ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TRUETT-HURST, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
542
|
|
|
$
|
4,043
|
|
Accounts receivable
|
|
|
1,985
|
|
|
|
2,678
|
|
Inventories, net
|
|
|
19,336
|
|
|
|
19,918
|
|
Bulk wine deposits
|
|
|
568
|
|
|
|
271
|
|
Other current assets
|
|
|
180
|
|
|
|
125
|
|
Total current assets
|
|
|
22,611
|
|
|
|
27,035
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
5,356
|
|
|
|
5,583
|
|
Intangible assets, net
|
|
|
503
|
|
|
|
496
|
|
Other assets, net
|
|
|
300
|
|
|
|
391
|
|
Total assets
|
|
$
|
28,770
|
|
|
$
|
33,505
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
$
|
4,311
|
|
|
$
|
10,311
|
|
Accounts payable
|
|
|
3,024
|
|
|
|
1,351
|
|
Accrued expenses
|
|
|
392
|
|
|
|
1,348
|
|
Depletion allowance
|
|
|
566
|
|
|
|
610
|
|
Current maturities of long-term debt
|
|
|
507
|
|
|
|
475
|
|
Total current liabilities
|
|
|
8,800
|
|
|
|
14,095
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
3,115
|
|
|
|
3,189
|
|
Total liabilities
|
|
|
11,915
|
|
|
|
17,284
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value of $0.001 per share, 5,000,000 shares authorized, none issued and outstanding at March 31, 2017 and June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
Class A common stock, par value of $0.001 per share, 15,000,000 authorized, 4,426,789 and 4,306,609 issued and outstanding at March 31, 2017 and June 30, 2016, respectively
|
|
|
4
|
|
|
|
4
|
|
Class B common stock, par value of $0.001 per share, 1,000 authorized, 7 issued and outstanding at March 31, 2017 and June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
15,890
|
|
|
|
15,794
|
|
Accumulated deficit
|
|
|
(5,296
|
)
|
|
|
(5,600
|
)
|
Total Truett-Hurst, Inc. equity
|
|
|
10,598
|
|
|
|
10,198
|
|
Noncontrolling interest
|
|
|
6,257
|
|
|
|
6,023
|
|
Total equity
|
|
|
16,855
|
|
|
|
16,221
|
|
Total liabilities and equity
|
|
$
|
28,770
|
|
|
$
|
33,505
|
|
See accompanying notes to condensed consolidated
financial statements.
TRUETT-HURST, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales
|
|
$
|
5,427
|
|
|
$
|
5,090
|
|
|
$
|
17,487
|
|
|
$
|
20,367
|
|
Less excise tax
|
|
|
(87
|
)
|
|
|
(184
|
)
|
|
|
(525
|
)
|
|
|
(587
|
)
|
Net sales
|
|
|
5,340
|
|
|
|
4,906
|
|
|
|
16,962
|
|
|
|
19,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,318
|
|
|
|
3,186
|
|
|
|
11,074
|
|
|
|
13,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,022
|
|
|
|
1,720
|
|
|
|
5,888
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,236
|
|
|
|
1,103
|
|
|
|
3,843
|
|
|
|
3,925
|
|
General and administrative
|
|
|
641
|
|
|
|
635
|
|
|
|
2,156
|
|
|
|
2,244
|
|
Loss on disposal of assets
|
|
|
4
|
|
|
|
11
|
|
|
|
47
|
|
|
|
10
|
|
Total operating expenses
|
|
|
1,881
|
|
|
|
1,749
|
|
|
|
6,046
|
|
|
|
6,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
141
|
|
|
|
(29
|
)
|
|
|
(158
|
)
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(71
|
)
|
|
|
(73
|
)
|
|
|
(248
|
)
|
|
|
(242
|
)
|
Other
|
|
|
(14
|
)
|
|
|
(80
|
)
|
|
|
945
|
|
|
|
(148
|
)
|
Total other income (expense)
|
|
|
(85
|
)
|
|
|
(153
|
)
|
|
|
697
|
|
|
|
(390
|
)
|
Net income (loss) before income taxes
|
|
|
56
|
|
|
|
(182
|
)
|
|
|
539
|
|
|
|
(61
|
)
|
Income tax expense
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Net income (loss) from continuing operations
|
|
|
55
|
|
|
|
(183
|
)
|
|
|
537
|
|
|
|
(62
|
)
|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
Net income (loss)
|
|
|
55
|
|
|
|
(183
|
)
|
|
|
537
|
|
|
|
(17
|
)
|
Net (income) loss attributable to noncontrolling interest: H.D.D. LLC
|
|
|
(22
|
)
|
|
|
90
|
|
|
|
(234
|
)
|
|
|
(55
|
)
|
Net income (loss) attributable to Truett-Hurst, Inc.
|
|
$
|
33
|
|
|
$
|
(93
|
)
|
|
$
|
303
|
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
Diluted per share
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
4,365,122
|
|
|
|
4,253,026
|
|
|
|
4,323,487
|
|
|
|
4,114,545
|
|
Diluted weighted average shares
|
|
|
7,459,702
|
|
|
|
4,253,026
|
|
|
|
7,572,351
|
|
|
|
4,114,545
|
|
See accompanying notes to condensed consolidated
financial statements.
TRUETT-HURST, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
537
|
|
|
$
|
(17
|
)
|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
(45
|
)
|
Net income (loss) from continuing operations
|
|
|
537
|
|
|
|
(62
|
)
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
623
|
|
|
|
496
|
|
Stock-based compensation
|
|
|
96
|
|
|
|
274
|
|
Deferred rent
|
|
|
-
|
|
|
|
(5
|
)
|
(Gain) loss on fair value of interest rate swap
|
|
|
(140
|
)
|
|
|
112
|
|
Reserve
for assets to be abandoned
|
|
|
141
|
|
|
|
-
|
|
Loss on disposal of assets
|
|
|
47
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
693
|
|
|
|
1,061
|
|
Inventories
|
|
|
582
|
|
|
|
2,289
|
|
Bulk wine deposits
|
|
|
(297
|
)
|
|
|
(595
|
)
|
Other current assets
|
|
|
(37
|
)
|
|
|
30
|
|
Accounts payable
|
|
|
1,673
|
|
|
|
(875
|
)
|
Accrued expenses
|
|
|
(834
|
)
|
|
|
(332
|
)
|
Depletion allowance
|
|
|
(44
|
)
|
|
|
216
|
|
Due to related parties
|
|
|
-
|
|
|
|
(38
|
)
|
Cash provided by discontinued
operations
|
|
|
-
|
|
|
|
78
|
|
Net cash provided by operating
activities
|
|
|
3,040
|
|
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(473
|
)
|
|
|
(395
|
)
|
Acquisition of intangible and other assets
|
|
|
(31
|
)
|
|
|
(125
|
)
|
Proceeds from sale of assets
|
|
|
5
|
|
|
|
4
|
|
Net cash used in investing
activities
|
|
|
(499
|
)
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net (payments on) proceeds from line of credit
|
|
|
(6,000
|
)
|
|
|
1,022
|
|
Proceeds from long-term debt
|
|
|
388
|
|
|
|
500
|
|
Payments on long-term debt
|
|
|
(430
|
)
|
|
|
(373
|
)
|
Net cash (used in) provided
by financing activities
|
|
|
(6,042
|
)
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(3,501
|
)
|
|
|
3,292
|
|
Cash and cash equivalents
at beginning of period
|
|
|
4,043
|
|
|
|
1,578
|
|
Cash and cash equivalents
at end of period
|
|
$
|
542
|
|
|
$
|
4,870
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
245
|
|
|
$
|
242
|
|
Cash paid for income taxes
|
|
$
|
2
|
|
|
$
|
-
|
|
See accompanying notes to condensed consolidated
financial statements.
