Attached files

file filename
EX-32.2 - EX-32.2 - Truett-Hurst, Inc.thst-ex322_7.htm
EX-32.1 - EX-32.1 - Truett-Hurst, Inc.thst-ex321_9.htm
EX-31.2 - EX-31.2 - Truett-Hurst, Inc.thst-ex312_8.htm
EX-31.1 - EX-31.1 - Truett-Hurst, Inc.thst-ex311_6.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 December 31, 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

 

4,496,383

 

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 December 31, 2017 (unaudited) and June 30, 2017

3

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31,2017 and 2016 (both unaudited)

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 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

16

 

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

27

 

Item 3.

Defaults Upon Senior Securities

27

 

Item 4.

Mine Safety Disclosures

27

 

Item 5.

Other Information

27

 

Item 6.

Exhibits

28

 

Signatures

 

30

 

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)

 

 

 

December 31, 2017

(Unaudited)

 

 

June 30, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

261

 

 

$

783

 

Accounts receivable

 

 

2,550

 

 

 

1,932

 

Inventories, net

 

 

22,275

 

 

 

20,609

 

Bulk wine deposits

 

 

94

 

 

 

 

Other current assets

 

 

627

 

 

 

505

 

Total current assets

 

 

25,807

 

 

 

23,829

 

Property and equipment, net

 

 

6,575

 

 

 

5,426

 

Intangible assets, net

 

 

505

 

 

 

506

 

Other assets, net

 

 

210

 

 

 

277

 

Total assets

 

$

33,097

 

 

$

30,038

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Lines of credit

 

$

8,275

 

 

$

7,290

 

Accounts payable

 

 

4,669

 

 

 

1,994

 

Accrued expenses

 

 

747

 

 

 

546

 

Depletion allowance and accrual for sales returns

 

 

535

 

 

 

495

 

Current maturities of long term debt and capital lease obligation

 

 

575

 

 

 

502

 

Total current liabilities

 

 

14,801

 

 

 

10,827

 

Long term debt, net of current maturities

 

 

3,020

 

 

 

3,065

 

Total liabilities

 

 

17,821

 

 

 

13,892

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

   none issued and outstanding at December 31, 2017 and June 30, 2017

 

 

 

 

 

 

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

   authorized, 4,496,383 issued and outstanding at December 31,

   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 December 31, 2017 and June 30, 2017,

   respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

16,254

 

 

 

16,082

 

Accumulated deficit

 

 

(6,234

)

 

 

(5,651

)

Total Truett-Hurst, Inc. shareholders' equity

 

 

10,024

 

 

 

10,435

 

Noncontrolling interest

 

 

5,252

 

 

 

5,711

 

Total equity

 

 

15,276

 

 

 

16,146

 

Total liabilities and equity

 

$

33,097

 

 

$

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 December 31,

 

 

Six Months Ended December 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Sales

$

5,867

 

 

$

5,958

 

 

$

12,284

 

 

$

12,060

 

Less excise tax

 

(166

)

 

 

(221

)

 

 

(393

)

 

 

(438

)

Net sales

 

5,701

 

 

 

5,737

 

 

 

11,891

 

 

 

11,622

 

Cost of sales

 

3,858

 

 

 

3,700

 

 

 

8,003

 

 

 

7,756

 

Gross profit

 

1,843

 

 

 

2,037

 

 

 

3,888

 

 

 

3,866

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,479

 

 

 

1,380

 

 

 

2,933

 

 

 

2,604

 

General and administrative

 

953

 

 

 

706

 

 

 

1,743

 

 

 

1,518

 

Loss (gain) on disposal of assets

 

4

 

 

 

26

 

 

 

(19

)

 

 

43

 

Total operating expenses

 

2,436

 

 

 

2,112

 

 

 

4,657

 

 

 

4,165

 

Net (loss) from operations

 

(593

)

 

 

(75

)

 

 

(769

)

 

 

(299

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(111

)

 

 

(96

)

 

 

(221

)

 

 

(176

)

Gain on fair value of interest rate swap

 

25

 

 

 

108

 

 

 

27

 

 

 

131

 

Other (expense) income

 

(3

)

 

 

(7

)

 

 

(10

)

 

 

828

 

Total other (expense) income

 

(89

)

 

 

5

 

 

 

(204

)

 

 

783

 

Net (loss) income before income taxes

 

