S-1/A 1 m329131s1a2.htm AMENDMENT NO. 2 m329131s1a2.htm
As filed with the Securities and Exchange Commission on April 3, 2013
Registration No. 333-187164


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
Truett-Hurst, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
2080
46-1561499
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)

5610 Dry Creek Road
Healdsburg, CA 95448
(707) 433-9545
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
Phillip L. Hurst
President and Chief Executive Officer
Truett-Hurst, Inc.
5610 Dry Creek Road
Healdsburg, CA 95448
(707) 433-9545
 
 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies to:
Anna T. Pinedo, Esq.
James R. Tanenbaum, Esq.
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York 10104
Tel: (212) 468-8000
 
Michael A. Hedge, Esq.
Gary J. Kocher, Esq.
K&L Gates LLP
925 Fourth Avenue, Suite 2900
Seattle, Washington 98104
Tel: (206) 623-7580

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer     o
Non-accelerated filer    o   (Do not check if a smaller reporting company)  Smaller reporting company      x
_____________________
 
CALCULATION OF REGISTRATION FEE
 
Title of Each Class of
Securities to be Registered
Amount to be
Registered (1)
Proposed Maximum
Aggregate
Offering Price (2)
Amount of
Registration Fee
Class A Common Stock, par value $0.001 per share
2,902,557
$43,538,355.00
$5,939.00(3)
(1)
This Registration Statement also covers the re-offer and sale of Class A common stock on an ongoing basis after their initial sale in market-making transactions by WRHambrecht + Co, LLC, an affiliate of the Registrant.  All such market-making transactions with respect to these shares of Class A common stock are being made pursuant to this Registration Statement.
(2)
Estimated solely for the purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3)
Previously paid.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


 
 

 
 
The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED APRIL 3, 2013.
 
Truett-Hurst, Inc.

2,902,557 Shares of
Class A Common Stock
This is our initial public offering and no public market currently exists for our shares. We are selling 2,250,000 shares of our Class A common stock, and the selling stockholders identified in this prospectus are selling 652,557 shares of our Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. We expect that the initial public offering price will be between $11.00 and $15.00 per share. Immediately following this offering, the holders of our Class A common stock will collectively own 100% of the economic interests in Truett-Hurst, Inc. and have approximately 43.9% of the voting power of Truett-Hurst, Inc. The holders of our Class B common stock will have approximately 52.2% of the voting power of Truett-Hurst, Inc.
 
Our Class A common stock has been approved for listing on the Nasdaq Capital Market under the symbol “THST.”
     
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act and, as such, may elect to comply with certain reduced reporting requirements after this offering.
  
OpenIPO® and Best Efforts Offering: The method of distribution being used by the underwriters in this offering differs somewhat from that traditionally employed in underwritten public offerings. The public offering price and allocation of shares will be determined primarily by an auction process conducted by the underwriters participating in this offering. The underwriters have agreed to use their best efforts to procure potential purchasers for the shares of Class A common stock offered pursuant to this prospectus. The shares are being offered on an all or none basis.  All investor funds received prior to the closing will be deposited into escrow with an escrow agent until closing.  If investor funds for the full amount of the offering are not received at closing, the offering will terminate and any funds received will be returned promptly.   
 
The auction will close and a public offering price will be determined after the registration statement becomes effective. The auction will remain open no longer than 30 days following effectiveness. The minimum size of any bid is 100 shares.
    
A more detailed description of this process is included in “The OpenIPO Auction Process” beginning on page 25 and in “Plan of Distribution” beginning on page 112.
THE OFFERING
PER SHARE
TOTAL
Initial Public Offering Price
$
$
Placement Agents Fee
$
$
Proceeds to Truett-Hurst, Inc.
$
$
Proceeds to the Selling Stockholders
$
$
The underwriters expect to deliver the shares of Class A common stock on                        , 2013.

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 12.
 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
Sidoti & Company, LLC CSCA
 
 
The date of this prospectus is                        , 2013.
 
 
 

 
 
 
 
 

 
 
TABLE OF CONTENTS
 
 
Page
Prospectus Summary
1
   
Risk Factors
12
   
Special Note Regarding Forward-Looking Statements
24
   
Industry Data
24
   
The OpenIPO Auction Process
25
   
Use of Proceeds
34
   
Dividend Policy
35
   
Capitalization
36
   
Dilution
38
   
Selected Consolidated Financial Data
48
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
49
   
Business
58
   
History and Formation Transactions
77
   
Directors and Executive Officers
82
   
Executive Compensation
86
   
Certain Relationships and Related Party Transactions
89
   
Principal and Selling Stockholders
95
   
Description of Capital Stock
99
   
Shares Eligible for Future Sale
103
   
Material U.S. Federal Tax Consequences to Non-U.S. Holders
106
   
Plan of Distribution
110
   
Conflicts of Interest
112
   
Legal Matters
113
   
Experts
113
   
Where You Can Find Additional Information
113
   
Index to Consolidated Financial Statements
 
 
                                               
You should rely only on the information contained in this document or to which we have referred you. Neither we nor the selling stockholders have authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Our business and financial condition may have changed since that date.
 
Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit a public offering of the shares of our Class A common stock or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.
 
 
i

 
 
Unless the context suggests otherwise, references in this prospectus to "Truett-Hurst," the "Company," "we," "us" and "our" refer (1) prior to the consummation of the offering transactions described under "History and Formation Transactions—Organizational Structure," to H.D.D. LLC and its consolidated subsidiaries and (2) after the offering transactions described under "History and Formation Transactions—Organizational Structure," to Truett-Hurst, Inc. and its consolidated subsidiaries. We refer to the owners of membership interests in H.D.D. LLC prior to the offering transactions, collectively, as our "existing owners."
 
 
 
 
 
 
 
ii

 
 
 
PROSPECTUS SUMMARY
 
This summary highlights the information contained elsewhere in this prospectus, and is qualified in its entirety by reference to the more detailed information and financial statements appearing elsewhere in this prospectus.  Because this is only a summary, it does not contain all of the information that may be important to you.  Before investing in our Class A common stock, you should read this entire prospectus, including the information set forth under the heading “Risk Factors” and the financial statements and the notes thereto.
 
Truett-Hurst is an innovative and fast-growing Super-premium and Ultra-premium wine sales, marketing and production company based in the acclaimed Dry Creek and Russian River Valleys of Sonoma County, California.  The core of our business is a combination of direct to consumer sales, traditional brand sales and “custom label” partnerships with major retailers, such as Trader Joe’s and Safeway.  We work closely with our retail partners to develop tailored brands to be sold to the discovery-oriented wine consumer.  We offer a top quality product at a reasonable price, a result of our competitive grape sourcing, high-quality wine making and world-class packaging and label design.  Our “custom label” model allows us to own the brands that we create, which we believe differentiates us from the traditional private label model and allows us to potentially expand the brands into the broad market, further building brand equity.  Our retail partners value their relationships with us because they collaborate in the development of the products and ultimately benefit from the higher margins that we offer them.   We believe that we have attracted these partners as a result of our rapid brand development cycles, our ability to quickly adjust to market demand and because we can bypass many traditional distribution layers to offer higher margin products for our partners’ key target customers.
 
We have experienced rapid sales growth in the last few years.  Nielsen estimates that 22% of consumer products sold by food and drug retailers in the United States are private label.  However, in the U.S. wine sector, only 3.7% of sales are made through private labels.  Other more mature wine markets, such as the U.K. and Australia, have much higher penetration of private label wine sales (19% and 16%, respectively).  Given the $33 billion market for wine sales in the United States, the private label business represents a market opportunity of many billions of dollars.
 
The California wine industry, which accounts for 89.5% of total U.S. wine production, is dominated by a few producers who make up the vast majority of sales. The top four wine producers in California control approximately 65% of unit shipments of California wine.   Our business approach seeks to disrupt this oligopoly by providing high quality wine at a reasonable cost, in part by avoiding an expensive and competitive distribution system.  Likewise, our large chain partners have turned to private label and custom label as a way to gain margin, customer loyalty and differentiation that allows them to compete with powerful producers and suppliers for this growing market.
 
In addition to our focus on our custom label business model, we also have business operations in the direct to consumer and traditional three-tier distribution channels.  Our direct to consumer channel consists of sales through our tasting rooms and wine clubs, which serve as strong tools for increasing brand visibility and loyalty, and through our ownership interest in The Wine Spies, LLC (“The Wine Spies”), an internet wine retailer specializing in short-lived “flash” sales.  Our more traditional three-tier distribution business consists of sales of our wine under four fully-owned labels, Truett-Hurst, VML, Healdsburg Ranches and Bradford Mountain, through a variety of distributor channels.
 
Market Opportunity
 
A combination of fundamental market changes in the United States created an opportunity for us, including:
 
 
·
Steady growth in the U.S. wine market:  The U.S. wine market has grown at an average annual rate of 5% over the past decade and is now the largest in the world (although per capita consumption remains relatively low).  In the recent past, growth in wine sales has been focused in domestic brands; from 2007 to 2011, wine imports have only grown by 1.6% per year. According to the 2011 Gomberg-Fredrikson & Associates Annual Wine Industry Review for the twelve months ended December 2011, two of the three fastest growing price points are the $7-$14 (“Super-premium”) and over-$14 (“Ultra-premium”) segments.  We have focused on the higher end of the Super-premium segment and also have a significant presence in the Ultra-premium segment, which together accounted for 66% of industry-wide revenue in 2011.
 
 
 
1

 
 
 
 
·
Market ripe for disruption:  Food retailers account for roughly 65% of wine sales, with a high concentration of market share among only a handful of major wine producers and distributors.  The top four wine producers in California control approximately 65% of unit shipments of California wine.  In order to compete with powerful producers and suppliers for this growing profit pool, food and grocery retailers have turned to private label programs as a way of gaining margin, customer loyalty, category growth and differentiation.
 
