UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
10-K/A
(Mark One)
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended June 30, 2018
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-35973
TRUETT-HURST, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 46-1561499 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | |
125 Foss Creek Circle, Healdsburg, California | 95448 | |
(Address of principal executive offices) | (zip code) |
(707) 431-4423
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A | The NASDAQ Capital Market |
Securities registered pursuant to sectionSection 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No ☒x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No ☒x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ☐¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ¨☒ No x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer |
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Non-accelerated filer |
| Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No ☒x
As of December 31,29, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common stock held by non-affiliates was approximately $9,286,813 based upon a total of 4,486,383 shares of Class A common stock held by non-affiliates and a closing price of $2.07 per share for the Class A common stock as reported on The NASDAQ Capital Market. Shares held by each executive officer, director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding with respect to each of the classes of our common stock, as of October 10, 2018, is set forth below:
Class | Number of shares outstanding | |||
Class A common stock, par value $0.001 per share | 4,575,680 | |||
Class B common stock, par value $0.001 per share | 6 |
Documents incorporated by reference: The Registrant's definitive proxy statement, to beSee “Explanatory Note.”
Explanatory Note
This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the Annual Report on Form 10-K of Truett-Hurst, Inc. (the “Company”) for the fiscal year ended June 30, 2018, originally filed with the Securities and Exchange Commission not later than 120 days after June 30,(the “SEC”) on October 15, 2018 is incorporated by reference in(the “Original Filing”). We are filing this Amendment (i) to amend Part III of this Report.the Original Filing to include information previously omitted in reliance upon General Instruction G(3) to Form 10-K and (ii) to file the current Bylaws of the Company, as amended, and to make corresponding updates to the Exhibit Index. In accordance with the Rule 12b-15 of the Exchange Act, we are also including as exhibits the current certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.
Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing other than as expressly indicated in this Amendment. Accordingly, this Amendment should be read in conjunction with the Original Filing and our other filings made with the SEC on or subsequent to October 15, 2018. In this Amendment, unless the context indicates otherwise, the terms “company,” “we,” “us,” and “our” refer to Truett-Hurst, Inc. Other defined terms used in this Amendment but not defined herein shall have the meaning specified for such terms in the Original Filing.
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TRUETT-HURST, INC. AND SUBSIDIARY
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Item 10. |
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Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
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Certain Relationship and Related Transactions, and Director Independence |
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Part IV | |||||||
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2PART III
Forward-Looking StatementsITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This Annual Report on Form 10-K contains forward-looking statements, which reflect
Directors and Executive Officers
The following persons are our current viewsdirectors and executive officers and hold the positions set forth below:
Name | Age | Principal Position | Director Since | |||
Marcus Benedetti (1)(2) | 43 | Director | 2014 | |||
Daniel A. Carroll (1)(3) | 58 | Director | 2012 | |||
Paul E. Dolan, III | 68 | Director | 2012 | |||
Barrie Graham (2)(3) | 70 | Director | 2012 | |||
Spencer Grimes(3) | 52 | Director | 2017 | |||
Gerry Hansen(1)(2) | 64 | Director | 2018 | |||
Philip L. Hurst | 55 | President, Chief Executive Officer and Director | 2013 | |||
Karen Weaver | 57 | Chief Financial Officer and Secretary | n/a |
(1) Audit Committee member
(2) Compensation Committee member
(3) Nominating and Governance Committee member
Marcus Benedetti. Marcus Benedetti is President and Chief Executive Officer of Clover Stornetta Farms Inc. (“Clover”). Clover is a leading manufacturer and distributor of milk and dairy products in California, Nevada and Arizona, known for sustainable agricultural practices and non-GMO, non-RBST products. Mr. Benedetti joined Clover in 2000 and was named CEO and a Board Member in 2006. Mr. Benedetti serves as a Board member of the Association of Independent Dairies of America, the Dairy Institute of California, and as an honorary advisory Board member for the UC Davis Agriculture Sustainability Institute, Community Foundation of Sonoma County and Social Advocates for Youth. Mr. Benedetti holds a Business of Administration degree from the University of Alaska. The Nominating and Governance Committee selected Mr. Benedetti to serve on our Board due to his wealth of knowledge and experience developing, producing and selling consumer products to retailers in the western United States.
Daniel A. Carroll. Dan Carroll has served as a partner/managing director of TPG Capital L.P. from 1995 to present. He has served on the Board of Shenzhen Development Bank (China) (2005-2010), Myer Department Stores, Ltd (Australia) (2006-2009), Bank Thai, Ltd (Thailand) (2007-2009) and Healthscope Australia (2010-2011). Mr. Carroll received a Bachelor of Arts from Harvard University in 1982 and a Master of Business Administration from Stanford University Graduate School of Business in 1986. Mr. Carroll has served as a managing member of H.D.D. LLC (“LLC”) and a Director of Truett-Hurst, Inc. since 2012. The Nominating and Governance Committee and the Board selected Mr. Carroll to serve on our Board due to his extensive experience in executive management oversight, private equity, capital markets and transactional matters.
Paul E. Dolan, III. Paul E. Dolan, III has been involved in the wine business since 1975 and is considered the founding father of organics and biodynamic in the California wine industry. Mr. Paul Dolan started his winemaking career with respectwhat was then a small winery in Mendocino, Fetzer Vineyards, in 1977 and then helped the Fetzer family grow to amongone of the premier California wineries, selling over three million cases. Mr. Paul Dolan managed the company as President for the new owners, the Brown-Forman Corporation, from 1992 to 2002. He has served as Chairman of the Wine Institute (1990-2012) and became the first Chairman of the Sustainable Winegrowers Alliance (2002-2003). Mr. Dolan holds a Bachelor of Arts in Finance from the University of Santa Clara and a Master of Science in Enology from the University of California-Fresno. Mr. Paul Dolan is also author of True to Your Roots: Fermenting a Business Revolution. Mr. Paul Dolan has served as a managing member of the LLC since 2010 and a Director of Truett-Hurst, Inc. since 2012. The Nominating and Governance Committee and the Board selected Mr. Paul Dolan to serve on our Board due to his extensive knowledge of our business, which he gained as one of our founders, as well as his experience in building wine companies and leadership in developing and promoting sustainable farming techniques.
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Barrie Graham. Barrie Graham has over 25 years of experience in commercial and investment banking. Mr. Graham served as Chief Operating Officer of WR Hambrecht & Co. (2011-2013); President, Chief Executive Officer and Director of Exchange Bank (1995-2008), and as a Senior Manager at Wells Fargo (1985-1995). Mr. Graham is a former Director and past-Chairman of the Pacific Coast Banking School at the University of Washington-Seattle (1998-2011, Chairman 2009-2010), a former Director of the California Bankers Association (2004-2008), a former President and Chief Executive Officer of hybridCore Homes (2009-2011). Mr. Graham is Chairman of the Marines Memorial Association in San Francisco, a Director of Empire Law School (2004-Present) and serves on numerous other things,non-profits. Mr. Graham is a former Marine Infantry Officer and has served as a managing member of the operationsLLC since 2011 and a Director of Truett-Hurst, Inc. since 2012. The Nominating and Governance Committee and the Board selected Mr. Graham to serve on our Board due to his experience in executive management oversight, accounting and financial performance. You can identify these forward-looking statementstransactions.
Spencer Grimes. Spencer Grimes is Managing Partner of Twinleaf Management LLC, a Connecticut-based investment advisor (“Twinleaf”). Twinleaf constructs and manages client portfolios with an exclusive focus on undervalued small capitalization equities. Twinleaf currently owns approximately 9.68% of the Company’s shares of Class A common stock. See “Security Ownership of Certain Beneficial Owners and Management” below. Prior to founding Twinleaf in 2011, Mr. Grimes was a private equity investor at BG Media Partners and Sequence LLC. From 1996 to 2000, he was an equity research analyst at Citigroup Smith Barney. Early in his career, he held sales and marketing positions at Viacom, Inc., a global entertainment company. Mr. Grimes is also currently an adjunct professor at The New School in New York, teaching a graduate level finance course. He holds a Bachelor of Arts from the University of Virginia and a Masters of Business Administration from Emory University in Atlanta. The Nominating and Governance Committee and the Board selected Mr. Grimes to serve on the board due to his experience in executive management oversight and finance. He is a board director at The Meet Group, Inc. (Nasdaq: MEET).
Gerry Hansen. Gerry Hansen has served as an Executive Coach and Consultant since 2008 with Hansen Coaching and Consulting. Previously, Ms. Hansen served in various roles at Charles Schwab & Co, Inc. and Charles Schwab Europe from 1994-2000, including Senior Vice President, in which she had responsibility for a variety of financial, accounting and operating functions. Ms. Hansen is the Audit Committee chairwoman and the Audit Committee’s financial expert. The Nominating and Governance Committee and the Board selected Ms. Hansen to serve on our Board due to her financial, accounting and executive management oversight experience.
Phillip L. Hurst. Phillip L. Hurst began his career in the wine industry in 1985 at Fetzer Vineyards when he was hired by Paul Dolan to help make premium wines and build the brand. Fetzer Vineyards was sold to the Brown-Forman Corporation in 1992, and Mr. Hurst left in 1998 to run International Sales and Marketing for Golden State Vintners, Inc. which needed to bolster the senior management team for the launch of its initial public offering. During his time at Golden State Vintners, Inc. (1998-1999), Mr. Hurst met his future partners in what was to become one of the world’s largest private label beer, wine and spirits companies, Winery Exchange Inc. As co-founder and Senior Vice President of Sales and Marketing from 1999 to 2007, he helped grow the company to over $100 million in sales in less than 10 years. Mr. Hurst sold his stake in the company to partner with his longtime friend and mentor, Paul Dolan, to follow their dream of buying and building super-premium wineries and vineyards in California’s premier appellations. Mr. Hurst has a winemaking degree from University of California-Davis. Mr. Hurst has served as President, Chief Executive Officer and a managing member of the LLC since 2007 and as President, Chief Executive Officer and Director of Truett-Hurst, Inc. since 2012. The Nominating and Governance Committee and the Board selected Mr. Hurst to serve on our Board due to his extensive knowledge of our operations, competitive challenges and opportunities gained through his position as our President and Chief Executive Officer as well as his extensive experience and education in winemaking.
Karen Weaver. Karen Weaver has served as Chief Financial Officer of Truett-Hurst, Inc. since 2018 and has served as Vice President, Corporate Controller of the Company since December 18, 2017. Prior to joining Truett-Hurst, Inc., Ms. Weaver was previously employed by Amyris, Inc. (“Amyris”), a publicly-traded biotechnology company delivering renewable products through its science technology as Vice President and Corporate Controller from October 2012 until September 2014 and Vice President, Finance from September 2014 until her departure on December 15, 2017. On August 1, 2013, Ms. Weaver was appointed Principal Accounting Officer of Amyris. From September 2009 until February 2011, Ms. Weaver served as Vice President and Corporate Controller of Sonic Solutions (“Sonic”), a publicly-traded global digital media software and entertainment solutions provider. At Sonic, Ms. Weaver oversaw the global finance team and was involved in Sonic’s mergers and acquisitions activities. Ms. Weaver has approximately 30 years of management, leadership and industry experience, and has led finance functions for varying stages of companies from early stage to public companies with domestic and foreign operations in the technology, biotechnology, manufacturing and financial services industries.
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Committees and Meetings of the Board of Directors
Board Committees
Our Board of Directors has established an Audit Committee, a Compensation Committee and Nominating and Governance Committee, which have the composition and responsibilities described below. Each committee operates under a charter that has been approved by the useBoard of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative versionDirectors and current copies of these wordscharters are posted on our website, https://www.truetthurstinc.com/corporate-governance. The information on our website is not incorporated by reference and is not part of this Form 10-K/A.
Audit Committee
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee is composed of Marcus Benedetti, Daniel A. Carroll and Gerry Hansen. All are non-employee members of our Board of Directors. Ms. Hansen is our Audit Committee chairwoman. Ms. Hansen is considered an “audit committee financial expert,” as currently defined under the SEC and NASDAQ rules. Our Board of Directors has determined that Mr. Benedetti, Mr. Carroll and Ms. Hansen are independent within the meaning of the applicable SEC rules and the listing standards of NASDAQ.
Our Audit Committee oversees our corporate accounting and financial reporting process. Among other matters, the Audit Committee evaluates the independent registered public accounting firm’s qualifications, independence and performance; determines the engagement of the independent registered public accounting firm; reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements; approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting firm on our engagement team as required by law; reviews our critical accounting policies and estimates; and will annually review the Audit Committee charter and the committee’s performance. The Audit Committee operates under a written charter adopted by the Board of Directors that satisfies the applicable standards of NASDAQ.
Compensation Committee
Our Compensation Committee is composed of Marcus Benedetti, Barrie Graham and Gerry Hansen. Mr. Graham is our Compensation Committee chairman.
Our Compensation Committee reviews and recommends policies relating to the compensation and benefits of our officers. The Compensation Committee reviews and approves corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and makes recommendations to the Board regarding compensation of these officers based on such evaluations. The Compensation Committee will administer the issuance of stock options and other awards under our stock plans. The Compensation Committee reviews and evaluates, at least annually, its own performance. The Compensation Committee operates under a written charter adopted by the Board that satisfies the applicable standards of NASDAQ.
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Nominating and Governance Committee
Our Nominating and Governance Committee is composed of Daniel A. Carroll, Barrie Graham and Spencer Grimes, and Mr. Carroll is our Nominating and Governance Committee chairman. Our Nominating and Governance Committee is responsible for making recommendations regarding candidates for directorships and the size and the composition of our Board. In addition, the Nominating and Governance Committee is responsible for overseeing our corporate governance principles and making recommendations concerning governance matters. The Nominating and Governance Committee operates under a written charter adopted by the Board that satisfies the applicable standards of NASDAQ.
The Nominating and Governance Committee’s purpose is to monitor and oversee matters of corporate governance, including the evaluation of the Board’ performance and processes and the “independence” of directors, and select, evaluate and recommend to the Board qualified candidates for election or other comparable words. Such forward-looking statements are subjectappointment to various risksthe Board. The Nominating and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or resultsGovernance Committee identifies director candidates through recommendations made by members of the Board, management, stockholders and others, including the possibility of a search firm. The Nominating and Governance Committee does consider nominations from its stockholders made pursuant to differ materiallySection 2.10 of our bylaws. The applicable procedures from those indicated in these statements. We believe these factorsSection 2.10 of our bylaws include, but are not limited to, those described under the section “Risk Factors”following. Stockholders wishing to submit nomination recommendations to the Nominating and Governance Committee should review Section 2.10 of our bylaws in Item 1A of this Report. Additional risk factors may be described from timetheir entirety as the below summary is incomplete.
· | Timeliness. To be timely, notice by the stockholder must be delivered to the Secretary at the Corporation’s principal executive offices not later than 90 days prior to the date of the annual meeting. |
· | Substance of Notice. The stockholder’s notice relating to director nomination(s) must set forth, among other things more fully discussed in Section 2.10 of our bylaws, the following: |
o | as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are beneficially owned by the person, (iv) a statement whether such person, if elected, intends to tender a resignation effective upon such person’s failure to receive the required vote for re-election at the next meeting at which such person would face re-election and upon acceptance of such resignation by the Board of Directors and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Exchange Act; and |
o | as to the stockholder giving the notice, (i) the name and record address of the stockholder, and (ii) the class and number of shares of the Corporation which are beneficially owned by the stockholder. |
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At a minimum, a Board nominee should have significant management or leadership experience which is relevant to timethe Company’s business, as well as personal and professional integrity. The Board believes it is in future filings with the Securities and Exchange Commission (“SEC”). We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. We believe these factors include but are not limited to those described under “Item 1A. Risk Factors” such as:
The Company’s sale of its wholesale wine business assets to Precept Brands, including related contingent liabilities, and subsequent shift in strategic directionbest interest of the Company.
A reductionCompany and its stockholders to identify and select highly-qualified candidates to serve as directors and for the Board to be comprised of a diverse group of individuals with different backgrounds and perspectives. Recommendations are developed based on the nominee’s own knowledge and experience in the supplya variety of grapesfields, and bulk wine available from the independent grape growers and bulk wine suppliers could reduce the annual production of wine.
The Company has a history of losses and may not achieve or maintain profitability in the future.
The Company faces significant competition which could adversely affect profitability.
The loss of key employees, including the departure of Phil Hurst, could damageresearch conducted by the Company’s reputationstaff at the Nominating and business.Governance Committee’s direction.
A reduction in access to or an increase in
Board Meetings and Attendance
There were thirteen meetings held by the costBoard of the third-party services used to produce wine could harm the business.
We may need additional debt and/or equity financingDirectors for the business, which may not be available on favorable terms or at all.
Because the founding LLC members (the “Founders”) have retained significant control over Truett-Hurst, Inc., current shareholders and new investors will not have as much influence on corporate decisions as they would if control were less concentrated.
The Company has certain transactions with related parties, including the Founders and principal shareholders. These transactions may present conflicts of interest.
The Company depends upon trademarks and proprietary rights, and any failure to protect intellectual property rights or any claims that the Company is infringing upon the rights of others may adversely affect competitive position and brand equity.
The Founders have significant influence on Truett-Hurst, Inc. and their interest may differ from those of the public shareholders.
The Company faces inventory risk, and if the Company fails to predict accurately demand for products, the Company may face write-downs or other charges.
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. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
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Truett-Hurst Inc. is a holding company incorporated in 2012 as a Delaware corporation and our sole asset is a controlling equity interest in H.D.D. LLC (the “LLC”). Unless the context suggests otherwise, references in this report to “Truett-Hurst,” the “Company,” “we,” “us” and “our” 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. Our 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 June 30, 2018, unless otherwise specifically noted. References to “FY” or “fiscal year” refer to the fiscal year ending on June 30th of the designated year. For example, “FY18” and “fiscal year 2018” each refer to the fiscal year ended June 30, 2018. This Annual Report on Form 10-K references certain trademarks and registered trademarks which may be trademarks or registered trademarks of their respective owners.
On October 8, 2017 and for several days thereafter, significant wildfires broke out in Napa, Sonoma, and surrounding counties in Northern California. Certain of our inventory, primarily juice pressed from grapes picked duringThe Audit Committee had eight meetings, the 2017 harvest and maintained at outside production and storage facilities, was damaged due to smoke taint during the barrel aging process. We filed a claim with our insurance carrier, who performed testing on samples sent to its labs in June 2018. The results indicated positive for exposure, and as a result we received $1.9 million in insurance proceeds in June of 2018.
On August 13, 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Precept Brands LLC, a Washington limited liability company (“Precept”) pursuant to which we have sold certain assets comprising our wholesale wine business (the “Wholesale Business”) to Precept (the “Precept Transaction”). See Note 3 “Discontinued Operations”, and Note 12 “Subsequent Events”.
General
Following the sale of the Wholesale Business to Precept on August 13, 2018, we are now only operating our Direct to Consumer (“DTC”) business based at our estate property in Healdsburg, California as well as the sale of our Compensation Committee had three brands to certain national retailers. We produce super ultra-premium and luxury tier Pinot Noir, Chardonnay, Sauvignon Blanc, Zinfandel, Petite Sirah, and Syrah for our three brands Truett Hurst, VML and Svengali. We maintain a wine club for Truett Hurst and VML and we provide a premier experience leveraging our creekside property, our hospitality, customer service and award winning wine quality. We continue to be headquartered in Sonoma County, California and lease space for wine production within a custom crush facility located in Santa Rosa, California. The DTC channel consists of sales of products produced by us through our tasting rooms, wine clubs and our winery websites.
Strategic Objectives
We sell our wine into two primary categories: Super Ultra-Premium ($25-49 per bottle retail price) and Luxury ($50+ per bottle retail price). With our focus on the DTC business, we plan to focus on the following sales channels:
Walk In Visitors: Dry Creek Valley is home to over 75 wineries and tasting rooms and draws from a large population base in and around the San Francisco Bay Area. These sales make up approximately 25% of our total sales and we work to convert these customers to longer term customers via our Wine Clubs.
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Wine Club: Truett Hurst and VML Wine Clubs have over 6,000 member from which we generate approximately 75% of our annual sales. Wine Club members can choose from a variety of membership options and can also customize their membership to include specific wines or shipping timing. The most common memberships ship four times per year.
E-Commerce: With a database of over 20,000 customers we regularly develop offerings of special lots, one time buys and end of vintage opportunities.
Retail: We currently sell the Truett Hurst brand directly to several retailers including Total Wine and More and sell the VML brand to a select group of retailers via a traditional three tier distribution.
Wine Operations
Brands
We operate two tasting rooms and one winery where wine is produced from many varieties of grapes principally grown or purchased in Sonoma County’s Dry Creek Valley and Russian River Valley appellations. Established in 2007, Truett-Hurst was the first winery operation and brand that focuses on producing limited lots of super-premium wine from a range of varietals, including Zinfandel, Chardonnay, Sauvignon Blanc, Pinot Noir, Petite Sirah and other unique red blends from grapes sourced from local growers in the Dry Creek Valley. Established in 2011, VML was the second winery operation and brand that focuses on producing limited lots of super-premium and ultra-premium wines from grapes purchased from local growers in the Russian River Valley. The primary varietals include Pinot Noir, Chardonnay, Sauvignon Blanc, and Gewurztraminer. The Svengali brand was established most recently to focus entirely on a single Dry Creek Valley Syrah.
Property
We own a 25-acre property located at 5610 Dry Creek Road, Healdsburg, California, of which approximately 15 acres is used for growing grapes. The remainder of the property is used for the Truett-Hurst and VML tasting rooms, retail sales space, and office space for support staff. Although we have maintained the proper permits to build a winery at this location and there is infrastructure, such as electricity and access to water, necessary to operate a winery on the property, we have not made the requisite capital expenditures to construct a building to house grape-crushing equipment and wine storage tanks. We believe that the property can be used to expand our wine-making operations in the future and provide better control over wine quality.
