NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim condensed consolidated financial statements include the results of Truett-Hurst, Inc. (the “Company”) and its subsidiary H.D.D. LLC (the “LLC”). They have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with general instructions for quarterly reports filed on Form 10-Q and Article 8 of Regulation S-X. The Company consolidates the financial results of the LLC and records a noncontrolling interest representing the portion of equity ownership in the LLC that is not attributable to the Company.
The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The accompanying unaudited condensed consolidated financial statements were prepared on the same basis as the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017, and, in the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim period presented are not necessarily indicative of the results expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2017 filed with the Securities and Exchange Commission (“SEC”) on October 13, 2017.
Quantities or results referred to as “to date” or “as of this date” mean as of or to September 30, 2017, unless otherwise specifically noted. References to “FY” or “fiscal year” refer to the fiscal year ending on June 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 Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Reclassifications
Certain prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. These reclassifications had no effect on the reported condensed consolidated results of continuing operations.
Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09:
Revenue from Contracts with Customers (Topic 606),
a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact of this ASU.
6
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
In November 2015, the FASB issued ASU No. 2015-17:
Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes.
The update sets forth a requirement for companies to classify deferred tax assets and liabilities as non-current amounts on the balance sheet. It is effective for financial statements issued for annual
periods beginning after December 15, 2016
,
and interim periods within those annual periods. The Company
adopted
this standard
and it did not
have a material impact on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02:
Leases (Topic 842).
The standard includes a lessee accounting model that recognizes two types of leases – finance and operating leases. It requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU.
In March 2016, the FASB issued ASU No. 2016-09:
Improvements to Employee Share-Based Payment Accounting
which amends ASU 718,
Compensation – Stock Compensation.
The update sets forth an initiative to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard and it did not have a material impact on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15:
Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments
. The update sets forth guidance on eight specific cash flow issues. The amendment is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. The Company adopted this standard and it did not have a material impact on its condensed consolidated financial statements.
In 2015, the FASB issued ASU 2015-11:
Inventory (Topic 330)
–Topic 330 currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value. The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company
adopted this standard and it did not have a material impact on its condensed consolidated financial statements.
In 2014, the FASB issued ASU 2014-09:
Revenue from Contracts with Customers (Topic 606),
a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact of this ASU.
In 2016, the FASB issued ASU 2016-08:
Revenue from Contracts with Customers (Topic 606)
, which amends the principal-versus-agent implementation guidance set forth in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The Company is currently evaluating the impact of this ASU.
In 2016, the FASB issued ASU 2016-10:
Revenue from Contracts with Customers (Topic 606)
, which amends certain aspects of ASU 2014-09 related to identifying performance obligations and licensing implementation. The Company is currently evaluating the impact of this ASU.
7
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 2 – INVENTORIES
Inventories comprise:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
(in thousands)
|
|
Grapes and bulk wine
|
|
$
|
5,405
|
|
|
$
|
5,933
|
|
Bottled wine
|
|
|
15,400
|
|
|
|
14,495
|
|
Bottling materials and other
|
|
|
524
|
|
|
|
268
|
|
|
|
|
21,329
|
|
|
|
20,696
|
|
Less: inventory reserves
|
|
|
(127
|
)
|
|
|
(87
|
)
|
Total inventories, net
|
|
$
|
21,202
|
|
|
$
|
20,609
|
|
See Note 12, Subsequent Events.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment, net comprise:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
(in thousands)
|
|
Land and land improvements
|
|
$
|
3,261
|
|
|
$
|
3,260
|
|
Building and improvements
|
|
|
1,547
|
|
|
|
1,420
|
|
Machinery and equipment
|
|
|
2,756
|
|
|
|
2,189
|
|
Vineyard development
|
|
|
554
|
|
|
|
554
|
|
Vineyard equipment
|
|
|
53
|
|
|
|
88
|
|
Furniture and fixtures
|
|
|
163
|
|
|
|
293
|
|
Leasehold improvements
|
|
|
45
|
|
|
|
79
|
|
Vehicles
|
|
|
119
|
|
|
|
113
|
|
|
|
|
8,498
|
|
|
|
7,996
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,711
|
)
|
|
|
(2,570
|
)
|
Total property and equipment, net
|
|
$
|
5,787
|
|
|
$
|
5,426
|
|
In the prior year, the Company recorded a reserve for assets that were abandoned when the Company vacated the Russian River Valley tasting room based on a litigation settlement. See Litigation section of Note 7.