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. (“THI”) and its subsidiary H.D.D. LLC (the
“LLC”) (collectively, “Truett-Hurst” or “the Company”) and have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information
and with the general instructions for quarterly reports filed on Form 10-Q and Article 8 of Regulation S-X. THI 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 THI.
On January 25, 2016, the
LLC sold its fifty percent interest in The Wine Spies, LLC (“Wine Spies”) with an effective date of December 31, 2015.
The results from Wine Spies, which were previously consolidated, have been deconsolidated in the unaudited interim condensed consolidated
financial statements. The gain on the sale along with the prior year results have been recorded in the condensed consolidated statements
of operations as part of discontinued operations.
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, 2016, 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, 2016 filed with the Securities and Exchange Commission (“SEC”) on September
28, 2016.
Quantities or results referred
to as “to date” or “as of this date” mean as of or to March 31, 2017, unless otherwise specifically noted.
References to “fiscal year” refer to the fiscal year ending on June 30
th
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 Annual Report on Form
10-K for the fiscal year ended June 30, 2016.
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 consolidated results of continuing operations.
Accounting Pronouncements
In November 2015, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 does not expect
the adoption of this standard to 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.
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
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 is currently evaluating the impact of this ASU.
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 is currently evaluating the impact of this ASU.
NOTE 2 – INVENTORIES, net
Inventories, net comprise:
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
(in thousands)
|
|
Grapes and bulk wine
|
|
$
|
5,940
|
|
|
$
|
8,413
|
|
Bottled wine
|
|
|
13,072
|
|
|
|
11,262
|
|
Bottling materials and other
|
|
|
340
|
|
|
|
322
|
|
|
|
|
19,352
|
|
|
|
19,997
|
|
Less: inventory reserves
|
|
|
(16
|
)
|
|
|
(79
|
)
|
Total inventories, net
|
|
$
|
19,336
|
|
|
$
|
19,918
|
|
NOTE 3 – PROPERTY AND EQUIPMENT, net
Property and equipment,
net comprise:
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
(in thousands)
|
|
Land and land improvements
|
|
$
|
3,260
|
|
|
$
|
3,231
|
|
Building and improvements
|
|
|
1,431
|
|
|
|
1,380
|
|
Machinery and equipment
|
|
|
2,027
|
|
|
|
1,935
|
|
Vineyard development
|
|
|
554
|
|
|
|
554
|
|
Vineyard equipment
|
|
|
88
|
|
|
|
88
|
|
Furniture and fixtures
|
|
|
285
|
|
|
|
262
|
|
Leasehold improvements
|
|
|
26
|
|
|
|
190
|
|
Vehicles
|
|
|
85
|
|
|
|
85
|
|
|
|
|
7,756
|
|
|
|
7,725
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,400
|
)
|
|
|
(2,142
|
)
|
Total property and equipment, net
|
|
$
|
5,356
|
|
|
$
|
5,583
|
|
Total depreciation and
amortization expense for the three and nine months ended March 31, 2017 was $0.2 million and $0.6 million, respectively, compared
to $0.1 million and $0.4 million for the same periods in fiscal year 2016.
NOTE 4 – BORROWINGS
The Company’s indebtedness
is comprised primarily of bank loans including lines of credit and long-term debt.
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
Lines of Credit
The credit facilities,
which mature on July 31, 2017, include (a) 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”), (b) a capital equipment line with a maximum commitment
of $0.5 million which carries an interest rate of 2.25% above floating One-Month LIBOR, and (c) a foreign exchange facility with
a maximum commitment of $0.1 million which allows 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 nine months ended March 31, 2017.
The credit facilities are
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 loan 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).
During the fourth quarter
of fiscal year 2017, the Company received notification from its lender under the credit facilities that, as of December 31, 2016
and March 31, 2017, the Company was not in compliance with a certain covenant under the credit facilities. On April 19, 2017 and
May 9, 2017, the parties entered into waiver agreements under which the lender waived the breach of such covenant, calculated as
of December 31, 2016 and March 31, 2017, respectively. The Company expects to be in compliance in all material aspects with the
covenants set forth under its credit facilities as of June 30, 2017.
Long-Term Debt
Long-term debt comprises:
|
|
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
(in thousands except payment information)
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
Note 1
|
|
(1)
|
|
$
|
2,750
|
|
|
$
|
2,851
|
|
Note 2
|
|
(2)
|
|
|
64
|
|
|
|
120
|
|
Note 3
|
|
(3)
|
|
|
180
|
|
|
|
244
|
|
Note 4
|
|
(4)
|
|
|
-
|
|
|
|
57
|
|
Note 5
|
|
(5)
|
|
|
301
|
|
|
|
392
|
|
Note 6
|
|
(6)
|
|
|
327
|
|
|
|
-
|
|
|
|
|
|
|
3,622
|
|
|
|
3,664
|
|
Less: current maturities
|
|
|
|
|
(507
|
)
|
|
|
(475
|
)
|
Total long-term debt
|
|
|
|
$
|
3,115
|
|
|
$
|
3,189
|
|
|
(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 January 15, 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 1, 2019; at 3.75% interest.