We lease wine production space within a custom crush facility located in Santa Rosa, California. The lease commenced on 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. Previously, we leased a winery located at 4035 Westside Road, Healdsburg, California, but vacated those premises prior to May 31, 2017.
Production
The wine production space within the custom crush facility allows us to crush, ferment and oak barrel age approximately 700 tons (50,000 cases) of ultra-premium grapes annually, with capacity to increase to 1,000 tons with additional capital improvements. For increased production capacity, we outsource to a variety of specialist wineries and bottling facilities. We have been able to satisfy the production requirements to date and considers our sources to be adequate at this time. However, the inability of any of the suppliers to satisfy our requirements could adversely affect operations.
We entered into a Transition Services Agreement with Precept to harvest and produce wine for Precept from the 2018 vintage and oversee blending and bottling of the bulk wine sold to Precept in the Precept Transaction. See Note 12 “Subsequent Events” for further information.
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Grape and Wine Contracts
The majority of annual grape requirements are satisfied by purchases from each year’s harvest and from fruit harvested from our estate vineyards which normally begins in August and runs through October. In addition to purchasing grapes, we supplement our needs with bulk wine purchase contracts based on sales and production requirements. Depending upon overall demand and availability of bulk wine, we could experience shortages and/or increased prices.
We enter into grape contracts with terms generally of one to four years, which requires payment of an agreed upon price per ton that varies according to the type of grape, its appellation and in certain cases, the vineyard block in which the grapes are grown. Contracts are typically terminable after a specified term, unless earlier mutually agreed by the parties.
Vineyards Owned by Founders
Certain of the Founders operate or farm vineyards. The grapes produced from these vineyards are sold to us at market prices, with the balances sold to other wineries. See Part II, Item 8, Note 8, “Commitments and Contingencies,” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional details regarding related party commitments.
Sources and Availability of Production Materials
We utilize glass and other materials such as corks, capsules, labels and cardboard cartons in the bottling and packaging of our products. After grape purchases and associated production overhead, glass bottle costs are the next most significant component of the cost of sales. The glass bottle industry is highly concentrated with only a small number of quality producers. We obtain glass requirements from a limited number of producers under supply arrangements. We have been able to satisfy production requirements with respect to the foregoing and consider the sources of supply to be adequate at this time. However, the inability of any of the glass bottle suppliers to satisfy our requirements could adversely affect our operations.
Seasonality
There is seasonality in the growing, procurement and transportation of grapes. The wine industry typically experiences increased sales in October, November and December. Sales are typically higher upon the launch of a new product into the marketplace and when retailers promote brands through in-store displays and advertisements. We expect these trends to continue.
Company Team and Culture
Our team consists of seasoned professionals who have worked their way up through the industry often achieving senior level positions in noted wine companies such as the Brown-Forman Corporation, Gallo, Domaine Chandon, Kendall-Jackson, and Fetzer Vineyards.
In addition to building a seasoned team of professionals and shaping the entrepreneurial culture, an important part of the ongoing strategy is to create partnerships with the best organizations and professionals in order to leverage core competencies in the most efficient, cost effective and profitable manner. We are proud of the corporate partnerships that have been created throughout the sales channels and believe we can build a business that can change the way consumers purchase and enjoy wine.
Sales and Marketing
We employ a relatively small full-time, in-house marketing, sales and customer service organization. The sales and marketing team uses a range of marketing strategies designed to build brand equity and increase sales. Strategies include, but are not limited to, market research, consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, on premise promotions, social media and public relations.
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As a part of the sale of our Wholesale Business to Precept in August 2018, we sold our wholesale brands and, as a result our future sales will be comprised of sales through our DTC business.On a combined basis, the DTC segment represented approximately 27% of our net sales and 51% of our gross profit for the year ended June 30, 2018. DTC sales have high margins, typically include more expensive wines, and create a “halo effect” for our national brands. The remaining national brand segment is comprised of brands we have developed and own (VML, Truett Hurst and Svengali). We also sell these brands to on and off-premise regional and national retail chains, as well as independent restaurants, liquors stores, and grocery stores.
Competitive Environment
All the segments we participate in are highly competitive. We compete on the basis of quality, price, brand recognition and distribution strength against domestic and multinational producers and distributors, some of which have greater resources than us, for consumer purchases, as well as shelf space in retail stores, restaurant presence and wholesaler attention. Further, wine competes with other alcoholic and nonalcoholic beverages.
There are relatively few publicly traded beverage companies with significant wine operations and most also have beer and spirits divisions.
Demand for wine in our market segments can rise and fall with general economic conditions. Our ability to respond to market demand, deliver a variety of wine styles, create and design innovative packaging combined with an effective distribution system will allow us to continue to penetrate the mainstream wine markets.
Intellectual Property
We protect proprietary rights through a variety of means and measures, including patents, trade secrets, copyrights, trademarks, contractual restrictions and technical measures. A number of brands are under registered trademarks. International trademark registrations are also maintained where it is appropriate to do so. Each of the U.S. trademark registrations is renewable indefinitely so long as we are making a bona fide usage of the trademark. Subsequent to the sale of the Wholesale Business on August 13, 2018, we have 3 registered material trademarks.
Regulatory Environment
The wine industry is part of the highly regulated U.S. liquor industry. While there have been significant relaxations over time, such as those arising following the Granholm v. Heald U.S. Supreme Court decision in 2005, the U.S. wine industry is still highly regulated. For example, we are able to ship wine directly now to consumers and businesses in 42 states, but must only work through traditional “three-tier” distributors in the remaining 8 states.
The production and sale of wine is subject to extensive regulation by the United States Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureaumeeting and the California Liquor Control Commission. We are licensed by and meet the bonding requirements of each of these governmental agencies. Sales of wine are subject to federal alcohol tax, payable at the time wine is removed from the bonded area of the winery for shipment to customers or for saleNominating & Governance Committee had one meeting in our tasting rooms.
In conjunction with the signing of the 2018 Tax Reform Bill, the federal alcohol tax rate changed effective January 1, 2108. The previous rates of $1.07 per gallon for wines with alcohol content at or below 14% and $1.57 per gallon for wines above 14% but less than 21% has been modified to reflect the following tiered structure:
For wines with alcohol content of 16% and under – ($.07 per gallon on first 30,000 gallons, $.17 per gallon from 30,001 – 130,000, $.535 per gallon from 130,001 – 750,000, $1.07 over 750,000)
For wines with alcohol content between 16% - 21% - ($.57 per gallon on first 30,000 gallons, $.67 per gallon from 30,001 – 130,000, $1.035 per gallon from 130,001 – 750,000, $1.57 over 750,000)
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For wines with alcohol content between 21% - 24% ($2.15 per gallon on first 30,000 gallons, $2.25 per gallon from 30,001 – 130,000, $2.62 per gallon from 130,001 – 750,000, $3.15 over 750,000)
Consumer direct sales are also subject to state regulation which governs the quantity and manner in which products can be shipped, delivered and excise taxes collected.
As an agricultural processor, we are also regulated by Sonoma County and, as a producer of wastewater, by the state of California. We maintain all necessary permits.
Prompted by growing government budget shortfalls and public reaction against alcohol abuse, Congress and many state legislatures are considering various proposals to impose additional excise taxes on the production and sale of alcoholic beverages, including table wines. Some of the excise tax rate increases being considered are substantial. The ultimate effects of such legislation, if passed, cannot be assessed accurately since the proposals are still in the discussion stage. Any increase in the taxes imposed on table wines can be expected to have a potentially adverse impact on overall sales of such products. However, the impact may not be proportionate to that experienced by producers of other alcoholic beverages and may not be the same in every state.
Management is strongly focused on environmental stewardship and maintains a variety of policies and processes designed to protect the environment, the public and the consumers of our wine. Many of the expenses for protecting the environment are voluntary, however we are regulated by various local, state and federal agencies regarding environmental laws where the costs of these laws and requirements of these agencies are effectively integrated into regular operations and do not cause significant negative impacts or costs.
We believe we are in compliance in all material respects with all applicable governmental laws and regulations in the countries in which we operate. We also believe that the cost of administration and compliance with, and liability under, such laws and regulations have not had a material adverse impact on our financial condition, results of operations or cash flows for the fiscal year ended June 30, 2018. The Board of Directors requires that directors make a reasonable effort to attend the Company’s annual stockholder meeting.
Employees
As of June 30, 2018, we had 35 full time, 15 part time,Board Role in Risk Oversight
Our Board as a whole has responsibility for overseeing our risk management. The Board exercises this oversight responsibility directly and 4 seasonal employees. We hire part time and seasonal help as needed. All employees are located in the United States. We believe that future success will depend in large part on the ability to attract and retain highly skilled technical, managerial, and sales and marketing personnel. Nonethrough its committees. The oversight responsibility of the employees are subject to collective bargaining agreements. We believe relations with our employees are good.
Information About Our Executive Officers
The information required under this ItemBoard and its committees is incorporatedinformed by referencereports from our definitive proxy statementmanagement team that are designed to be filed relatingprovide visibility to the Board about the identification and assessment of key risks and our risk mitigation strategies. The full Board has primary responsibility for evaluating strategic and operational risk management, and succession planning. Our Audit Committee has the responsibility for overseeing our major financial and accounting risk exposures and the steps our management has taken to monitor and control these exposures, including policies and procedures for assessing and managing risk. Our Audit Committee also reviews programs for promoting and monitoring compliance with legal and regulatory requirements. Our Compensation Committee evaluates risks arising from our compensation policies and practices. The Audit Committee and the Compensation Committee provide reports to the full Board regarding these and other matters.
Stockholder Communications with the Board of Directors
Stockholders may send communications to our 2018 annual meeting of stockholders.
Available Information
Principal executive offices are located at 125 Foss Creek Circle,Board, including any individual director or the directors as a group, by mailing such communications to Truett-Hurst, Inc., P.O. Box 1532, Healdsburg, California 95448, and Attention: Corporate Secretary. Such correspondence shall be addressed to the telephone numberBoard or any individual director by either name or title.
All communications received as set forth in the preceding paragraph will be opened by our Acting Corporate Secretary for the sole purpose of determining whether the contents represent a message to our directors. Any contents that are not in the nature of advertising, promotions of a product or service, or patently offensive material will be forwarded promptly to the addressee. In the case of communications to our Board or any individual director, our Corporate Secretary will make sufficient copies of the contents to send to each director to which the envelope is (707) 431-4423. addressed.
Code of Business Conduct and Ethics
We file Annual Reportshave adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including the Chief Executive Officer and Chief Financial Officer. These individuals are required to abide by the Code of Business Conduct and Ethics to ensure that its business is conducted in a consistently legal and ethical manner. Our Code of Business Conduct and Ethics covers all areas of professional conduct, including employment policies, conflicts of interest, intellectual property and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of its business. Any waivers of the Code of Business Conduct and Ethics for directors or executive officers must be approved by the Board. The full text of our Code of Business Conduct and Ethics is published on Form 10-K, Quarterly Reportsour website at https://www.truetthurstinc.com/corporate-governance. A hardcopy can be requested via mail to our P.O. Box, attention: Corporate Matters, and will be mailed without charge. P.O. Box 1532, Healdsburg, CA 95448.
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We intend to disclose future amendments to, or waivers from, provisions of its Code of Business Conduct and Ethics on Form 10-Q, Current Reports on Form 8-K,our website within four business days following the date of such amendment or waiver.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and proxy statementsofficers, and persons who beneficially own more than ten percent (10%) of our common stock, who are hereinafter collectively referred to as the Reporting Persons, to file with the SEC. The public may readSEC reports of beneficial ownership and copy any materials thatreports of changes in beneficial ownership of our common stock on Forms 3, 4 and 5. Reporting Persons are required by applicable SEC rules to furnish us with copies of all such forms filed with the SEC atpursuant to Section 16(a) of the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549,Exchange Act. To our knowledge, based solely on official business daysour review of the copies of the Forms 3, 4 and 5 received by us during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issues, including we file electronically with the SEC at www.sec.gov. You may learn more about us by visiting the website at www.truetthurstinc.com. The information on the website is not part of this Form 10-K. The foregoing information regarding the website and its content is for your convenience only. The content of the website is not deemed to be incorporated by reference in this report or filed with the SEC.
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Emerging Growth Company Status
We were initially an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, enacted on April 5, 2012 (“JOBS Act”). For as long as we remained an “emerging growth company,” we could take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding shareholder advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We reached our fifth anniversary of our IPO as offiscal year ended June 30, 2018 and written representations that no longer qualifyother reports were required, we believe that all reports required to be filed by such persons with respect to the Company’s fiscal year ended June 30, 2018, were timely filed, except that, due to an administrative oversight, Karen Weaver filed a late Form 3.
ITEM 11. EXECUTIVE COMPENSATION
Our executive compensation program is straightforward. We provide our executives with an annual base salary as a fixed, stable form of compensation and an “emerging growth company’ under the JOBS Act.annual cash bonus opportunity to create additional performance incentives. We also from time to time grant our executives equity-based awards to provide an additional incentive to grow our business and further link their interests with those of our stockholders. Our Compensation Committee reviews our executive officers’ overall compensation packages on an annual basis or more frequently as it deems warranted.
Smaller Reporting Company
Although we no longer qualify as an “emerging growth company” we are still able to take advantage of certain exemptions from various reporting obligations asAs a “smaller reporting company”. We became subject (as such term is defined under applicable securities laws), we are required to disclose the reporting requirements of Section 15(d)compensation for our principal executive officer and our two other most highly compensated executive officers serving as of the Exchange Act, subject to the disclosure requirements of Regulation S-Klast day of the SEC,applicable fiscal year. In certain cases, disclosure may also be required for individuals who served as a “smaller reporting company,” on the effective date of the IPO. The designation of being a “smaller reporting company” relieves us from some of the more detailed informational requirements of Regulation S-K.
Risks Related to the Company’s Business
We recently consummated the sale of assets constituting our wholesale wine business, one of our two primary business segments. This divestiture and related contingent liabilities from the sale could adversely affect our results of operations and financial condition.
On August 13, 2018 we completed the sale of certain assets comprising our wholesale wine business (the “Wholesale Business”) to Precept Brands LLC, a Washington limited liability company (“Precept”)executive officers for a cash purchase price (subject to certain post-closing adjustments), assumed liabilities and future royalty payments (the “Precept Transaction”). As a result of the Precept Transaction, our revenues will be materially reduced as compared to prior periods.
We expect to restructure our operations to focus on our direct to consumer business (the “DTC Business”). Our success in realizing benefits from such restructuring, and the timing of this realization, depends on many factors, some of which are not within our control. For example, risks in realizing these benefits include failure to retain key customers, employees and suppliers; difficulties under contracts (particularly those that covered both businesses); changes in our senior leadership; diversion of resources to address transition services obligations; inherent risks in operating the business; and unanticipated issues, expenses and liabilities. Even if we are able to restructure our business and operations successfully, restructuring may not result in the realization of the full benefits of the Precept Transaction that we currently expect within the anticipated time frame, or at all.
The Precept Transaction could result in a financial loss which could have a material adverse effect on our results.
In addition, in connection with such divestiture, we have retained responsibility for some of the known and unknown contingent liabilities related to the Precept Transaction such as indemnification, lawsuits, tax liabilities, product liability claims, and other matters. The realization of any of these potential liabilities could have a material adverse effect on our business or results of operations.
We also entered into a Transition Services Agreement in connection with the sale of the Wholesale Business, under which we will provide winemaking and other services to Precept over the nine month period following closing. Such services may divert human and financial resources from focus on the remaining business, and may expose us to additional risks and liabilities.
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Finally, a portion of the purchase price is based on Precept’s salesfiscal year but were not serving as executive officers at the end 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.year.
Following the sale of the Wholesale Business, we have chosen to refocus the strategic direction of our business on our DTC Business. There can be no guarantee that this strategy will be successful or that we will experience consistent and sustainable profitability in the future as a result of our new strategy.
The sale oftable below sets forth the Wholesale Business enables usannual compensation for services rendered during fiscal 2018 and, to concentrate exclusively on our DTC Business. We cannot guarantee that our strategy is the right one or that we will be effective in executing our strategy. Our strategy may not succeed for a number of reasons, including, but not limited to: general economic risks; execution risks; risks associated with sales not materializing based on a change in circumstances; disruption to sales; increasing competitiveness in our markets; our ability to retain key personnel; the dynamic nature of the markets in which we operate; specific economic risks in different geographies and among different customer segments; uncertainty regarding increased business and renewals from existing customers; uncertain growth prospects and market share; risks of new product development and introductions and innovation; product defects; unexpected costs, assumption of unknown liabilities and increased costs for any reason; potential litigation and disputes and the potential costs related thereto; distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; risks associated with management of growth; competition and pricing pressure. If one or more of the foregoing risks were to materialize, our business, results of operations and ability to achieve sustained profitability could be adversely affected.
We may not be able to maintain the profitability or operating efficiencies that we and the DTC Business had achieved or might achieve with the Wholesale Business. We may be less able to offset such risks in the DTC Businessextent applicable under SEC rules, fiscal 2017 by operating with a single line of business. The markets in which the DTC Business operates may not experience the growth rates expected and any economic downturn affecting those markets could negatively impact the DTC Business. These markets may experience more volatility than expected or face more operating risks than in the markets in which we have historically operated with the Wholesale Business. If the DTC Business or the markets in which it operates deteriorate, the potential cost savings, efficiencies, growth opportunities and other benefits of the Precept Transaction may not be realized fully, or at all, or may take longer to realize than expected. In such case, our business, financial condition, results of operations and cash flows may be negatively impacted.
We may require additional debt and/or equity financing for our DTC Business, and such financing may not be available to us on favorable terms, or at all.
In connection with the restructuring of the DTC Business, we may require funds in excess of our existing cash resources and debt to fund operations, develop new products, fulfill SEC reporting and compliance obligations and finance general and administrative activities.
Due to market conditions at the time we may need additional funding, or due to our financial condition at that time, it is possible that we will be unable to obtain additional debt or equity financing as and when we need it. If we are unable to obtain additional funding, we may not be able to repay debts when they are due and payable. If we are able to obtain capital it may be on unfavorable terms or terms which excessively dilute our stockholders. If we are unable to obtain additional funding as and when needed, we could be forced to delay our business growth efforts and, if we continue to experience losses, potentially cease operations.
Management changes in connection with the Precept Transaction, particularly relating to PhilPhillip L. Hurst, our President and Chief Executive Officer, may have an adverse impact on our operations and reputation.
In connection with the Precept Transaction, we made changes in certain management positions, including the resignation of Phil Hurst, our President and Chief Executive Officer, effective November 1, 2018. We may experience further changes in key leadership or key positions in the future. The departure of key leadership personnel, especially a long-serving Chief Executive Officer, can take from us significant knowledge and experience. There can be no assurance that we will be successful in such efforts.
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A reduction in the supply of grapes and bulk wine available to us from the independent grape growers and bulk wine suppliers could reduce our annual production of wine.
We rely on annual contracts with independent growers to purchase substantially all the grapes used in wine production. The business would be harmed if we are unable to contract for the purchase of grapes at acceptable prices from these or other suppliers in the future. The terms of many of our purchase agreements also constrain the ability to discontinue purchasing grapes in circumstances where we might want to do so.
Some of these agreements provide that either party may terminate the agreement prior to the beginning of each harvest year.
We depend on various bulk wine suppliers for the production of several wines, including those being produced for Precept under the Transition Services Agreement. These contracts currently cover the 2017-2019 harvests. Extension of these contracts is not guaranteed and thus we may have exposure to the availability and pricing of bulk wine for our production needs which could increase the cost or reduce the amount of wine we are able to produce for sale in the future. This could reduce sales and profits.
We face inventory risk, and if we fail to predict accurately demand for products, we may face write-downs or other charges.
We are exposed to inventory risks that may adversely affect operating results as a result of new product launches, changes in product cycles and pricing, limited shelf-life of certain of our products, changes in consumer demand, and other factors. We endeavor to predict accurately, based on information from distributors and reasonable assumptions, the expected demand for their products in order to avoid overproduction. Demand for products, however, can change significantly between the time of production and the date of sale. It may be more difficult to make accurate predictions regarding new products. In part, we depend on the marketing initiatives and efforts of distributors in promoting products and creating consumer demand and we have limited or no control regarding their promotional initiatives or the success of their efforts.
We have a history of losses, and may not achieve or maintain profitability in the future.
We have had a limited number of quarters or years of profitability and historically raised additional capital to meet our growth needs. Further, the sale of the Wholesale Business removed certain costs but also removed revenue streams associated with that line of business. We expect to make significant investments in order to develop and expand our restructured business, which, we believe, will result in additional sales, marketing and general and administrative expenses that will require increased sales to recover these additional costs. As a public company, we expect to continue to incur legal, accounting, and other administrative expenses that are material. Our revenues have been subject to volatility in recent periods and this volatility may cause us to not cover our costs and successfully compete in the highly competitive wine market.
We may not generate sufficient revenue to achieve profitability. We may incur significant losses in the future for a number of reasons, including slowing demand for our products and increasing competition, as well as the other risks described in this Annual Report on Form 10-K, and may encounter unforeseen expenses, difficulties, complications and delays, and other unknown factors in the expansion of the business. Accordingly, we may not be able to achieve or maintain profitability and, may incur significant losses in the future, and this could cause the price of the Class A common stock to decline.
We face significant competition which could adversely affect profitability.
The wine industry is intensely competitive. Our wines compete in several super-premium and ultra-premium wine market segments with many other super-premium and ultra-premium domestic and foreign wines, with imported wines coming from the Burgundy and Bordeaux regions of France, as well as Italy, Chile, Argentina, South Africa and Australia. Our wines also compete with other alcoholic and, to a lesser degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus by independent distributors, many of which carry extensive brand portfolios. As a result of this intense competition there has been and may continue to be upward pressure on selling and promotional expenses. In addition, the wine industry has experienced significant consolidation. Many competitors have greater financial, technical, marketing and public relations resources. Our sales may be harmed to the extent we
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are not able to compete successfully against such wine or alternative beverage producers’ costs. There can be no assurance that in the future we will be able to successfully compete with current competitors or that we will not face greater competition from other wineries and beverage manufacturers.
