NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim condensed consolidated financial statements include the results of Truett-Hurst, Inc. (the “Company”) and its subsidiary H.D.D. LLC (the “LLC”). They have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with general instructions for quarterly reports filed on Form 10-Q and Article 8 of Regulation S-X. The Company consolidates the financial results of the LLC and records a noncontrolling interest representing the portion of equity ownership in the LLC that is not attributable to the Company.
The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The accompanying unaudited condensed consolidated financial statements were prepared on the same basis as the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018, 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, 2018 filed with the Securities and Exchange Commission (“SEC”) on October 15, 2018.
Quantities or results referred to as “to date” or “as of this date” mean as of or to September 30, 2018, unless otherwise specifically noted. References to “FY” or “fiscal year” refer to the fiscal year ending on June 30
th
of the designated year.
Critical Accounting Policies and Estimates
Except as described below, and within the Recently Adopted Accounting Pronouncements discussion below, 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, 2018.
Revenue recognition:
Revenue is recognized once performance obligations under the terms of the Company’s contracts with its customers have been satisfied; this occurs at a point in time when control of the promised product or service is transferred to customers. Generally, all of the Company’s contracts with its customers have a single performance obligation and are short term in nature. Revenue is measured in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company accounts for shipping and handling activities as costs to fulfill its promise to transfer the associated products. Accordingly, the Company records amounts billed for shipping and handling costs as a component of net sales, and classifies such costs as a component of costs of sales. The Company’s products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been material to the Company.
Wine club membership sales are made under contracts with customers, which specify the quantity and timing of future wine shipments. Customer credit cards are charged in advance of quarterly wine shipments in accordance with each contract. The Company transfers control and recognizes revenue for these contracts upon shipment of the wine to the customer.
6
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Tasting room and internet wine sales are paid for at the time of sale. The Company transfers control and recognizes revenue for this wine when the product is either received by the customer (on-site tasting room sales) or upon shipment to the customer (web
site/internet sales).
We hold various public and private events for customers and their wine club members. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. The balance of payments are due on the date of the event. The Company recognizes event revenue on the date the event is held.
Other revenue also includes tasting fees and retail sales, which are paid for and received or consumed at the time of sale. The Company transfers control and recognizes revenue at the time of sale.
Reclassifications
Certain prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation. See further discussion of reclassifications made within Note 2 – Discontinued Operations. Excluding the adjustment made to reflect the discontinued operations, any additional reclassifications had no material effects on the reported condensed consolidated results of continuing operations.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09:
Revenue from Contracts with Customers (Topic 606),
a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017.
Effective July 1, 2018, we adopted the FASB amended guidance regarding the recognition of revenue from contracts with customers using the modified retrospective application method.
The new revenue standard is required to be applied retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company has evaluated the effect of the standard and concluded it will not be material to the Company’s financial reporting. Additionally, the Company has concluded that the application of the standard does not have a material effect that would require a retrospective adjustment.
Our revenue consists primarily of the sale of wine through our Direct to Consumer (DTC) activities. Revenues consist of sales of products produced by us through our tasting rooms, wine clubs and our winery websites.
We have evaluated our business activities in an attempt to identify any other revenue generating activities under the disaggregation disclosure criteria outlined within the amended guidance and concluded that any other revenue generating activities are immaterial for separate disclosure.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 made eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted the provisions of ASU 2016-15 effective July 1, 2018, and the adoption of this standard had no impact the Company’s consolidated statement of cash flows.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Changes to the terms or conditions of a share-based payment award that do not impact the fair value of the award, vesting conditions, and the classification as an equity or liability instrument will not need to be assessed under modification accounting. The Company adopted the provisions of ASU 2017-09 effective July 1, 2018. The adoption of this standard did not impact the Company’s accounting for its stock-based compensation.