 
·
Retailer focus on innovation: Increased market competition has heightened for retailers the emphasis on increasing consumer traffic to grow same store sales year over year.  In order to create excitement in their stores, major global retail chains and top wine retailers in the United States have made wine and packaging innovations, including “earth-friendly” elements, a key strategic initiative for 2013 and beyond.   Our core values are aligned with our retail partners’ initiatives and consumer consciousness as we strive to make our products in a way that minimizes waste and fossil fuel usage and increases recyclability.
 
 
·
Private label model remains in its infancy:  Nielsen estimates that, in the United States, only 3.7% of wines, by dollar value, were sold through private labels in the year to date, as of August 2010, which was a 20% increase compared to the prior year.  Other mature wine markets have experienced considerably higher penetration; for example, private label wine sales make up 19% and 16% of total wine sales in the U.K. and Australia, respectively. The U.S. market appears poised for growth in this segment.
 
 
·
Declining brand loyalty:  Along with robust growth, the U.S. wine market has also witnessed a proliferation of new brands.  In 2010 alone, the United States approved 120,000 new wine labels.  Consumers have shown an increasing appetite to sample new labels and varietals, which can be promoted cost-effectively on an in-store basis.  For example, relatively new brands like Cupcake, Ménage à Trois and E.&J. Gallo Winery’s Apothic grew by 55%, 18% and 258%, respectively, in 2011.  Food retailers are well-positioned to manage this promotion as they control the shelf space and brand positioning in their stores.  In an ever more crowded market, this advantage has become increasingly valuable.
 
 
·
Rapid growth of internet retailing: Small but rapidly growing, we expect the internet segment to continue to outpace brick and mortar retailer sales, and we believe it is poised to surpass winery direct sales.
 
 
·
“Premiumization” of the market: Following years of explosive growth in the late 1980s and early 1990s, the U.S. market experienced a supply glut which resulted in severe pricing pressure from so-called “value brands.”  Due to significant consumption growth of California wines and the reduction of imported wines, as well as changes in exchange rates and taste preferences, this trend has reversed in the current cycle, with the Super-premium and Ultra-premium segments among those experiencing the highest growth.
 
 
·
Significant direct to consumer sales growth: Tasting room and wine club sales are typically the highest gross margin sales for a winery.  Our direct to consumer net sales increased 54% for the fiscal year ended June 30, 2012 as compared to the prior fiscal year and 56% for the six months ended December 31, 2012 as compared to the prior-year period, with gross margins averaging approximately 61%, which we believe is generally consistent with industry averages.
 
 
 
2

 
 

Our Strategy
 
Recognizing the opportunity created by these trends, our founders developed a strategy focused on the following key elements:
 
 
·
Model scalability will drive growth:  We combine the best of deep experience in the wine industry and the speed and agility of a start-up to work with both retailers and distributors to develop and market new brands.  Because we are smaller, more agile and less prone to layers of decision making and because we have a world-class brand development/creative team in house, we are able to launch innovative new brands faster and more cost-effectively.  This allows us and our partners to respond rapidly to market opportunities.
 
 
·
Highly collaborative channel partnerships:  Our management believes that it is critical to support multiple players in the distribution system in order for a young company to defend a sustainable market position.  This includes a strong collaboration with well-known and reputable retailers who are looking for innovative, higher-margin brands to market.  Our reputation has been enhanced by our success with these channel partners, leading to new opportunities in brand development, including selling some of our brands via traditional three-tier distribution at a reduced cost.

Currently, we have a small share of this sizeable market.  For example, for the first six months of fiscal year 2013, our sales to Safeway were less than $2 million, which is less than 1% of Safeway’s 2011 annual wine sales.   Our goal is to expand our sales with our existing retailer partners, including large businesses such as Trader Joe’s, Safeway and Total Wine & More, as well as increase the number of new major retailers that we partner with, including The Kroger Company, Publix and Wal-Mart.
 
 
·
Collaborative and rapid brand development:  Our development process with our partners is highly collaborative and our products are developed based on our partners’ market data and understanding of what their customers want.  Instead of developing a brand and bringing it to market based on consultants’ input and wine maker reputation, we exploit our retail partners’ quantitative data about brands, price points, packaging and varietals that its customers are buying.  When we initiate a partnership, we approach a retailer with numerous concepts; an agreement to move forward typically includes multiple brands, varietals and price points that are launched in tandem.  This allows the retailer to test various concepts, with the expectation that about half of the brands will be successful and further developed, while the other half will be scaled back or discontinued.   Typically, it takes six months from the initial conversations with a retailer until the product is on their shelves.
 
 
·
Quality focused on the robust premium sector: The private label business has historically focused on the generic, Sub-premium category (below $7 per bottle retail price), with wine quality consistent with the price points.  However, recognizing the opportunity for growth, we have positioned ourselves in the Super-premium and Ultra-premium segments.  In order to support our premium strategy, we have identified and contracted premium grape sources from Paso Robles, Sonoma and Mendocino Counties.  Our founders’ diverse and extensive experience in the industry allows us to leverage longstanding relationships with California growers, an increasingly important asset as grape supplies tighten globally.  We are also able to source grapes on a priority basis from our founders and members of our management team, who collectively control 500 acres of vineyards in Sonoma and Mendocino Counties.  In addition, we have hired a top-quality winemaking staff and invested in state of the art systems and equipment.
 
While we have focused primarily on the higher end of the Super-premium segment, we also have a significant presence in the Ultra-premium segment of the industry.
   
 
 
3

 
 
 
 
·
Innovative packaging and label design:  Given the proliferation of brands and the need to “rise above the noise” in wine displays, innovative labeling and packaging is increasingly important to success in launching new wine brands.  Our founders and Kevin Shaw, an independent contractor who serves as our creative director, have world-class experience in this area and are establishing a reputation as market leaders with novel packaging, such as evocative paper-wrapping, unique bottle shapes and the world’s first paper-based bottles.
 
 
o
Evocative wine wraps: We have developed, produced and sold one of the world’s first “wine wrap” packaging concepts to Safeway, one of the country’s largest wine retailers.  We have applied for trademarks on the wine wrap brands and a patent on the unique packaging.
 
 
o
The world’s first paper bottle: In 2013, we entered into a seven-year exclusive agreement with the producer of what we believe to be the first ever paper wine bottle. We intend to begin selling wine in the paper bottle in the second half of 2013 and are in discussions with several of the top U.S. retailers and distributors, including Safeway, The Kroger Company, Young’s Market Company and Southern Wines and Spirits, to sell the product.
 
 
o
Proprietary square bottle: We have designed a unique square-shaped glass bottle and created a brand that will “own” this concept.  We have applied for a trademark on the brand and a patent on the design.  Five of the top U.S. wine retailers are vying for the product, and we anticipate establishing a partnership for launch in spring 2013. We have partnered with one of the country’s fastest growing and most important wine retail chains, Total Wine & More, to produce and sell 40,000 cases (generating approximately $3.5 million in sales) in the first 12-month period beginning spring 2013.
 
 
·
Management team and key personnel: The founding team of Phil Hurst and Paul Dolan represents decades of experience in the wine industry and success at building businesses to scale, typically only seen in much larger, global players in the wine and spirits industry.
 
 
o
Phillip L. Hurst, Co-Founder, President and Chief Executive Officer: co-founded and helped build Winery Exchange Inc. into a global private label beer, spirits and wine company with more than $100 million in sales.
 
 
o
Paul E. Dolan, III, Co-Founder: worked at Fetzer Vineyards for 27 years, initially as wine maker and later as President, and scaled the business from 30,000 cases to over 4 million cases sold per year.
 
 
o
Virginia Marie Lambrix, Director of Winemaking: experience making wine for such leading producers as De Loach Vineyards, La Follette and Hendry Ranch.
 
 
o
Heath E. Dolan, Co-Founder, Director of Vineyard Operations: has 16 years of experience in the wine business, including managing cellar operations for Fetzer Vineyards.
 
 
o
Kevin Shaw, Independent Contractor/Creative Director: has nearly 20 years of experience as a designer.  As proprietor and founder of Stranger and Stranger design agency, he received the 2012 Harpers Wine & Spirits Magazine Design Award for “Best Design Agency.”  Kevin designs over 100 beverage brands every year in markets all around the world, including Jack Daniels, Avion Tequila, Lillet and The Kraken Spiced Rum.  Collectively, his brands sell over a billion bottles a year.
 
 
o
James D. Bielenberg, Chief Financial Officer: has more than 30 years of public and private accounting experience.  After gaining public accounting experience with Arthur Young (now Ernst & Young), he has spent the last 25 years working in wine-making operations with such well known firms as Kendall-Jackson Wine Estates, Francis Ford Coppola Winery, Ascentia Wine Estates, LLC and Rodney Strong Vineyards.
  
 
 
4

 
 
 
 
o
Daniel A. Carroll, Director: retired partner of TPG Capital, where he was a founder of the firm's Asian operations (formerly Newbridge Capital). Prior to 1995, he spent nine years with Hambrecht & Quist Group.
 
 
o
William R. Hambrecht, Director: after selling Hambrecht & Quist Group in 1998, Bill founded WR Hambrecht + Co, LLC (“WR Hambrecht + Co”) where he is now Chairman and Co-CEO.  He has been actively involved in the wine business for 40 years as an owner and operator of vineyards and wineries.
 
Our Structure
 
The net proceeds from this offering will be used by Truett-Hurst, Inc. to purchase 2,250,000 newly-issued LLC units (“LLC Units”) from H.D.D. LLC (the “LLC”) at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering, as described under "History and Formation Transactions—Organizational Structure—Offering Transactions." The LLC will use these proceeds to pay down amounts owed on our credit facility, for working capital, capital expenditures, hiring additional personnel, and other general corporate purposes, as further described under “Use of Proceeds.” Truett-Hurst, Inc. will also exchange, pursuant to the exchange agreement discussed below, 652,557 LLC Units held by the selling stockholders in this offering for newly-issued Class A common shares.  After the offering, Truett-Hurst, Inc. will hold 2,902,557 LLC Units, representing a 45.7% equity interest in the LLC.  Truett-Hurst, Inc. will not purchase for cash in this offering any LLC Units held by members of the LLC.
 