Total depreciation and amortization expense for the three months ended September 30, 2017 and September 30, 2016 was $0.2 million.
NOTE 4 – ACCOUNTS PAYABLE
Accounts payable comprises:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
(in thousands)
|
|
Grapes
|
|
$
|
1,655
|
|
|
$
|
583
|
|
Other production related
|
|
|
1,514
|
|
|
|
940
|
|
Barrels
|
|
|
184
|
|
|
|
—
|
|
Administrative
|
|
|
817
|
|
|
|
471
|
|
Total accounts payable
|
|
$
|
4,170
|
|
|
$
|
1,994
|
|
8
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Accounts payable as of September 30, 2017 reflect the seasonality associated with the 2017 harvest, specifically, grape procurement, barrel purchases, acquisition of new winery equipment for the leased space within the custom crush facility, and increased
production activities.
NOTE 5 – BORROWINGS
The Company’s indebtedness is comprised primarily of bank loans including lines of credit and long term debt.
Lines of Credit
On August 17, 2017, the Company completed the renewal process of the revolving line of credit with Bank of the West. The Company chose not to request a new equipment purchase line of credit note from the lender. In addition, the Company chose not to extend the maturity date of the foreign exchange note.
In July 2017, the Company’s capital equipment line of credit matured
and automatically converted into a $0.3 million term loan with a 36-month amortization schedule and a 4.25% interest rate.
In July 2016, the Company’s capital equipment line of credit from matured and automatically converted into a $0.3 million term loan with a 48-month amortization schedule and a 3.95% interest rate.
The credit facility, which matures on July 31, 2018, consists of a revolving line of credit with a maximum commitment of $10.0 million which accrues interest at 2.25% above the London Interbank Offered Rate (“LIBOR”). In the fiscal year 2016, the credit facility also included (a) a capital equipment line with a maximum commitment of $0.5 million which carried an interest rate of 2.25% above floating One-Month LIBOR, and (b) a foreign exchange facility with a maximum commitment of $0.1 million which allowed the Company’s bank to enter into any spot or forward transaction to purchase or sell a foreign currency. The Company did not use the foreign exchange facility during the three months ended September 30, 2017 and September 30, 2016.
The credit facility is secured by a pledge of substantially all of the Company’s assets with guarantees from the LLC members. The bank borrowings contain usual and customary covenants, including, among others, limitations on incurrence of senior indebtedness, the making of loans and advances, investments, acquisitions, and capital expenditures, the incurrence of liens, and the consummation of mergers and asset sales. The credit facility maintains the minimum current assets to current liabilities ratio covenant (measured quarterly) and the maximum debt to effective tangible net worth ratio covenant (measured quarterly).
When the line of credit was renewed on August 17, 2017, the previous debt service coverage ratio (measured quarterly on a trailing twelve-month basis) was replaced with a minimum quarterly EBITDA covenant. The Company was out of compliance with the minimum EBITDA covenant on its revolving line of credit for the quarter ended September 30, 2017, but received a waiver in October 2017 for that period from the Company’s lender. If the Company was unable to obtain the necessary waivers and the debt was accelerated, it would have a material adverse effect on the financial condition and future operating performance, and the Company may be required to limit activities. The Company was in compliance with all other covenants at September 30, 2017.
In July 2016,
the previous minimum EBITDA covenant was replaced with a minimum debt service coverage ratio (measured quarterly on a trailing twelve-month basis).
The Company was out of compliance with the debt service coverage ratio for the quarters ended June 30, 2017, March 31, 2017, and December 31, 2016, but received waivers for t
hose periods from the Company’s lender. The Company was in compliance with all other covenants during those prior year periods.