The loss of key employees or personnel could damage our reputation and business.
We believe that success largely depends on the employment of experienced professionals in a number of key positions. The Company has experienced turnover in such key positions in fiscal year 2018, including changes inKaren Weaver, our Chief Financial Officer, Phil Hurst’s transitionJason J. Strobbe, our former Executive Vice President of Sales, and Evan B. Meyer, our former Chief Financial Officer. These individuals are referred to Precept as described above, and the recent departure of Ginny Lambrix, our chief winemaker. Any inability or unwillingness of key management team members to continue in their present capacities could harm the business and our reputation.“named executive officers.”
Attracting, retaining, and developing individuals in key roles is a component of our strategy for addressing our business opportunities. Attracting and retaining qualified leadership may be more challenging under certain business conditions, especially in times of transition such as those now facing us. Failure to attract and retain the right talent, or to smoothly manage the transition of responsibilities resulting from such turnover, would affect our ability to meet our challenges and may cause us to miss performance objectives or financial targets.
A reduction in our access to or an increaseAs previously disclosed in the cost of the third-party services used to produce our wine could harm our business.
We utilize capacity at several third-party facilities for the production of a significant portion of our wines. The inability to use these or alternative facilities, at reasonable prices or at all, could increase the cost or reduce the amount of production, which could reduce our sales and profits. Certain of these facilities may have been impacted by the Northern California wildfires in October 2017. We do not have long-term agreements with any of these facilities, and they may provide services to competitors at a price above what we are willing to pay. The activities conducted at outside facilities include crushing, fermentation, storage, blending, and bottling. The relianceCurrent Reports on these third-parties varies according to the type of production activity. As production increases, we must increasingly rely upon these third-party production facilities. Reliance on third-parties will also vary with annual harvest volumes.
In addition, we have limited direct impact over the quality control and quality assurance of these third-party manufacturers. If our suppliers are not able to deliver products that satisfy our requirements, we may be forced to seek alternative providers, which may not be available at the same price, or at all. Moving production to a new third-party service provider could negatively impact our financial results.
The terms of future bank loans may restrict current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.
As discussed above, the Company may require funds in excess of our existing cash resources and debt to fund operations, develop new products, fulfill SEC reporting and compliance obligations and finance general and administrative activities. We have in the past used bank loans as a method of obtaining funds for such matters, and expect to do so in the future.
Bank loans may include restrictive covenants that could impair our financing and operational flexibility and make it difficult to react to market conditions and satisfy ongoing capital needs and unanticipated cash requirements.
Our ability to comply with any such covenants and other terms of our bank loans will depend on future operating performance and, in addition, may be affected by events beyond our control, and we may not meet them.
Because the Founders retain significant control over Truett-Hurst, Inc., current shareholders and new investors will not have as much influence on corporate decisions as they would if control were less concentrated.
As of June 30, 2018, our Founders and current officers and directors (together, “Founders and Affiliates”) control approximately 40.11% of the combined voting power of the Company through ownership of outstanding Class A common stock and/or Class B common stock. Prior to conversion of their LLC Units, each holder of LLC Units
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holds a single share of Class B common stock. Although these shares have no economic rights, they allow the existing owners to exercise voting power over Truett-Hurst, Inc., the managing member of the LLC, at a level that is consistent with their overall equity ownership of the business. As a result, Founders and Affiliates have significant influence in the election of directors and the approval of corporate actions that must be submitted for a vote of shareholders.
The interests of these Founders and Affiliate may conflictForm 8-K filed with the interests of other shareholders,SEC on August 16, 2018 and the actions they take or approve may be contrary to those desired by the other shareholders. This concentration of ownership may also have the effect of delaying, preventing or deterring an acquisition of Truett-Hurst, Inc. by a third-party.
We have certain transactions with related parties, including Founders, which may present a conflict of interest.
We routinely source grapes for our products from vineyards owned by Founders and principal shareholders. The interests of these affiliates in such transactions may be contrary to those desired by shareholders. The policies in place designed to mitigate the risk associated with such transactions; however, shareholders may be harmed by self-dealing with affiliates and loss of corporate opportunity.
In addition, from time to time we enter into transactions for goods and services with entities in which our executive officers, directors and/or affiliates have interests,October 15, 2018, Mr. Hurst has resigned as further described under Part II, Item 8, Note 8, “Commitments and Contingencies,” to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
We also enter into grape and bulk wine purchase agreements and bulk wine storage contracts from time to time with entities in which Founders have financial interests. During FY18, we entered into such arrangements with:
Premium Wine Storage, which is owned Paul E. Dolan III (33%) and Heath E. Dolan (33%).
Paul E. Dolan and Heath E. Dolan each control approximately 5.4% of the combined voting power of the Company. Paul E. Dolan is a director of the Company and has been appointed the President and Chief Executive Officer effective November 1, 2018 while Heathand Paul E. Dolan, resignedIII has been appointed as the Company��s President and Chief Executive Officer, effective as of such date, at a director in May 2017.base salary for Mr. Dolan of $200,000 per year during his service as the Company’s President and Chief Executive Officer.
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Summary Compensation Table - Fiscal 2017-2018
Name and Principal Position |
| Fiscal Year | Salary ($) | Bonus ($)(1) | Stock Awards ($)(2) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($)(1) | All Other Compensation ($)(3) | Total ($) | |||||||||||||||||||||||
Phillip L. Hurst(4) | 2018 | 315,927 | - | - | - | - | 10,800 | 326,727 | ||||||||||||||||||||||||
President and Chief Executive Officer | 2017 | 322,351 | - | - | - | - | 10,800 | 333,151 | ||||||||||||||||||||||||
Karen Weaver(5) | 2018 | 111,538 | 5,000 | - | - | - | - | 116,538 | ||||||||||||||||||||||||
Chief Financial Officer | ||||||||||||||||||||||||||||||||
Jason J. Strobbe(6) | 2018 | 277,443 | 25,000 | 112,800 | - | - | - | 415,243 | ||||||||||||||||||||||||
Former Executive Vice President - Sales | ||||||||||||||||||||||||||||||||
Evan B. Meyer(7) | 2018 | 317,445 | 32,488 | 110,448 | 67,500 | - | 188,924 | 716,805 | ||||||||||||||||||||||||
Former Chief Financial Officer | 2017 | 182,983 | - | - | 80,500 | - | 31,600 | 295,083 |
(1) | The amounts reported in the “Bonus” column represent discretionary cash bonuses awarded to our executives during fiscal 2018. No bonuses were paid under our executive bonus plan described below for fiscal 2017 or fiscal 2018. |
(2) | The amounts reported in these columns represent the aggregate grant date fair value of stock and option awards granted to the named executive officers in the applicable fiscal year (and, in the case of Mr. Meyer, the incremental value of certain awards that accelerated in connection with his termination as referred to in note (7) below). These values have been determined under the principles used to calculate the value of equity awards for purposes of our financial statements. For a discussion of the assumptions and methodologies used to calculate the amounts referred to above, please see the discussion of equity-based awards contained in Note 9, Stock-Based Compensation, to our consolidated financial statements for the year ended June 30, 2018 included in our Annual Report on Form 10-K, filed with the SEC on October 15, 2018 (or, for awards granted prior to fiscal 2018, the corresponding note to our consolidated financial statements for the applicable fiscal year). |
(3) | The amounts reported in the “All Other Compensation” column for 2018 include, for Mr. Hurst, an automobile allowance of $900 a month and, for Mr. Meyer, $42,450 in housing costs paid by the Company |
(4) | In August 2018, the Company announced that Mr. Hurst will resign from his position as the Company’s Chief Executive Officer and President, effective November 1, 2018. |
(5) | Ms. Weaver commenced employment with the Company on December 18, 2017 and was appointed as the Company’s Chief Financial Officer effective April 27, 2018. |
(6) | Mr. Strobbe commenced employment with the Company on May 9, 2016 and was appointed as an executive officer of the Company effective January 1, 2018. Mr. Strobbe’s employment with the Company terminated effective August 31, 2018. |
(7) | Mr. Meyer commenced employment with the Company effective October 26, 2016. His employment with the Company terminated effective March 30, 2018. The amount in the “Salary” column for Mr. Meyer includes $3,600 for the payment of his accrued paid time off upon his termination, and the amount in the “All Other Compensation” column includes $144,500 cash severance and $1,974 for COBRA premiums paid by the Company following the termination of his employment as described below under “Separation Agreement.” The amounts in the “Stock Awards” and “Option Awards” columns reflect both (a) the grant date fair values of awards of restricted stock units and stock options, respectively, granted to Mr. Meyer during fiscal 2018 and (b) the incremental fair values attributable to the acceleration of Mr. Meyer’s then-outstanding awards of restricted stock units and stock options, respectively, in connection with the termination of his employment during fiscal 2018 as described below under “Separation Agreement.” |
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Outstanding Equity Awards as of June 30, 2018
The following table provides information regarding outstanding equity awards held by each of our named executive officers as of June 30, 2018, including the vesting dates for the portions of these awards that had not vested as of that date.
Option Awards | Stock Awards | |||||||||||||||||||||||||||
Name | Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested(#) | Market Value of Shares or Units of Stock That Have Not Vested($)(1) | |||||||||||||||||||||
Phillip L. Hurst | - | - | - | - | - | - | - | |||||||||||||||||||||
Karen Weaver | - | - | - | - | - | - | - | |||||||||||||||||||||
Jason J. Strobbe | 5/9/2016 | 35,000 | 35,000 | (2) | $ | 1.53 | 5/9/2026 | |||||||||||||||||||||
10/30/2017 | 60,000 | (3) | $ | 98,400 | ||||||||||||||||||||||||
Evan B. Meyer | - | - | - | - | - | - | - |
(1) | The dollar amounts shown in this column are determined by multiplying the applicable number of shares or units by $1.64, the closing price of the Company’s common stock on the NASDAQ Global Select Market on June 29, 2018 (the last trading day of fiscal 2018). |
(2) | The unvested portion of this option vests in two annual installments, with the first such installment vesting on May 9, 2019. |
(3) | These unvested RSUs consist of (i) an award of 10,000 RSUs that vest in four annual installments, with the first such installment vesting on October 30, 2018, and (ii) an award of 50,000 RSUs that vest upon a change in control of the Company. |
Executive Employment and Severance Agreements
We believe these arrangements reflect substantiallyentered into an offer letter with Ms. Weaver in November 2017 in connection with her joining the same market termsCompany. Her offer letter was amended in July 2018. As amended, the letter provides for Ms. Weaver to receive an initial annual base salary of $200,000 and to be eligible for an annual bonus of up to 20% of her salary. She would also be entitled to severance of six months of her base salary if her employment is terminated by the Company in connection with a sale of a majority interest in the Company or a going private transaction. In addition, if Ms. Weaver's employment is terminated by the Company without cause prior to December 31, 2018, she will be entitled to a severance payment equal to the amount of base salary she would have received for the period from her termination of employment through December 31, 2018 had her employment not terminated.
We entered into an offer letter with Mr. Meyer in September 2016 that provided for him to receive an initial base salary of $275,000 and an annual bonus of 20% of the bonus pool established each year under our executive bonus plan described below. The letter also provided for Mr. Meyer to receive a grant of 70,000 stock options upon joining the Company. If a majority interest in the Company was sold and Mr. Meyer’s employment was terminated due to the sale within the first 18 months of his employment with the Company, he would be receivedentitled to severance equal to 12 months of his initial base salary. As noted above, Mr. Meyer’s employment with us terminated effective March 30, 2018.
We entered into an offer letter with Mr. Strobbe in transactions with unaffiliated third-parties. However, if we failApril 2016 that provided for him to receive market termsan initial base salary of $250,000 and eligibility to participate each year in our executive bonus plan described below. The letter also provided for these transactions or other similar transactionsMr. Strobbe to receive a grant of 70,000 stock options upon joining the Company. As noted above, Mr. Strobbe’s employment with us terminated effective August 31, 2018.
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Executive Bonus Plan
We provide our named executive officers the opportunity to receive a cash incentive bonus each fiscal year under our executive bonus plan. Under the plan, a bonus pool equal to 50% of our net income for the fiscal year (up to a maximum pool amount of $500,000) is established, and each participant in the future, expenses could increase.
A failureplan is entitled to receive a specified percentage of one or more of our key information technology systems, networks, processes, associated sites or service providers could have a material adverse impact on the business.
We rely on information technology (“IT”) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in the management of our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting the internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping product to customers; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing confidential and proprietary research, business plans, and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes necessary to manage the business.
Increased IT security threats and more sophisticated cyber-crime pose a potential risk to the security of our IT systems, networks, and services, as well as the confidentiality, availability, and integrity of our data. If the IT systems, networks, or service providers fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively address these failures on a timely basis, we may suffer interruptions in our ability to manage operations and reputational, competitive and/or business harm, which may adversely affect business operations and/or financial condition. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, suppliers or consumers. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems.
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If we are unable to maintain effective internal control over financial reporting in the future, the accuracy, and timeliness of our financial reporting may be adversely affected.
Companies that file reports with the SEC, including us, arepool, subject to the requirementsparticipant’s continued employment with the Company in good standing through the bonus payment date. For fiscal 2018, Mr. Hurst was eligible to receive a 25% share of Section 404this bonus pool, and Mr. Meyer was eligible to receive a 20% share of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”).this bonus pool pursuant to his offer letter described above. The Sarbanes-Oxley Act requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filedCompany determined that no bonuses would be awarded under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP” or “GAAP”). Our management is responsibleplan for establishing and maintaining adequate internal control over financial reporting, and a report of our management is included under Item 9A.“Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive an unqualified report from our independent auditors.
If we identify material weaknesses in our internal controls over financial reporting or fail to meet the demands placed upon usfiscal 2018 as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weakness, our reputation, financial condition and operating results could suffer.
The success of our business relies heavily on brand image, reputation, and product quality.
It is important that we maintain and increase the image and reputation of our existing brands and products. Concerns about product quality, even when unsubstantiated, could be harmful to our image and reputation of our brands and products. While we have quality control programs in place, in the event we experienced an issue with product quality, we may experience recalls or liability in addition to business disruption which could further negatively impact brand image and reputation and negatively affect our sales. Our brand image and reputation may also be more difficult to protect due to less oversight and control as a result of the outsourcing of some of our operations. We also could be exposed to lawsuits relating to product liability or marketing or sales practices. Deterioration to our brand equity may be difficult to combat or reverse and could have a material effect on our business and financial results. In addition, because our brands carry family names, personal activities by certain members of the Truett or Hurst families that harm their public image or reputation could have an adverse effect on our brands.
We depend upon trademarks and proprietary rights, and any failure to protect intellectual property rights or any claims that are infringing upon the rights of others may adversely affect our competitive position and brand equity.
Our future success depends significantly on the ability to protect our current and future brands and products, and to defend intellectual property rights. We have staked out a reputation for innovation and has introduced new product innovations, including, for example, our brand names, evocative “wine wraps” and our proprietary square bottle (which was transferred to Precept in the sale of the Wholesale Business). The intellectual property relating to these innovations includes copyright, trademark, patent and trade secrets, some of which are developed in-house and some of which is developed by third party consultants. Although most of our intellectual property is owned by the Company third party intellectual property is sometimes co-owned withdid not have positive net income for the developers or licensed for use. Any failure to obtain, maintain and defend sufficient rights to this intellectual property could harm our reputation, results and financial condition.year.
We have been granted numerous trademark registrations covering its brands and products and has filed, and expects to continue to file, trademark applications seeking to protect newly-developed brands and products. We cannot be sure that trademark registrations will be issued with respect to any of the trademark applications. There is also a risk that, by our omission, failure to timely renew or protect a trademark, the trademark could be lost.
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Additionally, competitors could challenge, invalidate or circumvent existing or future intellectual property developed by, issued to, or licensed by, the Company. Should we come into conflict with third parties over intellectual property rights, it could result in disruptive and expensive litigation. Any of the foregoing could harm our business.Equity Incentive Plan
A reduction in consumer demand for wines could harm our business.
There have been periods in the past in which there were substantial declines in the overall per capita consumption of alcoholic beverages in the United States and other markets in which we participate. A limited or general decline in consumption in one or more of the product categories could occur in the future due to a variety of factors, including a general decline in economic conditions, increased concern about the health consequences of consuming beverage alcohol products and about drinking and driving, a trend toward a healthier diet including lighter, lower calorie beverages such as diet soft drinks, juices and water products, the increased activity of anti-alcohol consumer groups and increased federal, state or foreign excise and other taxes on alcoholic beverage products. The competitive position of our products could also be affected adversely by any failure to achieve consistent, reliable quality in the product or service levels to customers.
Changes in consumer spending could have a negative impact on our financial condition and business results.
Wine sales depend upon a number of factors related to the level of consumer spending, including the general state of the economy, federal and state income tax rates, deductibility of business entertainment expenses under federal and state tax laws, and consumer confidence in future economic conditions. Changes in consumer spending in these and other areas can affect both the quantity and the price of wines that customers are willing to purchase at restaurants or through retail outlets. Reduced consumer confidence and spending may result in reduced demand for products, limitations on the ability to increase prices and increased levels of selling and promotional expenses. This, in turn, may have a considerable negative impact upon sales and profit margins.
The market price of our stock may fluctuate due to seasonal fluctuations in wine sales, operating expenses and net income.
We experience seasonal and quarterly fluctuations in sales, operating expenses and net income. We have managed, and will continue to manage, the business to achieve long-term objectives. In doing so, we may make decisions that we believe will enhance long-term profitability, even if these decisions may reduce quarterly earnings. These decisions include the timing of the release of wines for sale, our wines’ competitive positioning and the grape and bulk wine sources used to produce wines.
Bad weather, drought, plant diseases and other factors could reduce the amount or quality of the grapes available to produce our wines.
A shortage in the supply of quality grapes may result from the occurrence of any number of factors which determine the quality and quantity of grape supply, such as weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, pruning methods, the existence of diseases and pests, and the number of vines producing grapes, as well as the level of consumer demand for wine. Any shortage could cause an increase in the price of some or all of the grape varieties required for wine production and/or a reduction in the amount of wine we are able to produce, which could harm the business and reduce sales and profits.
Recent examples of events affecting supply include the frost in 2008 that significantly impacted the amount of grapes harvested in Mendocino County, the frost of 2011 that had a significant impact on the crop size in Paso Robles and the widespread drought which impacted parts of the United States from 2011 to 2016.
Factors that reduce the quantity of grapes may also reduce their quality, which in turn could reduce the quality or amount of wine we produce. Deterioration in the quality of the wine produced could harm our brand name and a decrease in production could reduce sales and increase expenses.
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Adverse public opinion about alcohol may harm our business.
While a number of research studies suggest that moderate alcohol consumption may provide various health benefits, other studies conclude or suggest that alcohol consumption has no health benefits and may increase the risk of stroke, cancer and other illnesses. An unfavorable report on the health effects of alcohol consumption could significantly reduce the demand for wine, which could harm the business and reduce sales and increase expenses.
In recent years, activist groups have used advertising and other methods to inform the public about the societal harms associated with the consumption of alcoholic beverages. These groups have also sought, and continue to seek, legislation to reduce the availability of alcoholic beverages, to increase the penalties associated with the misuse of alcoholic beverages, or to increase the costs associated with the production of alcoholic beverages. Over time, these efforts could cause a reduction in the consumption of alcoholic beverages generally, which could harm our business and reduce sales and increase expenses.
Contamination of our wines would harm business.
Because our products are designed for human consumption, our business is subject to hazards and liabilities related to food products, such as contamination. A discovery of contamination in any of our wines, through tampering or otherwise, could result in a recall of products. Any recall would significantly damage our reputation for product quality, which we believe is one of our principal competitive assets, and could seriously harm our business and sales. Although we maintain insurance to protect against these risks, we may not be able to maintain insurance on acceptable terms, and this insurance may not be adequate to cover any resulting liability.
A decrease in wine score ratings by important rating organizations could have a negative impact on our ability to create greater demand and pricing.
Many of our brands are issued ratings or scores by local and national wine rating organizations, and higher scores usually translate into greater demand and higher pricing. Although some of our brands have been highly rated in the past, and we believe our farming and winemaking activities are of a quality to generate good ratings in the future, we have no control over ratings issued by third-parties which may not be favorable in the future.
Increased regulatory costs or taxes would harm our financial performance.
The wine industry is regulated extensively by the Federal Tax and Trade Bureau and state and local liquor authorities and State of California environmental agencies. These regulations and laws dictate various matters, including:
Excise taxes;
Licensing requirements;
Trade and pricing practices;
Permitted distribution channels;
Permitted and required labeling;
Advertising;
Relationships with distributors and retailers; and
Air quality, storm water and irrigation use.
Recent and future zoning ordinances, environmental restrictions and other legal requirements may limit our plans to expand production capacity, as well as any future development of new vineyards and wineries. In addition, federal legislation has been proposed that could significantly increase excise taxes on wine. Other federal legislation has been proposed which would prevent us from selling wine directly through the mail. This proposed legislation, or other new regulations, requirements or taxes, could harm business and operating results. Future legal or regulatory challenges to the wine industry could also harm business and impact our operating results.
Prompted by growing government budget shortfalls and public reaction against alcohol abuse, Congress and many state legislatures are considering various proposals to impose additional excise taxes on the production and sale of alcoholic beverages, including table wines. Some of the excise tax rates being considered are substantial. The
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ultimate effects of such legislation, if passed, cannot be assessed accurately since the proposals are still in the discussion stage. Any increase in the taxes imposed on table wines can be expected to have a potentially adverse impact on overall sales of such products. However, the impact may not be proportionate to that experienced by producers of other alcoholic beverages and may not be the same in every state.