|
|
(4)
|
On November 30, 2014, the Company acquired the unrestricted use of the Stonegate trademark in exchange
for a trademark release payment which is to be made over time and is accounted for as a note payable. The note payable has three
equal installments: a) within five days of November 30, 2014, b) on October 31, 2015, and c) on July 31, 2016. The note does not
accrue interest outstanding on the principal. An imputed interest rate of 5.5% was assessed under GAAP and the impact was considered
immaterial.
|
|
(5)
|
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.
|
|
(6)
|
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.
|
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
Future principal and interest payments for the long-term debt as
of March 31, 2017 are as follows:
Years ending June 30,
|
(in thousands)
|
2017 (remaining three months)
|
|
$
|
129
|
|
2018
|
|
|
491
|
|
2019
|
|
|
434
|
|
2020
|
|
|
249
|
|
2021
|
|
|
144
|
|
Thereafter
|
|
|
2,175
|
|
|
|
|
3,622
|
|
Add: estimated interest payments
|
|
|
542
|
|
Total future principal and interest payments
|
|
$
|
4,164
|
|
NOTE 5 – ACCOUNTS PAYABLE
Accounts payable comprise:
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
(in thousands)
|
|
Trade accounts payable
|
|
$
|
2,868
|
|
|
$
|
1,351
|
|
Grape contracts payable
|
|
|
156
|
|
|
|
-
|
|
Total accounts payable
|
|
$
|
3,024
|
|
|
$
|
1,351
|
|
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Leases
The Company leases one
of its tasting rooms and a winery production facility. The lease for both of these facilities was modified in July 2016. The modification
called for the Company to vacate the tasting room portion of the property no later than December 31, 2016, and the balance of the
space no later than May 31, 2017. The tasting room located on Westside Rd. was vacated as of December 31, 2016.
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 nine months ended March 31, 2017, respectively, compared to $0.1
million and $0.3 million for the same periods in fiscal year 2016.
Future lease commitments
are:
Years ending June 30,
|
(in thousands)
|
2017 (remaining three months)
|
|
$
|
43
|
|
2018
|
|
|
84
|
|
2019
|
|
|
90
|
|
2020
|
|
|
30
|
|
Thereafter
|
|
|
-
|
|
Total future lease payments
|
|
$
|
247
|
|
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 fiscal year 2017 were received in the first quarter of fiscal year 2017. Future
minimum grape and bulk wine inventory purchase commitments are as follows:
Years ending June 30,
|
|
Third-Parties
|
|
|
Related Parties
|
|
|
Total
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
1,652
|
|
|
$
|
-
|
|
|
$
|
1,652
|
|
2018
|
|
|
1,687
|
|
|
|
57
|
|
|
|
1,744
|
|
2019
|
|
|
649
|
|
|
|
-
|
|
|
|
649
|
|
Thereafter
|
|
|
316
|
|
|
|
-
|
|
|
|
316
|
|
Total grape and bulk purchase commitments
|
|
$
|
4,304
|
|
|
$
|
57
|
|
|
$
|
4,361
|
|
At March 31, 2017, total
future purchase commitments for finished goods were approximately $4.2 million and are expected to be fulfilled during the remainder
of fiscal year 2017 and continue into fiscal year 2018.
Customer Contracts
In March 2017, the Company
entered into a three-year contract ending December 31, 2019 with a new customer. As part of the contract, the Company committed
to the following minimum performance requirement:
Contract year 1:
|
2,500 cases
|
|
Contract year 2:
|
5,000 cases
|
|
Contract year 3:
|
10,000 cases
|
|
TRUETT-
HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
Production and 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 an average of $2.85 per case to be bottled in a one-year period. During fiscal year 2016, the Company transferred some
of its bulk wine inventory to a storage facility owned by a related party. At March 31, 2017, approximately 42% of its bulk wine
inventory was stored at the related party location.
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 consolidated balance sheets, statements of operations, or statements of cash flows.
On January 29, 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 deny the claims, deny all wrongdoing, and deny that they caused any
harm to MWG. 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. The Court ruled the cases
were sufficiently related and should be tried together. A new trial date has been set for November 3, 2017. No amount has been
recorded in the condensed consolidated financial statements related to this suit. On March 22, 2017, the Company received notice
from its directors and officers (“D&O”) insurance carrier that 50% of the legal fees associated with the defense
of Phil Hurst will be covered under the D&O insurance policy subject to a $150,000 retention amount.
The Company settled outstanding
litigation related to the lease of one of its tasting rooms and a winery production facility, 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 will vacate the balance of the space no later than May 31, 2017. The Company received payments
of $0.7 million and $0.15 million during the first and second quarters of fiscal year 2017, respectively. The balance of $0.15
million is held in an escrow account with the amount payable upon vacating the winery production facility by May 31, 2017. The
$0.15 million receivable is recorded in accounts receivable on the condensed consolidated balance sheets. The entire $1.0 million
was recorded as a gain in other income on the condensed consolidated statements of operations. The gain was offset by a reserve
for abandoned assets in the amount of $0.1 million. The $0.1 million represents the book value of assets that were left at the
property when the Company vacated the tasting room premises.
Exchange and Tax
Receivable Agreement
The Company has an exchange
agreement with the existing owners of the LLC (the “LLC members”), 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 units in the LLC (“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.
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
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 March 31, 2017 and June 30, 2016 for these obligations on the condensed consolidated balance sheets.
NOTE 7 – DISCONTINUED OPERATIONS
On January 25, 2016, the
LLC sold its fifty percent interest in Wine Spies with an effective date of December 31, 2015. The results from Wine Spies, which
were previously consolidated, have been deconsolidated in the condensed consolidated financial statements. The gain on the sale
along with the prior year results have been recorded in the condensed consolidated statements of operations as part of discontinued
operations. The Company has no continuing relationship with Wine Spies. For the nine months ended March 31, 2016, net income from
discontinued operations was $0.05 million. Earnings per share from discontinued operations were less than one cent.