9
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Long Term Debt
Long term debt comprises:
|
|
|
|
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
(in thousands except
payment information)
|
|
Long term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1
|
|
|
(1
|
)
|
|
$
|
2,683
|
|
|
$
|
2,716
|
|
Note 2
|
|
|
(2
|
)
|
|
|
26
|
|
|
|
45
|
|
Note 3
|
|
|
(3
|
)
|
|
|
136
|
|
|
|
158
|
|
Note 4
|
|
|
(4
|
)
|
|
|
239
|
|
|
|
270
|
|
Note 5
|
|
|
(5
|
)
|
|
|
280
|
|
|
|
304
|
|
Note 6
|
|
|
(6
|
)
|
|
|
319
|
|
|
|
—
|
|
Total notes payable
|
|
|
|
|
|
|
3,683
|
|
|
|
3,493
|
|
Less: current maturities
|
|
|
|
|
|
|
(475
|
)
|
|
|
(491
|
)
|
Total long term debt
|
|
|
|
|
|
$
|
3,208
|
|
|
$
|
3,002
|
|
|
(1)
|
Note payable to a bank, secured by a deed of trust on property, payable monthly with principal payments of $11,270 plus interest, matures May 31, 2022, variable interest of 2.25% above LIBOR.
|
|
(2)
|
Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $6,535, matures November 1, 2018, at 3.75% interest.
|
|
(3)
|
Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $7,783, matures March 15, 2019, at 3.75% interest.
|
|
(4)
|
Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $11,267, matures July 1, 2019, at 3.90% interest.
|
|
(5)
|
Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $8,729, matures July 1, 2020, at 3.95% interest.
|
|
(6)
|
Note payable to a bank, secured by equipment, payable monthly with principal and interest payments of $9,701, matures August 15, 2020, at 4.25% interest.
|
Future principal and interest payments for the long term debt as of September 30, 2017 are as follows:
Years ending June 30,
|
|
(in thousands)
|
|
2018 (remaining nine months)
|
|
$
|
440
|
|
2019
|
|
|
543
|
|
2020
|
|
|
362
|
|
2021
|
|
|
163
|
|
2022
|
|
|
2,175
|
|
|
|
|
3,683
|
|
Add: estimated interest payments
|
|
|
493
|
|
Total
|
|
$
|
4,176
|
|
Capital Lease
In June 2017, the Company entered into a $0.06 million, 72-month capital lease related to wine production equipment. The future lease commitments are approximately $0.015 million per year for fiscal years 2018 through 2023.
10
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE
6
– DEPLETION ALLOWANCE AND ACCRUAL FOR SALES RETURNS
The depletion allowance was $0.5 million as of September 30, 2017 and June 30, 2017.
In a prior year, the accrual for sales returns was established for the return of product that had oxidized. The initial accrual amount was $0.5 million. In June 2016, a final settlement was reached between the Company and the last distributor with remaining material financial exposure associated with the oxidized products. As of September 30, 2017, approximately $0.03 million of case goods remain to be shipped.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Leases
The Company leases wine production space within a custom crush facility located in Santa Rosa, California. The lease commenced on April 15, 2017 and ends on June 15, 2018. The initial 14-month term may be renewed for additional periods as agreed to by both parties.
See Litigation section below.
The Company has two lease agreements for administrative office space. Both are three-year leases with an end date of October 31, 2019. One of these leases contains three one-year renewal options with adjustment to market rates.
Lease payments for these facilities were $0.1 million and $0.08 million for the three months ended September 30, 2017 and September 30, 2016, respectively.
Future lease commitments are:
Years ending June 30,
|
|
(in thousands)
|
|
2018 (remaining nine months)
|
|
$
|
214
|
|
2019
|
|
|
90
|
|
2020
|
|
|
31
|
|
Total future rent payments
|
|
$
|
335
|
|
Supply Contracts
The Company enters into short and long term contracts with third-parties and related party growers to supply a portion of its future grape and bulk wine inventory requirements. The grape commitments for the fiscal year 2018 were received in the first and second quarters of fiscal year 2018. In fiscal year 2017, the Company did not extend a large contract for the purchase of bulk wine to future years. Future minimum grape and bulk wine inventory purchase commitments are as follows:
Years Ending June 30,
|
|
Third-Parties
|
|
|
Related
Parties
|
|
|
Total
|
|
|
|
(in thousands)
|
|
2018
|
|
$
|
4,671
|
|
|
$
|
57
|
|
|
$
|
4,728
|
|
2019
|
|
|
2,552
|
|
|
|
—
|
|
|
|
2,552
|
|
2020
|
|
|
1,927
|
|
|
|
—
|
|
|
|
1,927
|
|
2021
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
2022
|
|
|
51
|
|
|
|
—
|
|
|
|
51
|
|
Total
|
|
$
|
9,251
|
|
|
$
|
57
|
|
|
$
|
9,308
|
|
At September 30, 2017, total future purchase commitments for finished goods were approximately $4.9 million and are expected to be fulfilled during fiscal years 2018 through 2020.