An increase in the cost of energy or the cost of environmental regulatory compliance could affect our profitability.
We have experienced increases in energy costs, and energy costs could continue to rise, which would result in higher transportation, freight and other operating costs. We may experience significant future increases in the costs associated with environmental regulatory compliance, including fees, licenses and the cost of capital improvements to our operating facilities in order to meet environmental regulatory requirements. Future operating expenses and margins will be dependent on the ability to manage the impact of cost increases. We cannot guarantee that it will be able to pass along increased energy costs or increased costs associated with environmental regulatory compliance to our customers through increased prices.
In addition, we may be party to various environmental remediation obligations arising in the normal course of business or in connection with historical activities of businesses that may be acquired. Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified contaminants at current and former properties, the potential exists for remediation, liability and indemnification costs to differ materially from the costs that have been estimated. We cannot guarantee that the cost in relation to these matters will not exceed projections or otherwise have an adverse effect upon our business reputation, financial condition or results of operations.
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business, operations or financial performance, and water scarcity or poor water quality could negatively impact production costs and capacity.
Our business depends upon agricultural activity and natural resources. There has been much public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Severe weather events and climate change may negatively affect agricultural productivity in the regions from which we presently source agricultural raw materials such as grapes. Decreased availability of raw materials may increase the cost of goods for our products. Severe weather events or changes in the frequency or intensity of weather events can also disrupt the supply chain, which may affect production operations, insurance cost and coverage, as well as delivery of products to retailers and consumers.
Water is essential in the production of our products. The quality and quantity of water available for use is important to the supply of grapes and our ability to operate our business. Water is a limited resource in many parts of the world and if climate patterns change and droughts become more severe, there may be a scarcity of water or poor water quality that may affect production costs or impose capacity constraints. Such events could adversely affect results of operations and financial condition.
Natural disasters, including earthquakes or fires, could destroy our facilities or our inventory, and/or negatively impact contracted third-party production and storage capacity and availability.
We must store our wine in a limited number of locations for a period of time prior to its sale or distribution. Any intervening catastrophes, such as an earthquake or fire, that result in the destruction of all or a portion of our wine would result in a loss of investment in, and anticipated profits and cash flows from, that wine. Such a loss would seriously harm business and reduce sales and profits.
From time to time, we may become subject to litigation arising in the ordinary course of business. Uninsured judgments or a rise in insurance premiums may adversely impact business, financial condition and results of operations.
In the ordinary course of business, we may become subject to legal and regulatory proceedings. Any claims raised in such proceedings, whether with or without merit, could be time consuming and expensive to defend and
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could divert our attention and resources. Additionally, the outcome of such proceedings may differ from expectations because outcomes are often difficult to predict reliably. Various factors can lead to changes in estimates of liabilities and other costs and may require us to make new or additional estimates. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on results of operations in any particular period.
In accordance with customary practice, we maintain insurance against some, but not all, potential claims. In the future, we may not be able to maintain insurance at commercially acceptable premium levels. In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact on the business, financial condition and results of operations.
Risks Related to Our Organizational Structure
Truett-Hurst, Inc.’s only material asset is its interest in the LLC, and it is accordingly dependent upon distributions from the LLC to pay taxes, make payments under the tax receivable agreement or pay dividends.
Truett-Hurst, Inc. is a holding company and has no material assets other than its controlling memberCompany grants equity interest in the LLC. It has no independent means of generating revenue. We will cause the LLC to make distributionsincentive awards to our unit holders in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the tax receivable agreement (which we expect to be substantial) and declared dividends, if any. To the extent that we need funds, and the LLC is restricted from making such distributions under applicable law or regulation or under the terms of the financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.
The Founders have significant influence on Truett-Hurst, Inc. and their interests may differ from those of the public shareholders.
As of June 30, 2018, the Founders and Affiliates control 40.1% of the combined voting power through their ownership of the outstanding Class A common stock and/or Class B common stock. Because the Founders and Affiliates hold a majority of their ownership interest in the business through the LLC (approximately 94% of their ownership), rather than through the public company, the Founders and Affiliates may have conflicting interests with holders of shares of the Class A common stock. For example, the Founders and Affiliates may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement that we entered in to, and whether and when we should terminate the tax receivable agreement and accelerate the obligations thereunder. In addition, the structuring of future transactions may take into consideration the Founders’ and Affiliates’ tax or other considerations even where no similar benefit would accrue to us. The tax receivable agreement also provides that upon certain mergers, asset sales, or other forms of business combinations, substantial payment obligations to the Founders and Affiliates will accelerate.
We will be required to pay the counterparties to the tax receivable agreement for certain tax benefits we may claim arising in connection with current exchanges, future purchases or exchanges of LLC Units and related transactions, and the amounts we may pay could be significant.
We entered into a tax receivable agreement with the pre-IPO owners that provides for the payment by Truett-Hurst, Inc. to these parties of 90% of the benefits, if any, that Truett-Hurst, Inc. is deemed to realize as a result of the increases in tax basis resulting from its purchases or exchanges of LLC Units and certain other tax benefits related to it entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
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We expect the payments that we may make under the tax receivable agreement will be substantial. There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the tax receivable agreement exceed the actual benefits realized in respect of the tax attributes subject to the tax receivable agreement and/or distributions to Truett-Hurst, Inc. by the LLC, or if LLC funds are not sufficient to permit Truett-Hurst, Inc. to make payments under the tax receivable agreement after it has paid taxes. The payments under the tax receivable agreement are not conditioned upon the continued ownership of us by the counterparties to the tax receivable agreement. The tax receivable agreement also provides that upon certain mergers, asset sales, or other forms of business combinations, substantial payment obligations to the Founders and Affiliates will accelerate.
We are required to make a good faith effort to ensure that we has sufficient cash available to make any required payments under the tax receivable agreement. The operating agreement of the LLC requires the LLC to make “tax distributions” which, in the ordinary course, will be sufficient to pay the actual tax liability and to fund required payments under the tax receivable agreement. If for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient funds, interest would accrue on any unpaid amounts at LIBOR plus 500 basis points until they are paid. If we breach any of our material obligations under the tax receivable agreement, substantial payment obligations will generally be accelerated and due as if we had exercised our right to terminate the agreement
In the event that we and an exchanging LLC Unit holder are unable to resolve a disagreement with respect to the tax receivable agreement, we are required to appoint either an expert in the relevant field or an arbitrator to make a determination, depending on the matter in dispute.
In certain cases, payments under the tax receivable agreement to the existing owners may be accelerated and/or significantly exceed the actual benefits realized in respect of the tax attributes subject to the tax receivable agreement.
The tax receivable agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if, at any time, Truett-Hurst, Inc. elects an early termination of the tax receivable agreement, Truett-Hurst, Inc.’s (or its successor's) obligations with respect to exchanged or acquired LLC Units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that the corporate taxpayer would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. As a result, (i) we could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of the actual benefits realized in respect of the tax attributes subject to the tax receivable agreement and (ii) if we elect to terminate the tax receivable agreement early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, and this upfront payment may be made years in advance of the actual realization of such future benefits. Upon a subsequent actual exchange, any additional increase in tax deductions, tax basis and other benefits in excess of the amounts assumed at the change in control will also result in payments under the tax receivable agreement. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. There can be no assurance that we will be able to finance our obligations under the tax receivable agreement.
Payments under the tax receivable agreement are based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, Truett-Hurst, Inc. will not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefits that we actually realize in respect of (i) the increases in tax basis resulting from exchanges of LLC Units and (ii) certain other tax benefits related to entering in to the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
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Risks Related to our Class A Common Stock
Our failure to meet the continued listing requirements of The NASDAQ Capital Market could result in a delisting of the Class A common stock.
If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market, such as the requirement that it maintain a share price of at least $1.00 per share, NASDAQ may take steps to de-list the Class A common stock. Such a delisting could have a significant negative effect on the value and liquidity of our Class A common stock, may preclude us from using exemptions from certain state and federal securities regulations, and could adversely affect our ability to raise capital on terms acceptable to us or at all. In the event of a delisting, we would expect to seek to take actions to restore compliance with NASDAQ’s listing requirements, but we can provide no assurance that any such action taken would allow the Class A common stock to become listed again, stabilize the market price or improve the liquidity of the Class A common stock or prevent the Class A common stock from dropping below the NASDAQ minimum bid price requirement in the future.
We could choose to delist and deregister the Class A common stock, which would result in more limited access to information and decreased liquidity.
The Company incurs direct and indirect costs and burdens associated with the filing and reporting requirements imposed on SEC reporting companies by the Exchange Act and complying with the Sarbanes-Oxley Act. In light of such costs and burdens and the sale of the Wholesale Business, the Company has considered and will continue to consider cost-saving alternatives to remaining a NASDAQ listed reporting company. We would be eligible to delist from The NASDAQ Capital Market and deregister our Class A common stock under Sections 12(b), 12(g) and 15(d) of the Exchange Act if we have less than 300 shareholders of record (as defined in the Exchange Act), do not file a registration statement (of which we have no current plans to file) in the current fiscal year and meet certain other requirements. Delisting would likely have a negative effect on the price of the Class A common stock and would impair our ability to sell or purchase our Class A common stock when we wished to do so, and deregistration would suspend our obligations to provide periodic reporting under the Exchange Act and to comply with proxy rules, beneficial ownership reporting and other similar SEC requirements, resulting in limited access to financial and other information. As of the June 30, 2018, we believe we meet the requirements to delist and deregister, after which your access to our business information would be more restricted and the liquidity of your Class A common stock would significantly decrease.
We do not intend to pay any cash dividends in the foreseeable future.
We do not expect to pay any dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including the business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation in the price of the Class A common stock, if any, may be the only source of gain on an investment in the Class A common stock.
Even if we decide in the future to pay any dividends, Truett-Hurst, Inc. is a holding company with no independent operations of its own except its controlling member equity interest in the LLC. As a result, Truett-Hurst, Inc. depends on the LLC and its affiliates for cash to pay its obligations and make dividend payments. Deterioration in the financial condition, earnings or cash flow of the LLC and its affiliates for any reason could limit or impair its ability to pay cash distributions or other distributions to us. In addition, our ability to pay dividends in the future is dependent upon receipt of cash from the LLC and its affiliates. The LLC and its affiliates may be restricted from sending cash to us by, among other things, law or provisions of the documents governing our existing or future indebtedness.
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If securities or industry analysts stop publishing research or reports about our business, or if they downgrade their recommendations regarding our Class A common stock, the stock price and trading volume could decline further.
As a small-cap company, our common stock has limited liquidity. The market price and trading volume of shares of the common stock are volatile and are likely to continue to fluctuate substantially in response to various factors, many of which are beyond our control and may not be related to operating performance. The trading market for our Class A common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. We have limited research coverage for our stock and it is difficult to attract research coverage for small-cap companies like ours. If any of the analysts who cover us downgrade our Class A common stock or publishes inaccurate or unfavorable research about our business, our Class A common stock price may decline further. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the Class A common stock price or trading volume to decline further and the Class A common stock to be less liquid.
The market price and trading volume of our common stock are volatile and may be affected by market conditions beyond our control.
As a small-cap company, our common stock has limited liquidity. The market price and trading volume of shares of the common stock are volatile and are likely to continue to fluctuate substantially in response to various factors, many of which are beyond our control and may not be related to operating performance. These fluctuations could cause investors to lose part or all of their investment in shares of our common stock. In addition, operating results could be below the expectations of the public market analysts and investors due to a number of potential factors, including variations in quarterly operating results, departures of key management personnel, failure to meet analysts' earnings estimates, publication of research reports about the industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, and other factors. You may be unable to resell our shares of Class A common stock at or above the price you originally paid. In addition, as a result of our market capitalization, among other factors, there is limited liquidity in the market for our common stock. As a result, even if you choose to sell your shares of Class A common stock, you may find it difficult to do so.
In past years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
You may be diluted by the future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise.
As of June 30, 2018, we had an aggregate of 10.5 million shares of Class A common stock authorized but unissued, including approximately 2.73 million shares of Class A common stock issuable upon exchange of outstanding LLC Units and 0.1 million shares reserved for issuance under our 2012 Incentive Plan. See Part II, Item 8, Note 9, “Stock-based Compensation” to the Consolidated Financial Statements included in this Annual Report on Form 10-K. The certificate of incorporation authorizes us to issue these shares of Class A common stock and restricted stock rights relating to Class A common stock for the consideration and on the terms and conditions established by the board of directors in our sole discretion. Any Class A common stock that is issued, including under the 2012 Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by then existing holders of Class A common stock.
We incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect results of operations, financial condition, business and prospects.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and NASDAQ. We expect compliance with these rules and regulations will require significant management time and attention.
21
The costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.
Our failure to timely file periodic reports we are required to file under the Securities Exchange Act of 1934 could adversely affect the market for our Class A common stock and make it more difficult for us to access the public markets to raise debt or equity capital.
We filed our Annual Report on Form 10-K for the year ended June 30, 2017 approximately two weeks late, and because of the time required to complete and file this report, we also were also unable to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 on a timely basis. We are also filing this Annual Report on Form 10-K approximately two weeks late. Failure to timely file periodic reports subjects us to the risk of delisting of our Class A common stock from The NASDAQ Capital Market, may preclude us from using exemptions from certain state and federal securities regulations, limit our ability to access the public markets to raise debt or equity and could adversely affect our ability to raise capital on terms acceptable to us or at all.
As a result of our failure to timely file the Part III information in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, we are currently ineligible to file new short form registration statements on Form S-3 for sales of securities by us, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to a Registration Statement on Form S-1. The ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.
As a result of our failure to timely file the Part III information in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, we are currently ineligible to file new short form registration statements on Form S-3. If we seek to access the capital markets through a registered offering during the period of time that we are unable to use Form S-3, we may be required to publicly disclose the proposed offering and the material terms thereof before the offering commences, we may experience delays in the offering process due to SEC review of a Form S-1 registration statement and we may incur increased offering and transaction costs and other considerations. Disclosing a public offering prior to the formal commencement of an offering may result in downward pressure on our stock price. In addition, our inability to conduct an offering “off the shelf” may require us to offer terms that may not be advantageous (or may be less advantageous) to us or may generally reduce our ability to raise capital in a registered offering. If we are unable to raise capital through a registered offering, we would be required to conduct our financing transactions on a private placement basis, which may be subject to pricing, size and other limitations imposed under rules of The NASDAQ Capital Market.
Assuming we continue to timely file our required Exchange Act reports, the earliest we would regain the ability to use Form S-3 is April 17, 2019.
22
We no longer qualify as an “emerging growth company” and will be required to comply with certain provisions of the Sarbanes-Oxley Act and can no longer take advantage of reduced disclosure requirements.
For as long as we remained an emerging growth company, we could take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation. We no longer qualify for such status, and as we are no longer an emerging growth company, we expect to incur additional expenses and devote substantial management effort toward ensuring compliance with those requirements applicable to companies that are not emerging growth companies. Even though we no longer qualify as an emerging growth company, we currently do, and may continue to, qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements. However, we cannot be certain we will continue to so qualify or predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Item 1B. Unresolved Staff Comments
None.
We own a 25-acre property located at 5610 Dry Creek Road, Healdsburg, California, of which approximately 15 acres is used for growing grapes. The remainder of the property is used for two tasting rooms, retail sales space, and office space for support staff. Although we have maintained the proper permits to build a winery at this location and there is infrastructure, such as electricity and access to water, necessary to operate a winery on the property, we have not made the requisite capital expenditures to construct a building to house grape-crushing equipment and wine storage tanks. We believe that the facility can be used to expand our wine-making operations in the future and provide better control over wine quality.
We lease wine production space within a custom crush facility located in Santa Rosa, California. The lease commenced on April 15, 2017 and ends in March 2019. The initial 14-month term has been renewed for additional periods as agreed to by both parties. Previously, we leased a winery located at 4035 Westside Road, Healdsburg, California. In June of 2016, we settled outstanding litigation related to this tasting room and winery production facility lease in exchange for payment of $1.0 million to the LLC, quitclaimed certain rights, and modified our lease such that we vacated the tasting room portion of the property prior to December 31, 2016, and vacated the winery production portion prior to May 31, 2017. We received a series of settlement payments totaling $1.0 million in fiscal year 2017. The entire $1.0 million was recorded as a gain in other income on the consolidated statement of operations in FY17. 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 we vacated the premises in December 2016.
We lease approximately 2,500 square feet for administrative offices at 125 Foss Creek Circle, Healdsburg, California. In June 2016, we renewed the lease for an additional three years. The renewed lease term is November 1, 2016 through October 31, 2019. We also lease 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.
We consider these facilities to be suitable and adequate for the management and operation of our business. For additional information related to leases, see Part II, Item 8, Note 8, “Commitments and Contingencies.”
23
We may be subject to various litigation matters arising in the ordinary course of business from time to time. Other than the matters discussed below, we are 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 our consolidated financial position, results of operations, or cash flows.
In January 2016, Mendocino Wine Group (“MWG”) filed a complaint against Phillip Hurst and the LLC alleging breach of fiduciary duty, interference with contract, and interference with economic advantage. On November 10, 2016, the Sonoma County Superior Court granted MWG’s Motion to Consolidate the case with a second complaint MWG filed against a law firm for legal malpractice and breach of fiduciary duty. On November 20, 2017, the Sonoma County Superior Court granted Phillip Hurst and the LLC’s Motion for Summary Judgment to dismiss the breach of fiduciary duty claim. MWG has dismissed the other two causes of action. The plaintiff, MWG, had until February 2018 to appeal the Court’s decision. This matter is now closed and a final disbursement from the trust account related to the settlement was received in April 2018 in the amount of $10,000.
In June 2016, we settled outstanding litigation with the Hambrecht Wine Group, L.P. related to the lease of one of our 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 our lease such that we vacated the tasting room portion of the property prior to December 31, 2016, and vacated the winery production portion prior to May 31, 2017. We 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 our consolidated statement of operations for the fiscal year ended June 30, 2017.
Indemnification Obligations
Our certificate of incorporation and bylaws provide that we shall indemnify directors andnamed executive officers and shall indemnify other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnificationselected employees. Such awards are granted under, the bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws would permit indemnification.
We believe that these provisions are necessary to attract and retain qualified persons as directors and executive officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the company pursuant to the foregoing provisions, the opinion of the SEC is that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
In addition, we maintain standard policies of insurance under which coverage is provided to our directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law. We maintain a Directors and Officers liability insurance policy which enables us to recover a portion of future indemnification claims paid, subject to retentions, conditions and limitations of those policies. In addition, we make available standard life insurance and accidental death and disability insurance policies to our employees.
Item 4. Mine Safety Disclosures
Not Applicable.
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Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
Our Class A common stock is traded on The NASDAQ Capital Market under the symbol “THST.” As of June 30, 2018, there were 54 holders of record of Class A common stock and 6 holders of record of Class B common stock. The following table sets forth, for the quarterly periods indicated, the high and low sales prices per share for the Class A common stock, as reported on The NASDAQ Capital Market:
Fiscal 2017 |
| Low Price |
|
| High Price |
| ||
Quarter ended 9/30/2016 |
| $ | 1.55 |
|
| $ | 2.34 |
|
Quarter ended 12/31/2016 |
| $ | 1.58 |
|
| $ | 1.92 |
|
Quarter ended 3/31/2017 |
| $ | 1.74 |
|
| $ | 2.54 |
|
Quarter ended 6/30/2017 |
| $ | 2.00 |
|
| $ | 2.36 |
|
Fiscal 2018 |
| Low Price |
|
| High Price |
| ||
Quarter ended 9/30/2017 |
| $ | 1.90 |
|
| $ | 2.27 |
|
Quarter ended 12/31/2017 |
| $ | 1.88 |
|
| $ | 2.27 |
|
Quarter ended 3/31/2018 |
| $ | 1.82 |
|
| $ | 2.10 |
|
Quarter ended 6/30/2018 |
| $ | 1.26 |
|
| $ | 2.07 |
|
As of September 28, 2018, the last reported sale price on The NASDAQ Capital Market for our common shares was $1.84 per share. Our Class B common stock is not publicly traded.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain all future earnings for use in the expansion and operation of our business and does not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of the board of directors, subject to applicable law and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that the board of directors may deem relevant.
We are a holding company and have no material assets other than our controlling member equity interest in the LLC. We intend to cause the LLC to make distributions in an amount sufficient to cover cash dividends, if any, declared by us. If the LLC makes such distributions to us, the other holders of LLC Units will be entitled to receive equivalent distributions.
Item 6. Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions as described under the “Forward-Looking Statements” section that appears earlier in this Annual Report on Form 10-K. Actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
The Company is a holding company incorporated as a Delaware corporation and its sole asset is a controlling equity interest in H.D.D. LLC (the “LLC”). Unless the context suggests otherwise, references in this report to “Truett-Hurst,” the “Company,” “we,” “us” and “our” refer (1) prior to the June 2013 initial public offering (“IPO”) of Truett-Hurst Inc. and related transactions, to the LLC and (2) after our IPO and related transactions, to Truett-Hurst Inc.
Overview
Following the sale of the Wholesale Business to Precept on August 13, 2018, we are now only operating our direct to consumer (“DTC”) business based at our estate property in Healdsburg, California as well as the sale of our three brands to national retailers. We produce luxury tier Pinot Noir, Chardonnay, Sauvignon Blanc, Zinfandel, Petite Sirah, and Syrah for our three brands: Truett Hurst, VML and Svengali. We maintain a wine club for Truett Hurst and VML and we provide a premier experience leveraging our creekside property, hospitality, customer service and award winning wine quality. We continue to be headquartered in Sonoma County, California and lease space for wine production within a custom crush facility located in Santa Rosa, California. The direct to consumer channel consists of sales of products produced by us through our tasting rooms, wine clubs and our winery websites.
