settlement payments totaling $1.0 million in fiscal year 2017 and recorded a net gain of $0.8 million related to the lease termination in the Company’s condensed consolidated statement of operations for the quarter ended September 30, 2016.

Exchange and Tax Receivable Agreement

The Company has an exchange agreement with the existing owners of the LLC, several of whom are directors and/or officers.  Under the exchange agreement, each LLC member (and certain permitted transferees thereof) may (subject to the terms of the exchange agreement), exchange their LLC Units for shares of Class A common stock of the Company on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash, at the Company’s election. In connection with the exchange agreement, the Company has a tax receivable agreement (“TRA”) with the LLC members. The agreement provides for the payment from time to time, as “corporate taxpayer,” to holders of LLC Units of 90% of the amount of the benefits, if any, that the corporate taxpayer is deemed to realize as a result of (i) increases in tax basis resulting from the exchange of LLC Units and (ii) certain other tax benefits related to the Company entering into the agreement, including tax benefits attributable to payments under the agreement. These payment obligations are obligations of the corporate taxpayer and not of the LLC. The term of the agreement will continue until all such tax benefits have been utilized or expired, unless the corporate taxpayer exercises its right to terminate the agreement for an amount based on the agreed payments remaining to be made under the agreement or the corporate taxpayer breaches any of its material obligations under the agreement in which case all obligations will generally be accelerated and due as if the corporate taxpayer had exercised its right to terminate the agreement. In addition, the tax receivable agreement provides that upon certain

12


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

mergers, asset sales, or other forms of business combinations, substantial payment obligations to the founding LLC members and affiliates will accelerate.

Indemnification

From time to time the Company enters into certain types of contracts that contingently require it to indemnify various parties against claims from third-parties. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded at September 30, 2017 and September 30, 2016 for these obligations on the condensed consolidated balance sheets.

 

NOTE 8 – STOCK-BASED COMPENSATION

Equity Incentive Plan

The Company has granted restricted stock awards, stock options and restricted stock units to employees, directors and non-employees under its 2012 Stock Incentive Plan. As of September 30, 2017, the 2012 Plan has 1.0 million shares reserved for issuance and a total of 0.4 million shares available to be issued.

A summary of the Company’s activity for restricted stock awards is presented below:

 

 

 

Number

of Shares

 

 

Weighted Avg

Grant Date

Fair Value

per Share

 

 

Weighted Avg

Contractual

Term in Years

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at June 30, 2017

 

 

2,631

 

 

$

3.80

 

 

 

0.49

 

 

$

5

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Released

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

2,631

 

 

$

3.80

 

 

 

0.24

 

 

$

6

 

Expected to vest at September 30, 2017

 

 

2,631

 

 

$

 

 

 

 

 

$

 

 

A summary of the Company’s activity for restricted stock units is presented below:

 

 

 

Number

of Shares

 

 

Weighted Avg

Grant Date

Fair Value

per Share

 

 

Weighted Avg

Contractual

Term in

Years

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at June 30, 2017

 

 

33,334

 

 

$

2.25

 

 

 

0.50

 

 

$

69

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Released

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

33,334

 

 

$

2.25

 

 

 

0.25

 

 

$

76

 

Expected to vest at September 30, 2017

 

 

33,334

 

 

$

 

 

 

 

 

$

 

 

13


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

A summary of the Company’s activity for stock options is presented below:

 

 

 

Number of

Shares

 

 

Weighted Avg

Grant Date

Fair Value

per Share

 

 

Weighted Avg

Contractual

Term in

Years

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at June 30, 2017

 

 

215,000

 

 

$

1.67

 

 

 

9.04

 

 

$

 

Granted

 

 

50,000

 

 

 

2.08

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

(35,000

)

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

230,000

 

 

$

1.71

 

 

 

8.93

 

 

$

 

Options Vested

 

 

57,500

 

 

$

1.71

 

 

 

8.93

 

 

 

 

Options Non-Vested

 

 

172,500

 

 

$

1.71

 

 

 

8.93

 

 

$

 

Options Exercisable

 

 

57,500

 

 

$

1.71

 

 

 

8.93

 

 

 

 

 

The following table summarizes the Company’s stock-based compensation included in the condensed consolidated statements of operations for the three months ended September 30, 2017 and September 30, 2016:

 

 

 

Three Months Ended September 30,

 

 

 

(in thousands)

 

 

 

2017

 

 

2016

 

Sales and marketing

 

$

5

 

 

$

10

 

General and administrative

 

 

57

 

 

 

85

 

Total stock-based compensation

 

$

62

 

 

$

95

 

 

NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount reflected in the condensed consolidated balance sheets of financial assets and liabilities are all categorized as Level 1. They include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, which approximated their fair values due to the short-term nature of these financial assets and liabilities. The carrying amount of the Company’s debt approximates its fair value based on prevailing interest rates and time to maturity.

In October 2012, the Company executed an interest rate swap obligation that was measured using observable inputs such as the LIBOR and ten-year Treasury interest rates, and therefore has been categorized as Level 2. This derivative is not designated as a hedging instrument and has been recorded at fair value on the condensed consolidated balance sheets. Changes in the fair value of this instrument have been recognized in the condensed consolidated statements of operations in other expense. The maturity date of the swap is May 31, 2022. At June 30, 2017 and September 30, 2017, the interest rate swap balance was $0.1 million for both the fair value and the Level 2 value. The balance for the interest rate swap is included in other current assets on the condensed consolidated balance sheets.

NOTE 10 – INCOME TAXES

For the three months ended September 30, 2017, the Company recorded income tax expense of $0.001 million and had an effective tax rate of less than 1%. The Company has net operating loss (“NOL”) carryforwards available to offset fiscal year 2018 taxable income. The utilization of the NOL carryforwards may be subject to substantial annual limitations due to ownership change provisions under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in the expiration of NOL’s before they can be utilized by the Company.

14


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

The Company's effective tax rate is a function of:

 

A rate benefit attributable to the fact that the LLC operates as a limited liability company which is not subject to federal or state income tax. Accordingly, a portion of the earnings are not subject to corporate level taxes.

 

Operating losses for the periods or utilization of net operating loss carryforwards.

 

Recording a full valuation allowance against net deferred tax assets as the Company has determined that it is more likely than not that the future tax benefits would not be realized. The Company did not record a deferred tax asset during the three months ended September 30, 2017.

There were no unrecognized tax benefits at September 30, 2017 and the Company did not incur any income tax related interest expense or penalties related to uncertain tax positions.

NOTE 11 – SIGNIFICANT CUSTOMER INFORMATION, SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

The Company’s primary reporting segments are identified as wholesale and direct to consumer.

Wholesale sales include the retail exclusive brand label model and other brands sold through the three-tier distribution system. Direct to consumer sales occur through the Company’s tasting rooms, wine clubs, and winery websites. Operating and other expenses are not allocated between operating segments; therefore, operating and net income (loss) information for the respective segments is not available. In addition, discrete financial information related to segment specific assets is not available. Sales and cost of sales are reported by segment.

The following table reflects net sales, cost of sales and gross profit by segment for continuing operations for each of the three months ended September 30, 2017 and 2016, respectively:

 

 

 

Three Months Ended September 30,

 

 

 

(in thousands)

 

 

 

Wholesale

 

 

Direct to Consumer

 

 

Total

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net Sales

 

$

4,779

 

 

$

4,510

 

 

$

1,411

 

 

$

1,376

 

 

$

6,190

 

 

$

5,886

 

Cost of Sales

 

 

3,648

 

 

 

3,538

 

 

 

497

 

 

 

518

 

 

 

4,145

 

 

 

4,056

 

Gross Profit

 

$

1,131

 

 

$

972

 

 

$

914

 

 

$

858

 

 

$

2,045

 

 

$

1,830

 

Gross Profit %

 

 

23.7

%

 

 

21.6

%

 

 

64.8

%

 

 

62.3

%

 

 

33.0

%

 

 

31.1

%

 

Significant Customer Information:

The following table sets forth concentrations of wholesale sales and accounts receivable as a percent of each total:

 

 

 

Percentage of Wholesale Sales

 

 

Percentage of Total Accounts Receivable

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

27

%

 

 

10

%

 

 

33

%

 

 

11

%

Customer B

 

 

23

%

 

 

42

%

 

 

18

%

 

 

49

%

Customer C

 

 

11

%