(682

)

 

 

(70

)

 

 

(973

)

 

 

484

 

Income tax expense

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

(2

)

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

   and H.D.D. LLC

 

(683

)

 

 

(71

)

 

 

(974

)

 

 

482

 

Net (loss) income attributable to noncontrolling

   interest: H.D.D. LLC

 

(274

)

 

 

(25

)

 

 

(391

)

 

 

212

 

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

$

(409

)

 

$

(46

)

 

$

(583

)

 

$

270

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic per share

$

(0.09

)

 

$

(0.01

)

 

$

(0.13

)

 

$

0.06

 

Diluted per share

$

(0.09

)

 

$

(0.01

)

 

$

(0.13

)

 

$

0.04

 

Weighted average shares used in computing net (loss)

   income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

4,460,417

 

 

 

4,314,553

 

 

 

4,449,208

 

 

 

4,310,559

 

Diluted weighted average shares

 

4,460,417

 

 

 

4,314,553

 

 

 

4,449,208

 

 

 

7,510,936

 

 

See accompanying notes to condensed consolidated financial statements.

4


TRUETT-HURST, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(974

)

 

$

482

 

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

486

 

 

 

410

 

Reserve for assets to be abandoned

 

 

 

 

 

127

 

Stock-based compensation

 

 

102

 

 

 

151

 

Gain on fair value of interest rate swap

 

 

(27

)

 

 

(130

)

(Gain) loss on disposal of assets

 

 

(19

)

 

 

43

 

Changes in operating assets and liabilities, net

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(618

)

 

 

667

 

Inventories

 

 

(1,666

)

 

 

163

 

Bulk wine deposits

 

 

(94

)

 

 

271

 

Other current assets

 

 

(95

)

 

 

22

 

Accounts payable

 

 

2,675

 

 

 

173

 

Accrued expenses

 

 

201

 

 

 

(557

)

Depletion allowance and accrual for sales returns

 

 

40

 

 

 

(110

)

Net cash provided by operating activities

 

 

11

 

 

 

1,712

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(1,557

)

 

 

(371

)

Acquisition of intangible and other assets

 

 

(12

)

 

 

(18

)

Proceeds from sale of assets

 

 

23

 

 

 

5

 

Net cash used in investing activities

 

 

(1,546

)

 

 

(384

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from (payments on) lines of credit

 

 

985

 

 

 

(5,430

)

Proceeds from long term debt

 

 

327

 

 

 

387

 

Payments on long term debt and capital lease obligation

 

 

(299

)

 

 

(302

)

Net cash provided by (used in) financing activities

 

 

1,013

 

 

 

(5,345

)

Net change in cash and cash equivalents

 

 

(522

)

 

 

(4,017

)

Cash and cash equivalents at beginning of period

 

 

783

 

 

 

4,043

 

Cash and cash equivalents at end of period

 

$

261

 

 

$

26

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

219

 

 

$

174

 

Cash paid for income taxes

 

$

 

 

$

2

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Equipment financed with capital lease obligation

 

 

 

 

 

387

 

 

 

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 majority owned 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 December 31, 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.

In the six months ended December 31, 2017, the Company adopted these Accounting Standard Updates (ASUs):

 

ASU 2015-11: Inventory (Topic 330)

 

ASU No. 2015-17: Income Taxes (Topic 740)

 

ASU No. 2016-09: Improvements to Employee Share-Based Payment Accounting (Topic 718)

 

ASU No. 2016-15: Statement of Cash Flows (Topic 230)

None of these ASUs had a material impact on the Company’s condensed consolidated financial statements.

Reclassifications

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

Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The guidance in this update, along with amendments issued in 2015 and 2016,

6


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers, in an amount that reflects the consideration that is expected to be received for those goods or services. This accounting standard update, as amended, will be effective to reporting periods beginning after December 15, 2017. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption (“modified retrospective basis”). The Company is in the process of evaluating its revenue arrangements and the anticipated effect.

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.