NOTE 8 – STOCK-BASED COMPENSATION
Equity Incentive Plan
The Company has granted
restricted stock awards, restricted stock units and stock options to employees, directors and non-employees under its 2012 Stock
Incentive Plan (the “2012 Plan”). As of March 31, 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 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, 2016
|
|
|
5,264
|
|
|
$
|
3.80
|
|
|
|
-
|
|
|
$
|
12
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Released
|
|
|
(2,632
|
)
|
|
|
3.80
|
|
|
|
-
|
|
|
|
(6
|
)
|
Forfeited, cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2017
|
|
|
2,632
|
|
|
$
|
3.80
|
|
|
|
0.7
|
|
|
$
|
6
|
|
Expected to vest at March 31, 2017
|
|
|
2,632
|
|
|
$
|
3.80
|
|
|
|
0.7
|
|
|
$
|
6
|
|
A summary of the 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, 2016
|
|
|
88,930
|
|
|
$
|
3.30
|
|
|
|
-
|
|
|
$
|
204
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Released
|
|
|
(45,180
|
)
|
|
|
1.66
|
|
|
|
-
|
|
|
|
(103
|
)
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, cancelled or expired
|
|
|
(43,750
|
)
|
|
|
5.00
|
|
|
|
-
|
|
|
|
(101
|
)
|
Outstanding at March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Expected to vest at March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
A summary of the 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, 2016
|
|
|
465,000
|
|
|
$
|
2.95
|
|
|
|
-
|
|
|
$
|
(305
|
)
|
Granted
|
|
|
100,000
|
|
|
|
1.78
|
|
|
|
-
|
|
|
|
52
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, cancelled or expired
|
|
|
(320,000
|
)
|
|
|
3.56
|
|
|
|
-
|
|
|
|
(405
|
)
|
Outstanding at March 31, 2017
|
|
|
245,000
|
|
|
$
|
1.67
|
|
|
|
9.21
|
|
|
$
|
152
|
|
Options Vested
|
|
|
47,500
|
|
|
$
|
1.65
|
|
|
|
-
|
|
|
$
|
30
|
|
Options Non-Vested
|
|
|
197,500
|
|
|
$
|
1.67
|
|
|
|
-
|
|
|
$
|
122
|
|
Options Exercisable
|
|
|
47,500
|
|
|
$
|
1.65
|
|
|
|
-
|
|
|
$
|
30
|
|
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
The following table summarizes
stock-based compensation included in the condensed consolidated statements of operations for the three and nine months ended March
31, 2017 and 2016:
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
(in thousands)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales and marketing
|
|
$
|
8
|
|
|
$
|
18
|
|
|
$
|
25
|
|
|
$
|
36
|
|
General and administrative
|
|
|
(59
|
)
|
|
|
84
|
|
|
|
71
|
|
|
|
237
|
|
Total stock-based compensation
|
|
$
|
(51
|
)
|
|
$
|
102
|
|
|
$
|
96
|
|
|
$
|
273
|
|
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 amounts 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 10-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 in 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 income (expense). The maturity date of the swap is May 31, 2022. The
interest rate swap balance was $0.02 million and ($0.1) million for both the fair value and the Level 2 value as of March 31, 2017
and June 30, 2016, respectively. The balance for the interest rate swap is included in other current assets and accrued expenses
on the condensed consolidated balance sheets.
NOTE 10 – INCOME TAXES
For the nine months ended March 31, 2017, the
Company recorded income tax expense of $0.002 million and had an effective tax rate of less than 1%. The Company has net operating
loss (“NOL”) carryforwards available to offset fiscal year 2017 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 Company’s earnings are not subject to corporate level taxes.
|
|
·
|
Operating losses for the periods or utilization of NOL carryforwards.
|
|
·
|
A full valuation allowance recorded 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 nine months ended March 31, 2017.
|
There were no unrecognized
tax benefits at March 31, 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.
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(Unaudited)
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 and wine clubs. 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 tables reflect net sales, cost
of sales and gross profit by segment for continuing operations for each of the three and nine months ended March 31, 2017 and 2016,
respectively:
|
|
Three Months Ended March 31,
|
|
|
|
(in thousands)
|
|
|
|
Wholesale
|
|
|
Direct to Consumer
|
|
|
Total
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
$
|
3,924
|
|
|
$
|
3,491
|
|
|
$
|
1,416
|
|
|
$
|
1,415
|
|
|
$
|
5,340
|
|
|
$
|
4,906
|
|
Cost of Sales
|
|
|
2,834
|
|
|
|
2,681
|
|
|
|
484
|
|
|
|
505
|
|
|
|
3,318
|
|
|
|
3,186
|
|
Gross Profit
|
|
$
|
1,090
|
|
|
$
|
810
|
|
|
$
|
932
|
|
|
$
|
910
|
|
|
$
|
2,022
|
|
|
$
|
1,720
|
|
Gross Profit %
|
|
|
27.8
|
%
|
|
|
23.2
|
%
|
|
|
65.8
|
%
|
|
|
64.3
|
%
|
|
|
37.9
|
%
|
|
|
35.1
|
%
|
|
|
Nine Months Ended March 31,
|
|
|
|
(in thousands)
|
|
|
|
Wholesale
|
|
|
Direct to Consumer
|
|
|
Total
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
$
|
12,378
|
|
|
$
|
15,451
|
|
|
$
|
4,584
|
|
|
$
|
4,329
|
|
|
$
|
16,962
|
|
|
$
|
19,780
|
|
Cost of Sales
|
|
|
9,430
|
|
|
|
11,753
|
|
|
|
1,644
|
|
|
|
1,519
|
|
|
|
11,074
|
|
|
|
13,272
|
|
Gross Profit
|
|
$
|
2,948
|
|
|
$
|
3,698
|
|
|
$
|
2,940
|
|
|
$
|
2,810
|
|
|
$
|
5,888
|
|
|
$
|
6,508
|
|
Gross Profit %
|
|
|
23.8
|
%
|
|
|
23.9
|
%
|
|
|
64.1
|
%
|
|
|
64.9
|
%
|
|
|
34.7
|
%
|
|
|
32.9
|
%
|
Significant Customer Information:
The following tables set forth concentrations
of wholesale sales and accounts receivable as a percent of each total:
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total
|
|
|
|
Percentage of Wholesale Sales
|
|
|
Accounts Receivable
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
30
|
%
|
|
|
41
|
%
|
|
|
24
|
%
|
|
|
41
|
%
|
|
|
31
|
%
|
|
|
45
|
%
|
Customer B
|
|
|
26
|
%
|
|
|
15
|
%
|
|
|
30
|
%
|
|
|
18
|
%
|
|
|
27
|
%
|
|
|
13
|
%
|
International sales were
$0.2 million and $0.7 million for the three and nine months ended March 31, 2017, respectively, compared to $0.2 million and $0.7
million for the same periods of fiscal year 2016.