Truett-Hurst, Inc. is a Delaware corporation formed to serve as a holding company that will hold an interest in the LLC.  Truett-Hurst, Inc. has not engaged in any business or other activities other than in connection with its formation.  The current board of directors of Truett-Hurst, Inc. is made up of six members of the LLC, as well as two individuals meeting the criteria for independence under the rules of the Nasdaq Capital Market (“Nasdaq”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These LLC members will remain controlling holders of Truett-Hurst, Inc. following the offering.  See “Directors and Executive Officers.”  Following this offering, Truett-Hurst, Inc. will remain a holding company and its sole asset will be this equity interest in the LLC. Truett-Hurst, Inc. will become the sole managing member of the LLC, will operate and control all of its business and affairs and consolidate its financial results. The limited liability company agreement of the LLC will be amended and restated to, among other things, modify its capital structure by replacing the different classes of interests currently held by our existing owners with a single new class of LLC Units and to provide that the conduct, control and management of the LLC shall be vested exclusively in Truett-Hurst, Inc., as sole managing member. The other members of the LLC will not have the right to remove the sole managing member for any reason.
 
We and our existing owners will also enter into an exchange agreement under which (subject to the terms of the exchange agreement) they will have the right to 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.  See "Certain Relationships and Related Party Transactions— Exchange Agreement."
 
In connection with the offering, one share of Class B common stock of Truett-Hurst, Inc. will be distributed to each existing holder of LLC Units, each of which provides its owner with no economic rights but entitles the holder, without regard to the number of shares of Class B common stock held by such holder, to one vote on matters presented to stockholders of Truett-Hurst, Inc. for each LLC Unit held by such holder, as described in "Description of Capital Stock—Common Stock—Voting Rights." Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.
 
Immediately following this offering and the application of net proceeds from this offering, our existing owners will control approximately 56.1% of the combined voting power of our outstanding Class A and Class B common stock. Accordingly, our existing owners will have the ability to elect all of the members of our board of directors, and thereby to control our management and affairs.
 
As a result of these transactions:
 
 
·
The investors in this offering will collectively own 2,902,557 shares of our Class A common stock and Truett-Hurst, Inc. will hold 2,902,557 LLC Units;
 
·
Our existing owners will hold 3,450,087 LLC Units;
 
·
The investors in this offering will collectively have approximately 43.9% of the voting power in Truett-Hurst, Inc.;
 
·
Our existing owners, through their holdings of our Class B common stock, will have 52.2% of the voting power in Truett-Hurst, Inc.; and
 
·
Truett-Hurst, Inc. will own approximately 45.7% of the economic interest in the LLC and will exercise exclusive control over the LLC, as its sole managing member.
 
In addition, James D. Bielenberg, our Chief Financial Officer, holds 42,000 shares of restricted Class A common stock  and Kevin Shaw, an independent contractor who acts as our creative director, holds 210,000 shares of restricted Class A common stock.  These shares of restricted Class A common stock were granted in December 2012 and February 2013, respectively, and vest over a three-year period.  Mr. Bielenberg and Mr. Shaw are entitled to vote these shares prior to vesting.  In the aggregate, these shares will represent approximately 3.8% of the voting power of the Class A common stock outstanding after the offering.   
  
 
 
5

 
 
 
The diagram below depicts our organizational structure immediately following this offering:
 
In connection with the offering, Truett-Hurst, Inc. will enter into a tax receivable agreement with our existing owners that provides for the payment from time to time by Truett-Hurst, Inc. to our existing owners of 90% of the amount of the benefits, if any, that Truett-Hurst, Inc. is deemed to realize as a result of (i) increases in tax basis resulting from our exchange of LLC Units and (ii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, and the amount and timing of our income. A chart estimating the amounts of such payments appears on page 90 of this prospectus. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”
 
Summary of Risk Factors
 
Our business is subject to numerous risks, which are described in the section entitled “Risk Factors” immediately following this prospectus summary on page 12. You should carefully consider these risks before making an investment. In particular, the following considerations, among others, may offset our competitive strengths or have a negative effect on our growth strategy, which could cause a decline in the price of our Class A common stock and result in a loss of all or a portion of your investment:
 
 
·
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 face significant competition which could adversely affect our profitability.
 
 
·
Because a significant amount of our business is made through our direct to retailer partnerships, any change in our relationships with them could harm our business.
 
 
·
The loss of Mr. Hurst, Mr. Bielenberg, Ms. Lambrix, Mr. Dolan or other key employees would damage our reputation and business.
 
 
·
A reduction in our access to, or an increase in the cost of, the third-party services we use to produce our wine could harm our business.
 
 
·
Because our existing owners will retain significant control over Truett-Hurst after this offering, new investors will not have as much influence on corporate decisions as they would if control were less concentrated.
 
 
·
Many of our transactions are with related parties, including our founders, executive officers, principal stockholders and other related parties, and present conflicts of interest.
 
 
·
Several of our executive officers and key team members have outside business interests which may create conflicts of interest.
  
 
 
6

 
 
 
 
·
We depend upon our trademarks and proprietary rights, and any failure to protect our intellectual property rights or any claims that we are infringing upon the rights of others may adversely affect our competitive position and brand equity.
 
 
·
We are controlled by our existing owners, whose interests may differ from those of our public stockholders.
 
 
·
We are a “controlled company” within the meaning of the corporate governance standards of Nasdaq and, as a result, expect to qualify for, and rely on, exemptions from certain corporate governance requirements.
 
Emerging Growth Company Status
 
We are 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 are an “emerging growth company,” we may 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 stockholder advisory “say-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation.
 
Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:
 
 
·
the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;
 
 
·
the last day of the fiscal year following the fifth anniversary of the completion of this offering;
 
 
·
the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and
 
 
·
the date on which we are deemed to be a “large accelerated filer” under the Exchange Act (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter).
 
The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
 
Corporate Information
 
We were originally formed as a limited liability company in the State of California in 2007. Following this offering, Truett-Hurst, Inc. will be a holding company, and its sole asset will be its equity interest in the LLC. Our principal executive offices are located at 5610 Dry Creek Road, Healdsburg, California 95448.  Our telephone number is (707) 433-9545. Our website address is www.truetthurst.com. The reference to our website is an inactive textual reference only, the information that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our Class A common stock.
  
 
 
7

 
 
 
Trade Names
 
We sell our products under a number of trademarks that we own.  As of March 31, 2013, we had 16 registered, 15 published and nine pending material trademarks.
 
 
 
 
 
 
 
8

 
 
 
THE OFFERING
 
Class A common stock offered
by us
2,250,000 shares.
   
Class A common stock
offered by the selling stockholders
652,557 shares.
   
Class A common stock to be
outstanding after the offering
2,902,557 shares (or 6,352,644 shares if all outstanding LLC Units held by our existing owners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis).
   
Class B common stock
outstanding after the offering
Nine shares, or one share for every holder of LLC Units.
   
Price per share
$
   
Use of proceeds
We intend to use the net proceeds from this offering to purchase LLC Units from the LLC, and we will cause the LLC to use these proceeds to pay down amounts owed on our credit facility and for working capital, capital expenditures, hiring additional personnel and other general corporate purposes. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
   
Voting rights
Each share of our Class A common stock, including any share of restricted Class A common stock granted pursuant to the 2012 Stock Incentive Plan (the “2012 Plan”), entitles its holder to one vote on all matters to be voted on by stockholders generally.
  
After the offering, each existing owner of the LLC will hold one share of Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of Truett-Hurst, Inc. that is equal to the aggregate number of LLC Units held by such holder. See "Description of Capital Stock—Common Stock—Voting Rights."
   
Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.
   
Exchange rights of holders of
LLC Units
Prior to the closing of this offering, we will enter into an exchange agreement with our existing owners so that they may (subject to the terms of the exchange agreement) exchange their LLC Units for shares of Class A common stock of Truett-Hurst, Inc. 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.
    
 
 
9

 
 
 
Underwriters
WR Hambrecht + Co
Sidoti & Company, LLC
CSCA Capital Advisors, LLC
   
Risk Factors
Investing in our Class A common stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks of investing in our Class A common stock in “Risk factors” beginning on page 12.
   
Conflicts of Interest
William R. Hambrecht and Barrie Graham each serve as an officer, and Mr. Hambrecht serves as a director, of WR Hambrecht + Co, an underwriter in this offering.  Both Mr. Hambrecht and Mr. Graham serve on our board of directors and have the power to influence or cause the direction of our management and policies. Additionally, Hambrecht Wine Group, L.P., which is approximately 83.7% beneficially owned by a trust for the benefit of Mr. Hambrecht and his family members and as to which Mr. Hambrecht is a trustee, owns 12.94% of the combined voting power of our Class A and Class B common stock prior to this offering and will own 8.53% of the combined voting power of our Class A and Class B common stock after this offering.  Mr. Hambrecht is deemed to beneficially own all of the equity interest held by Hambrecht Wine Group, L.P.  Because of the foregoing, WR Hambrecht + Co is deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority, Inc. (“FINRA”).  Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. Rule 5121 requires that a “qualified independent underwriter” meeting certain standards participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence with respect thereto. CSCA Capital Advisors, LLC has agreed to act as a “qualified independent underwriter” within the meaning of Rule 5121 in connection with this offering. WR Hambrecht + Co will not confirm sales of the shares to any account over which it exercises discretionary authority without the prior written approval of the customer.
   
Nasdaq Symbol
THST
 
In this prospectus, unless otherwise indicated, the number of shares of Class A common stock outstanding and the other information based thereon reflects a 1-for-14 stock split to be effected immediately prior to the offering and does not reflect:
              
 
·
3,450,087 shares of Class A common stock issuable upon exchange of 3,450,087 LLC Units;
 
·
42,000 shares of restricted Class A common stock granted to James D. Bielenberg, our Chief Financial Officer, and 210,000 shares of restricted Class A common stock granted to Kevin Shaw, an independent contractor who acts as our creative director, in each case pursuant to the 2012 Plan; these shares of restricted Class A common stock were granted in December 2012 and February 2013, respectively, and vest over a three-year period;
 
·
shares available for future grant under the 2012 Plan; and
 
·
shares available for grant under the automatic increase provisions of the 2012 Plan (see “Executive Compensation—Employee Benefit and Stock Plans—2012 Stock Incentive Plan”).
   