We operate two tasting rooms and lease a winery where wine is produced from many varieties of grapes principally grown or purchased in Sonoma County’s Dry Creek Valley and Russian River Valley appellations. Established in 2007, Truett-Hurst was the first winery operation and brand that focuses on producing limited lots of super-premium wine from a range of varietals, including Zinfandel, Chardonnay, Sauvignon Blanc, Pinot Noir, Petite Sirah and other unique red blends from grapes sourced from local growers in the Dry Creek Valley. Established in 2011, VML was the second winery operation and brand that focuses on producing limited lots of super-premium and ultra-premium wines from grapes purchased from local growers in the Russian River Valley. The primary varietals include Pinot Noir, Chardonnay, Sauvignon Blanc, and Gewurztraminer. The Svengali brand was established most recently to focus entirely on a single Dry Creek Valley Syrah.
Formation Transactions
On June 19, 2013, the limited liability company agreement of the LLC was amended and restated to, among other things, modify our capital structure by replacing the different classes of interests previously held by our then-existing owners with a single new class of units that are referred to as “LLC Units.” We and our then-existing owners also entered into an exchange agreement under which (subject to, the terms of the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan is administered by the Compensation Committee of our Board of Directors. The Compensation Committee has authority to interpret the plan provisions and make all required determinations under the 2012 Plan (including making appropriate adjustments to reflect stock splits and similar events). Employees, directors and consultants of the Company and its subsidiaries and affiliates are eligible for award grants under the 2012 Plan. Awards of stock options, stock appreciation rights, restricted stock, restricted stock units and other awards may be granted under the plan.
Awards granted under the 2012 Plan are generally only transferable to a beneficiary of a named executive officer upon his death. However, the Compensation Committee may establish procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable securities laws and, with limited exceptions set forth in the plan document, are not made for value.
Under the terms of the 2012 Plan, if there is a change in control of the Company, outstanding awards granted under the plan (including awards held by our named executive officers) will generally terminate unless the Compensation Committee provides for the substitution, assumption, exchange agreement) they haveor other continuation of the outstanding awards. The Compensation Committee has discretion to provide for outstanding awards to become vested in connection with the change in control transaction.
In July 2017, we granted Mr. Meyer 50,000 options with an exercise price of $2.08 per share and a maximum term of 10 years (subject to early termination in connection with a termination of Mr. Meyer’s employment of a change in control of the Company). The option was 25% vested upon grant, and the remaining 75% vested in three annual installments thereafter. In October 2017, we granted to each of Mr. Meyer and Mr. Strobbe an award of 10,000 restricted stock units that vests in four annual installments and an award of 50,000 restricted stock units that vests if a change in control of the Company occurs during the executive’s employment with the Company. Each unit represents the right to exchange their LLC Units for sharesreceive a share of the Company’s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.upon vesting of the unit.
In connection withJuly 2018, we granted Ms. Weaver an award of 60,000 restricted stock units that vests in one installment on July 11, 2019 or, if earlier, upon a sale of the IPO, one shareCompany or repurchase of Class B common stock was distributed to each existing holdera majority of LLC Units each of which provides its owner with no economic rights but entitles the holder, without regard to the number of shares ofCompany’s Class A common stock held by such holder,stock.
Other Benefits
The named executive officers are entitled to one voteparticipate in the Company’s health and welfare plans on matters presentedthe same terms as other employees generally. We also do not provide any material perquisites to our shareholders for each LLC Unit held by such holder. Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law.
26
At June 30, 2018, there were 2.73 million LLC Units held by partiesexecutives, other than the Company which upon exercisea car allowance of the right$900 per month to exchange would exchange for Class A common stock on a one-for-one basis. At June 30, 2018, our FoundersMr. Hurst and Affiliates control 40.1% of the voting power of the outstanding Class A common stock and the outstanding Class B common stock. Prior to conversion of their LLC Units, each holder of LLC Units holds a single share of the Class B common stock. Accordingly, the Founders and Affiliates have significant influence on the election of the members of the board of directors, and thereby of the management and affairs.
Exchange Agreement and Tax Receivable Agreement
We have 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 our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash, at our election. As a holder exchanges their LLC Units, our interest in the LLC will be correspondingly increased. Through June 30, 2018, certain LLC members have exchanged 1.3million LLC units, on a one-for-one basis, for shares of our Class A common stock, under the exchange agreement.
In connection with the exchange agreement,housing benefits as we also entered into a tax receivable agreement (“TRA”) with the LLC members. The agreement provides for the paymentdeem appropriate from time to time, as “corporate taxpayer,”time.
We also provide all full-time employees, including our named executive officers, with the opportunity to holders of LLC Units of 90% of the amount of the benefits, if any, that the corporate taxpayerparticipate in a defined contribution 401(k) plan. Our 401(k) plan is deemedintended 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 our 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. For purposes of the agreement, the benefit deemed realized by the corporate taxpayer will be computed by comparing the actual income tax liability of the corporate taxpayer (calculated with certain assumptions) to the amount of such taxes that the corporate taxpayer would have been required to pay had there been no increase to the tax basis of the assets of the LLC as a result of the exchanges, and had the corporate taxpayer not entered into the agreement. The term of the agreement will continue until all such tax benefits have been utilized or expired, unless the corporate taxpayer exercises its right to terminate the agreement for an amount based on the agreed payments remaining to be made under the agreement or the corporate taxpayer breaches any of its material obligations under the agreement in which case all obligations will generally be accelerated and due as if the corporate taxpayer had exercised its right to terminate the agreement. In addition, the tax receivable agreement provides that upon certain mergers, asset sales, or other forms of business combinations, substantial payment obligations to the Founders and Affiliates will accelerate.
The LLC has made an electionqualify under Section 754401 of the Internal Revenue Code (the “Code”) effective for eachso that employee contributions and income earned on such contributions are not taxable year in which an exchange of LLC Units for shares of Class A common stock as described above occurs, whichto employees until withdrawn. Employees may result in an adjustmentelect to the tax basis of the assets of the LLC at the time of an exchange of the LLC Units. As a result of these exchanges, Truett-Hurst Inc. will become entitled to a proportionate share of the existing tax basis of the assets of LLC. In addition, the purchase of LLC Units and subsequent exchanges are expected to result in increases in the tax basis of the assets of the LLC that otherwise would not have been available. Both this proportionate share and these increases in tax basis may reduce the amount of tax that Truett-Hurst, Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
RESULTS OF OPERATIONS
Factors Affecting Operating Results
Net sales are affected by advertising, discounts and promotions, merchandising and packaging, 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 existing brands, the ability to effectively manage the sales channels, and the ability to maintain sufficient product supply to meet expected growth in demand.
Cost of sales 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.
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Discontinued Operations
During the fourth quarter ended June 30, 2018, we implemented a plan to sell off our wholesale business line (the “Business”). We completed the sale as of August 13, 2018.
Comparison of the Fiscal Year 2018 and 2017
The following table compares the financial results:
|
| Fiscal Years Ended June 30, |
| |||||
|
| (in thousands, except percentages) |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Net Sales |
| $ | 6,471 |
|
| $ | 5,960 |
|
Cost of Sales |
|
| 2,502 |
|
|
| 2,153 |
|
Gross Profit |
|
| 3,969 |
|
|
| 3,807 |
|
Gross Profit % |
|
| 61.3 | % |
|
| 63.9 | % |
For the fiscal year ended June 30, 2018, net sales increased $0.5 million or 8.6% while the gross profit margin decreased from 63.9% to 61.3%. The decrease in gross profit during the year ended June 30, 2018 compared to the prior year was primarily due to an increase in cost of sales attributable to higher case sales, and an increase in discounts which contributed to lower net sales. Also contributing to the lower gross profit during the fiscal year ended June 30, 2018 is an increase in inventory reserves and write-offs.
Direct to consumer net sales increased 8.6% for the year ended June 30, 2018. The increase in direct to consumer net sales 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 others. A portion of the increase is also due to higher sales in the broad retail market for the year ended June 30, 2018, and sales to one large retailer during the first quarter.
Sales discounts and depletion allowances are recorded as a reduction of sales at the time of sale. For the fiscal years ended June 30, 2018 and June 30, 2017, sales discounts and depletion allowances totaled $3.1 million and $2.3 million, respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, advertising and other costs for marketing and promoting our products.
A comparative summary of sales and marketing expenses follows:
|
| Fiscal Years Ended June 30, |
| |||||||||||||
|
| In thousands, except percentages |
| |||||||||||||
|
| 2018 |
|
| 2017 |
|
| Increase (Decrease) |
|
| % Change |
| ||||
Sales and marketing |
| $ | 1,509 |
|
| $ | 1,654 |
|
| $ | (145 | ) |
|
| (8.8 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales |
|
| 23.3 | % |
|
| 27.7 | % |
|
| -4.4 | % |
|
|
|
|
28
While the absolute dollars spent on sales and marketing expenses decreased 8.8% for the fiscal year ended June 30, 2018 compared to fiscal year ended June 30, 2017, the expense measured asdefer a percentage of nettheir eligible compensation (not to exceed the statutorily prescribed annual limit) in the form of elective deferral contributions to our 401(k) plan. Our 401(k) plan also sales decreased from 27.7% in 2017has a “catch-up contribution” feature for employees aged 50 or older (including those who qualify as “highly compensated” employees) who can defer amounts over the statutory limit that applies to 23.3% in 2018 caused by lower net sales. The dollar decrease forall other employees. Currently, we make matching contributions of 25% of an employee’s deferrals up to 4% of the fiscal year 2018 is due to lower hosted wine club events and lower freight and shipping costs.
The amounts billed to customers for shipping and handling are recorded as sales and reported asemployee’s eligible compensation under the costs are incurred for shipping and handling as a sales and marketing expense. For the fiscal years ended June 30, 2018 and June 30, 2017, shipping costs were $0.5 million and $0.6 million, respectively.
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:plan.
|
| Fiscal Years Ended June 30, |
| |||||||||||||
|
| In thousands except percentages |
| |||||||||||||
|
| 2018 |
|
| 2017 |
|
| Increase (Decrease) |
|
| % Change |
| ||||
General and administrative |
| $ | 2,338 |
|
| $ | 1,763 |
|
| $ | 575 |
|
|
| 32.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales |
|
| 36.1 | % |
|
| 29.6 | % |
|
| -6.5 | % |
|
|
|
|
12 |
General and administrative expense for the fiscal year ended June 30, 2018 increased $0.6 million compared to FY17. The increase was primarily due to increases in outside services. Also included in general and administrative expense for the year ended June 30, 2018 is the accrual of a termination liability of $0.3 million as further explained below.Separation Agreements
On March 30, 2018, Evan B. Meyer, the Company’s former Chief Financial Officer, terminated
As noted above, Mr. Meyer’s employment with the Company.Company terminated effective March 30, 2018. In connection with his termination, wethe Company and Mr. Meyer entered into a separation agreement providingthat provided for him to receive a cash severance payment of $0.1 million,$144,500, to be paid in two monthly installments, and payment of his COBRA premiums for continuation of health benefits for up to six months. In addition, Mr. Meyer’s outstanding equity-based awards granted whichby the Company that were unvested on the date of his termination became fully vested and, in the case of options, exercisable. The separation agreement also includes Mr. Meyer’s release of claims and certain other covenants in favor of the Company. Since this condition existed as of March 31, 2018, we accrued $0.3 million in general and administrative associated
As noted above, Mr. Strobbe’s employment with the Company terminated effective August 31, 2018. In connection with his termination, the Company and Mr. Strobbe entered into a separation agreement that provided for him to receive a cash severance payment of $37,358 and a bonus of $5,000, to be paid in a lump sum. In addition, Mr. Strobbe’s outstanding equity-based awards granted by the Company that were unvested on the date of his termination became fully vested and, in the case of options, exercisable. The separation agreement also includes Mr. Strobbe’s release of claims and certain other covenants in favor of the Company.
DIRECTOR COMPENSATION
Under our current director compensation program, we provide compensation to our directors who are not employed by us or any of our subsidiaries (referred to herein as a termination liability“non-employee directors”) as follows:
Annual Retainer | $ | 15,000 | ||
Quarterly Meeting Fee | $ | 2,500 per meeting | ||
Audit Committee Chair Retainer | $ | 10,000 | ||
Compensation Committee Chair Retainer | $ | 5,000 | ||
Nominating and Governance Committee Chair Retainer | $ | 5,000 |
These retainers and fees are paid to the non-employee directors solely in the form of March 31, 2018 consisting of $0.2 million of acceleration of stock options and restricted stock units that generally vest over a one-year period following the date of grant. The non-employee director awards are typically granted in or around December each year. Non-employee directors may also be reimbursed for travel, food, lodging and $0.1 millionother expenses directly related to their activities as directors.
Under our director compensation program in severanceeffect for fiscal 2018, retainer and benefit payments.meeting fees for Messrs. Benedetti, Graham, Grimes and Weber were granted in the form of restricted stock units during January 2018 and May 2018, with the applicable dollar amounts being converted to shares based on the closing price of our Class A common stock on the applicable grant date. Each of these awards is scheduled to vest on December 12, 2018. Messrs. Carroll and Dolan declined to receive any award grants for fiscal 2018.
Interest Expense
In connection with her joining the Board, Ms. Hansen received an award of 23,475 restricted stock units that is scheduled to vest on July 13, 2019. Because this award was granted after fiscal 2018, it is considered compensation for fiscal 2019 under applicable SEC rules and, accordingly, is not reflected in the table below.
Directors who also serve as employees receive no additional compensation for their service as directors. During fiscal 2018, Mr. Hurst, our President and Chief Executive Officer, was our employee as well as a member of the Board of Directors and thus received no additional compensation for service as a director. See the section titled “Executive Compensation” above for more information about Mr. Hurst’s compensation for fiscal 2018.
13 |
The following table sets forth the total compensation paid to our non-employee directors for their service on our board of directors during fiscal 2018:
Name | Fees Earned or Paid in Cash($) | Stock Awards ($)(1)(2) | Option Awards ($)(1) | All Other Compensation ($) | Total ($) | |||||||||||||||
Marcus Benedetti | - | $ | 26,536 | - | - | $ | 26,536 | |||||||||||||
Daniel A. Carroll | - | - | - | - | - | |||||||||||||||
Paul Dolan III | - | - | - | - | - | |||||||||||||||
Barrie Graham | - | $ | 33,256 | - | - | $ | 33,256 | |||||||||||||
Spencer Grimes | - | $ | 17,632 | - | - | $ | 17,632 | |||||||||||||
Gerry Hansen(3) | - | - | - | - | - | |||||||||||||||
Paul J. Weber(4) | - | $ | 34,999 | - | - | $ | 34,999 |
(1) | The amounts reported in these columns represent the aggregate grant date fair value of stock and option awards granted to the non-employee directors in fiscal 2018. These values have been determined under the principles used to calculate the value of equity awards for purposes of our financial statements. For a discussion of the assumptions and methodologies used to calculate the amounts referred to above, please see the discussion of equity-based awards contained in Note 9, Stock-Based Compensation, to our consolidated financial statements for the year ended June 30, 2018 included in our Annual Report on Form 10-K, filed with the SEC on October 15, 2018. |
(2) | As of June 30, 2018, our non-employee directors held outstanding and unvested restricted stock unit awards with respect to the following number of shares: Mr. Benedetti, 12,255, Mr. Carroll, 0, Mr. P. Dolan, 0, Mr. Graham, 14,706, Mr. Grimes,8,495, Ms. Hansen, 0, and Mr. Weber, 0. None of our non-employee directors held outstanding stock options on that date. |
(3) | Ms. Hansen was appointed to the Board of Directors effective April 12, 2018. |
(4) | Mr. Weber resigned as a member of the Board of Directors effective April 15, 2018. |
14 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of the Class A and Class B common stock as of October 19, 2018 (i) by each person who is known by us to beneficially own more than 5% of the outstanding shares of our Class A common stock, (ii) by each of the fiscal years endedour directors, (iii) by each of our named executive officers, and (iv) by all directors and executive officers as a group.
The table is based upon information supplied by directors, officers and principal stockholders. Applicable percentage ownership for each stockholder is based on 4,535,750 shares of Class A common stock and 6 shares of Class B Common Stock, outstanding as of June 30, 2018, together with applicable vested restricted stock units for such stockholders. Beneficial ownership is determined in accordance with the SEC rules and generally includes voting or investment power with respect to securities, subject to community property laws where applicable. Shares of common stock subject to restricted stock awards are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options, but are not treated as outstanding for computing the percentage ownership of any other person.
15 |
Name and Address | Class A Common Stock | Class B Common Stock(14) | Class A Percentage of Shares Beneficially Owned | Class B Percentage of Shares Beneficially Owned | ||||||||||||
Bard Associates(1) | 457,844 | - | 10.09 | % | - | |||||||||||
North Star Investment Management Corporation(2) | 1,274,271 | - | 28.09 | % | - | |||||||||||
Twinleaf Management, LLC(3) | 408,106 | - | 9.00 | % | - | |||||||||||
Directors and Officers | ||||||||||||||||
Marcus Benedetti(4) | 15,820 | - | * | - | ||||||||||||
Daniel A. Carroll(5) | 38,700 | 1 | * | �� | 16.67 | % | ||||||||||
Paul E. Dolan, III(6) | 4,600 | 1 | * | 16.67 | % | |||||||||||
Barrie Graham(7) | 68,694 | 1 | 1.51 | % | 16.67 | % | ||||||||||
Spencer Grimes(8) | 444,184 | - | 9.79 | % | - | |||||||||||
Gerry Hansen(9) | - | - | - | - | ||||||||||||
Phillip L. Hurst(10) | 440 | 1 | * | 16.67 | % | |||||||||||
Evan Meyer(11) | 180,000 | - | 3.97 | % | - | |||||||||||
Jason Strobbe(12) | 130,000 | - | 2.87 | % | - | |||||||||||
Karen Weaver(13) | - | - | - | - | ||||||||||||
All directors and executive officers as a group (10 persons) | 882,438 | 4 | 19.46 | % | 66.67 | % |
* | less than 1%. |
(1) | The address of Bard Associates, Inc. is 135 S. LaSalle St., Suite 3700, Chicago IL, 60603. Comprises of 1,794 shares of Class A common stock in which Bard Associates, Inc. has the sole power to vote or to direct the vote and 457,844 shares of Class A common stock in which Bard Associates has the sole power to dispose or to direct the disposition of, based solely on a Schedule 13G filed on February 13, 2018 for December 31, 2017. |
(2) | The address of North Star Investment Management Corporation (“North Star”) is 20 N. Wacker Drive, Suite 1416, Chicago, Illinois 60606. Based solely on a Schedule 13D/A filed on August 16, 2018, the total shares of Class A common stock comprised of 758,034 shares in which North Star has the sole power to vote or to direct the vote, 758,034 shares in which North Star has the sole power to dispose or to direct the disposition thereof and 516,237 shares in which North Star has shared power to dispose or to direct the disposition thereof. As of August 16, 2018, the following persons were known to the North Star to have the right to receive dividends from, or the proceeds from the sale of more than 5% of the Class A common stock of the Company: North Star Micro Cap Fund and North Star 10 10 Fund L.P. |
(3) | The address of Twinleaf is 131 Brookwood Lane, New Canaan, CT 06840. The shares are allocated across nine (9) discretionary client accounts. Such clients have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such securities. No such client contains an interest relating to more than five percent (5%) of the class of securities. Mr. Spencer Grimes, as the Managing Member of Twinleaf, may be deemed to beneficially own the 408,106 shares of Class A common stock allocated across the discretionary accounts. |
(4) | Mr. Benedetti also holds 12,136 restricted stock units which will fully vest on December 12, 2018. |
16 |
(5) | The shares of Class A common stock and Class B common stock, and voting power thereof, are owned by the Carroll-Obremeskey Family Trust u/a/d 15 April 1996, a revocable trust established by Mr. Carroll and Ms. Obremskey. Mr. Carroll and Mrs. Obremskey are joint trustees of the Trust and each person has the power to vote and dispose of any and all securities held by the Trust. Both Mr. Carroll and Mrs. Obremskey disclaims beneficial ownership of the shares and options owned by the other. Does not include 806,596 LLC units, which have the right to exchange for shares of our Class A common stock on a one-for-one basis. |
(6) | The shares of Class A common stock and Class B common stock, and voting power thereof, are owned by the Dolan 2005 Family Trust u/a/d 24 August 2005 and amended 28 September 2012, a revocable trust established by Mr. Paul Dolan and Mrs. Dolan. Mr. Paul Dolan and Mrs. Dolan are joint trustees of the Trust and each person has the power to vote and dispose of any and all securities held by the Trust. Both Mr. Paul Dolan and Mrs. Dolan disclaims beneficial ownership of the shares and options owned by the other. Does not include 774,128 LLC units, which have the right to exchange for shares of our Class A common stock on a one-for-one basis. |
(7) | Does not include 168,168 LLC units, which have the right to exchange for shares of our Class A common stock on a one-for-one basis. |
(8) | Mr. Spencer Grimes, as the Managing Member of Twinleaf, may be deemed to beneficially own the 408,106 shares of Class A common stock allocated across Twinleaf’s nine discretionary client accounts. |
(9) | Ms. Hansen holds 23,475 restricted stock units which will fully vest on July 13, 2019. |
(10) | The shares of Class A common stock and Class B common stock, and voting power thereof, are owned by the Hurst Family Trust u/a/d 1 August 2004, a revocable trust established by Mr. Hurst and Mrs. Hurst, husband and wife. Mr. Hurst and Mrs. Hurst are joint trustees of the Trust and each person has the power to vote and dispose of any and all securities held by the Trust. Both Mr. Hurst and Mrs. Hurst disclaims beneficial ownership of the share by the other. Does not include 819,114 LLC units, which have the right to exchange for shares of our Class A common stock on a one-for-one basis. |
(11) | Consists of stock options to purchase 120,000 shares of Class A common stock and 60,000 restricted stock units, all of which became fully-vested on April 6, 2018 (pursuant to the terms of Mr. Meyer’s separation agreement). Mr. Meyer’s employment with the Company terminated on March 30, 2018. |
(12) | Consists of stock options to purchase 70,000 shares of Class A common stock and 60,000 restricted stock units, all of which became fully-vested on August 31, 2018 (pursuant to the terms of Mr. Strobbe’s separation agreement). Mr. Strobbe’s employment with the Company terminated on August 31, 2018. |
(13) | Ms. Weaver holds 60,000 restricted stock units that vest in one installment on July 11, 2019 or, if earlier, upon a sale of the Company or repurchase of a majority of the Company’s Class A common stock. |
(14) | Each holder of Class B common stock shall be entitled, without regard to the number of shares of Class B common stock held by such holder, to one vote for each LLC Unit held by such holder. |
17 |
Equity Compensation Plan Information
We currently maintain the 2012 Stock Incentive Plan (the “2012 Plan”), which has been approved by our stockholders. The following table sets forth information with respect to the 2012 as of June 30, 20172018.