NOTE 12 – SUBSEQUENT EVENTS
The Company has evaluated all subsequent event
activity through the issue date of these condensed consolidated financial statements and concluded that no additional subsequent
events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes
to the condensed consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management’s
Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q
contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical
fact, regarding strategy, future operations, financial position, prospects, plans, opportunities, and objectives constitute “forward-looking
statements.” The words “may,” “will,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “potential” or “continue” and similar types of expressions
identify such statements, although not all forward-looking statements contain these identifying words. These statements are based
upon information that is currently available to the Company and or management’s current expectations, speak only as of the
date hereof, and are subject to risks and uncertainties. The Company expressly disclaims any obligation, except as required by
federal securities laws, or undertaking to update or revise any forward-looking statements contained herein to reflect any change
or expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking
statement is based, in whole or in part. The Company’s actual results may differ materially from the results discussed in
or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited
to, a reduction in the supply of grapes and bulk wine available to the Company; significant competition; any change in relationships
with retailers which could harm the Company’s business; the Company may not achieve or maintain profitability in the future;
the loss of key employees; a reduction in access to, or an increase in the cost of, the third-party services the Company uses to
produce its wine; credit facility restrictions on the Company’s current and future operations; failure to protect, or infringement
of, trademarks and proprietary rights; these factors should not be construed as exhaustive and should be read in conjunction with
the other cautionary statements that are included in this report. The Company undertakes no obligation to publicly update or review
any forward-looking statement, whether as a result of new information, future developments or otherwise. Risks that may affect
the Company’s operating results include, but are not limited to, those discussed in the “Risk Factors” section
of its Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with the SEC on September 28, 2016. Readers should
carefully review the risk factors described in the Annual Report on Form 10-K for the fiscal year ended June 30, 2016 and in other
documents that the Company files from time to time with the SEC.
The unaudited interim condensed
consolidated financial statements include the results of THI and its subsidiary, the LLC, and have been prepared in accordance
with GAAP for interim financial information and with the general instructions for quarterly reports filed on Form 10-Q and Article
8 of Regulation S-X. The disclosures do not include all the information necessary for audited financial statements in accordance
with GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes contained in the Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with
the SEC on September 28, 2016. In the opinion of the Company’s management, all adjustments, which include normal recurring
adjustments, considered necessary for a fair presentation have been included. All intercompany transactions and balances
have been eliminated. Unless otherwise indicated, the notes to the unaudited condensed consolidated financial statements relate
to the discussion of the Company’s continuing operations. The Company’s condensed consolidated financial statements
reflect all of the Company’s accounts, including those of its controlled subsidiary and the portion of equity in a consolidated
subsidiary that is not attributable to the Company, directly or indirectly, is presented as noncontrolling interests.
OVERVIEW OF BUSINESS [formatting of the
paragraphs in this section are inconsistent]
General
The Company is a holding
company incorporated as a Delaware corporation and its sole asset is a controlling equity interest in the LLC. Unless the context
suggests otherwise, references in this report to “Truett-Hurst” and the “Company” refer to Truett-Hurst,
Inc. and its consolidated subsidiary. Truett-Hurst consolidates the financial results of the LLC and records a noncontrolling interest
for the economic interest in the LLC it does not own. The Company’s amended and restated certificate of incorporation authorizes
two classes of common stock, Class A common stock and Class B common stock.
Quantities or results referred
to as “to date” or “as of this date” mean as of or to March 31, 2017, unless otherwise specifically noted.
References to “fiscal year” refer to the fiscal year ending on June 30th of the designated year. For example, “fiscal
year 2017” refers to the fiscal year ended June 30, 2017. This Quarterly Report on Form 10-Q references certain trademarks
and registered trademarks which may be trademarks or registered trademarks of their respective owners.
On January 25, 2016, the
LLC sold its fifty percent interest in Wine Spies with an effective date of December 31, 2015. The results from Wine Spies, which
were previously consolidated, have been deconsolidated in the Company’s condensed consolidated financial statements. The
gain on the sale along with the prior year results have been recorded in the condensed consolidated statements of operations on
the discontinued operations line. Prior periods have been accounted for on a consistent basis.
The Company produces and
sells premium, super-premium, and ultra-premium wines made generally from grapes purchased from California-based growers. In addition,
the Company purchases semi-finished bulk wine under contract and opportunistically on the spot market. On a more limited basis,
the Company also purchases finished goods from both foreign and domestic producers. The Company is headquartered in Sonoma County,
California with tasting rooms in the Dry Creek and Russian River valleys. The Company owns its tasting room and winery in the Dry
Creek Valley and leases the tasting room and winery located in the Russian River Valley. The Company vacated its tasting room in
the Russian River Valley prior to December 31, 2016. The wines include Pinot Noir, Chardonnay, Sauvignon Blanc, Zinfandel, Petite
Sirah, Merlot and Cabernet Sauvignon and are sold across a number of price points via two distinct distribution channels: three-tier
and direct to consumer. The business model is a combination of direct to consumer sales, traditional three-tier brand sales and
retail exclusive brand sales. The Company owns, designs and develops its brands, including those developed and sold on a retailer
exclusive basis. The brands are differentiated and marketed through innovative packaging and label designs.
Wines in the three-tier
channel are sold to distributors with programs available to the broad market or to specific retailers on an exclusive basis. The
traditional three-tier distribution business consists of sales of VML, Healdsburg Ranches, Colby Red and Bradford Mountain branded
wines. Through a retail exclusive brand model, the Company works with retail partners to develop innovative brands which resonate
with their customers and are intended to increase store traffic and expand exclusive brand sales. The retail exclusive model allows
the Company to own the brands it creates, which the Company believes differentiates it from the traditional private label model,
and allows it the option of expanding the brands into national and international markets, thereby increasing sales and building
its brand equity. The direct to consumer channel consists of sales of products produced by the Company through its tasting
rooms, wine clubs and its winery websites.
Strategic Objectives
There are three primary
categories into which the Company sells its wine: premium ($12-$14 per bottle retail price), super-premium ($15-$24 per bottle
retail price), and ultra-premium ($25-$49 per bottle retail price). The Company believes it can benefit from growth at the premium
and above price points and continue to grow the business relying on its competitive strengths: its experienced and knowledgeable
team; its relationships with the world’s top wine distributors and retailers; and its innovative approach to distribution
and brand development. The Company intends to continue growing by:
|
·
|
Developing innovative
retail exclusive products that meet the needs of wine retailers.
The Company has a reputation for developing innovative retail
exclusive brands and working with retail partners on unique programs to support sales of those products. With its branding expertise,
the Company intends to continue innovating and building its market share with global wine retailers who are focused on increasing
their profitability through retail exclusive offerings.
|
|
·
|
Growing the customer base to include additional major U.S. retail chains.
The Company is actively pursuing relationships with the largest retail chains in the United States.
|
|
·
|
Expanding the direct to consumer business.