 
 
10

 
 
 
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
 
The following summary historical consolidated financial and other data of the LLC should be read together with “History and Formation Transactions—Organizational Structure,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements and related notes, all included elsewhere in this prospectus.
 
We have derived the consolidated statement of operations data for the fiscal years ended June 30, 2011 and 2012 and our consolidated balance sheet data as of June 30, 2011 and 2012 from our audited consolidated financial statements and related notes included elsewhere in this prospectus.  We derived the consolidated statement of operations data for the six months ended December 31, 2011 and 2012 and our consolidated balance sheet data as of December 31, 2012 from our unaudited consolidated financial statements included elsewhere in this prospectus.  Our historical results are not necessarily indicative of the results that may be expected in the future.
 
Consolidated Statement of Operations Data:
 
   
Fiscal Year Ended
   
Six Months Ended
 
 
 
June 30,
   
December 31,
 
          (unaudited)  
   
2011
   
2012
   
2011
   
2012
 
                                 
Net sales
  $ 5,402,045     $ 12,693,395     $
8,378,109
    $
8,570,316
 
Cost of sales
    3,900,942       9,618,065      
6,573,563
     
5,850,463
 
Gross profit
    1,501,103       3,075,330      
1,804,546
     
2,719,853
 
Operating expenses:
                               
Sales and marketing
    595,226       1,387,321      
782,142
     
1,146,316
 
Gain on sale of assets
    (111,150 )     (6,945 )     -       -  
General and administrative
    1,435,908       1,194,353      
428,318
     
1,581,239
 
Total operating expenses
    1,919,984       2,574,729      
1,210,460
     
2,727,555
 
Income (loss) from operations
    (418,881 )     500,601      
594,086
     
(7,702
Other income (expense):
                               
Interest expense
    (401,134 )     (463,339 )    
(198,618
   
(179,762
Warrant re-valuation
    -       (10,000 )     -      
(4,000
Unrealized loss on interest rate swap
    -       -       -       (70,830 )
Total other expense
    (401,134 )     (473,339 )    
(198,618
   
(254,592
Income (loss) before provision for
income taxes
    (820,015 )     27,262      
395,468
     
(262,294
Provision for income taxes
    800       800      
800
     
1,600
 
Net income (loss) before
noncontrolling interest
    (820,815 )     26,462      
394,668
     
(263,894
Loss attributable to noncontrolling
interest
    -       -       -      
(47,877
)
Net income (loss) attributable to
H.D.D. LLC members
  $ (820,815 )   $ 26,462     $
394,668
    $
(216,017
)

             
Consolidated Balance
 
At June 30,
   
At December 31, 2012
 
Sheet Data:
 
2011
   
2012
   
(unaudited)
 
                         
Cash and cash equivalents
  $ 274,422     $ 167,309     $
116,472
 
Total assets
    10,099,873       14,082,617      
18,008,377
 
Total liabilities
    7,394,347       8,823,364      
12,652,532
 
Total members’ equity (deficit)
    (3,540,625 )     (626,898 )    
5,355,845
 
 
 
 
11

 
 
RISK FACTORS
 
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this prospectus, before deciding whether to invest in shares of our Class A common stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our Class A common stock may decline and you may lose all or part of your investment.
 
Risks Related to our Business and Strategy
 
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 over 20 independent growers to purchase substantially all of the grapes used in our wine production.  Our 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 our 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 bulk wine suppliers for the production of several of our wines, particularly our direct to retailer designated labels.  We have contracts with some wineries to provide us with bulk wine for a four-year term at specified prices and terms. These contracts will provide us with limited growth opportunities for the next two years. Further growth beyond our grape and wine contracts depends on the availability of bulk wine at the right price and quality for our labels.
 
The price, quality and available quantity of bulk wine has fluctuated in the past. It is possible that we will not be able to purchase bulk wine of acceptable quality at acceptable prices and quantities in the future, which could increase the cost or reduce the amount of wine we produce for sale. This could reduce our sales and profits.
 
In fiscal year 2012, E&J Gallo Winery and Robert Hall Winery were our largest suppliers of bulk wine.  It is possible that we will not be able to source wine from these or comparable suppliers in the future, which could reduce our annual production of wine and harm our sales and profits.
 
We face significant competition which could adversely affect our 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 popularly-priced generic wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus by our independent distributors, many of which carry extensive brand portfolios. A result of this intense competition has been and may continue to be upward pressure on our selling and promotional expenses. In addition, the wine industry has experienced significant consolidation. Many of our competitors have greater financial, technical, marketing and public relations resources than we do. Our sales may be harmed to the extent we 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 our current competitors or that we will not face greater competition from other wineries and beverage manufacturers.
 
 
12

 
 
Because a significant amount of our business is made through our direct to retailer partnerships, any change in our relationship with them could harm our business.
 
In fiscal year 2011, approximately 83% of our gross wholesale sales were made through our direct retailer relationships to Trader Joe’s and Total Wine & More.  In fiscal year 2012, 89% was concentrated in these two accounts.  For the first six months of fiscal year 2013, 85% was concentrated in Trader Joe’s, Safeway, Inc. and Total Wine & More.
 
Our agreements with our direct retail partners are informal and therefore subject to change.  If one or more of our direct retail partners chose to purchase fewer of our products, or we were forced to reduce the prices at which we sell our products to these partners, our sales and profits would be reduced and our business would be harmed.
 
The loss of Mr. Hurst, Mr. Bielenberg, Ms. Lambrix, Mr. Dolan or other key employees or personnel would damage our reputation and business.
 
We believe that our success largely depends on the continued employment of a number of our key employees, including Phil Hurst, our Chief Executive Officer, James Bielenberg, our Chief Financial Officer, Virginia Lambrix, our Winemaker, Paul Dolan, one of our co-founders and Kevin Shaw, an independent contractor who serves as our creative director.  Any inability or unwillingness of Mr. Hurst, Mr. Bielenberg, Ms. Lambrix, Mr. Dolan, Mr. Shaw or other key management team members to continue in their present capacities could harm our business and our reputation.
 
A reduction in our access to, or an increase in the cost of, the third-party services we use to produce our wine could harm our business.
 
We utilize several third-party facilities, of which there is a limited supply, for the production of our wines.  Our inability in the future to use these or alternative facilities, at reasonable prices or at all, could increase the cost or reduce the amount of our production, which could reduce our sales and our profits.  We do not have long-term agreements with any of these facilities, and they may provide services to our competitors at a price above what we are willing to pay. The activities conducted at outside facilities include crushing, fermentation, storage, blending and bottling.  Our reliance 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 control 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 for these goods and services, which may not be available at the same price, or at all, which would harm our financial results.
 
Because our existing owners will retain significant control over Truett-Hurst after this offering, new investors will not have as much influence on corporate decisions as they would if control were less concentrated.
 
Following this offering and assuming that all LLC Units held by our existing owners and their respective affiliates, if any, have been converted, our directors and executive officers and their respective affiliates will beneficially own 3,424,481 shares of our outstanding Class A common stock, or approximately 51.85% of our outstanding Class A common stock. Prior to conversion of their LLC Units, each holder of LLC Units will hold a single share of our Class B common stock. Although these shares have no economic rights, they will allow our 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 our business. As a result, our existing owners and their respective affiliates have significant influence in the election of directors and the approval of corporate actions that must be submitted for a vote of stockholders.
 
In addition, certain existing owners, as well as certain trusts and other entities under their control, have entered into guarantee agreements in connection with our credit facility with Bank of the West. See “Management’s Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesIndebtedness.”
 
The interests of these affiliates may conflict with the interests of other stockholders, and the actions they take or approve may be contrary to those desired by the other stockholders.  This concentration of ownership may also have the effect of delaying, preventing or deterring an acquisition of Truett-Hurst by a third party.
 
Many of our transactions are with related parties, including our founders, executive officers and other related parties, and present conflicts of interest.
 
We routinely source bulk wine and grapes for our products from vineyards owned by our founders, executive officers, and principal stockholders.  We also engage in other transactions with affiliates.  The interests of these affiliates in such transactions may be contrary to those desired by stockholders.  Although we intend to put in place policies related to mitigating the risk associated with such transactions, stockholders may be harmed by self-dealing with affiliates and our loss of corporate opportunity. See “Certain Relationships and Related Party Transactions.”
       
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, as further described under “Certain Relationships and Related Party Transactions.”  For example, we lease our VML Winery facility, including all of the buildings, grounds, parking areas and other facilities and equipment located at VML Winery, from Hambrecht Wine Group, a member of the LLC.

We also enter into grape and bulk wine purchase agreements from time to time with entities in which our executives and/or founders have financial interests.  We have entered into such arrangements with:

 
·
Hambrecht Vineyards, which is owned by the Hambrecht 1980 Revocable Trust (the “Hambrecht Trust”), of which William R. Hambrecht, a director of the LLC and Truett-Hurst, Inc., serves as trustee. The manager of Hambrecht Vineyards is Forrester R. Hambrecht, a member of the LLC and the grandson of William R. Hambrecht.
 
·
Ghianda Rose Vineyard, which is owned by Diana Fetzer, wife of Paul E. Dolan, III a member of our board of directors.
 
·
Gobbi Street Vineyards, which is partly owned by Diana Fetzer, and Paul E. Dolan, III’s daughter, Nya Kusakabe.
 
·
Mendo Farming Company, which is managed by Heath E. Dolan and owned by the following members: (i) Phillip L. Hurst and Sylvia M. Hurst as trustees of The Hurst Family Revocable Trust Dated August 1, 2004 (the “Hurst Trust”) (33.333% interest); (ii) Paul E. Dolan III, as trustee of The Dolan 2003 Family Trust Dated June 5, 2003 (the “Dolan 2003 Trust”) (30.334% interest); (iii) Peter E. Dolan (17.333% interest); (iv) Heath E. Dolan and Robin A. Dolan, as trustees of The Dolan 2005 Family Trust Dated August 24, 2005 (the “Dolan 2005 Trust”) (9.500% interest); and (v) Zachary Y. Schat and Melissa Schat, as trustees of The Zachary Schat Trust U/D/T Dated September 1, 2004 (the “Schat Trust”) (9.500% interest). Peter E. Dolan is the brother of Paul E. Dolan, III.
    