7
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This update requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include both qualitative and quantitative information. The effective date for ASU 2016-02 is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier adoption permitted. The Company is still evaluating the impact of ASU 2016-02 on its consolidated financial position and results of operations.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”, which changes the classification analysis of certain equity-linked financial instruments with down round features. Under current U.S. GAAP, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under ASC 480 is evaluated under the ASC 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative (and is therefore measured at fair value at each reporting period). Under ASU 2017-11, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock under ASC 815. Accordingly, these financial instruments are no longer measured at fair value at each reporting period. ASU 2017-11 also requires entities that calculate earnings per share to recognize the effect of the down round feature when it is triggered (at this time, the effect is treated as a dividend and as a reduction of income available to common stockholders in basic earnings per share). It is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures.
The accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.
NOTE 2 - DISCONTINUED OPERATIONS
During the fourth quarter of fiscal year 2018, the Company determined to discontinue operations of our wholesale wine business (the “Wholesale Business”). The Company decided to sell all assets and liabilities directly related to those assets associated with the Wholesale Business due to the sustained losses incurred.
Further,
the Company determined that the discontinued operations represented a strategic shift that will have a major effect on the Company’s operations and financial results since it represented a complete exit from the wholesale business and, therefore, classified the disposal group as held for sale as of June 30, 2018.
The Company received aggregate consideration of approximately $18 million in cash and future royalty payments to acquire the Wholesale Business which consisted of the sale of certain assets, primarily inventory and related intangibles. Pursuant to the terms of the Purchase Agreement dated August 13, 2018, the Company also entered into a Royalty Payment Agreement and Transition Services Agreement.
A portion of the purchase price is based on Precept’s sales of the Wholesale Business brands and is paid over time pursuant to a Royalty Payment Agreement. If Precept fails to sell sufficient amounts of such brands or the market for the Wholesale Business brands deteriorates, such royalty amounts may not be realized in full or at all.
Under the Transition Services Agreement, the Company is providing winemaking and other services to Precept over a nine-month period following the closing.
After the estimated transaction-related costs and expenses of approximately $0.9 million, the Company used a portion of the remaining p
roceeds to pay off secured and unsecured debt of $12 million. The Company also recorded a gain on sale of discontinued operations of approximately $2.6 million.
8
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
In accordance with ASC 205-20-45-1E, the
results of discontinued operations were aggregated and separately presented in our consolidated statements of operations, net of income taxes. On August 13, 201
8, pursuant to the terms of the Purchase Agreement of the same date, the LLC sold the Wholesale Business. The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued operations” and “Liabil
ities of discontinued operations,” respectively, within the accompanying Consolidated Balance Sheets at June 30, 2018 and consist of the following:
Assets and Liabilities of Discontinued Operations
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
Carrying amounts of assets included in
discontinued operations
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
692
|
|
|
$
|
3,031
|
|
Inventories
|
|
|
-
|
|
|
|
14,151
|
|
Bulk wine deposits
|
|
|
-
|
|
|
|
629
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
26
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
219
|
|
Other current assets, net
|
|
|
-
|
|
|
|
340
|
|
Total current assets
|
|
$
|
692
|
|
|
$
|
18,396
|
|
Carrying amounts of liabilities included in
discontinued operations
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
936
|
|
Accrued expenses
|
|
|
-
|
|
|
|
2,164
|
|
Depletion allowance and accrual for sales returns
|
|
|
363
|
|
|
|
640
|
|
Total current liabilities
|
|
$
|
363
|
|
|
$
|
3,740
|
|
Operating Results of Discontinued Operations
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
Total revenues less excise tax
|
|
$
|
2,058
|
|
|
$
|
4,781
|
|
Cost of sales
|
|
|
1,754
|
|
|
|
3,468
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
872
|
|
|
|
778
|
|
Gain on sale of discontinued operations
|
|
|
2,558
|
|
|
|
—
|
|
Net gain attributable to Truett-Hurst, Inc. and
H.D.D. LLC from Discontinued Operations
|
|
|
1,990
|
|
|
|
535
|
|
Net gain attributable to noncontrolling interest:
H.D.D. LLC
|
|
|
796
|
|
|
|
214
|
|
Net gain attributable to Truett Hurst, Inc.
|
|
|
1,194
|
|
|
|
321
|
|
Net gain per share from discontinued
Operations:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
0.44
|
|
|
|
0.12
|
|
9
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Cash Flow from Discontinued Operations
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
14,242
|
|
|
$
|
3,205
|
|
Net cash provided by discontinued operations
|
|
$
|
14,242
|
|
|
$
|
3,205
|
|
As a part of this agreement the Company will maintain a continuing relationship with the purchaser as noted in the
Royalty Payment Agreement (the “Royalty Payment Agreement”) and the Transition Services Agreement (the “Transition Services Agreement”)
.