11
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Production & Storage
The Company enters into various contracts with third-party service providers for grape crushing, wine storage and bottling. The costs are recorded in the period for which the service is provided. The actual costs related to custom crush services are based on volume. The Company’s current contracts for custom crush services cover the 2017 harvest. The current bottling contract requires a minimum of 120,000 cases at $2.85 per case to be bottled in a one year period.
For the three months ended September 30, 2017, the monthly average percentage of the Company’s bulk wine stored at a related-party storage facility was 45%.
Litigation
From time to time, the Company may be subject to various litigation matters arising in the ordinary course of business. Other than discussed below, the Company is not aware of any current pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on the Company’s condensed consolidated financial position, results of operations, or cash flows.
In January 2016, Mendocino Wine Group (“MWG”) filed a complaint against Phil Hurst and the LLC. The complaint alleges that, prior to January 2012, Phil Hurst and the LLC aided and abetted Paul Dolan in his alleged breach of fiduciary duties to MWG and that they interfered with Paul Dolan’s contract with Thornhill Management Company (the manager of MWG), and aided and abetted Paul Dolan’s interference with MWG’s economic advantage. Phil Hurst and the LLC denied the claims, denied all wrongdoing, and denied that they caused any harm to MWG. In November 2016, the Sonoma County Superior Court granted MWG’s Motion to Consolidate the Hurst/LLC case with a second complaint MWG filed against a law firm for legal malpractice and breach of fiduciary duty. The Court ruled the cases were sufficiently related and should be tried together. No amount had been recorded in the condensed consolidated financial statements related to this suit.
In October 2017, the Sonoma County Superior Court granted the Company’s summary judgement motion and dismissed the case against Phil Hurst and the LLC.
The
plaintiff, MWG, has 60 days to appeal the Court’s decision. If such an appeal is filed, the process may take 9 to 18 months to obtain a final resolution.
In June 2016, the Company settled outstanding litigation with the Hambrecht Wine Group, L.P. related to the lease of one of its tasting rooms and a winery production facility located at 4035 Westside Road, Healdsburg, California, in exchange
for payment of $1.0 million to the LLC, quitclaimed certain rights, and modified its lease such that the Company vacated the tasting room portion of the property prior to December 31, 2016, and vacated the winery production portion prior to May 31, 2017. The Company received a series of settlement payments totaling $1.0 million in fiscal year 2017 and recorded a net gain of $0.8 million related to the lease termination in the Company’s condensed consolidated statement of operations for the quarter ended September 30, 2016.
Exchange and Tax Receivable Agreement
The Company has an exchange agreement with the existing owners of the LLC, several of whom are directors and/or officers. Under the exchange agreement, each LLC member (and certain permitted transferees thereof) may (subject to the terms of the exchange agreement), exchange their LLC Units for shares of Class A common stock of the Company on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash, at the Company’s election. In connection with the exchange agreement, the Company has a tax receivable agreement (“TRA”) with the LLC members. The agreement provides for the payment from time to time, as “corporate taxpayer,” to holders of LLC Units of 90% of the amount of the benefits, if any, that the corporate taxpayer is deemed to realize as a result of (i) increases in tax basis resulting from the exchange of LLC Units and (ii) certain other tax benefits related to the Company entering into the agreement, including tax benefits attributable to payments under the agreement. These payment obligations are obligations of the corporate taxpayer and not of the LLC. The term of the agreement will continue until all such tax benefits have been utilized or expired, unless the corporate taxpayer exercises its right to terminate the agreement for an amount based on the agreed payments remaining to be made under the agreement or the corporate taxpayer breaches any of its material obligations under the agreement in which case all obligations will generally be accelerated and due as if the corporate taxpayer had exercised its right to terminate the agreement.
In addition, the tax receivable agreement provides that upon certain
12
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
mergers, asset sales, or other forms of business combinations, substa
ntial payment obligations to the founding LLC members and affiliates will accelerate.
Indemnification
From time to time the Company enters into certain types of contracts that contingently require it to indemnify various parties against claims from third-parties. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded at September 30, 2017 and September 30, 2016 for these obligations on the condensed consolidated balance sheets.