NOTE 2 – INVENTORIES

Inventories comprise:

 

 

 

December 31, 2017

 

 

June 30, 2017

 

 

 

(in thousands)

 

Grapes and bulk wine

 

$

6,562

 

 

$

5,933

 

Bottled wine

 

 

15,623

 

 

 

14,495

 

Bottling materials and other

 

 

259

 

 

 

268

 

 

 

 

22,444

 

 

 

20,696

 

Less: inventory reserves

 

 

(169

)

 

 

(87

)

Total inventories, net

 

$

22,275

 

 

$

20,609

 

 

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment, net comprise:

 

 

 

December 31, 2017

 

 

June 30, 2017

 

 

 

(in thousands)

 

Land and land improvements

 

$

3,260

 

 

$

3,260

 

Building and improvements

 

 

1,742

 

 

 

1,420

 

Machinery and equipment

 

 

3,587

 

 

 

2,189

 

Vineyard development

 

 

554

 

 

 

554

 

Vineyard equipment

 

 

53

 

 

 

88

 

Furniture and fixtures

 

 

164

 

 

 

293

 

Leasehold improvements

 

 

29

 

 

 

79

 

Vehicles

 

 

119

 

 

 

113

 

 

 

 

9,508

 

 

 

7,996

 

Less: accumulated depreciation and amortization

 

 

(2,933

)

 

 

(2,570

)

Total property and equipment, net

 

$

6,575

 

 

$

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 6.

Total depreciation and amortization expense for the three and six months ended December 31, 2017 and December 31, 2016 was $0.2 million and $0.4 million, respectively, compared to $0.2 million and $0.4 million for the same periods in FY17.

7


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

NOTE 4 – ACCOUNTS PAYABLE

Accounts payable comprises:

 

 

 

December 31, 2017

 

 

June 30, 2017

 

 

 

(in thousands)

 

Grapes

 

$

2,553

 

 

$

583

 

Other production related

 

 

1,086

 

 

 

940

 

Barrels

 

 

107

 

 

 

 

Administrative

 

 

870

 

 

 

471

 

Due to related party

 

 

53

 

 

 

 

Total accounts payable

 

$

4,669

 

 

$

1,994

 

 

Accounts payable as of December 31, 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

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

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.

On August 17, 2017, the Company completed the renewal process of its 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. 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 six months ended December 31, 2017.

The credit facility is secured by a pledge of substantially all of the Company’s assets and is supported by guaranties from certain LLC members with significant ownership positions. 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 12-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 quarters ended September 30, 2017 and December 31, 2017, but received waivers in October 2017 and February 2018, respectively, for those periods 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 would be required to limit activities. The Company was in compliance with all other covenants at December 31, 2017.

8


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

In July 2016, the previous minimum EBITDA covenant was replaced with a minimum debt service coverage ratio (measured quarterly on a trailing 12-month basis). The Company was out of compliance with the debt service coverage ratio for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, 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.

Long Term Debt and Capital Lease

Long term debt comprises:

 

 

 

 

 

 

 

December 31, 2017

 

 

June 30, 2017

 

 

 

 

 

 

 

(in thousands except

payment information)

 

Long term debt:

 

 

 

 

 

 

 

 

 

 

 

 

Note 1

 

 

(1

)

 

$

2,648

 

 

$

2,716

 

Note 2

 

 

(2

)

 

 

7

 

 

 

45

 

Note 3

 

 

(3

)

 

 

114

 

 

 

158

 

Note 4

 

 

(4

)

 

 

207

 

 

 

270

 

Note 5

 

 

(5

)

 

 

257

 

 

 

304

 

Note 6

 

 

(6

)

 

 

293

 

 

 

 

Capital lease

 

 

(7

)

 

 

69

 

 

 

74

 

Total notes payable and capital lease

 

 

 

 

 

 

3,595

 

 

 

3,567

 

Less: current maturities

 

 

 

 

 

 

(575

)

 

 

(502

)

Total long term debt and capital lease

 

 

 

 

 

$

3,020

 

 

$

3,065

 

 

 

(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.

 

(7)

In June 2017, the Company entered into a $0.07 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.

9


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

Future principal and interest payments for the long term debt and capital lease as of December 31, 2017 are as follows:

 

Years ending June 30,

 

(in thousands)

 

2018 (remaining six months)

 

$

289

 

2019

 

 

554

 

2020

 

 

374

 

2021

 

 

176

 

2022

 

 

2,189

 

Thereafter

 

 

13

 

 

 

 

3,595

 

Add: estimated interest payments

 

 

471

 

Total

 

$

4,066

 

 

NOTE 6 – 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.