NOTE 3 – INVENTORIES
Inventories comprise:
|
|
September 30, 2018
|
|
|
June 30, 2018
|
|
|
|
(in thousands)
|
|
Grapes and bulk wine
|
|
$
|
1,706
|
|
|
$
|
2,412
|
|
Bottled wine
|
|
|
4,452
|
|
|
|
3,315
|
|
Bottling materials and other
|
|
|
4
|
|
|
|
99
|
|
Total inventories, net
|
|
$
|
6,162
|
|
|
$
|
5,826
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, net comprise:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
|
(in thousands)
|
|
Land and land improvements
|
|
$
|
3,261
|
|
|
$
|
3,260
|
|
Building and improvements
|
|
|
1,858
|
|
|
|
1,854
|
|
Machinery and equipment
|
|
|
3,519
|
|
|
|
3,437
|
|
Vineyard development
|
|
|
554
|
|
|
|
554
|
|
Vineyard equipment
|
|
|
53
|
|
|
|
53
|
|
Furniture and fixtures
|
|
|
438
|
|
|
|
391
|
|
Leasehold improvements
|
|
|
28
|
|
|
|
28
|
|
Vehicles
|
|
|
119
|
|
|
|
119
|
|
|
|
|
9,830
|
|
|
|
9,696
|
|
Less: accumulated depreciation and amortization
|
|
|
(3,597
|
)
|
|
|
(3,376
|
)
|
Total property and equipment, net
|
|
$
|
6,233
|
|
|
$
|
6,320
|
|
Total depreciation and amortization expense for the three months ended September 30, 2018 and September 30, 2017 was $0.2 million.
10
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 5 – BORROWINGS
In connection with the sale of the Wholesale Business on August 13, 2018, the Company paid off all obligations pursuant to its bank borrowings, and terminated its obligations thereunder. Our indebtedness in prior periods was comprised primarily of bank loans including lines of credit and long-term debt.
Lines of Credit
During the quarter the Company paid off all obligations pursuant to its lines of credit, and terminated its obligations thereunder. Balances outstanding under the lines of credit total $8.1 million as of June 30, 2018.
Long Term Debt
Long term debt comprises:
|
|
|
|
|
|
September 30, 2018
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
(in thousands except
payment information)
|
|
Long term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1
|
|
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
2,581
|
|
Note 2
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Note 3
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
69
|
|
Note 4
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
143
|
|
Note 5
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
209
|
|
Note 6
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
233
|
|
Total notes payable
|
|
|
-
|
|
|
|
|
|
|
|
3,235
|
|
Less: current maturities
|
|
|
|
|
|
|
-
|
|
|
|
(3,235
|
)
|
Total long term debt
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(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.
|
11
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Capital Lease
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 $0.02 million per year for fiscal years 2018 through 2023.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Leases
The Company leases space for wine production within a custom crush facility located in Santa Rosa, California. The initial lease term commenced April 15, 2017 and ended on June 15, 2018. The initial 14-month term has been renewed for an additional 12 month period as agreed to by both parties.
The Company leases approximately 2,500 square feet for administrative offices at 125 Foss Creek Circle, Healdsburg, California. In June 2016, the Company renewed the lease for an additional three years. The renewed lease term is November 1, 2016 through October 31, 2019. The Company also leases approximately 1,600 square feet for executive and administrative offices at 165 Foss Creek Circle, Healdsburg, California. The lease commenced on September 1, 2016 and ends on October 31, 2019.
Lease payments for these facilities were $0.1 million and $0.1 million for three months ended September 30, 2018 and September 30, 2017, respectively.
The future lease commitments as presented below include amounts for these two leases.
Years ending June 30,
|
|
(in thousands)
|
|
2019 (remaining nine months)
|
|
$
|
269
|
|
2020
|
|
|
31
|
|
Total future rent payments
|
|
$
|
300
|
|
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 requirements.