Plan Category | (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | (b) Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |||||||||
Plans Approved by Shareholders | 208,291 | (1) | $ | 0.83 | 350,853 | (2) | ||||||
Plan Not Approved by Shareholders | - | - | - | |||||||||
Totals | 208,291 | $ | 0.83 | 350,853 |
(1) | 110,000 of these shares were subject to stock options then outstanding under the 2012 Plan, and 98,291 of these shares were to subject to restricted stock unit awards outstanding under the 2012 Plan. The weighted-average exercise price presented in column (b) of the table above does not take restricted stock unit awards into account. |
(2) | All of these shares were available for issuance under the 2012 Plan. The shares available under the 2012 Plan may be used for any type of award authorized under the 2012 Plan, including stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and other awards payable in shares of our common stock. |
18 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policies and Procedures Regarding Related Party Transactions
Our Board reviews related party transactions for potential conflict of interest issues. Our Board has adopted a written related party transaction policy to set forth the policies and loan fee amortization was approximately $0.1 million.
29
LIQUIDITY AND CAPITAL RESOURCES
General
The primary sourcesprocedures for the review and approval or ratification of available cash are from operations, bank borrowings and equity offerings. The primary cash needsrelated person transactions. This policy covers any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to fund working capital requirements (primarily inventory), capital expenditures for barrelsbe a participant, the amount involved exceeds $120,000 and other equipment to facilitate production, repaya related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, (interest and principal payments) and operating expenses. We are able to borrow against working capital assets (accounts receivable and inventory) through an asset based bank loan.guarantees of indebtedness or employment by us or a related person.
|
| June 30, 2018 |
|
| June 30, 2017 |
|
| Increase (Decrease) |
|
| % Change |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Working capital |
| $ | 11,197 |
|
| $ | 13,002 |
|
| $ | (1,805 | ) |
|
| (13.9 | )% |
Cash and cash equivalents |
| $ | 278 |
|
| $ | 783 |
|
| $ | (505 | ) |
|
| (64.5 | )% |
Grape and Bulk Wine Agreements
The line of credit,We enter into grape and bulk wine purchase agreements from time to time with entities in which was refinanced on August 17, 2017, is a revolving line of creditour executives and/or founders have financial interests. We have entered into such arrangements with:
· | Ghianda Rose Vineyard, which is owned by Diana Fetzer, wife of Paul E. Dolan, III, a member of our Board. |
· | Gobbi Street Vineyards, which is partly owned by Diana Fetzer and Paul E. Dolan, III’s daughter, Nya Kusakabe. |
· | Dark Horse Farming Company, which is owned by Paul E. Dolan, III (75%), and Heath E. Dolan (25%). |
· | Premium Wine Storage, which is owned by Paul E. Dolan, III (33%) and Heath E. Dolan (33%). |
We believe these arrangements reflect substantially the same market terms we would receive in transactions with a maximum commitment of $10.0 million which accrues interest at 2.25% aboveunaffiliated third parties. However, if we fail to receive market terms for these transactions or other similar transactions in the LIBOR. The line of credit initially matured on July 31, 2018. We received an extension on the maturity to October 31, 2018.future, our profits could be reduced.
The weighted average interest rate on the line of credit was 3.79% and 2.82% for the fiscal years ended June 30, 2018 and June 30, 2017, respectively.
During the fiscal year 2018, our average borrowings outstanding under our revolving credit facility was $8.5 million, comparedpayments of $53,523 and $113,307 to average borrowings under the credit facility of $5.5 million in the prior year.
The outstanding balances on the lines of credit are:Dark Horse Farming Company and Premium Wine Storage, respectively were made.
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
Lines of Credit |
| (in thousands) |
| |||||
Revolving line of credit |
| $ | 8,058 |
|
| $ | 6,963 |
|
Equipment line of credit |
|
| — |
|
|
| 327 |
|
Total lines of credit |
| $ | 8,058 |
|
| $ | 7,290 |
|
The bank borrowings were collateralized by substantially all of our assets and supported by guaranties from certain of the LLC members with significant ownership positions. Availability on the revolving line of credit was 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 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. We were out of compliance with minimum quarterly EBITDA covenant for quarters ended September 30, 2017, December 31, 2017, March 31, 2018 and June 30, 2018, but received waivers for those periods from our lender, with the exception of June 30 due to the full payoff of the outstanding facilities in August. We were in compliance with all other covenants at June 30, 2017 and June 30, 2018.
All debt balances were paid off on August 13, 2018 with the proceeds received from the sale of Wholesale Business to Precept.
We believe that our 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. We may, however, require additional liquidity as we continue to execute our business strategy. We anticipate that to the extent that we require 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.
30
Cash Flows
|
| Fiscal Years Ended |
|
|
|
|
| |||||
|
| (in thousands) |
|
|
|
|
| |||||
|
| 2018 |
|
| 2017 |
|
| Increase (Decrease) |
| |||
Net cash (used in) provided by operating activities |
| $ | (1,254 | ) |
| $ | 699 |
|
| $ | (1,953 | ) |
Net cash provided by (used in) investing activities |
| $ | 82 |
|
| $ | (709 | ) |
| $ | (792 | ) |
Net cash provided by (used in) financing activities |
| $ | 500 |
|
| $ | (3,192 | ) |
| $ | 3,692 |
|
Operating Activities
For the fiscal year ended June 30, 2018, net cash used in operating activities was $1.3 million which was an increase of $2.0 million versus the prior year. The increase in cash flows used in operating activities is primarily attributable to higher inventories and lower payables offset by a decrease in accounts receivable.
Investing Activities
We used $0.8 million less cash related to investing activities in FY18 compared to FY17. This was largely the result of a $1.9 million one time insurance proceed settlement receipt in FY18. Excluding the one time settlement cash used in investing activities would have increased by $1.3 million largely driven by purchases of wine making equipment.
Financing Activities
The increase in net cash provided by financing activities relates solely to borrowings from bank financing and a change in our fiscal year end cash management strategy.
Contractual Obligations and Commitments
Financing Agreements
Borrowings
Our indebtedness during fiscal year 2018 was comprised primarily of bank loans including a line of credit and long term debt. Subsequent to June 30, 2018 the associated balances were paid in full. See further discussion in Note 12 “Subsequent Events”.
Lines of Credit
On September 8, 2017, we completed the refinancing process of our lines of credit. Below is a description of the lines of credit as of June 30, 2018 as well as the line put in place as of September 8, 2017.
Line of Credit Note - As of June 30, 2018, we had a $10.0 million revolving line of credit with an outstanding balance of $8.1 million and a maturity date of July 31, 2018. The outstanding balance accrued interest at an annual interest rate of 2.25% above LIBOR.
Equipment Purchase Line of Credit Note - As of June 30, 2018, we had a $0.5 million equipment purchase line of credit note with no outstanding balance. The outstanding balance accrued interest at a rate of 2.25% above the floating One-Month LIBOR Rate. This equipment purchase line of credit matured July 31, 2018 and converted to a $0.3 million term loan with a 36-month amortization schedule. We chose not to request a new equipment purchase line of credit note from the lender.
31
Foreign Exchange Note - As of June 30, 2018, we had foreign exchange note in the principal amount of $0.1 million from the bank due on or before July 31, 2018 that carried a 15% credit percentage and permitted us to enter into any spot or forward transaction to purchase from or sell to the bank a foreign currency of an agreed amount. There was no balance outstanding on the foreign exchange note as of June 30, 2017. We chose not to extend the maturity date of the foreign exchange note.
Capital Lease
In June 2017, we entered into a 72-month capital lease related to wine production equipment. The future lease commitments are $0.02 million per year for fiscal years 2019 through 2023.
Long Term Debt
Long term debt in fiscal year 2018 consisted 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 June 30, 2018 was $3.2 million. The interest rates and maturity dates of the notes are described in Part II, Item 8, Note 7, “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.
Non-cash Common Stock Issuance
In accordance with our board of director’s compensation policy, restricted stock units totaling 93,334 and 45,180 vested during FY18 and FY17, respectively, and resulted in the noncash issuance of our Class A common shares.
Covenants
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 included the minimum current assets to current liabilities ratio covenant (measured quarterly) and the maximum debt to effective tangible net worth ratio covenant (measured quarterly). Pursuant to the lender’s Modification Agreement dated 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.
We were out of compliance with the minimum quarterly EBITDA covenant for quarters ended September 30, 2017, December 31, 2017, March 31, 2018 and June 30, 2018, but received waivers for those periods from our lender, with the exception of June 30 due to the full payoff of the outstanding facilities in August. We were in compliance with all other covenants at June 30, 2017 and June 30, 2018.
Security Agreements and Limited Guaranties
The bank borrowings were collateralized by substantially all our assets. Additionally, certain LLC members who are also our executive officers and/or directors, as well as certain trusts and other entities under their control (together the “Guarantors”), entered into limited guarantee agreements which guarantee the payment to the bank of all sums presently due and owning and all sums which shall in the future become due and owning. The liability of the individual Guarantors ranges from 23% to 61% of the sum of all obligations due plus the costs, expenses and interest associated with the collection of amounts recoverable under the guarantee. Subsequent to June 30, 2018 the associated balances were paid in full. See further discussion in Note 12 “Subsequent Events”.
Concentration of Credit Risk and Off-Balance Sheet Arrangements
Our cash is held in highly rated credit institutions. Although we try to limit the amount of credit exposure with any one financial institution, we do in the normal course of business maintain cash balances in excess of federally insured limits.
32
Accounts receivable consists primarily of trade receivables from customers. We review accounts receivable regularly and makes estimates for an allowance when there is doubt as to the collectability of individual balances. The accounts receivable credit risk is not concentrated within any one geographic area. We have national distribution agreements with multi-state distributors and these distributors make up a significant amount of the accounts receivable; however, we believe the accounts receivable credit risk is limited. We have not experienced any material charge offs.
Off-Balance Sheet Arrangements
We do not have off-balance sheet risks related to foreign exchange contracts, option contracts or other foreign hedging arrangements.
We enter into short and long term contracts with third-parties and related party growers to supply a portion of future grape inventory requirements. The following table presents future minimum grape and purchase commitments as of June 30, 2018:
Years ending June 30, |
| Third-Parties |
|
| Related Parties |
|
| Total |
| |||
|
| (in thousands) |
| |||||||||
2019 |
| $ | 1,095 |
|
| $ | 30 |
|
| $ | 1,125 |
|
2020 |
|
| 594 |
|
|
| 59 |
|
|
| 653 |
|
2021 |
|
| 157 |
|
|
| 60 |
|
|
| 217 |
|
Thereafter |
|
| 51 |
|
|
| 123 |
|
|
| 174 |
|
Total |
| $ | 1,897 |
|
| $ | 272 |
|
| $ | 2,169 |
|
Production & Storage
We enter 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. Our current contracts for custom crush services cover the 2018 harvest.
Leases
We lease space for wine production within a custom crush facility located in Santa Rosa, California. The lease, which relates to the 2017 harvest, commenced April 15, 2017 and initially terminated 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 future lease commitments as presented below include amounts for this lease. In addition, pursuant to the terms of the lease and related winery facilities agreement, we are obligated to pay variable processing fees based on the tonnage of grapes crushed in the facility.
We lease approximately 2,500 square feet for administrative offices at 125 Foss Creek Circle, Healdsburg, California. In June 2016, we renewed the lease for an additional three years. The renewed lease term is November 1, 2016 through October 31, 2019. We also lease 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. The future lease commitments as presented below include amounts for these two leases.
33
Rent payments were $0.4 million for the fiscal year ended June 30, 2018, compared to $0.4 million for the fiscal year ended June 30, 2017.
Future lease commitments are:
Years ending June 30, |
| |||
(in thousands) |
| |||
2019 |
| $ | 390 |
|
2020 |
|
| 31 |
|
2021 |
|
| — |
|
Thereafter |
|
| — |
|
Total future rent payments |
| $ | 421 |
|
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. We intend to pass along rising costs through increased selling prices, subject to normal competitive conditions. There can be no assurances, however, that we will be able to pass along rising costs through increased selling prices effectively. In addition, we continue to identify on-going cost savings initiatives.
Critical Accounting Policies and Estimates and Recent Pronouncements
Please see Note 2 of Part II, Item 8 of this Annual Report on Form 10-K for the summary of critical accounting policies and recent accounting pronouncements.
34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are set forth in Item 15 of this Annual Report and are incorporated herein by reference.Director Independence
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSOur common stock is listed on The NASDAQ Capital Market. As required under the listing standards of NASDAQ, a majority of the members of the Board must qualify as “independent” as affirmatively determined by the Board. Our Board has affirmatively determined that the following five directors are independent within the meaning of the applicable NASDAQ listing standards: Messrs. Benedetti, Carroll, Graham and Grimes, and Ms. Hansen.
| 19 |
F-2
F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2018 and 2017
F-4
Consolidated Statements of Equity for the Fiscal Years Ended June 30, 2018 and 2017
F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2018 and 2017
F-6
F-7
F-1
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Truett-Hurst, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Truett-Hurst, Inc. and subsidiary (the “Company”) as of June 30, 2018 and 2017, and the related consolidated statements of operations, equity, and cash flows for each of the years in the two-year period ended June 30, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BPM LLP
We have served as the Company’s auditor since 2012.
Santa Rosa, California
October 15, 2018
F-2
TRUETT-HURST, INC. AND SUBSIDIARY
(In thousands)
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 278 |
|
| $ | 783 |
|
Inventories |
|
| 5,826 |
|
|
| 6,277 |
|
Other current assets |
|
| 251 |
|
|
| 295 |
|
Current assets of discontinued operations |
|
| 18,396 |
|
|
| 16,474 |
|
Total current assets |
|
| 24,751 |
|
|
| 23,829 |
|
Property and equipment, net |
|
| 6,320 |
|
|
| 5,353 |
|
Intangible assets |
|
| 38 |
|
|
| 38 |
|
Other assets, net |
|
| 73 |
|
|
| 142 |
|
Noncurrent assets of discontinued operations |
|
| — |
|
|
| 676 |
|
Total assets |
| $ | 31,182 |
|
| $ | 30,038 |
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Lines of credit |
| $ | 8,058 |
|
| $ | 7,290 |
|
Accounts payable |
|
| 409 |
|
|
| 606 |
|
Accrued expenses |
|
| 237 |
|
|
| 125 |
|
Current portion of capital lease obligation |
|
| 11 |
|
|
| 11 |
|
Current maturities of long term debt |
|
| 3,235 |
|
|
| 491 |
|
Liabilities of discontinued operations |
|
| 3,740 |
|
|
| 2,304 |
|
Total current liabilities |
|
| 15,690 |
|
|
| 10,827 |
|
Long term debt, net of current maturities |
|
| — |
|
|
| 3,002 |
|
Capital lease obligation, net of current portion |
|
| 52 |
|
|
| 63 |
|
Total liabilities |
| $ | 15,742 |
|
| $ | 13,892 |
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value of $0.001 per share, 5,000,000 shares authorized, none issued and outstanding at June 30, 2018 and 2017 |
|
| — |
|
|
| — |
|
Class A common stock, par value of $0.001 per share, 15,000,000 authorized, 4,535,750 issued and outstanding at June 30, 2018 and 4,426,789 issued and outstanding at June 30, 2017 |
|
| 4 |
|
|
| 4 |
|
Class B common stock, par value of $0.001 per share, 1,000 authorized, 6 issued and outstanding at June 30, 2018 and 7 issued and outstanding at June 30, 2017 |
|
| — |
|
|
| — | �� |
Additional paid-in capital |
|
| 16,527 |
|
|
| 16,082 |
|
Accumulated deficit |
|
| (6,299 | ) |
|
| (5,651 | ) |
Total Truett-Hurst, Inc. shareholders' equity |
|
| 10,232 |
|
|
| 10,435 |
|
Noncontrolling interest |
|
| 5,208 |
|
|
| 5,711 |
|
Total equity |
|
| 15,440 |
|
|
| 16,146 |
|
Total liabilities and equity |
| $ | 31,182 |
|
| $ | 30,038 |
|
See accompanying notes to consolidated financial statements.
F-3
TRUETT-HURST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
|
| Fiscal Year Ended June 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Sales |
| $ | 6,483 |
|
| $ | 5,972 |
|
Less excise tax |
|
| (12 | ) |
|
| (12 | ) |
Net sales |
|
| 6,471 |
|
|
| 5,960 |
|
Cost of sales |
|
| 2,502 |
|
|
| 2,153 |
|
Gross profit |
|
| 3,969 |
|
|
| 3,807 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 1,509 |
|
|
| 1,654 |
|
General and administrative |
|
| 2,338 |
|
|
| 1,763 |
|
Loss on disposal of assets |
|
| 16 |
|
|
| 62 |
|
Total operating expenses |
|
| 3,863 |
|
|
| 3,479 |
|
Income from operations |
|
| 106 |
|
|
| 328 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (102 | ) |
|
| (81 | ) |
Gain on lease termination, net |
|
| — |
|
|
| 844 |
|
Gain on fair value of interest rate swap |
|
| 76 |
|
|
| 131 |
|
Gain on insurance settlement |
|
| 1,879 |
|
|
| — |
|
Other income (expense), net |
|
| 11 |
|
|
| (7 | ) |
Total other income, net |
|
| 1,864 |
|
|
| 887 |
|
Income before income tax expense |
|
| 1,970 |
|
|
| 1,215 |
|
Income tax expense |
|
| (2 | ) |
|
| (2 | ) |
Net income from continuing operations |
|
| 1,968 |
|
|
| 1,213 |
|
Loss from discontinued operations, net of tax |
|
| (3,049 | ) |
|
| (1,417 | ) |
Net loss attributable to Truett-Hurst, Inc. and H.D.D. LLC |
|
| (1,081 | ) |
|
| (204 | ) |
Net loss attributable to noncontrolling interest: H.D.D. LLC |
|
| (433 | ) |
|
| (153 | ) |
Net loss attributable to Truett-Hurst, Inc. |
| $ | (648 | ) |
| $ | (51 | ) |
Net income (loss) per share, basic and diluted: |
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.44 |
|
| $ | 0.28 |
|
Discontinued operations |
|
| (0.68 | ) |
|
| (0.32 | ) |
Attributable to noncontrolling interest |
|
| 0.10 |
|
|
| 0.03 |
|
Attributable to Truett-Hurst, Inc. |
| $ | (0.14 | ) |
| $ | (0.01 | ) |
Weighted average shares used in computing net loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares |
|
| 4,470,185 |
|
|
| 4,377,994 |
|
See accompanying notes to consolidated financial statements.
F-4
TRUETT-HURST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
|
| Class A Shares |
|
| Amount |
|
| Class B Shares |
|
| Amount |
|
| Add’l Paid- in Capital |
|
| Accumulated Deficit |
|
| Non Controlling Interest |
|
| Total Equity |
| ||||||||
Balance at July 1, 2016 |
|
| 4,306,609 |
|
| $ | 4 |
|
|
| 7 |
|
| $ | — |
|
| $ | 15,794 |
|
| $ | (5,600 | ) |
| $ | 6,023 |
|
| $ | 16,221 |
|
Vesting of Class A restricted stock |
|
| 45,180 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of LLC Units for Class A common stock |
|
| 75,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 159 |
|
|
| — |
|
|
| (159 | ) |
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 129 |
|
|
| — |
|
|
| — |
|
|
| 129 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (51 | ) |
|
| (153 | ) |
|
| (204 | ) |
Balance at June 30, 2017 |
|
| 4,426,789 |
|
|
| 4 |
|
|
| 7 |
|
|
| — |
|
|
| 16,082 |
|
|
| (5,651 | ) |
|
| 5,711 |
|
|
| 16,146 |
|
Vesting of Class A restricted stock |
|
| 95,966 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of LLC Units for Class A common stock |
|
| 33,628 |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| 70 |
|
|
| — |
|
|
| (70 | ) |
|
| — |
|
Taxes paid related to net share settlement of equity awards |
|
| (20,633 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 375 |
|
|
| — |
|
|
| — |
|
|
| 375 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
| (648 | ) |
|
| (433 | ) |
|
| (1,081 | ) |
Balance at June 30, 2018 |
|
| 4,535,750 |
|
| $ | 4 |
|
|
| 6 |
|
| $ | — |
|
| $ | 16,527 |
|
| $ | (6,299 | ) |
| $ | 5,208 |
|
| $ | 15,440 |
|
See accompanying notes to consolidated financial statements.