We believe these arrangements reflect substantially the same market terms we would receive in transactions with unaffiliated third parties. However, if we fail to receive market terms for these transactions or other similar transactions in the future, our profits could be reduced.
 
 
13

 
 
The terms of our credit facility with Bank of the West may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.
 
Our senior credit facility includes a number of customary restrictive covenants that could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. The credit facility contains usual and customary covenants, including, without limitation:
 
     ·  
limitation on incurring senior indebtedness;
 
     ·  
limitation on making loans and advances;
 
     ·  
limitation on investments, acquisitions and capital expenditures;
 
     ·  
limitation on liens, mergers and sales of assets; and
 
     ·  
limitations on activities of Truett-Hurst.
 
In addition, the credit facility contains negative and financial covenants, including, without limitation, a minimum current assets to current liabilities ratio (measured quarterly), debt to effective tangible net worth ratio (measured quarterly) and debt service coverage ratio (measured annually).
 
We were not in compliance with the minimum current assets to current liabilities ratio or the debt to effective tangible net worth ratio at December 31, 2012. In March 2013, as a condition of receiving a waiver from Bank of the West, we entered into certain capital improvement transactions as described in “Management’s Discussion and Analysis of Financial Condition and Results of OperationsIndebtedness.”
 
Our ability to comply with the covenants and other terms of our senior credit facility will depend on our future operating performance and, in addition, may be affected by events beyond our control, and we cannot assure you that we will meet them. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders or agree with our lenders to an amendment of the facility's terms to maintain compliance under such facility. If we are unable to obtain any necessary waivers and the debt under our senior credit facility is accelerated, it would have a material adverse effect on our financial condition and future operating performance.
 
We have identified a material weakness in internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline.
 
In connection with the audits of our consolidated financial statements as of the fiscal years ended June 30, 2011 and 2012 and for each of the years in the two-year period ended June 30, 2012, our management identified a material weakness in our internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
 
The material weakness pertains to deficiencies in the accounting research and reporting functions and the closing and reporting process due to our lack of accounting documentation and procedures, lack of segregation of duties, potential for management override of controls and lack of current expertise in reporting requirements.
 
Historically, we have functioned as a closely held, principally family-owned enterprise.  In preparation for becoming a public company, we have added an experienced Chief Financial Officer, James D. Bielenberg, and a Controller, and have more recently added accounting personnel to support the accounting function.  In addition, we have implemented policies to document various procedures.  We are in the process of documenting and testing our internal control over financial reporting. The actions that we are taking are subject to ongoing senior management review. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating the material weakness. If our remedial measures are insufficient to address the material weakness, or if significant deficiencies or material weaknesses in our internal control over financial reporting are discovered or occur in the future, it may adversely affect the results of our management evaluations and, when required, annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. In addition, if we are unable to successfully remediate the material weakness and if we are unable to produce accurate and timely financial statements or we are required to restate our financial results, our stock price may be adversely affected.  For more information, please see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls” in this report.
 
 
14

 
 
Several of our executive officers and key team members have outside business interests that may create conflicts of interest.

Several of our executive officers and affiliates have their own vineyards or wineries. Although these executives and key team members are committed to devoting their attention to our business, they may devote time to outside interests that do not benefit our stockholders.  If our executives and key team members fail to devote sufficient time to the management of our business, our sales and profits could be reduced.
    
We depend upon our trademarks and proprietary rights, and any failure to protect our intellectual property rights or any claims that we are infringing upon the rights of others may adversely affect our competitive position and brand equity.
 
Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights. We have staked out a reputation for innovation and we have introduced new product innovations, including, for example, our evocative “wine wraps,” the world’s first paper bottle and our proprietary square bottle. We have been granted numerous trademark registrations covering our brands and products and have filed, and expect 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 our trademark applications. There is also a risk that we could, by omission, fail to timely renew or protect a trademark or that our competitors will challenge, invalidate or circumvent any existing or future trademarks issued to, or licensed by, us.
 
A reduction in consumer demand for premium 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 our 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 our products, limitations on our ability to increase prices and increased levels of selling and promotional expenses. This, in turn, may have a considerable negative impact upon our sales and profit margins.
 
The market price of our stock may fluctuate due to seasonal fluctuations in our wine sales, operating expenses and net income.
 
We experience seasonal and quarterly fluctuations in sales, operating expenses and net income.  Generally, the second and third quarters of our fiscal year have lower sales volumes than the first and fourth quarters.  We have managed, and will continue to manage, our business to achieve long-term objectives.  In doing so, we may make decisions that we believe will enhance our long-term profitability, even if these decisions may reduce quarterly earnings.  These decisions include the timing of the release of our wines for sale, our wines’ competitive positioning and the grape and bulk wine sources we use to produce our wines.
 
Bad weather, 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, 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 our wine production and/or a reduction in the amount of wine we are able to produce, which could harm our business and reduce our sales and profits.  The California wine industry is currently experiencing a shortage of grapes due to the fact that grapes were in oversupply in the early 2000s and the industry is just now starting to replant.
 
Recent examples of events affecting supply include the frost in 2008 that significantly impacted the amount of grapes harvested in Mendocino County and the frost of 2011 that had a significant impact on the crop size in Paso Robles.
 
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 our wines could harm our brand name and a decrease in our production could reduce our sales and profits.
 
 
15

 
 
Although we grow only a small portion of the grapes we use, our business is still subject to numerous agricultural risks.  Over the last 20 years the California winegrowers have experienced crop damage from pest and diseases such as Phylloxera, sharpshooters, grape leaf skeletonizer and vinemeallybug.
 
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 our business and reduce our sales and profits.
 
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 our sales and profits.
 
Contamination of our wines would harm our 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 our 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.
 
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 our business and operating results.  Future legal or regulatory challenges to the wine industry could also harm our business and impact our operating results.
 
 
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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 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. Our future operating expenses and margins will be dependent on our ability to manage the impact of cost increases. We cannot guarantee that we 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 our business or in connection with historical activities of businesses we acquire. Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified contaminants in our current and former properties, the potential exists for remediation, liability and indemnification costs to differ materially from the costs that we have estimated. We cannot assure you that our costs in relation to these matters will not exceed our 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 our 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 our agricultural raw materials such as grapes. Decreased availability of our 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 our supply chain, which may affect production operations, insurance cost and coverage, as well as delivery of our products to wholesalers, 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 our production costs or impose capacity constraints. Such events could adversely affect our results of operations and financial condition.
 
Natural disasters, including earthquakes or fires, could destroy our facilities or our inventory.
 
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 our investment in, and anticipated profits and cash flows from, that wine. Such a loss would seriously harm our business and reduce our sales and profits.
 
 
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Risks Related to Our Organizational Structure
 
Truett-Hurst, Inc.s only material asset after completion of this offering will be 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. will be a holding company and will have no material assets other than our ownership of LLC Units. Truett-Hurst, Inc. will have no independent means of generating revenue. We intend to cause the LLC to make distributions to its unit holders in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the tax receivable agreement and dividends, if any, declared by Truett-Hurst, Inc. To the extent that Truett-Hurst, Inc. needs funds, and the LLC is restricted from making such distributions under applicable law or regulation or under the terms of its financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect Truett-Hurst, Inc.s liquidity and financial condition.
 
We are controlled by our existing owners, whose interests may differ from those of our public stockholders.
 
Immediately following this offering and the application of net proceeds therefrom, our existing owners will own approximately 54.3% of the LLC Units. Because they hold their ownership interest in our business through the LLC, rather than through the public company, these existing owners may have conflicting interests with holders of shares of our Class A common stock. For example, our existing owners 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 will enter in to in connection with this offering, 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 these existing owners' tax or other considerations even where no similar benefit would accrue to us. See "Certain Relationships and Related Party Transactions—Tax Receivable Agreement."
 
We are a “controlled company” within the meaning of the corporate governance standards of Nasdaq and, as a result, expect to qualify for, and rely on, exemptions from certain corporate governance requirements.
 
Upon completion of this offering, our affiliates will continue to control a majority of the combined voting power of Truett-Hurst, Inc. As a result, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under the Nasdaq rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and need not comply with certain requirements, including the requirement that a majority of the board of directors consist of independent directors and the requirements that our compensation and nominating and governance committees be composed entirely of independent directors. Following this offering, we intend to utilize these exemptions if we continue to qualify as a “controlled company.” If we utilize these exemptions, we will not have a majority of independent directors and our compensation and nominating and governance committees will not consist entirely of independent directors, and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. See “Directors and Executive Officers—Controlled Company Status.”
 
We will be required to pay our existing owners for certain tax benefits we may claim arising in connection with this offering and related transactions, and the amounts we may pay could be significant.
 
As described in "History and Formation Transactions—Organizational Structure—Offering Transactions," we intend to use the proceeds from this offering to purchase LLC Units.  We will enter into a tax receivable agreement with our existing owners that provides for the payment by us to our existing owners of 90% of the benefits, if any, that we are deemed to realize as a result of (i) the increases in tax basis resulting from our exchanges of LLC Units and (ii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. See "Certain Relationships and Related Party Transactions—Tax Receivable Agreement."

 
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We expect that the payments that we may make under the tax receivable agreement may be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments. There may be a material negative effect on our liquidity if distributions to us by the LLC are not sufficient to permit us to make payments under the tax receivable agreement after we have paid taxes. For example, we may have an obligation to make tax receivable agreement payments for a certain amount while receiving distributions from the LLC in a lesser amount, which would negatively affect our liquidity. The payments under the tax receivable agreement are not conditioned upon our existing owners' continued ownership of us.
 