NOTE 8 – STOCK-BASED COMPENSATION
Equity Incentive Plan
The Company has granted restricted stock awards, stock options and restricted stock units to employees, directors and non-employees under its 2012 Stock Incentive Plan. As of September 30, 2017, the 2012 Plan has 1.0 million shares reserved for issuance and a total of 0.4 million shares available to be issued.
A summary of the Company’s activity for restricted stock awards is presented below:
|
|
Number
of Shares
|
|
|
Weighted Avg
Grant Date
Fair Value
per Share
|
|
|
Weighted Avg
Contractual
Term in Years
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at June 30, 2017
|
|
|
2,631
|
|
|
$
|
3.80
|
|
|
|
0.49
|
|
|
$
|
5
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Released
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited, cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2017
|
|
|
2,631
|
|
|
$
|
3.80
|
|
|
|
0.24
|
|
|
$
|
6
|
|
Expected to vest at September 30, 2017
|
|
|
2,631
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
A summary of the Company’s activity for restricted stock units is presented below:
|
|
Number
of Shares
|
|
|
Weighted Avg
Grant
Date
Fair Value
per Share
|
|
|
Weighted Avg
Contractual
Term in
Years
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at June 30, 2017
|
|
|
33,334
|
|
|
$
|
2.25
|
|
|
|
0.50
|
|
|
$
|
69
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Released
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited, cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2017
|
|
|
33,334
|
|
|
$
|
2.25
|
|
|
|
0.25
|
|
|
$
|
76
|
|
Expected to vest at September 30, 2017
|
|
|
33,334
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
13
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
A summary of the
Company’s
activity for stock options is presented below:
|
|
Number of
Shares
|
|
|
Weighted Avg
Grant Date
Fair Value
per Share
|
|
|
Weighted Avg
Contractual
Term in
Years
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at June 30, 2017
|
|
|
215,000
|
|
|
$
|
1.67
|
|
|
|
9.04
|
|
|
$
|
—
|
|
Granted
|
|
|
50,000
|
|
|
|
2.08
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited, cancelled or expired
|
|
|
(35,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2017
|
|
|
230,000
|
|
|
$
|
1.71
|
|
|
|
8.93
|
|
|
$
|
—
|
|
Options Vested
|
|
|
57,500
|
|
|
$
|
1.71
|
|
|
|
8.93
|
|
|
|
—
|
|
Options Non-Vested
|
|
|
172,500
|
|
|
$
|
1.71
|
|
|
|
8.93
|
|
|
$
|
—
|
|
Options Exercisable
|
|
|
57,500
|
|
|
$
|
1.71
|
|
|
|
8.93
|
|
|
|
—
|
|
The following table summarizes the Company’s stock-based compensation included in the condensed consolidated statements of operations for the three months ended September 30, 2017 and September 30, 2016:
|
|
Three Months Ended September 30,
|
|
|
|
(in thousands)
|
|
|
|
2017
|
|
|
2016
|
|
Sales and marketing
|
|
$
|
5
|
|
|
$
|
10
|
|
General and administrative
|
|
|
57
|
|
|
|
85
|
|
Total stock-based compensation
|
|
$
|
62
|
|
|
$
|
95
|
|
NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount reflected in the condensed consolidated balance sheets of financial assets and liabilities are all categorized as Level 1. They include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, which approximated their fair values due to the short-term nature of these financial assets and liabilities. The carrying amount of the Company’s debt approximates its fair value based on prevailing interest rates and time to maturity.
In October 2012, the Company executed an interest rate swap obligation that was measured using observable inputs such as the LIBOR and ten-year Treasury interest rates, and therefore has been categorized as Level 2. This derivative is not designated as a hedging instrument and has been recorded at fair value on the condensed consolidated balance sheets. Changes in the fair value of this instrument have been recognized in the condensed consolidated statements of operations in other expense. The maturity date of the swap is May 31, 2022. At June 30, 2017 and September 30, 2017, the interest rate swap balance was $0.1 million for both the fair value and the Level 2 value. The balance for the interest rate swap is included in other current assets on the condensed consolidated balance sheets.
NOTE 10 – INCOME TAXES
For the three months ended September 30, 2017, the Company recorded income tax expense of $0.001 million and had an effective tax rate of less than 1%.
The Company has net operating loss (“NOL”) carryforwards available to offset fiscal year 2018 taxable income. The utilization of the NOL carryforwards may be subject to substantial annual limitations due to ownership change provisions under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in the expiration of NOL’s before they can be utilized by the Company.