F-5
TRUETT-HURST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Fiscal Year Ended June 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income from continuing operations |
| $ | 1,968 |
|
| $ | 1,213 |
|
Loss from discontinued operations, net of tax |
|
| (3,049 | ) |
|
| (1,417 | ) |
Net loss |
|
| (1,081 | ) |
|
| (204 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 929 |
|
|
| 824 |
|
Stock-based compensation |
|
| 375 |
|
|
| 129 |
|
Executive termination benefits |
|
| 133 |
|
|
| — |
|
Impairment of intangibles |
|
| 4 |
|
|
| — |
|
Loss on sale of bulk wine |
|
| 22 |
|
|
| — |
|
Gain on fair value of interest rate swap |
|
| (76 | ) |
|
| (131 | ) |
Gain on lease termination, net |
|
| — |
|
|
| (844 | ) |
Proceeds received on lease termination |
|
| — |
|
|
| 955 |
|
Gain on insurance settlement |
|
| (1,879 | ) |
|
| — |
|
Loss on disposal of assets |
|
| 12 |
|
|
| 62 |
|
Changes in operating assets and liabilities, net |
|
|
|
|
|
|
|
|
Inventories |
|
| 402 |
|
|
| (211 | ) |
Other current assets |
|
| 121 |
|
|
| (249 | ) |
Accounts payable |
|
| (197 | ) |
|
| 643 |
|
Accrued expenses |
|
| (19 | ) |
|
| (275 | ) |
Net cash (used in) provided by operating activities |
|
| (1,254) |
|
|
| 699 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
| (1,910 | ) |
|
| (674 | ) |
Acquisition of intangible and other assets |
|
| (14 | ) |
|
| (40 | ) |
Proceeds from insurance settlement |
|
| 1,906 |
|
|
| — |
|
Proceeds from sale of assets |
|
| 100 |
|
|
| 5 |
|
Net cash provided by (used in) investing activities |
|
| 82 |
|
|
| (709 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (payments on) proceeds from lines of credit |
|
| 1,096 |
|
|
| (3,021 | ) |
Proceeds from long term debt |
|
| — |
|
|
| 387 |
|
Payments on long term debt |
|
| (585 | ) |
|
| (558 | ) |
Payments on capital lease obligation |
|
| (11 | ) |
|
| — |
|
Net cash provided by (used in) financing activities |
|
| 500 |
|
|
| (3,192 | ) |
Discontinued Operations |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
| 69 |
|
|
| (48 | ) |
Net cash provided by (used in) investing activities |
|
| 100 |
|
|
| (10 | ) |
Net cash provided by (used in) discontinued operations |
|
| 169 |
|
|
| (58 | ) |
Net change in cash and cash equivalents |
|
| (503 | ) |
|
| (3,260 | ) |
Cash and cash equivalents at beginning of year |
|
| 783 |
|
|
| 4,043 |
|
Cash and cash equivalents at end of year |
| $ | 278 |
|
| $ | 783 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 470 |
|
| $ | 327 |
|
Cash paid for income taxes |
| $ | 1 |
|
| $ | 2 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Equipment financed with capital lease obligation |
| $ | — |
|
| $ | 74 |
|
See accompanying notes to consolidated financial statements.
F-6
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Business
Truett-Hurst, Inc. (“Truett-Hurst”, the “Company”, or “THI”) is a holding company formed in Delaware and its sole asset is a controlling interest in H.D.D. LLC (“LLC”). The audited consolidated financial statements as of and for the years ended June 30, 2018 and June 30, 2017 include the results of Truett-Hurst, Inc. and its subsidiary, the LLC. Truett-Hurst consolidates the financial results of the LLC and records a noncontrolling interest for the economic interest in the LLC that is not attributable to Truett-Hurst, Inc.
The Company operates and controls all of the business and affairs and consolidates the financial results of the LLC. In addition, pursuant to the limited liability company agreement of the LLC, the Company has the right to determine when distributions will be made to the members of the LLC and the amount of distributions. If a distribution is authorized, such distribution will be made to the members of the LLC pro rata in accordance with the percentages of their respective limited liability company interests.
Quantities or results referred to as “to date” or “as of this date” mean as of or to June 30, 2018, unless otherwise specifically noted. References to “FY” or “fiscal year” refer to the fiscal year ending on June 30th of the designated year. For example, “FY18” and “fiscal year 2018” each refer to the fiscal year ended June 30, 2018. This Annual Report on Form 10-K references certain trademarks and registered trademarks of products or service names of other companies mentioned in this Annual Report on Form 10-K that may be trademarks or registered trademarks of its respective owners.
On August 13, 2018, the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Precept Brands LLC, a Washington limited liability company (“Precept”) pursuant to which the Company agreed to sell certain assets comprising its wholesale wine business (the “Wholesale Business”) to Precept (the “Precept Transaction”). As a result, certain balances have been adjusted to reflect the results of this transaction. See Note 3, “Discontinued Operations” , and Note 12, “Subsequent Events”.
Capital Structure
The Company has two classes of stock with shares outstanding: Class A common stock and Class B common stock. As of June 30, 2018, there were 4,535,750 shares of Class A common stock and 6 shares of Class B common stock outstanding. One share of Class B common stock is issued to each holder of LLC units which, on matters presented for shareholder vote, provides its owner one vote for each LLC unit held. The 6 shares of Class B common stock were associated with 2.73 million LLC units (the entire amount of LLC units held by parties other than the Company) and represents 40% of the voting power of the combined outstanding Class A and Class B common stock.
The Company maintains an exchange agreement with holders of LLC units, several of whom are directors and/or officers, under which each LLC member may exchange their LLC units for shares of Class A common stock on a one-to-one basis. Through ownership of Class A and Class B common stock, individuals who are officers and/or directors of the Company control 40% of the voting power of the combined outstanding Class A and Class B common stock.
Tax Receivable Agreement
Prior to the completion of the IPO, the Company entered into a tax receivable agreement 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 the exchange of LLC Units (current and future) and certain other tax benefits related to the Company entering into the agreement. These payment obligations are obligations of the corporate taxpayer and not of the LLC.
F-7
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE 2 - Critical Accounting Policies and Estimates
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP” or “GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities. Estimates are based on historical experience and on various other assumptions that management believes are reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. The Company periodically evaluates estimates used in the preparation of the financial statements for continued reasonableness and prospectively applies appropriate adjustments, if any, to these estimates.
The Company’s critical accounting policies include:
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity date when purchased of three months or less, and are stated at cost, which approximates fair value.
Accounts Receivable
Accounts receivable consists primarily of trade receivables from customers who tend to be large distributors. Accounts receivable are reviewed regularly and estimates are made for allowance for doubtful accounts when there is doubt as to the collectability of individual balances. No allowance for doubtful accounts was considered necessary as of June 30, 2018 and June 30, 2017.
Inventories
Inventories consist primarily of bulk and bottled wine and purchased grapes valued at the lower of cost or market using the first-in, first-out or specific identification method. In accordance with general wine industry practice, bulk and bottled wine inventories are included in current assets, although a portion of such inventories may be aged for a period longer than one year. Costs associated with winemaking and the production of wine are reflected in inventories as bulk wine until the wine has been bottled and is available for sale. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value. Net realizable value of such inventories is estimated based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of sales.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the useful lives of the asset, principally twenty to forty years for building and improvements, five years for machinery and equipment, seven to fifteen years for vineyard development, ten to twenty years for vineyard equipment, five to ten years for furniture and fixtures, the shorter of estimated useful life or lease term, generally five years for leasehold improvements and five years for vehicles. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Gains and losses from disposition of property and equipment are included as a component of income from operations.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted cash flows, an impairment loss is recognized to the extent of such difference.
F-8
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Intangible Assets
Indefinite lived intangible assets consist of trademarks and are reviewed for impairment during the fourth fiscal quarter of each year, or sooner, if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Finite lived intangible assets consist of patents and are amortized over their estimated legal lives. Patents begin amortizing at the granting of the patent.
Other Assets
Other assets consist of label design and website design costs and are amortized over their estimated useful lives, principally five years for both label design and website costs. Label designs are evaluated for impairment in accordance with the policy on impairment of long-lived assets.
Discontinued Operations
In determining whether a group of assets that is disposed (or to be disposed) should be presented as a discontinued operation, we analyze whether the group of assets being disposed represents a component of our Company; that is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial reporting purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect on our operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal, if applicable, are aggregated and separately presented in our consolidated statements of operations, net of income taxes
Revenue Recognition
Wine sales are recognized when the product is shipped and title passes to the customer. Standard terms are ‘FOB’ shipping point, with no customer acceptance provisions. The cost of price promotions and discounts are treated as reductions of sales. No products are sold on consignment. Credit sales are recorded as trade accounts receivable and no collateral is required. Net sales from items sold direct to consumer are recognized at the time of sale.
Sales Discounts and Depletion Allowances
Sales discounts and depletion allowances are recorded as a reduction of sales at the time of the sale. For FY18 and FY17, sales discounts and depletion allowances totaled $3.1 million and $2.3 million, respectively.
Cost of Sales
Cost of sales includes costs associated with grape growing, grapes purchased from vineyards not owned by the Company, bulk wine and finished goods purchases, packaging materials, winemaking and production costs, vineyard and production administrative support and overhead costs, purchasing and receiving costs and certain warehousing costs. No further costs are allocated to inventory once the product is bottled and available for sale. Inventory reserves and provisions are included in cost of sales.
Expense Allocation
The LLC Operating Agreement provides that substantially all expenses incurred by or attributable to the Company are borne by the LLC, except the Company’s income tax payments.
Sales and Marketing Expense
Sales and marketing expenses consist primarily of personnel costs, advertising and other costs for marketing and promoting the Company’s products. Sales and marketing expenses are expensed as incurred. For FY18 and FY17, sales and marketing expense totaled approximately $1.5 million and $1.7 million for fiscal years ended June 30, 2018 and June 30, 2017 respectively.
F-9
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
General and Administrative Expenses
General and administrative expenses include the costs associated with personnel, professional fees, insurance and other expenses related to administrative and compliance functions. For FY18 and FY17, total general and administrative expenses totaled approximately $2.3 million and $1.8 million, respectively.
Shipping and Handling Fees and Costs
Amounts billed to customers for shipping and handling are recorded as sales, and the costs incurred for shipping and handling are recorded as a sales and marketing expense. Gross margins may not be comparable to other companies in the same industry as other companies may record shipping and handling costs as cost of sales. For FY18 and FY17, shipping costs were $0.5 million and $0.6 million, respectively.
Income Taxes and Deferred Tax Asset Valuation
Truett-Hurst, Inc. is subject to U.S. federal, state, and local taxes with respect to its allocable share of any taxable income of H.D.D. LLC and will be taxed at the prevailing corporate rates. The LLC is treated as a partnership under the Internal Revenue Code of 1986, as amended (the “Code”). The members separately account for their pro-rata share of income, deductions, losses, and credits. Therefore, no provision is made for the LLC’s share of net income (loss) in the consolidated financial statements for liabilities for federal, state, or local income taxes which liabilities are the responsibility of the individual members. The LLC is subject to entity level taxation in the state of California. As a result, the accompanying consolidated statements of operations include tax expense related to this state.
The provision for income taxes is calculated using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The net deferred tax asset is evaluated at the end of each year considering all available positive and negative evidence, including reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. When the Company does not believe the realization of a deferred tax asset is likely, a valuation allowance is recorded.
Stock-Based Compensation
Stock-based compensation is recognized based on the estimated fair values at the grant date for equity classified awards and the recognition of the related compensation expense over the appropriate vesting period. Compensation expense is based on, among other things, (i) the classification of an award, (ii) assumptions relating to fair value measurement such as the value of the stock of Truett-Hurst and its volatility, the expected term of the award and forfeiture rates, and (iii) whether performance criteria, if any, have been met. Both internal and external data is used to assess compensation expense. Changes in these estimates could significantly impact stock-based compensation expense in the future. The expected term of the option is based upon the contractual term, expected employee exercise and expected post-vesting employment termination behavior. Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic market adjustments as the underlying equity instruments vest.
Earnings per Share
Basic earnings per share is computed by dividing the earnings attributable to the Company by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by giving effect to all potential dilutive common shares, including convertible LLC units and restricted stock unless this calculation would have an anti-dilutive effect in which case basic and diluted earnings per share are calculated similarly.
F-10
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Reclassifications
Certain prior period amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. These reclassifications had no effect on the reported consolidated results of continuing operations.
Recently Adopted Accounting Pronouncements
In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This standard amends ASC 740, Income Taxes, to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Company has applied the guidance in ASU 2018-05; see Note 11, Income Taxes, for further disclosure.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition (as updated by ASU 2015-14 in August 2015, ASU 2016-08 in March 2016, and ASU 2016-20 in December 2016). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 was to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. ASU 2015-14 delayed the required adoption date for public entities to periods beginning after December 15, 2017, although early adoption to the original effective date under ASU 2014-09 is permitted. Once implemented, the Company can use one of two retrospective application methods for prior periods.
The Company has completed its evaluation of the provisions of this standard and concluded that the adoption will not result in a material adjustment to beginning accumulated deficit as the Company does not have any uncompleted revenue contracts. Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing the service.
The Company will adopt this new standard effective July 1, 2018 using the modified retrospective method of adoption as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of stockholders’ equity, and revenues reported in the periods prior to the date of adoption are not changed. The adoption of Topic 606 will have not have a material impact on the Company’s financial position, results of operations, stockholders’ equity, or cash flows.
In February 2016, the FASB issued ASU 2016-02: “Leases (Topic 842) and ASU 2018-10: Codification Improvements to Topic 842, Leases”. These ASUs require that a lessee recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For income statement purposes, leases are still required to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The Company is assessing the impact the adoption of this standard will have on its financial statement and plans to adopt this ASU in fiscal year 2020.
F-11
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company will adopt the provisions of ASU 2016-15 effective July 1, 2018, and the adoption of this standard will not impact the Company’s consolidated statement of cash flows going forward.
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. The new guidance is expected to reduce diversity in practice and result in fewer changes to the terms of an award being 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. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company will adopt the provisions of ASU 2017-09 effective July 1, 2018 and the adoption of this standard will not impact the Company’s accounting for its stock-based compensation.
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.
NOTE 3 - DISCONTINUED OPERATIONS
During the fourth quarter of fiscal year 2018, we determined to discontinue operations of 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.
In accordance with ASC 205-20-45-1E, the results of discontinued operations are aggregated and separately presented in our consolidated statements of operations, net of income taxes. The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations,” respectively, within the accompanying Consolidated Balance Sheets at June 30, 2018 and 2017, and consist of the following:
F-12
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Assets and Liabilities of Discontinued Operations
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
Carrying amounts of assets included in discontinued operations |
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | 3,031 |
|
| $ | 1,932 |
|
Inventories |
|
| 14,151 |
|
|
| 14,332 |
|
Bulk wine deposits |
|
| 629 |
|
|
| — |
|
Property, plant and equipment, net |
|
| 26 |
|
|
| — |
|
Intangible assets, net |
|
| 219 |
|
|
| — |
|
Other current assets, net |
|
| 340 |
|
|
| 210 |
|
Total current assets |
| $ | 18,396 |
|
| $ | 16,474 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 73 |
|
Intangible assets, net |
|
| — |
|
|
| 468 |
|
Other assets, net |
|
| — |
|
|
| 135 |
|
Total noncurrent assets |
| $ | — |
|
| $ | 676 |
|
Total assets |
| $ | 18,396 |
|
| $ | 17,150 |
|
Carrying amounts of liabilities included in discontinued operations |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 936 |
|
| $ | 1,388 |
|
Accrued expenses |
|
| 2,164 |
|
|
| 421 |
|
Depletion allowance and accrual for sales returns |
|
| 640 |
|
|
| 495 |
|
Total current liabilities |
| $ | 3,740 |
|
| $ | 2,304 |
|
Operating Results of Discontinued Operations
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
Revenues |
|
|
|
|
|
|
|
|
Total revenues less excise tax |
| $ | 17,282 |
|
| $ | 15,576 |
|
Cost of sales |
|
| 13,468 |
|
|
| 12,161 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 6,377 |
|
|
| 4,473 |
|
Depreciation and amortization |
|
| 85 |
|
|
| 81 |
|
Interest expense |
|
| 373 |
|
|
| 250 |
|
Other expense |
|
| 28 |
|
|
| 28 |
|
Net loss attributable to Truett-Hurst, Inc. and H.D.D. LLC from Discontinued Operations |
|
| 3,049 |
|
|
| 1,417 |
|
Net loss attributable to noncontrolling interest: H.D.D. LLC |
|
| 1,221 |
|
|
| 1,063 |
|
Net loss attributable to Truett Hurst, Inc. |
|
| 1,828 |
|
|
| 354 |
|
Net loss per share from discontinued operations basic and diluted |
|
| (0.68 | ) |
|
| (0.32 | ) |
F-13
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Cash Flow from Discontinued Operations
|
| Fiscal Year Ended |
| |||||
|
| June 30, |
|
| June 30, |
| ||
|
| 2018 |
|
| 2017 |
| ||
Net cash provided by (used in) operating activities |
| $ | 69 |
|
| $ | (48 | ) |
Net cash provided by (used in) investing activities |
|
| 100 |
|
|
| (10 | ) |
Net cash provided by (used in) discontinued operations |
| $ | 169 |
|
| $ | (58 | ) |
On August 13, 2018, pursuant to the terms of the Purchase Agreement of the same date, the LLC sold the Wholesale Business. 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”).
The Company received proceeds of $18 million. After the estimated transaction-related costs and expenses of approximately $0.9 million, the Company used the remaining proceeds to pay off secured debt first with any residual proceeds used to pay unsecured debt.
NOTE 4 - INVENTORIES
Inventories comprise:
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
|
| (in thousands) |
| |||||
Grapes and bulk wine |
| $ | 2,412 |
|
| $ | 1,426 |
|
Bottled wine |
|
| 3,315 |
|
|
| 4,774 |
|
Bottling materials and other |
|
| 99 |
|
|
| 77 |
|
Total inventories |
| $ | 5,826 |
|
| $ | 6,277 |
|
See Note 12, “Subsequent Events”.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment comprise:
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
|
| (in thousands) |
| |||||
Land and land improvements |
| $ | 3,260 |
|
| $ | 3,260 |
|
Building and improvements |
|
| 1,854 |
|
|
| 1,420 |
|
Machinery and equipment |
|
| 3,437 |
|
|
| 2,189 |
|
Vineyard development |
|
| 554 |
|
|
| 554 |
|
Vineyard equipment |
|
| 53 |
|
|
| 88 |
|
Furniture and fixtures |
|
| 391 |
|
|
| 200 |
|
Leasehold improvements |
|
| 28 |
|
|
| 79 |
|
Vehicles |
|
| 119 |
|
|
| 113 |
|
|
|
| 9,696 |
|
|
| 7,903 |
|
Less: accumulated depreciation and amortization |
|
| (3,376 | ) |
|
| (2,550 | ) |
Total property and equipment, net |
| $ | 6,320 |
|
| $ | 5,353 |
|
F-14
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Total depreciation and amortization expenseindependent accountant for the fiscal years ended June 30, 2018 and June 30, 2017 was $0.9 million and $0.7 million, respectively.
NOTE 6 - INTANGIBLE ASSETS
Intangible assets comprise:
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
|
| (in thousands) |
| |||||
Indefinite lives: |
|
|
|
|
|
|
|
|
Trademarks |
| $ | 38 |
|
| $ | 38 |
|
Total intangible assets |
| $ | 38 |
|
| $ | 38 |
|
Amortization expense related to intangible assets was negligible during FY18 and FY17.
NOTE 7 - BORROWINGS
The Company’s indebtedness as of June 30, 2018 was comprised primarily of bank loans including lines of credit and long term debt. Subsequent to June 30, 2018 the associated balances were paid in full. See further discussion in Note “12 Subsequent Events”.
Lines of Credit
In July 2016, the Company’s capital equipment line of credit matured and automatically converted into a $0.3 million term loan with a 48-month amortization schedule and a 3.95% interest rate.
In July 2017, the Company’s capital equipment line of credit matured and automatically converted into a $0.3 million term loan with a 36-month amortization schedule and a 4.25% interest rate.
On August 17, 2017, the Company completed the renewal process of its revolving line of credit with Bank of the West. The Company chose not to request a new equipment purchase line of credit note from the lender. In addition, the Company chose not to extend the maturity date of the foreign exchange note. The credit facility, which initially matured 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 twelve months ended June 30, 2018.
The credit facility was secured by a pledge of substantially all of the Company’s assets and is supported by guaranties from certain LLC members with significant ownership positions. The bank borrowings contain usual and customary covenants, including, among others, limitations on incurrence of senior indebtedness, the making of loans and advances, investments, acquisitions, and capital expenditures, the incurrence of liens, and the consummation of mergers and asset sales. The credit facility maintains the minimum current assets to current liabilities ratio covenant (measured quarterly) and the maximum debt to effective tangible net worth ratio covenant (measured quarterly). When the line of credit was renewed on August 17, 2017, the previous debt service coverage ratio (measured quarterly on a trailing 12-month basis) was replaced with a minimum quarterly EBITDA covenant. The Company was out of compliance with the minimum EBITDA covenant on its revolving line of credit for the quarters ended September 30, 2017, December 31, 2017, and March 31, 2018, but received waivers in October 2017, February 2018 and May 2018, respectively, for those periods from the Company’s lender. If the Company was unable to obtain the necessary waivers and the debt was accelerated, it would have a material adverse effect on the financial condition and future
F-15
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
operating performance, and the Company would be required to limit activities. The Company was in compliance with all other covenants at June 30, 2018.
In July 2016, the previous minimum EBITDA covenant was replaced with a minimum debt service coverage ratio (measured quarterly on a trailing 12-month basis). The Company was out of compliance with the debt service coverage ratio for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, but received waivers for those periods from the Company’s lender. The Company was in compliance with all other covenants during those prior year periods.