Future minimum grape purchase commitments are as:
Years Ending June 30,
|
|
Third-Parties
|
|
|
Related
Parties
|
|
|
Total
|
|
|
|
(in thousands)
|
|
2019
|
|
$
|
1,822
|
|
|
$
|
58
|
|
|
$
|
1,880
|
|
2020
|
|
|
594
|
|
|
|
59
|
|
|
|
653
|
|
2021
|
|
|
157
|
|
|
|
60
|
|
|
|
217
|
|
2022
|
|
|
51
|
|
|
|
61
|
|
|
|
112
|
|
2023
|
|
|
–
|
|
|
|
62
|
|
|
|
62
|
|
Total
|
|
$
|
2,624
|
|
|
$
|
300
|
|
|
$
|
2,924
|
|
12
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Production & Storage
The Company enters into various contracts with third-party service providers for grape crushing, wine storage and bottling. The costs are recorded in the period for which the service is provided. The actual costs related to custom crush services are based on volume. The Company’s current contracts for custom crush services cover the 2018 harvest.
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.
The Company received a letter dated October 12, 2018 from a law firm representing one of our design firms alleging we had not paid the full value of the services provided during the last seven years for creative design and marketing services. The Company deems that it is likely that it will make a settlement payment in the range of $300k to $500k.
Exchange and Tax Receivable Agreement
The Company has an exchange agreement with the existing owners of the LLC, several of whom are directors and/or officers. Under the exchange agreement, each LLC member (and certain permitted transferees thereof) may (subject to the terms of the exchange agreement), exchange their LLC Units for shares of Class A common stock of the Company on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash, at the Company’s election.
In connection with the exchange agreement, the Company has entered into a tax receivable agreement (“TRA”) with the LLC members. The TRA 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 TRA will continue until all such tax benefits have been utilized or expired, unless the corporate taxpayer exercises its right to terminate the TRA for an amount based on the agreed payments remaining to be made under the TRA or the corporate taxpayer breaches any of its material obligations under the TRA in which case all obligations will generally be accelerated and due as if the corporate taxpayer had exercised its right to terminate the TRA. In addition, the TRA provides that upon certain mergers, asset sales, or other forms of business combinations, substantial payment obligations to the Founders and Affiliates will accelerate.
Indemnification
From time to time the Company enters into certain types of contracts that contingently require it to indemnify various parties against claims from third-parties. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded at September 30, 2018 and June 30, 2018 for these obligations on the condensed consolidated balance sheets.
13
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 7 – STOCK-BASED COMPENSATION
Equity Incentive Plan
In 2012, the Board of Directors approved and adopted The 2012 Stock Incentive Plan (the “Plan”). The Plan allows for the granting of restricted stock units, restricted stock awards and stock options to employees, directors and non-employees. As of September 30, 2018, 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 units is presented below:
|
|
Number
of Shares
|
|
|
Weighted Avg
Grant
Date
Fair Value
per Share
|
|
|
Weighted Avg
Contractual
Term in
Years
|
|
Outstanding at June 30, 2018
|
|
|
95,194
|
|
|
$
|
1.86
|
|
|
|
0.52
|
|
Granted
|
|
|
83,475
|
|
|
|
1.49
|
|
|
|
—
|
|
Exercised
|
|
|
(60,000
|
)
|
|
|
(1.88
|
)
|
|
|
—
|
|
Vested
|
|
|
3,097
|
|
|
1.59
|
|
|
|
—
|
|
Forfeited, cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
121,766
|
|
|
$
|
1.66
|
|
|
|
1.35
|
|
The restricted stock units vest predominantly over four years. The Company had an unrecognized expense at September 30, 2018 of approximately $112,585 related to unvested restricted stock units which will be recognized over the remaining weighted average service periods of 0.7 years.
As of September 30, 2018 and June 30, 2018 the Company had no issued or outstanding restricted stock awards.