We are required to make a good faith effort to ensure that we have 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 our 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.
 
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, as further described under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”
 
In certain cases, payments under the tax receivable agreement to our existing owners may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.
 
The tax receivable agreement will provide that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if, at any time, Truett-Hurst elects an early termination of the tax receivable agreement, Truett-Hurst’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 we realize 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 will be 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 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 Truett-Hurst actually realizes in respect of (i) the increases in tax basis resulting from our exchanges of LLC Units and (ii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
 
 
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Risks Related to the Auction Process for Our Offering
 
Our stock price could decline rapidly and significantly following our initial public offering.
 
Our initial public offering price will be determined by an auction process conducted by us and our underwriters. We believe this auction process will provide information about the market demand for our Class A common stock at the time of our initial public offering. However, this information may have no relation to market demand for our Class A common stock once trading begins. We expect that the bidding process will reveal a clearing price for shares of our Class A common stock offered in the auction. The auction clearing price is the highest price at which all of the shares offered may be sold to potential investors. Although we and our underwriters may elect to set the initial public offering price below the auction clearing price, we may also set an initial public offering price that is equal to the clearing price. If there is little or no demand for our shares at or above the initial public offering price once trading begins, the price of our shares would likely decline following our initial public offering. In addition, the auction process may lead to more stock price volatility or a stock price decline after the initial sales of our stock in the offering, which could lead to class action or securities litigation that would be expensive, time-consuming and distracting to our management team. If your objective is to make a short-term profit by selling the shares you purchase in the offering shortly after trading begins, you should not submit a bid in the auction.
 
The auction process for our public offering may result in a phenomenon known as the “winner’s curse,” and, as a result, investors may experience significant losses.
 
The auction process for our initial public offering may result in a phenomenon known as the “winner’s curse.” At the conclusion of the auction, bidders that receive allocations of shares in this offering (successful bidders) may infer that there is little incremental demand for our shares above or equal to the initial public offering price. As a result, successful bidders may conclude that they paid too much for our shares and could seek to immediately sell their shares to limit their losses should our stock price decline. In this situation, other investors that did not submit successful bids may wait for this selling to be completed, resulting in reduced demand for our Class A common stock in the public market and a significant decline in our stock price. Therefore, we caution investors that submitting successful bids and receiving allocations may be followed by a significant decline in the value of their investment in our Class A common stock shortly after our offering.
 
The auction process for our initial public offering may result in a situation in which less price sensitive investors play a larger role in the determination of our offering price and constitute a larger portion of the investors in our offering, and, therefore, the offering price may not be sustainable once trading of our Class A common stock begins.
 
In a typical initial public offering, a majority of the shares sold to the public are purchased by professional investors that have significant experience in determining valuations for companies in connection with initial public offerings. These professional investors typically have access to, or conduct their own independent research and analysis regarding investments in initial public offerings. Other investors typically have less access to this level of research and analysis, and as a result, may be less sensitive to price when participating in our auction process. Because of our auction process, these less price sensitive investors may have a greater influence in setting our initial public offering price and may have a higher level of participation in our offering than is normal for initial public offerings. This, in turn, could cause our auction process to result in an initial public offering price that is higher than the price professional investors are willing to pay for our shares. As a result, our stock price may decrease once trading of our Class A common stock begins. Also, because professional investors may have a substantial degree of influence on the trading price of our shares over time, the price of our Class A common stock may decline and not recover after our offering. Furthermore, if our initial public offering price is above the level that investors determine is reasonable for our shares, some investors may attempt to short sell the stock after trading begins, which would create additional downward pressure on the trading price of our Class A common stock.
 
 
20

 
 
Successful bidders may receive the full number of shares subject to their bids, so potential investors should not make bids for more shares than they are prepared to purchase.
 
We may set the initial public offering price near or equal to the auction clearing price. If we do this, the number of shares represented by successful bids will likely approximate the number of shares offered by this prospectus, and successful bidders may be allocated all or almost all of the shares that they bid for in the auction. Therefore, we caution investors against submitting a bid that does not accurately represent the number of shares of our Class A common stock that they are willing and prepared to purchase.
 
Our initial public offering price may have little or no relationship to the price that would be established using traditional valuation methods, and therefore, the initial public offering price may not be sustainable once trading begins.
 
We may set the initial public offering price near or equal to the auction clearing price. The offering price of our shares may have little or no relationship to, and may be significantly higher than, the price that otherwise would be established using traditional indicators of value, such as our future prospects and those of our industry in general; our sales, earnings, and other financial and operating information; multiples of revenue, earnings, cash flows and other operating metrics; market prices of securities and other financial and operating information of companies engaged in activities similar to ours; and the views of research analysts. As a result, our initial public offering price may not be sustainable once trading begins, and the price of our Class A common stock may decline.
 
If research analysts publish or establish target prices for our Class A common stock that are below the initial public offering price or the then current trading market price of our shares, the price of our shares of Class A common stock may fall.
 
Although the initial public offering price of our shares may have little or no relationship to the price determined using traditional valuation methods, we believe that research analysts will rely upon these methods to establish target prices for our Class A common stock. If research analysts, including research analysts affiliated with our underwriters, publish target prices for our Class A common stock that are below our initial public offering price or the then-current trading market price of our shares, our stock price may decline.
 
Submitting a bid does not guarantee an allocation of shares of our Class A common stock, even if a bidder submits a bid at or above the initial public offering price.
 
Our underwriters may require that bidders confirm their bids before the auction for our initial public offering closes. If a bidder is requested to confirm a bid and fails to do so within the permitted time period, that bid will be deemed to have been withdrawn and will not receive an allocation of shares even if the bid is at or above the initial public offering price. In addition, the underwriters, in consultation with us, may determine that some bids that are at or above the initial public offering price are manipulative or disruptive to the bidding process, in which case all of the bids submitted by that investor may be rejected.
 
Risks Related to the Offering
 
The fact that the offering is relatively small in size and involves some novel aspects of distribution could limit the market price, liquidity or trading volume of our stock.
 
We are offering only 2,902,557 shares.  The relatively small size of the offering may prevent us from obtaining as much research coverage from market analysts after the offering as we might obtain for an offering of greater size.  This reduced level of coverage may limit the market price, liquidity or trading volume of our Class A common stock.  In addition, the approach being used by the underwriters for the distribution of the shares differs somewhat from the distribution approach currently used in traditional underwritten offerings of equity securities.  The novel aspects of this distribution approach could affect the pricing of the shares, which could cause greater price volatility than if the distribution were done in the traditional manner. 
    
 
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We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
 
We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging public companies, which includes, among other things:
 
 
·
exemption from the auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act of 2002;
 
 
·
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;
 
 
·
exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangements; and
 
 
·
exemption from any rules requiring mandatory audit firm rotation and auditor discussion and analysis and, unless the Securities and Exchange Commission (the “SEC”) otherwise determines, any future audit rules that may be adopted by the Public Company Accounting Oversight Board.
 
We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary after our initial public offering, or until the earliest of (i) the last day of the fiscal year in which we have annual gross revenue of $1 billion or more, (ii) the date on which we have, during the previous three year period, issued more than $1 billion in non-convertible debt or (iii) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months.  The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.
 
Under the JOBS Act, emerging growth companies are also permitted to elect to delay adoption of new or revised accounting standards until companies that are not subject to periodic reporting obligations are required to comply, if such accounting standards apply to non-reporting companies.  We have made an irrevocable decision to opt out of this extended transition period for complying with new or revised accounting standards.
 
We cannot predict if investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
 
 
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We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to comply with the laws and regulations affecting public companies, particularly after we are no longer an emerging growth company.
 
We have never operated as a public company.  As a public company, particularly after we cease to qualify as an emerging growth company, we will 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, in order to comply with the rules and regulations imposed by the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq.  Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives and our legal and accounting compliance costs will increase. It is likely that we will need to hire additional staff in the areas of investor relations, legal and accounting to operate as a public company.  We also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
For example, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures. In particular, as a public company, we will be required to perform system and process evaluations and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.  As described above, as an emerging growth company, we will not need to comply with the auditor attestation provisions of Section 404 for several years.  Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and management time on compliance-related issues.  Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause our stock price to decline.
 
When the available exemptions under the JOBS Act, as described above, cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
 
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are usually accompanied by words such as "believes,"  "anticipates,"  "plans," "expects" and similar expressions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this prospectus.
 
Investing in our Class A common stock is risky.  You should carefully consider the risks discussed above in “Risk Factors” before making an investment decision.  These risks are not the only ones that we face. Additional risks that generally apply to publicly traded companies and companies in our industry, that we have not yet identified or that we think are immaterial may also impair our business operations.  Our business, operating results and financial condition could be adversely affected by any of the preceding risks. The trading price of our Class A common stock could decline due to any of these risks, and you could lose all or part of your investment.  You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes.
 
 
INDUSTRY DATA
 
Market data and other statistical information contained in this registration statement are based on independent industry publications, government publications, reports by market research firms and other published independent sources. Some data is also based on our good faith estimates, which are derived from other relevant statistical information, as well as the independent sources listed above. 
 

 
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THE OpenIPO AUCTION PROCESS
 
The distribution method being used in this offering is known as the OpenIPO auction, which differs from methods traditionally used in public offerings. In particular, as described under the captions “—Determination of Initial Public Offering Price” and “—Allocation of Shares” below, the public offering price and the allocation of shares are determined by an auction conducted by WR Hambrecht + Co and other factors as described below. All qualified individual and institutional investors may place bids in an OpenIPO auction and investors submitting valid bids have an equal opportunity to receive an allocation of shares.
 
The following describes how WR Hambrecht + Co and some selected dealers conduct the auction process and, on behalf of us and the selling stockholders, confirm bids from prospective investors.
 