The Company’s wine clubs continue to grow due to growing consumer awareness of the brands from targeted public relations, exciting wine club events and advertising. The direct to consumer business generally generates higher gross margins and the Company intends to continue building this distribution channel in order to further growth.
|
|
·
|
Marketing to key international markets.
Since fiscal year 2014, the Company has had a partnership agreement in place with the Trialto Wine Group, LTD, based in Vancouver Canada, to distribute the Truett-Hurst family of brands throughout Canada. The Company also continues to review selective brand development and distribution opportunities in other international markets.
|
|
·
|
Developing new ways to engage customers and to distribute products.
The Company continues to be discovery-oriented in its approach and is always looking for new innovations in and approaches to the global wine market. The Company believes that traditional wine marketing, to some degree, has stymied creativity and believes the Company’s innovative branding expertise allows the Company to rapidly capitalize on evolving customer demands.
|
RESULTS OF OPERATIONS
Factors Affecting Operating Results
Net sales are affected
by advertising, discounts and promotions, merchandising, packaging and in the wholesale segment, the availability of display space
at retailers, all of which have a significant impact on consumers’ buying decisions. Continued growth of net sales and profits
will depend, substantially, on the continued popularity of the Company’s new and existing brands, its ability to effectively
manage sales channels, and its ability to maintain sufficient product supply to meet expected growth in demand.
Cost of sales for the wholesale
and direct to consumer segments includes wine-related inputs, such as grapes and semi-finished bulk wine, bottling materials, such
as bottles, capsules, corks and labeling materials, labor and overhead expenses including inbound and outbound freight, storage
and barrel depreciation.
Comparison of the Three and Nine Months Ended March 31, 2017
and 2016
The following table compares
sales and gross profit by reporting segment:
|
|
Three Months Ended March 31,
|
|
|
|
(in thousands, except percentages)
|
|
|
|
Wholesale
|
|
|
Direct to Consumer
|
|
|
Total
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
$
|
3,924
|
|
|
$
|
3,491
|
|
|
$
|
1,416
|
|
|
$
|
1,415
|
|
|
$
|
5,340
|
|
|
$
|
4,906
|
|
Cost of Sales
|
|
|
2,834
|
|
|
|
2,681
|
|
|
|
484
|
|
|
|
505
|
|
|
|
3,318
|
|
|
|
3,186
|
|
Gross Profit
|
|
$
|
1,090
|
|
|
$
|
810
|
|
|
$
|
932
|
|
|
$
|
910
|
|
|
$
|
2,022
|
|
|
$
|
1,720
|
|
Gross Profit %
|
|
|
27.8
|
%
|
|
|
23.2
|
%
|
|
|
65.8
|
%
|
|
|
64.3
|
%
|
|
|
37.9
|
%
|
|
|
35.1
|
%
|
|
|
Nine Months Ended March 31,
|
|
|
|
(in thousands, except percentages)
|
|
|
|
Wholesale
|
|
|
Direct to Consumer
|
|
|
Total
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
$
|
12,378
|
|
|
$
|
15,451
|
|
|
$
|
4,584
|
|
|
$
|
4,329
|
|
|
$
|
16,962
|
|
|
$
|
19,780
|
|
Cost of Sales
|
|
|
9,430
|
|
|
|
11,753
|
|
|
|
1,644
|
|
|
|
1,519
|
|
|
|
11,074
|
|
|
|
13,272
|
|
Gross Profit
|
|
$
|
2,948
|
|
|
$
|
3,698
|
|
|
$
|
2,940
|
|
|
$
|
2,810
|
|
|
$
|
5,888
|
|
|
$
|
6,508
|
|
Gross Profit %
|
|
|
23.8
|
%
|
|
|
23.9
|
%
|
|
|
64.1
|
%
|
|
|
64.9
|
%
|
|
|
34.7
|
%
|
|
|
32.9
|
%
|
For the three months ended
March 31, 2017, net sales increased $0.4 million (8.8%) and for the nine months ended March 31, 2017, net sales decreased $2.8
million (14.2%). Net sales for the quarter increased due to additional promotional activities for several of the Company’s
brands in the wholesale segment. A significant portion of the nine month decrease relates to a single national retailer that did
not renew a promotional rollout from the prior year. The consolidated gross profit margin increased for the three and nine months
ended March 31, 2017 from 35.1% to 37.9% and from 32.9% to 34.7%, respectively. The gross profit margin improvement was due to
a relatively greater mix of direct to consumer sales compared to wholesale sales.
Wholesale net sales increased
12.4% for the three months ended March 31, 2017 and decreased 19.9% for the nine months ended March 31, 2017. The year to date
decrease was primarily caused by the nonrecurring promotional rollout from the prior year noted above and the sales composition
being more heavily weighted towards lower-priced product offerings.
Direct to consumer net
sales for the three months ended March 31, 2017 were in line compared to the same period in the prior year and increased by 5.9%
for the nine months ended March 31, 2017 compared to the same period in the prior year. The increase in direct to consumer net
sales for the nine months ended March 31, 2017 was primarily due to continued efforts to grow the channel through wine club and
tasting room sales, as well as special offers presented via email to wine club members and non-member consumers.
International sales were
$0.2 million and $0.7 million for the three and nine months ended March 31, 2017, respectively, which were flat compared to the
same periods in fiscal year 2016.
Sales discounts and depletion
allowances are recorded as a reduction of sales at the time of sale. Sales discounts and depletion allowances were $1.0 million
and $3.1 million for the three and nine months ended March 31, 2017, respectively, compared to $1.1 million and $3.8 million for
the same periods in fiscal year 2016. Sales discounts and depletion allowances were 15.4% of sales for both the three and nine
months ended March 31, 2017, respectively, compared to 18.5% and 16.1% for the same periods in fiscal year 2016.
Sales and Marketing
Sales and marketing expenses
consist primarily of personnel costs, advertising and other costs for marketing and promoting the Company’s products. Advertising
costs are expensed as incurred and were $0.1 million and $0.3 million for the three and nine months ended March 31, 2017, respectively,
compared to $0.04 million and $0.3 million for the same periods in fiscal year 2016.