A summary of the Company’s activity for stock options is presented below:
|
|
Number of
Shares
|
|
|
Weighted Avg
Grant Date
Fair Value
per Share
|
|
|
Weighted Avg
Contractual
Term in
Years
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at June 30, 2018
|
|
|
110,000
|
|
|
$
|
1.09
|
|
|
|
8.18
|
|
|
$
|
(109
|
)
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited, cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
110,000
|
|
|
$
|
1.09
|
|
|
|
7.46
|
|
|
$
|
(82.1
|
)
|
Options Vested
|
|
|
100,000
|
|
|
$
|
1.09
|
|
|
|
7.49
|
|
|
$
|
74.94
|
|
Options Non-Vested
|
|
|
10,000
|
|
|
$
|
1.12
|
|
|
|
7.21
|
|
|
$
|
7.20
|
|
Options Exercisable
|
|
|
100,000
|
|
|
$
|
1.09
|
|
|
|
7.49
|
|
|
$
|
74.94
|
|
14
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Stock options vest predominantly over four years. As
of September 30, 2018, unrecognized expense associated with unvested stock options totaled $6,759. These expenses will be recognized over the remained weighted average service periods of 1.0 years.
The following table summarizes the Company’s stock-based compensation included in the condensed consolidated statements of operations for the three months ended September 30, 2018 and September 30, 2017:
|
|
Three Months Ended September 30,
|
|
|
|
(in thousands)
|
|
|
|
2018
|
|
|
2017
|
|
Sales and marketing
|
|
$
|
—
|
|
|
$
|
5
|
|
General and administrative
|
|
|
50
|
|
|
|
57
|
|
Total stock-based compensation
|
|
$
|
50
|
|
|
$
|
62
|
|
On August 31, 2018, as part of the sale of the Wholesale Business, the Company terminated the Company’s former Vice President of Sales. In connection with his termination, the Company entered into a separation agreement providing for a cash severance payment of $0.05 million inclusive of payment for severance, annual bonus amounts owed and a portion of his COBRA premiums for continuation of health benefits. In addition, 60,000 of RSUs and 35,000 ISOs outstanding equity-based awards granted which were unvested on the date of his termination became fully vested and exercisable. The Company recorded $0.05 million in general and administrative expense associated with the separation agreement as a severance expense and $0.2 million in expense associated with the acceleration of stock options and restricted stock units.
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 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, 2018 the interest rate swap balance and derived Level 2 fair value equaled $0.1 million. In connection with the sale of the Wholesale Business on August 13, 2018, the Company repaid all obligations pursuant to its outstanding interest rate swap, and terminated its obligations thereunder.
NOTE 9 – INCOME TAXES
For the three months ended September 30, 2018, due to the loss from continuing operations, the Company did not record an income tax expense and therefore had an effective tax rate of 0%.
The Company has net operating loss (“NOL”) carryforwards available to offset fiscal year 2019 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 NOLs before they can be utilized by the Company.
15
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
The Company's effective tax rate is a function of:
|
•
|
A rate benefit attributable to the fact that the LLC operates as a limited liability company which is not subject to federal or state income tax. Accordingly, a portion of the earnings are not subject to corporate level taxes.
|
|
•
|
Operating losses for the periods or utilization of net operating loss carryforwards.
|
|
•
|
Recording a full valuation allowance against net deferred tax assets as the Company has determined that it is more likely than not that the future tax benefits would not be realized. The Company did not record a deferred tax asset during the three months ended September 30, 2018.
|
There were no unrecognized tax benefits at September 30, 2018 and the Company did not incur any income tax related interest expense or penalties related to uncertain tax positions.
NOTE 10 – SUBSEQUENT EVENTS
Certain of our inventory bottled during FY18 suffered damage from a faulty filtration system due to the mobile unit operator failing to take appropriate care during a bottling run. As a result, residual sugars began fermenting in the bottles resulting in damage. The Company filed a claim with its insurance carrier in August 2018, of which the coverage position and claim amount was accepted in October 2018. The Company accrued the amount of the insurance settlement of $0.6 million
and established an inventory reserve equal to $0.1 million and recognized a gain on insurance settlement of $0.5 million as of September 30, 2018. The corresponding insurance proceeds were received on October 26, 2018.
The Company has evaluated all subsequent event activity through the issue date of these consolidated financial statements and concluded that, other than the items discussed above, no additional subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.
16