Prior to Effectiveness of the Registration Statement
 
Before the registration statement relating to this offering becomes effective, but after a preliminary prospectus is available, the auction will open and WR Hambrecht + Co and participating dealers will solicit bids from prospective investors through the internet and by telephone and facsimile. The bids specify the number of shares of our Class A common stock the potential investor proposes to purchase and the price the potential investor is willing to pay for the shares. These bids may be above or below the range set forth on the cover page of the prospectus. The minimum size of any bid is 100 shares. Potential investors may submit multiple bids in the auction at multiple prices. All of an investor’s bids at or above the clearing price will be considered and cumulated at the close of the auction. Each of an investor’s successful bids will be treated separately for purposes of allocation and rounding of shares in the auction, as described in “—Allocation of Shares” below.
 
The shares offered by this prospectus may not be sold, nor may offers to buy be accepted, prior to the time that the registration statement filed with the SEC becomes effective. A bid received by WR Hambrecht + Co or a dealer involves no obligation or commitment of any kind prior to the notice of acceptance being sent, which will occur after effectiveness of the registration statement and closing of the auction. Bids can be modified at any time prior to the closing of the auction.
 
Potential investors may contact WR Hambrecht + Co or dealers through which they submitted their bid to discuss general auction trends or to consult on bidding strategy. The current clearing price is at all times kept confidential and will not be disclosed during the OpenIPO auction to any bidder; however, WR Hambrecht + Co or participating dealers may discuss general auction trends with potential investors. General auction trends may include a general description of the bidding trends or the anticipated timing of the offering. In all cases, any oral information provided with respect to general auction trends by WR Hambrecht + Co or dealer is subject to change. Any general auction trend information that is provided orally by WR Hambrecht + Co or a participating dealer is necessarily accurate only as of the time of inquiry and may change significantly prior to the auction closing. Therefore, bidders should not assume that any particular bid will receive an allocation of shares in the auction based on any auction trend information provided to them orally by WR Hambrecht + Co or a participating dealer.
 
Approximately two business days prior to the registration statement being declared effective, prospective investors will receive, by email, telephone or facsimile, a notice indicating the proposed effective date. Potential investors may at any time expressly request that all, or any specific, communications between them and WR Hambrecht + Co and participating dealers be made by specific means of communication, including email, telephone and facsimile. WR Hambrecht + Co and participating dealers will contact the potential investors in the manner they request.
 
After Effectiveness of the Registration Statement
 
After the registration statement relating to this offering has become effective, potential investors who have submitted bids to WR Hambrecht + Co or a dealer will be contacted by email, telephone or facsimile. Potential investors will receive a notice on the day of effectiveness at least one hour prior to the close of the auction notifying them of the time that the registration statement will be declared effective, that they may withdraw their bids at any time prior to receipt of the notice of acceptance, and that the auction may close, and notices of acceptance may be sent, in as little as one hour following effectiveness. Bids will continue to be accepted in the time period after the registration statement is declared effective but before the auction closes. Bidders may also withdraw their bids in the time period following effectiveness, including after the closing of the auction but before the notice of acceptance of their bid is sent.
 
 
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Reconfirmation of Bids
 
WR Hambrecht + Co will require that bidders reconfirm the bids that they have submitted in the offering if any of the following events occur:
 
 
·
more than 15 business days have elapsed since the bidder submitted its bid in the offering;
 
 
·
there is a material change in the prospectus;
 
 
·
there has been a decrease in the price range below the previously disclosed price range or an increase in the price range of more than 20% above the previously disclosed price range; or
 
 
·
if it is determined, after the auction is closed, that the initial public offering price will be below the stated price range or that there will be an increase in the price of more than 20% above the stated price range.
 
If a reconfirmation of bids is required, WR Hambrecht + Co will send an electronic notice (or communicate in an alternative manner as requested by a bidder) to everyone who has submitted a bid notifying them that they must reconfirm their bids by contacting WR Hambrecht + Co or participating dealers with which they have their brokerage accounts. Bidders will have a minimum of four hours to reconfirm their bids from the time they receive the notice requesting reconfirmation. Bidders will have the ability to modify or reconfirm their bids at any time until the auction closes. If bidders do not reconfirm their bids before the auction is closed (which will be no sooner than four hours after the request for reconfirmation is sent), we, the selling stockholders and WR Hambrecht + Co will disregard their bids in the auction, and they will be deemed to have been withdrawn. If appropriate, WR Hambrecht + Co may include the request for reconfirmation in a notice of effectiveness of the registration statement.
 
Changes in the Price Range or a Reduction in the Offering Size Before the Auction is Closed
 
We and the selling stockholders are putting up for auction 2,902,557 shares of Class A common stock. We, the selling stockholders and WR Hambrecht + Co are conducting the auction in order to sell the maximum number of shares being offered using the highest price for which valid bids are received as the clearing price. Based on the auction demand available before the auction is closed, we, the selling stockholders and WR Hambrecht + Co may elect to change the price range or reduce the number of shares being put up for auction either before or after the SEC declares the registration statement effective. We will file an amendment to the registration statement to reflect any changes to the price range or a reduction in shares being put up for auction either prior to or after the effectiveness of the registration statement. If we, the selling stockholders and WR Hambrecht + Co elect to change the price range or reduce the number of shares being put up for auction after effectiveness of the registration statement, WR Hambrecht + Co will keep the auction open for at least one hour after notifying bidders of the new auction terms.
 
In addition, for any change in price range or reduction in the number of shares being put up for auction, WR Hambrecht + Co or participating dealers will:
 
 
·
provide notice on the WR Hambrecht + Co website of the revised price range or the reduced number of shares to be sold in this offering, as the case may be;
 
 
26

 
 
 
·
if appropriate, issue a press release announcing the revised price range or the reduced number of shares to be sold in this offering, as the case may be; and
 
 
·
send an electronic notice (or communicate in an alternative manner as requested by a bidder) to everyone who has submitted a bid notifying them of the revised price range or the reduced number of shares to be sold in this offering, as the case may be.
 
In the event of a material change to the price range or any reduction in the number of shares being put up for auction from the previously provided disclosure, WR Hambrecht + Co will reconfirm all bids that have been submitted in the auction after notifying bidders of the new auction terms. WR Hambrecht + Co will generally not consider any increase or decrease in the price to be material unless there is a decrease in the price below the stated price range for the auction or an increase in the price of more than 20% above the stated price range.
 
Changes in the Price Range After the Auction is Closed and Pricing Outside the Price Range
 
If we and the selling stockholders determine after the auction is closed that the initial public offering price will be above the stated price range in the auction but it is determined, based on the factors described above, that it will not result in any material change to the previously provided disclosure, WR Hambrecht + Co and participating dealers may accept all successful bids without reconfirmation. In this situation, WR Hambrecht + Co and participating dealers will communicate the final price and size of the offering in the notice of acceptance that is sent to successful bidders.
 
In all cases, if we and the selling stockholders determine, after the auction is closed, that the initial public offering price will be below the stated price range or that there will be an increase in the price range of more than 20% above the previously disclosed price range, then we will elect one of two alternatives:
 
Under the first alternative, WR Hambrecht + Co and participating dealers will convey the final price and offering size to all bidders in the auction, we will file a post-effective amendment to the registration statement with the final price and offering size, and all bids will be reconfirmed and offers accepted after the post-effective amendment has been declared effective by the SEC.
 
Under the second alternative, we and the selling stockholders may re-open the auction pursuant to the following procedures:

 
·
WR Hambrecht + Co will provide notice on the WR Hambrecht + Co OpenIPO website that the auction has re-opened with a revised price range;
 
·
WR Hambrecht + Co and participating dealers will issue a press release announcing the new auction terms;
 
 
27

 
 
 
·
WR Hambrecht + Co and participating dealers will send an electronic notice (or communicate in an alternative manner as requested by a bidder) to everyone who has submitted a bid notifying them that the auction has re-opened with a revised price range;
 
·
new bids will be accepted in the re-opened auction, even if reconfirmed bids would be sufficient to cover the total number of shares offered in the new auction, and a new clearing price will be established in the re-opened auction, based upon all valid, new and reconfirmed bids received after close of the re-opened auction;
 
·
WR Hambrecht + Co and participating dealers will reconfirm all bids in the auction; and
 
·
we will file a post-effective amendment to the registration statement containing the new auction terms and have the post-effective amendment declared effective prior to the acceptance of any offers by WR Hambrecht + Co or participating dealers.
 
Any post-effective amendment that reflects a new auction will disclose the results of the preceding auction.
 
Closing of the Auction and Pricing
 
The auction will close and a public offering price will be determined after the registration statement becomes effective at a time agreed to by us, the selling stockholders and WR Hambrecht + Co, which we anticipate will be after the close of trading on Nasdaq on the same day on which the registration statement is declared effective. The auction may close in as little as one hour following effectiveness of the registration statement. However, the date and time at which the auction will close and a public offering price will be determined cannot currently be predicted and will be determined by us, the selling stockholders and WR Hambrecht + Co based on general market conditions during the period after the registration statement is declared effective. If we and the selling stockholders are unable to close the auction, determine a public offering price and file a final prospectus with the SEC within 15 days after the registration statement is initially declared effective, the rules of the SEC require that a post-effective amendment to the registration statement be filed and declared effective, and all bids more than 15 business days old must be reconfirmed, before the auction may be closed and before any bids may be accepted. The auction will remain open no longer than 30 days following initial effectiveness.
 
Once a potential investor submits a bid, the bid remains valid unless subsequently withdrawn by the potential investor (other than in situations where WR Hambrecht + Co is required to reconfirm bids as described above, in which case if the potential investor does not reconfirm such bid in a timely manner it will be disregarded). Potential investors are able to withdraw their bids at any time before the notice of acceptance is sent by notifying WR Hambrecht + Co or a participating dealer through which they submitted their bids. The auction website will not permit modification or cancellation of bids after the auction closes. Therefore, if a potential investor that bid through the internet wishes to cancel a bid after the auction closes, the investor may have to contact WR Hambrecht + Co (or the participating dealer through which the investor submitted the bid) by telephone, facsimile or email (or as specified by WR Hambrecht + Co or the participating dealer through which the bidder submitted the bid).
 