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 $0.2 million for the three and six months ended December 31, 2017, respectively, compared to $0.09 million and $0.2 million for the same periods in FY17.

Future lease commitments are:

 

Years ending June 30,

 

(in thousands)

 

2018 (remaining six months)

 

$

91

 

2019

 

 

90

 

2020

 

 

31

 

Total future rent payments

 

$

212

 

 

10


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

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

 

$

1,390

 

 

$

 

 

$

1,390

 

2019

 

 

2,552

 

 

 

 

 

 

2,552

 

2020

 

 

1,927

 

 

 

 

 

 

1,927

 

2021

 

 

50

 

 

 

 

 

 

50

 

2022

 

 

51

 

 

 

 

 

 

51

 

Total

 

$

5,970

 

 

$

 

 

$

5,970

 

  

 

At December 31, 2017, total future purchase commitments for finished goods were approximately $5.0 million and are expected to be fulfilled during fiscal years 2018 through 2020.

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. The monthly average percentage of the Company’s bulk wine stored at a related-party storage facility was 64% and 51% for the three and six months ended December 31, 2017, respectively.

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 Phillip Hurst and the LLC alleging breach of fiduciary duty, interference with contract, and interference with economic advantage. On November 10, 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. On November 20, 2017, the Sonoma County Superior Court granted Phillip Hurst and the LLC’s Motion for Summary Judgment to dismiss the breach of fiduciary duty claim. MWG has dismissed the other two causes of action. The plaintiff, MWG, has until February 2018 to appeal the Court’s decision.

The results for the six months ended December 31, 2016 include payments totaling $1.0 million and a net gain of $0.8 million related to the settlement of certain litigation and termination of a leased facility.

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

11


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

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 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 June 30, 2017 and December 31, 2017 for these obligations on the condensed consolidated balance sheets.

 

NOTE 7 – 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 December 31, 2017, the 2012 Plan has 1.0 million shares reserved for issuance and a total of 0.3 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

 

 

(2,631

)

 

 

(3.80

)

 

 

(0.49

)

 

 

(5

)

Released

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

Expected to vest at December 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

 

12


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

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

 

 

 

Number

of Units

 

 

Weighted Avg

Grant Date

Fair Value

per Unit

 

 

Weighted Avg

Contractual

Term in

Years

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at June 30, 2017

 

 

33,334

 

 

$

2.25

 

 

 

0.50

 

 

$

69

 

Granted

 

 

120,000

 

 

 

1.88

 

 

 

10

 

 

 

248

 

Exercised

 

 

(33,334

)

 

 

(2.25

)

 

 

(0.50

)

 

 

(69

)

Released

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

120,000

 

 

$

1.88

 

 

 

10

 

 

$

248

 

Expected to vest at December 31, 2017

 

 

120,000

 

 

$

 

 

 

 

 

$

 

 

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

 

 

 

Number of

Options

 

 

Weighted Avg

Grant Date

Fair Value

per Option

 

 

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 December 31, 2017

 

 

230,000

 

 

$

1.71

 

 

 

8.68

 

 

$

84

 

Options Vested

 

 

80,625

 

 

$

1.69

 

 

 

8.61

 

 

 

31

 

Options Non-Vested

 

 

149,375

 

 

$

1.71

 

 

 

8.72

 

 

$

53

 

Options Exercisable

 

 

80,625

 

 

$

1.69

 

 

 

8.61

 

 

 

31

 

 

The following table summarizes the Company’s stock-based compensation included in the condensed consolidated statements of operations for the three and six months ended December 31, 2017 and December 31, 2016:

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

(in thousands)

 

 

(in thousands)

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Sales and marketing

 

$

5

 

 

$

10

 

 

$

9

 

 

$

20

 

General and administrative

 

 

35

 

 

 

46

 

 

 

93

 

 

 

131

 

Total stock-based compensation

 

$

40

 

 

$

56

 

 

$

102

 

 

$

151

 

 

NOTE 8 – 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

13


TRUETT-HURST, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(Unaudited)

 

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 December 31, 2017, the interest rate swap balance was $0.01 million and $0.03 million, respectively 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 9 – INCOME TAXES

For the six months ended December 31, 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.

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 and six months ended December 31, 2017.

There were no unrecognized tax benefits at December 31, 2017 and the Company did not incur any income tax related interest expense or penalties related to uncertain tax positions.

NOTE 10 – 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; there