Long Term Debt
Long term debt comprises:
|
|
|
|
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
|
|
|
|
|
| (in thousands except payment information) |
| |||||
Long term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Note 1 |
|
| (1 | ) |
| $ | 2,581 |
|
| $ | 2,716 |
|
Note 2 |
|
| (2 | ) |
|
| — |
|
|
| 45 |
|
Note 3 |
|
| (3 | ) |
|
| 69 |
|
|
| 158 |
|
Note 4 |
|
| (4 | ) |
|
| 143 |
|
|
| 270 |
|
Note 5 |
|
| (5 | ) |
|
| 209 |
|
|
| 304 |
|
Note 6 |
|
| (6 | ) |
|
| 233 |
|
|
| — |
|
Total notes payable |
|
|
|
|
|
| 3,235 |
|
|
| 3,493 |
|
Less: current maturities |
|
|
|
|
|
| — |
|
|
| (491 | ) |
Total long term debt |
|
|
|
|
| $ | 3,235 |
|
| $ | 3,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Covenants
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). When the line of credit was renewed on August 17, 2017, the
F-16
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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 quarterly EBITDA covenant for quarters ended September 30, 2017, December 31, 2017, March 31, 2018 and June 30, 2018, but received waivers for those periods from the lender, with the exception of June 30 due to the full payoff of the outstanding facilities in August. The Company was in compliance with all other covenants at June 30, 2017 and June 30, 2018.
Capital Lease
In June 2017, the Company entered into a 72-month capital lease related to wine production equipment. The future lease commitments are $0.02 million per year for fiscal years 2019 through 2023.
NOTE 8 - 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. The future lease commitments as presented below include amounts for these two leases.
Rent payments for these facilities were $0.4 million for the fiscal years ended June 30, 2018 and June 30, 2017.
Future lease commitments are:
Years ending June 30, |
| |||
(in thousands) |
| |||
2019 |
| $ | 390 |
|
2020 |
|
| 31 |
|
2021 |
|
| — |
|
Thereafter |
|
| — |
|
Total future rent payments |
| $ | 421 |
|
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 follows:
Years ending June 30, |
| Third-Parties |
|
| Related Parties |
|
| Total |
| |||
2019 |
| $ | 1,095 |
|
| $ | 30 |
|
| $ | 1,125 |
|
2020 |
|
| 594 |
|
|
| 59 |
|
|
| 653 |
|
2021 |
|
| 157 |
|
|
| 60 |
|
|
| 217 |
|
Thereafter |
|
| 51 |
|
|
| 123 |
|
|
| 174 |
|
Total |
| $ | 1,897 |
|
| $ | 272 |
|
| $ | 2,169 |
|
At June 30, 2018, total future purchase commitments for grapes are approximately $2.2 million and are expected to be fulfilled during fiscal 2023.
F-17
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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 consolidated financial position, results of operations, or cash flows.
In January 2016, Mendocino Wine Group (“MWG”) filed a complaint against Phillip Hurst and the LLC alleging breach of fiduciary duty, interference with contract, and interference with economic advantage. On November 10, 2016, the Sonoma County Superior Court granted MWG’s Motion to Consolidate the Hurst/LLC case with a second complaint MWG filed against a law firm for legal malpractice and breach of fiduciary duty. On November 20, 2017, the Sonoma County Superior Court granted Phillip Hurst and the LLC’s Motion for Summary Judgment to dismiss the breach of fiduciary duty claim. MWG has dismissed the other two causes of action. The plaintiff, MWG, had until February 2018 to appeal the Court’s decision. This matter is now closed and a final disbursement from the trust account related to the settlement was received in April 2018 in the amount of $10,000.
Exchange Agreement 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 June 30, 2018 and June 30, 2017 for these obligations on the consolidated balance sheets.
F-18
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE 9 - 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 awards, restricted stock units and stock options to employees, directors and non-employees. As of June 30, 2018, the 2012 Plan has 1.0 million shares reserved for issuance and a total of 0.1 million granted equity incentive shares remaining 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 |
| |||
Outstanding at July 1, 2016 |
|
| 5,263 |
|
| $ | 3.80 |
|
|
| 1.46 |
|
Exercised |
|
| (2,632 | ) |
|
| — |
|
|
| — |
|
Outstanding at June 30, 2017 |
|
| 2,631 |
|
| $ | 3.80 |
|
|
| 0.49 |
|
Exercised |
|
| (2,631 | ) |
|
| (3.8 | ) |
|
| (0.49 | ) |
Outstanding at June 30, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
Expected to vest at June 30, 2018 |
|
| — |
|
| $ | — |
|
|
| — |
|
The Company’s vesting period for restricted stock awards varies from immediate vesting upon issuance to ratably over a four year period. The Company had an unrecognized expense at June 30, 2018 and 2017 of approximately $0 and $4,586 respectively, related to unvested restricted stock grants which will be recognized over the remaining weighted average service periods of 0 and 0.5 years, respectively.
In accordance with the Company’s board of director’s compensation policy, restricted stock units totaling 93,334 and 45,180 vested during FY18 and FY17, respectively, and resulted in the noncash issuance of the Company’s Class A common shares.
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 |
| |||
Outstanding at July 1, 2016 |
|
| 88,930 |
|
| $ | 3.30 |
|
|
| 2.22 |
|
Granted |
|
| 33,334 |
|
|
| 2.25 |
|
|
| — |
|
Vested |
|
| (45,180 | ) |
|
| 1.66 |
|
|
| — |
|
Forfeited, cancelled or expired |
|
| (43,750 | ) |
|
| 5.00 |
|
|
| — |
|
Outstanding at June 30, 2017 |
|
| 33,334 |
|
| $ | 2.25 |
|
|
| 0.50 |
|
Granted |
|
| 172,184 |
|
|
| 1.86 |
|
|
| — |
|
Vested |
|
| (93,334 | ) |
|
| (1.98 | ) |
|
| — |
|
Forfeited, cancelled or expired |
|
| (16,990 | ) |
|
| — |
|
|
| — |
|
Outstanding at June 30, 2018 |
|
| 95,194 |
|
| $ | 1.86 |
|
|
| 0.52 |
|
Expected to vest at June 30, 2018 |
|
| 95,194 |
|
| $ | — |
|
|
| — |
|
The restricted stock units vest predominantly over four years. The Company had an unrecognized expense at June 30, 2018 and 2017 of approximately $58,559 and $54,181, respectively, related to unvested restricted stock units which will be recognized over the remaining weighted average service periods of 0.3 and 0.5 years, respectively.
F-19
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
A summary of the activity for stock options is presented below:
|
| Number of Shares |
|
| Weighted Avg Exercise Price Fair Value per Share |
|
| Weighted Avg Contractual Term in Years |
|
| Aggregate Intrinsic Value (in thousands) |
| ||||
Outstanding at July 1, 2016 |
|
| 465,000 |
|
| $ | 2.95 |
|
|
| 9.04 |
|
| $ | — |
|
Granted |
|
| 100,000 |
|
|
| 1.78 |
|
|
| — |
|
|
| — |
|
Forfeited, cancelled or expired |
|
| (350,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Outstanding at June 30, 2017 |
|
| 215,000 |
|
| $ | 1.67 |
|
|
| 9.04 |
|
| $ | — |
|
Options Vested |
|
| 50,000 |
|
| $ | 1.61 |
|
|
| 8.90 |
|
|
| — |
|
Options Non-Vested |
|
| 165,000 |
|
| $ | 1.69 |
|
|
| 9.07 |
|
| $ | — |
|
Options Exercisable |
|
| 50,000 |
|
| $ | 1.61 |
|
|
| 8.90 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
| 50,000 |
|
|
| 1.35 |
|
|
| — |
|
|
| — |
|
Forfeited, cancelled or expired |
|
| (155,000 | ) |
|
| (1.27 | ) |
|
| — |
|
|
| — |
|
Outstanding at June 30, 2018 |
|
| 110,000 |
|
| $ | 1.09 |
|
|
| 8.18 |
|
| $ | (109 | ) |
Options Vested |
|
| 55,000 |
|
| $ | 1.09 |
|
|
| 8.33 |
|
|
| (78.8 | ) |
Options Non-Vested |
|
| 55,000 |
|
| $ | 1.09 |
|
|
| 7.72 |
|
| $ | (30 | ) |
Options Exercisable |
|
| 55,000 |
|
| $ | 1.09 |
|
|
| 8.33 |
|
|
| (78.8 | ) |
Stock options vest predominantly over four years. As of June 30, 2018, and June 30, 2017 unrecognized expense associated with unvested stock options totaled $29,452 and $171,568, respectively. These expenses will be recognized over the remained weighted average service periods of 0.4 and 2.0 years respectively.
During the year ended June 30, 2018, the Company granted various employees options to purchase a total of 50,000 shares of common stock. The options have a 3-year term and have an exercise price of 2.08 per share. The Company accounts for stock-based compensation costs at fair value measured on the date of grant of the award using a Black-Scholes option valuation model for stock option awards.
The weighted average estimated fair value per share of the stock options at grant date was $1.35 per share. Such fair values were estimated using the Black-Scholes stock option pricing model and the following weighted average assumptions.
|
| 2018 |
|
| 2017 |
| ||
Expected life |
| 5.4 years |
|
| 6.3 years |
| ||
Estimated volatility |
|
| 79.97 | % |
|
| 83.05 | % |
Risk-free interest rate |
|
| 0.02 | % |
|
| 0.01 | % |
Dividends |
|
| — |
|
|
| — |
|
The following table summarizes stock-based compensation included insets forth the consolidated statementsaggregate amount of operations for the fiscal years ended June 30, 2018 and 2017, respectively:various professional fees billed by our principal accountants (in thousands):
|
| Fiscal Year Ended June 30, |
| |||||
|
| (in thousands) |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Sales and marketing |
| $ | 21 |
|
| $ | 33 |
|
General and administrative |
|
| 354 |
|
|
| 96 |
|
Total stock-based compensation |
| $ | 375 |
|
| $ | 129 |
|
Years Ended June 30, | ||||||||
2018 | 2017 | |||||||
Audit fees(1) | $ | 346 | $ | 281 | ||||
Audit-related fees(1) | - | - | ||||||
Total audit and audit-related fees | $ | 346 | $ | 281 |
F-20
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
In March 2018, Evan B. Meyer, the Company’s former Chief Financial Officer, terminated employment with the Company. In connection with his termination, the Company and Mr. Meyer entered into a separation agreement providing that outstanding equity-based awards granted by the Company that were unvested on the date of his termination became fully vested and, in the case of options, exercisable. Stock compensation expense of $0.2 million was accrued in association with the acceleration of 120,000 (of which 43,125 shares were previously vested) stock options and 60,000 restricted stock units based on the market rate at the date of termination of $1.84. The acceleration of the vesting of these shares is reflected in the activity of the table for restricted units as the acceleration was dependent on Mr. Meyer’s acceptance of the separation agreement which occurred in April of 2018. There was no incremental expense as a result of this modification. Due to the acceleration of vesting there was a one time charge to expense of $0.3 million in April 2018.
NOTE 10 - 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 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 consolidated balance sheets. Changes in the fair value of this instrument have been recognized in the consolidated statements of operations in other income (expense). The maturity date of the swap is May 31, 2022. The following tables set forth the interest rate swap fair values at June 30, 2018 and at June 30, 2017:
|
| Fair value Measurements at Reporting Date |
| |||||
|
| (in thousands) |
| |||||
|
| Fair Value as June 30, 2018 |
|
| Significant Other Observable Inputs |
| ||
|
|
|
|
|
| (Level 2) |
| |
Assets |
|
|
|
|
|
|
|
|
Interest rate swap (1) |
| $ | 84 |
|
| $ | 84 |
|
Total |
| $ | 84 |
|
| $ | 84 |
|
|
| All audit and audit-related fees are approved by the |
|
| Fair value Measurements at Reporting Date |
| |||||
|
| (in thousands) |
| |||||
|
| Fair Value as of June 30, 2017 |
|
| Significant Other Observable Inputs |
| ||
|
|
|
|
|
| (Level 2) |
| |
Liabilities |
|
|
|
|
|
|
|
|
Interest rate swap (2) |
| $ | 8 |
|
| $ | 8 |
|
Total |
| $ | 8 |
|
| $ | 8 |
|
|
|
F-21
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
In connection with the sale of the Wholesale Business on August 13, 2018, the Company paid off all obligations pursuant to its outstanding interest rate swaps, and terminated its obligations thereunder.
NOTE 11 - INCOME TAXES
The Company is subject to entity level taxation in certain states and is subject to U.S. Federal and state income taxes with respect to its allocable share of any taxable income of the LLC. The Company will be taxed at the prevailing corporate tax rates.
All income before taxes is recognized domestically. Income tax expense for FY18 and FY17 consists of:
|
| Fiscal Year Ended June 30, 2018 |
| |||||||||
|
| (in thousands) |
| |||||||||
|
| Current |
|
| Deferred |
|
| Total |
| |||
U.S. Federal |
| $ | — |
|
| $ | — |
|
| $ | — |
|
State and Local |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| $ | 2 |
|
| $ | — |
|
| $ | 2 |
|
|
| Fiscal Year Ended June 30, 2017 |
| |||||||||
|
| (in thousands) |
| |||||||||
|
| Current |
|
| Deferred |
|
| Total |
| |||
U.S. Federal |
| $ | — |
|
| $ | — |
|
| $ | — |
|
State and Local |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| $ | 2 |
|
| $ | — |
|
| $ | 2 |
|
The difference between income taxes computed using the statutory federal income tax rate and the Company’s effective tax rate are summarized as follows:
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
|
| (in thousands) |
| |||||
Computed tax at statutory rate – continuing operations |
| $ | 336 |
|
| $ | 328 |
|
State taxes, net of federal benefit |
|
| 112 |
|
|
| 56 |
|
Loss from discontinued operations |
|
| (750 | ) |
|
| (464 | ) |
Rate benefit as a LLC |
|
| 91 |
|
|
| 52 |
|
Meals and entertainment |
|
| 16 |
|
|
| 14 |
|
Stock-based compensation |
|
| 32 |
|
|
| 22 |
|
Other permanent differences |
|
| 10 |
|
|
| — |
|
Tax Cuts and Jobs Act Impact |
|
| 1,480 |
|
|
| — |
|
Valuation allowance |
|
| (1,325 | ) |
|
| (6 | ) |
Income tax expense |
| $ | 2 |
|
| $ | 2 |
|
F-22
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Components of deferred tax assets (liabilities)Audit Fees. Audit fees consist of the following:
|
| June 30, 2018 |
|
| June 30, 2017 |
| ||
|
| (in thousands) |
| |||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued compensation |
| $ | 18 |
|
| $ | 10 |
|
Stock-based compensation |
|
| 39 |
|
|
| 44 |
|
Intangible assets |
|
| 1,397 |
|
|
| 2,568 |
|
Net operating losses |
|
| 1,101 |
|
|
| 1,354 |
|
Inventories |
|
| 67 |
|
|
| 84 |
|
Other |
|
| 6 |
|
|
| 6 |
|
Gross deferred tax assets |
|
| 2,628 |
|
|
| 4,066 |
|
Valuation allowance |
|
| (2,542 | ) |
|
| (3,867 | ) |
Total deferred tax assets, net of valuation allowance |
|
| 86 |
|
|
| 199 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized gain |
|
| (14 | ) |
|
| (2 | ) |
Property and equipment |
|
| (72 | ) |
|
| (197 | ) |
Total deferred tax liability |
|
| (86 | ) |
|
| (199 | ) |
Net deferred taxes |
| $ | — |
|
| $ | — |
|
In FY17, a valuation allowance of $3.9 million was recorded after assessing all the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The assessment of future income of the Company did not change in FY18 and a valuation allowance continues to be recorded on the deferred tax assets in the amount of $2.5 million. The Company’s possible liability associated with the tax receivable agreement will not be recognized until the valuation allowance is partially or fully reversed.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company has revalued its net deferred tax asset at December 31, 2017. The revaluation resulted in a reduction of our net deferred tax asset by $1.1 million, which was offset by a change in the valuation allowance of $1.1 million. Many of the Act's provisions become effective in our fiscal 2019, and the Company does not expect that the Act will have a significant impact on the results of operations.
The Company and the LLC are subject to annual California franchise tax. Truett-Hurst, Inc. files U.S. Federal and California income tax returns. The Company has gross federal and state net operating losses of approximately $3.8 million and $3.9 million, respectively. Both jurisdictions have expiration dates beginning in 2035.
For Truett-Hurst, Inc., U.S. federal and state tax returns associated with fiscal years 2015 through 2017 are currently open to examination. U.S. federal and state tax returnsaggregate fees for the LLC associated with calendar year ended 2014 and fiscal years ended 2015 through 2017 are currently open to examination. There were no material uncertain tax positions and the Company does not expect major changes in the next twelve months.
F-23
TRUETT-HURST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE 12 - SUBSEQUENT EVENTS
On August 13, 2018, the Company formally entered into the Purchase Agreement with Precept, pursuant to which the Company has sold certain assets, primarily inventory and related intangibles, comprising its Wholesale Business to Precept (the “Precept Transaction”). The Purchase Agreement provides that Precept will pay an aggregate consideration of approximately $18 million in cash and royalty payments to acquire the Wholesale Business, subject to certain closing adjustments. See Note 3 for further information regarding discontinued operations.
The Company also entered into a Transition Services Agreementprofessional services in connection with the saleaudit of our annual financial statements, quarterly reviews of our financial statements included in our quarterly reports and services in connection with statutory and regulatory filings. All audit fees are approved by the Wholesale Business, under which we will provide winemaking and other services to Precept over the nine month period following closing.
Finally, 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.
Concurrent with the execution of the Purchase Agreement the Company also terminated or modified the employment arrangements with Jason Strobbe and Jean-Marc Bussion. As a part of the respective separation agreements, the Company agreed to accelerate the vesting of certain outstanding equity awards. Both individuals were terminated effective August 31, 2018 which resulted in the acceleration of 2,085 RSUs and 48,336 stock options. There was no incremental expense incurred as a result of this modification.Board.
Audit-Related Fees. Audit-related fees consist of aggregate fees for assurance and related services related to the audit or review of our financial statements that are not reported under “Audit Fees” above.
Tax Fees. Tax fees, which were not incurred, would include fees for professional services for tax compliance, tax advice and tax planning, primarily, fees related to tax preparation services.
F-24
Item 9. Changes inAll Other Fees: Other fees, which were not incurred, would include fees for products and Disagreements with Accountants on Accounting and Financial Disclosureservices other than the services reported above.
None.
Item 9A. ControlsPre-Approval Policies and Procedures
Evaluation
Our Audit Committee has established procedures for pre-approval of Disclosure Controlaudit and Procedures
The Company carried out an evaluation, with the participation of management, and under the supervision of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act)non-audit services as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2018.
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting. The Company conducted an assessment of the effectiveness of the Company's internal control processes over financial reporting and concluded that the internal control over financial reporting was effective as of June 30, 2018.
The Company intends to regularly review and evaluate the design and effectiveness of its disclosure controls and procedures and internal control over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that the Company may discover in the future. While it is believed that the present design of the disclosure controls and procedures and internal control over financial reporting are effective, future events affecting the business may cause the Company to modify the controls and procedures.
This Form 10-K does not include an attestation report of the Company’s independent registered certified public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by an independent registered certified public accounting firm pursuant to the Sarbanes-Oxley Act of 2002, as amended, and the rules of the SEC promulgated thereunder, which permit the Company to provide only management’s report in this Annual Report.
Inherent Limitations of Controls
Management does not expect the disclosure controls and procedures or its internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving its objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, can be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
None.
36
Item 10. Directors, Executive Officers and Corporate Governance
The information required under this Item is incorporated by reference from the definitive proxy statement to be filed relating to the 2018 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 2018 fiscal year.
Item 11. Executive Compensation
The information required under this Item is incorporated by reference from the definitive proxy statement to be filed relating to the 2018 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 2018 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required under this Item is incorporated by reference from the definitive proxy statement to be filed relating to the 2018 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 2018 fiscal year.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required under this Item is incorporated by reference from the definitive proxy statement to be filed relating to the 2018 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 2018 fiscal year.
Item 14. Principal Accounting Fees and Services
The information required under this Item is incorporated by reference from the definitive proxy statement to be filed relating to the 2018 annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the 2018 fiscal year.
37
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
See Item 8 included in this Annual Report on Form 10-K.
(a)(2) Financial Statements Schedule.
All other schedules are omitted because they are not required, or are not applicable, or the information is included in the financial statements.
(a)(3) Exhibits:
A list of exhibits required to be filed as part of this Annual Report on Form 10-K is set forth in the Exhibit Index, which immediately precedes such exhibitsAudit Committee Charter. The Audit Committee considers whether the audit and is incorporated hereinaudit-related fee provisions disclosed above are compatible with maintaining BPM LLP’s independence and has so determined that the services provided by reference.
None.
38
EXHIBIT INDEX
BPM LLP are compatible with maintaining BPM LLP’s independence. The agreements and other documents filed as exhibitsAudit Committee pre-approved audit services provided to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties madeus by usBPM LLP in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.fiscal year 2018.
20 |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
Exhibit Number | Description | |
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
39
| ||
31.1 | ||
| ||
| ||
| ||
| ||
| ||
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Financial Statement Schedules
None.
|
|
|
|
|
|
40SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized on October 15,29, 2018.
TRUETT-HURST, INC. | ||
| By: | /s/ Phillip L. Hurst |
Phillip L. Hurst | ||
Chief Executive Officer and Chairman |
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Phillip L. Hurst and Karen Weaver, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act, of 1934, this report has been signed below by the following persons on behalf of the registrantCompany and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Phillip L. Hurst | ||||
Phillip L Hurst | President and Chief Executive Officer (Principal Executive Officer) and Director | October | ||
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/s/ Karen Weaver | ||||
Karen Weaver | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | October | ||
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* | October 29, 2018 | |||
| Director |
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* | ||||
| Director | October | ||
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/s/ Paul E Dolan III |
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Paul E Dolan III | Director | October 29, 2018 | ||
/s/ Barrie Graham |
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Barrie Graham | Director | October 29, 2018 | ||
/s/ Spencer Grimes |
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Spencer Grimes | Director | October 29, 2018 | ||
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Gerry Hansen | Director | October 29, 2018 |
* By | /s/ Phillip L. Hurst | |
Phillip L. Hurst, Attorney-in-Fact |
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