A comparative summary of
sales and marketing expenses follows:
|
|
Three Months Ended March 31,
|
|
|
Nine Months Ended March 31,
|
|
|
|
(in thousands, except for percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
% Change
|
|
|
2017
|
|
|
2016
|
|
|
Decrease
|
|
|
% Change
|
|
Sales and marketing
|
|
$
|
1,236
|
|
|
$
|
1,103
|
|
|
$
|
133
|
|
|
|
12.1
|
%
|
|
$
|
3,843
|
|
|
$
|
3,925
|
|
|
$
|
(82
|
)
|
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales
|
|
|
23.1
|
%
|
|
|
22.5
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
22.7
|
%
|
|
|
19.8
|
%
|
|
|
2.9
|
%
|
|
|
|
|
Sales and marketing expenses
increased 12.1% for the three months ended March 31, 2017 due to the recruitment of an additional sales rep and decreased 2.1% for
the nine months ended March 31, 2017, compared to the same periods in fiscal year 2016. The decrease for the nine months ended
March 31, 2017 is largely due to a reduction in point of sale expenses and storage fees, offset by increases in freight and outside
services.
Amounts billed to customers
for shipping and handling are recorded as sales and costs incurred for shipping and handling are recorded as a sales and marketing
expense. For the three and nine months ended March 31, 2017, shipping costs were $0.3 million and $0.8 million, respectively, about
$0.1 million higher compared to the same periods in fiscal year 2016.
General and Administrative
General and administrative
expenses include the costs associated with personnel, professional fees, insurance and other expenses related to administrative
and compliance functions.
A comparative
summary of general and administrative expenses follows:
|
|
Three Months Ended March 31,
|
|
|
Nine Months Ended March 31,
|
|
|
|
(in thousands, except for percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase
|
|
|
% Change
|
|
|
2017
|
|
|
2016
|
|
|
Decrease
|
|
|
% Change
|
|
General and administrative
|
|
$
|
641
|
|
|
$
|
635
|
|
|
$
|
6
|
|
|
|
0.01
|
%
|
|
$
|
2,156
|
|
|
$
|
2,244
|
|
|
$
|
(88
|
)
|
|
|
-3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales
|
|
|
12.0
|
%
|
|
|
12.9
|
%
|
|
|
-0.9
|
%
|
|
|
|
|
|
|
12.7
|
%
|
|
|
11.3
|
%
|
|
|
-1.4
|
%
|
|
|
|
|
General and administrative
expense for the three months ended March 31, 2017 was in line with the same period in fiscal year 2016 and for the nine months
ended March 31, 2017 decreased 3.9% compared to the same period in fiscal year 2016. The decrease for the nine months ended March
31, 2017 was largely due to decreases in personnel related costs and outside services offset by increases in legal and consulting
expenses.
Interest Expense
Interest and loan fee amortization
was $0.07 million and $0.3 million for the three and nine months ended March 31, 2017, respectively, compared to $0.08 million
and $0.3 million for the same periods in fiscal year 2016.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company’s primary
sources of available cash are from operations, bank borrowings and equity offerings. The Company’s primary cash needs are
for funding working capital requirements (primarily inventory), capital expenditures for barrels and other equipment to facilitate
production, repayment of indebtedness (interest and principal payments) and other operating expenses. The Company is able to borrow
against working capital assets (accounts receivable and inventory) via an asset based bank loan.
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
Increase
(Decrease)
|
|
|
% Change
|
|
|
|
(in thousands, except percentages)
|
|
Working capital
|
|
$
|
13,811
|
|
|
$
|
12,940
|
|
|
$
|
871
|
|
|
|
6.7
|
%
|
Cash and cash equivalents
|
|
$
|
542
|
|
|
$
|
4,043
|
|
|
$
|
(3,501
|
)
|
|
|
-86.6
|
%
|
The Company had approximately
$5.7 million of availability under its revolving credit facility as of March 31, 2017, compared to $5.2 million in the prior year.
During the third quarter of fiscal year 2017, the Company’s average borrowings outstanding under its revolving credit facility
were $4.2 million with a range of $1.3 million compared to average borrowings of $6.6 million and a range of $5.3 million in the
prior year.
The weighted average interest
rate on the line of credit was 2.77% and 2.79% for the three and nine months ended March 31, 2017, respectively, compared to 2.68%
and 2.53% for the same periods in fiscal year 2016.
In July 2016, the capital
equipment line of credit from the prior fiscal year was converted to a term loan. The interest rate on the loan is 3.95% with a
maturity date of July 1, 2020 and monthly payments of $0.09 million.
The Company’s lines
of credit, which were refinanced on July 29, 2016, include (a) a revolving line of credit with a maximum commitment of $10.0 million
which accrues interest at 2.25% above the LIBOR, (b) a capital equipment line of credit with a maximum commitment of $0.5 million
which carries an interest rate of 2.25% above floating One-Month LIBOR, and (c) a foreign exchange facility with a maximum commitment
of $0.1 million which allows the Company to enter into any spot or forward transaction to purchase or sell a foreign currency with
the bank. The Company did not use the foreign exchange facility during the third quarter of fiscal year 2017. These lines of credit
mature on July 31, 2017.
The outstanding balances
on the lines of credit are:
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
(in thousands)
|
|
Lines of Credit
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
3,984
|
|
|
$
|
9,924
|
|
Equipment line of credit
|
|
|
327
|
|
|
|
387
|
|
Total lines of credit
|
|
$
|
4,311
|
|
|
$
|
10,311
|
|
Bank borrowings are
collateralized by substantially all of the Company’s assets and are supported by guaranties from certain LLC members with
significant ownership positions. Availability on the revolving line of credit is subject to a monthly borrowing base and compliance
with certain covenants, including, without limitation, a minimum current assets to current liabilities ratio (measured quarterly),
and a debt to effective tangible net worth ratio (measured quarterly). When the lines of credit were renewed on July 29, 2016,
the previous minimum EBITDA covenant was replaced with a debt service coverage ratio (measured quarterly on a trailing twelve-month
basis).
During the fourth quarter
of fiscal year 2017, the Company received notification from its lender under the credit facilities that, as of December 31, 2016
and March 31, 2017, the Company was not in compliance with a certain covenant under the credit facilities. On April 19, 2017 and
May 9, 2017, the parties entered into waiver agreements under which the lender waived the breach of such covenant, calculated as
of December 31, 2016 and March 31, 2017, respectively. The Company expects to be in compliance in all material aspects with the
covenants set forth under its credit facilities as of June 30, 2017.
The Company believes
that its cash position, net cash provided by operating activities in coming periods, and the current lines of credit will be adequate
to finance working capital and operations needs for at least the next twelve months. The Company may, however, require additional
liquidity as it continues to execute its business strategy. The Company anticipates that to the extent that it requires additional
liquidity, it will be funded through the incurrence of indebtedness, additional equity financings or a combination of these potential
sources of liquidity, although no assurance can be given that such forms of capital will be available at all, or if available,
on terms acceptable to the Company.