14
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
The Company's effective tax rate is a function of:
|
•
|
A rate benefit attributable to the fact that the LLC operates as a limited liability company which is not subject to federal or state income tax. Accordingly, a portion of the earnings are not subject to corporate level taxes.
|
|
•
|
Operating losses for the periods or utilization of net operating loss carryforwards.
|
|
•
|
Recording a full valuation allowance against net deferred tax assets as the Company has determined that it is more likely than not that the future tax benefits would not be realized. The Company did not record a deferred tax asset during the three months ended September 30, 2017.
|
There were no unrecognized tax benefits at September 30, 2017 and the Company did not incur any income tax related interest expense or penalties related to uncertain tax positions.
NOTE 11 – SIGNIFICANT CUSTOMER INFORMATION, SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The Company’s primary reporting segments are identified as wholesale and direct to consumer.
Wholesale sales include the retail exclusive brand label model and other brands sold through the three-tier distribution system. Direct to consumer sales occur through the Company’s tasting rooms, wine clubs, and winery websites. Operating and other expenses are not allocated between operating segments; therefore, operating and net income (loss) information for the respective segments is not available. In addition, discrete financial information related to segment specific assets is not available. Sales and cost of sales are reported by segment.
The following table reflects net sales, cost of sales and gross profit by segment for continuing operations for each of the three months ended September 30, 2017 and 2016, respectively:
|
|
Three Months Ended September 30,
|
|
|
|
(in thousands)
|
|
|
|
Wholesale
|
|
|
Direct to Consumer
|
|
|
Total
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
$
|
4,779
|
|
|
$
|
4,510
|
|
|
$
|
1,411
|
|
|
$
|
1,376
|
|
|
$
|
6,190
|
|
|
$
|
5,886
|
|
Cost of Sales
|
|
|
3,648
|
|
|
|
3,538
|
|
|
|
497
|
|
|
|
518
|
|
|
|
4,145
|
|
|
|
4,056
|
|
Gross Profit
|
|
$
|
1,131
|
|
|
$
|
972
|
|
|
$
|
914
|
|
|
$
|
858
|
|
|
$
|
2,045
|
|
|
$
|
1,830
|
|
Gross Profit %
|
|
|
23.7
|
%
|
|
|
21.6
|
%
|
|
|
64.8
|
%
|
|
|
62.3
|
%
|
|
|
33.0
|
%
|
|
|
31.1
|
%
|
Significant Customer Information:
The following table sets forth concentrations of wholesale sales and accounts receivable as a percent of each total:
|
|
Percentage of Wholesale Sales
|
|
|
Percentage of Total Accounts Receivable
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
27
|
%
|
|
|
10
|
%
|
|
|
33
|
%
|
|
|
11
|
%
|
Customer B
|
|
|
23
|
%
|
|
|
42
|
%
|
|
|
18
|
%
|
|
|
49
|
%
|
Customer C
|
|
|
11
|
%
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
8
|
%
|
15
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
International sales were $0.2 million and $0.3
million for the three months ended September 30, 2017 and September 30, 2016, respectively.
NOTE 12 – SUBSEQUENT EVENTS
The Company was out of compliance with the minimum EBITDA covenant on its revolving line of credit for the quarter ended September 30, 2017, but received a waiver in October 2017 for that period from the Company’s lender. If the Company was unable to obtain the necessary waivers and the debt was accelerated, it would have a material adverse effect on the financial condition and future operating performance, and the Company may be required to limit activities. The Company expects to meet its covenants for the remainder of fiscal year 2018.
On October 8, 2017, and for several days thereafter, significant wildfires broke out in Napa, Sonoma, and surrounding counties in Northern California. Certain of the Company’s inventory, primarily juice pressed from grapes picked during the 2017 harvest and maintained at outside production and storage facilities, may have been subject to smoke taint and spoilage. The amount of spoilage, if any, cannot be reasonably estimated at this time. However, the Company believes that any loss of inventory related to the fires is substantially covered under the Company’s insurance policies. Additionally, there may be future negative impacts on the Company’s outside production and operating arrangements, including bottling and warehousing of case goods.
In October 2017, the Sonoma County Superior Court granted the Company’s summary judgement motion and dismissed the MWG case against Phil Hurst and the LLC. The plaintiff, MWG, has 60 days to appeal the Court’s decision.
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