Cash Flows
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
(in thousands)
|
|
|
Inc/(Dec)
|
|
Net cash provided by operating activities
|
|
$
|
3,040
|
|
|
$
|
2,659
|
|
|
$
|
381
|
|
Net cash (used in) investing activities
|
|
$
|
(499
|
)
|
|
$
|
(516
|
)
|
|
$
|
17
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(6,042
|
)
|
|
$
|
1,149
|
|
|
$
|
(7,191
|
)
|
Operating Activities
For the nine months ended March 31, 2017,
net cash provided by operating activities was $3.0 million, which was an increase of $0.4 million compared to the same period last
fiscal year. The changes in cash flows provided by operating activities in the first nine months of fiscal year 2017 are attributable
to a net improvement in working capital investment with decreases in accounts receivable and inventories, and an increase in bulk
wine deposits, coupled with an increase in accounts payable. Those improvements were partially offset by a decrease in various
accrued expense categories.
Investing Activities
Net cash used in investing activities was
relatively flat year over year with no significant changes to investment in property and equipment or intangible assets.
Financing Activities
Net cash used in financing activities was
$6.0 million for the nine months ended March 31, 2017 compared to net cash provided by financing activities of $1.1 million for
the nine months ended March 31, 2016. This decrease is the result of the Company paying down its line of credit in the amount of
$0.6 million during the three months ended March 31, 2017 and $5.9 million for the nine months ended March 31, 2017. Payments on
the Company’s term loans were $0.1 million during the three months ended March 31, 2017 and $0.4 million for the nine months
ended March 31, 2017.
Contractual Obligations and Commitments
Financing Agreements
The Company’s indebtedness is comprised primarily of bank
loans including lines of credit and long-term debt.
Lines of Credit
See discussion under “Liquidity and Capital Resources”
above.
Long-Term Debt
Long-term debt consists of various notes
payable to a bank secured by specific property and/or equipment. The total outstanding principal balance on all the notes as of
March 31, 2017 was $3.6 million. The interest rates and maturity dates of the notes are described in Note 4 - “Borrowings”
of the condensed consolidated financial statements of this Quarterly Report on Form 10-Q.
Concentration of Credit Risk and Off-Balance
Sheet Arrangements
The Company’s cash is held in highly
rated credit institutions. Although the Company tries to limit the amount of credit exposure with any one financial institution,
the Company does in the normal course of business, maintain cash balances in excess of federally insured limits.
Accounts receivable consists primarily
of trade receivables from customers. The Company reviews accounts receivable regularly and makes estimates for an allowance when
there is doubt as to the collectability of individual balances. The Company’s accounts receivable credit risk is not concentrated
within any one geographic area. The Company has national distribution agreements with multi-state distributors and these distributors
make up a significant amount of the accounts receivable; however, the Company believes the accounts receivable credit risk is limited.
The Company has not experienced any material charge offs.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet
risks related to foreign exchange contracts, option contracts or other foreign hedging arrangements.
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 fiscal year 2017 were received during the first quarter. 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)
|
|
2017
|
|
$
|
1,652
|
|
|
$
|
-
|
|
|
$
|
1,652
|
|
2018
|
|
|
1,687
|
|
|
|
57
|
|
|
|
1,744
|
|
2019
|
|
|
649
|
|
|
|
-
|
|
|
|
649
|
|
Thereafter
|
|
|
316
|
|
|
|
-
|
|
|
|
316
|
|
Total grape and bulk purchase commitments
|
|
$
|
4,304
|
|
|
$
|
57
|
|
|
$
|
4,361
|
|
At March 31, 2017, total future purchase
commitments for finished goods total approximately $4.2 million and are expected to be fulfilled during the remainder of fiscal
year 2017 and continue into fiscal year 2018.
Production and 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 an average
of $2.85 per case to be bottled in a one-year period. During fiscal year 2016, the Company transferred bulk wine to a storage facility
owned by related party. At March 31, 2017, approximately 42% of its bulk wine inventory was stored at the related party location.
The terms of the storage agreement are on the same basis as similar non-related party agreements.
Leases
During the first quarter of fiscal year
2017, the Company modified a tasting room and winery production facility lease agreement as described in Part II, Item 1. Legal
Proceedings. The future lease commitments as presented below give effect to the modified lease terms.
The Company has two lease agreements for
administrative office space. Both are 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 $0.02 million for the three and nine months ended March 31, 2017, respectively, compared to $0.1 million and $0.3
million for the same periods in fiscal year 2016.
Future lease commitments are:
Years ending June 30,
|
(in thousands)
|
2017 (remaining three months)
|
|
$
|
43
|
|
2018
|
|
|
84
|
|
2019
|
|
|
90
|
|
2020
|
|
|
30
|
|
Thereafter
|
|
|
-
|
|
Total future lease payments
|
|
$
|
247
|
|
The Company settled outstanding litigation
related to the lease of one of its tasting rooms and a winery production facility, 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 will vacate the balance of the space no later than May 31, 2017. The Company received payments
of $0.7 million and $0.15 million during the first and second quarters of fiscal year 2017, respectively. The balance of $0.15
million is held in an escrow account with the amount payable upon vacating the winery production facility by May 31, 2017. The
$0.15 million receivable is recorded in accounts receivable on the condensed consolidated balance sheets. The entire $1.0 million
was recorded as a gain in other income on the condensed consolidated statements of operations. The gain was offset by a reserve
for abandoned assets in the amount of $0.1 million. The $0.1 million represents the book value of assets that were left at the
property when the Company vacated the tasting room premises.
Effects of Inflation and Changing Prices
The results of operations and financial
condition have not been materially affected by inflation and changing prices; however, as agricultural commodities, grape and bulk
wine prices experience certain levels of variability. The Company intends to pass along rising costs through increased selling
prices, subject to normal competitive conditions. There can be no assurances, however, that the Company will be able to pass along
rising costs through increased selling prices effectively. In addition, the Company continues to identify on-going cost savings
initiatives.
Critical Accounting Policies and Estimates
There have been
no material changes to the critical accounting policies and estimates previously disclosed in the Annual Report on Form 10-K for
the fiscal year ended June 30, 2016.
Accounting Pronouncements
See Note 1 –
“Basis of Presentation and Significant Accounting Policies” of the condensed consolidated financial statements of this
Quarterly Report on Form 10-Q for the summary of accounting pronouncements.