Following the closing of the auction, WR Hambrecht + Co determines the highest price at which all of the shares offered may be sold to potential investors. This price, which is called the “clearing price,” is determined based on the results of all valid bids at the time the auction is closed. The clearing price is not necessarily the public offering price, which is set as described in “—Determination of Initial Public Offering Price” below. The public offering price determines the allocation of shares to potential investors, with all valid bids submitted at or above the public offering price receiving a pro rata portion of the shares bid for.
 
 
28

 
 
You will have the ability to withdraw your bid at any time until the notice of acceptance is sent. WR Hambrecht + Co will notify successful bidders that we and the selling stockholders have accepted their bids by sending a notice of acceptance after the auction closes and a public offering price has been determined, and bidders who submitted successful bids will be obligated to purchase the shares allocated to them regardless of (1) whether such bidders are aware that the registration statement has been declared effective and that the auction has closed or (2) whether they are aware that the notice of acceptance of that bid has been sent. WR Hambrecht + Co will not cancel or reject a valid bid after the notices of acceptance have been sent.
 
Once the auction closes and a clearing price is set as described below, we and the selling stockholders accept the bids that are at or above the public offering price, but may allocate to a prospective investor fewer shares than the number included in the investors bid, as described in “—Allocation of Shares” below.
 
Best Efforts, All or None, Offering
 
The shares are being offered on an all or none basis.  All investor funds received prior to the closing will be deposited into escrow with an escrow agent until closing for the benefit of the investors.  If investor funds for the full amount of the offering are not received at closing, the offering will terminate and any funds received will be returned promptly.
 
Determination of Initial Public Offering Price
 
The public offering price for this offering is ultimately determined by negotiation between us, the selling stockholders and WR Hambrecht + Co after the auction closes and does not necessarily bear any direct relationship to our assets, current earnings or book value or to any other established criteria of value, although these factors are considered in establishing the initial public offering price. Prior to this offering, there has been no public market for our common stock. The principal factor in establishing the public offering price is the clearing price resulting from the auction, although other factors are considered as described below. The clearing price is used by us, the selling stockholders and WR Hambrecht + Co as the principal benchmark, among other considerations described below, in determining the public offering price for the Class A common stock that will be sold in this offering.
 
The clearing price is the highest price at which all of the shares offered may be sold to potential investors, based on the valid bids at the time the auction is closed.
 
Depending on the outcome of negotiations between WR Hambrecht + Co, us and the selling stockholders, the public offering price may be lower, but will not be higher, than the clearing price. The bids received in the auction and the resulting clearing price are the principal factors used to determine the public offering price of the Class A common stock that will be sold in this offering. The public offering price may be lower than the clearing price depending on a number of additional factors, including general market trends or conditions, WR Hambrecht + Co’s assessment of our management, operating results, capital structure and business potential and the demand and price of similar securities of comparable companies. WR Hambrecht + Co, we and the selling stockholders may also agree to a public offering price that is lower than the clearing price in order to facilitate a wider distribution of the Class A common stock to be sold in this offering. For example, WR Hambrecht + Co, we and the selling stockholders may elect to lower the public offering price to include certain institutional or retail bidders in this offering. WR Hambrecht + Co, we and the selling stockholders may also lower the public offering price to create a more stable post-offering trading price for our shares.
 
 
29

 
 
The public offering price always determines the allocation of shares to potential investors. Therefore, if the public offering price is below the clearing price, all valid bids that are at or above the public offering price receive a pro rata portion of the shares bid for. If sufficient bids are not received, or if we and the selling stockholders do not consider the clearing price to be adequate, or if WR Hambrecht + Co, we and the selling stockholders are not able to reach agreement on the public offering price, then WR Hambrecht + Co, the selling stockholders and we will either postpone or cancel this offering. Alternatively, we may file with the SEC a post-effective amendment to the registration statement in order to conduct a new auction that may reflect a new price range.
 
The following simplified example illustrates how the public offering price is determined through the auction process:
 
We and the selling stockholders offer to sell 1,500 shares in a public offering of shares of Company X through the auction process. WR Hambrecht + Co, on behalf of us and the selling stockholders, receives five bids to purchase, all of which are kept confidential until the auction closes.
 
The first bid is to pay $10.00 per share for 1,000 shares. The second bid is to pay $9.00 per share for 100 shares. The third bid is to pay $8.00 per share for 900 shares. The fourth bid is to pay $7.00 per share for 400 shares. The fifth bid is to pay $6.00 per share for 800 shares.
 
Assuming that none of these bids are withdrawn or modified before the auction closes, and assuming that no additional bids are received, the clearing price used to determine the public offering price would be $8.00 per share, which is the highest price at which all 1,500 shares offered may be sold to potential investors who have submitted valid bids. However, the shares may be sold at a price below $8.00 per share based on negotiations between us, the selling stockholders and WR Hambrecht + Co.
 
If the public offering price is the same as the $8.00 per share clearing price, we and the selling stockholders would accept bids at or above $8.00 per share. Because 2,000 shares were bid for at or above the clearing price, each of the three potential investors who bid $8.00 per share or more would receive approximately 75% (1,500 divided by 2,000) of the shares for which bids were made. The two potential investors whose bids were below $8.00 per share would not receive any shares in this example.

If the public offering price is $7.00 per share, we and the selling stockholders would accept bids that were made at or above $7.00 per share. No bids made at a price of less than $7.00 per share would be accepted. The four potential investors with the highest bids would receive a pro rata portion of the 1,500 shares offered, based on the 2,400 shares they requested, or 62.5% (1,500 divided by 2,400) of the shares for which bids were made. The potential investor with the lowest bid would not receive any shares in this example.
 
As described in “— Allocation of Shares” below, because bids that are reduced on a pro rata basis may be rounded down to round lots, a potential investor may be allocated less than the pro rata percentage of the shares bid for. Thus, if the pro rata percentage was 75%, the potential investor who bids for 200 shares may receive a pro rata allocation of 100 shares (50% of the shares bid for), rather than receiving a pro rata allocation of 150 shares (75% of the shares bid for).
 
The following table illustrates the example described above, after rounding down any bids to the nearest round lot in accordance with the allocation rules described below and assuming that the initial public offering price is set at $8.00 per share. The table also assumes that these bids are the final bids, and that they reflect any modifications that have been made to reflect any prior changes to the offering range, and to avoid the issuance of fractional shares.
 
 
30

 
 
 
Bid Information
Initial Public Offering of Company X
   
Auction Results
 
 
Shares
Requested
 
Cumulative
Shares
Requested
   
Bid
Price
   
Shares
Allocated
   
Approximate
Allocated
Requested
Shares
   
Clearing
Price
   
Amount
Raised
 
 
1,000
   
1,000
   
$
10.00
     
700
     
75.0
%
 
$
8.00
   
$
5,600
 
 
100
   
1,100
   
$
9.00
     
100
     
75.0
%
 
$
8.00
   
$
800
 
Clearing Price
900
   
2,000
   
$
8.00
     
700
     
75.0
%
 
$
8.00
   
$
5,600
 
 
400
   
2,400
   
$
7.00
     
0
     
0
%
   
     
 
 
800
   
3,200
   
$
6.00
     
0
     
0
%
   
     
 
Total
                     
1,500
                   
$
12,000
 
 
Allocation of Shares
 
Bidders receiving a pro rata portion of the shares they bid for generally receive an allocation of shares on a round-lot basis, rounded to multiples of 100 or 1,000 shares, depending on the size of the bid. No bids are rounded to a round lot higher than the original bid size. Because bids may be rounded down to round lots in multiples of 100 or 1,000 shares, some bidders may receive allocations of shares that reflect a greater percentage decrease in their original bid than the average pro rata decrease. Thus, for example, if a bidder has submitted a bid for 200 shares, and there is an average pro rata decrease of all bids of 30%, the bidder may receive an allocation of 100 shares (a 50% decrease from 200 shares) rather than receiving an allocation of 140 shares (a 30% decrease from 200 shares). In addition, some bidders may receive allocations of shares that reflect a lesser percentage decrease in their original bid than the average pro rata decrease. For example, if a bidder has submitted a bid for 100 shares, and there is an average pro rata decrease of all bids of 30%, the bidder may receive an allocation of all 100 shares to avoid having the bid rounded down to zero.
 
Generally the allocation of shares in this offering will be determined in the following manner, continuing the first example above:
 
 
·
Any bid with a price below the public offering price is allocated no shares.
 
 
·
The pro rata percentage is determined by dividing the number of shares offered by the total number of shares bid at or above the public offering price. In our example, if there are 2,000 shares bid for at or above the public offering price, and 1,500 shares offered in the offering, then the pro rata percentage is 75%.
 
 
·
All of the successful bids are then multiplied by the pro rata percentage to determine the allocations before rounding. For example, the three winning bids for 1,000 shares (Bid 1), 100 shares (Bid 2) and 900 shares (Bid 3) would initially be allocated 750 shares, 75 shares and 675 shares, respectively, based on the pro rata percentage.
 
 
·
The bids are then rounded down to the nearest 100 share round lot, so the bids would be rounded to 700, 0 and 600 shares respectively. This creates a stub of 200 unallocated shares.
 
 
·
The 200 stub shares are then allocated to the bids. Continuing the example above, because Bid 2 for 100 shares was rounded down to 0 shares, 100 of the stub shares would be allocated to Bid 2. If there were not sufficient stub shares to allocate at least 100 shares to Bid 2, Bid 2 would not receive any shares in the offering. After allocation of these shares, 100 unallocated stub shares would remain.
 
 
·
Because Bid 3 for 900 shares was reduced, as a result of rounding, by more total shares than Bid 1 for 1,000 shares, Bid 3 would then be allocated the remaining 100 stub shares up to the nearest 100 round lot (from 600 shares to 700 shares).
 
If there are not sufficient remaining stub shares to enable a bid to be rounded up to a round lot of 100 shares the remaining unallocated stub shares would be allocated to smaller orders that are below their bid amounts. The table below illustrates the allocations in the example above.
 
 
31

 
 
   
Initial
Bid
   
Pro-Rata
Allocation (75%
of Initial Bid)
   
Initial
Rounding
   
Allocation
of
Stub
Shares
   
Final
Allocation
 
Bid 1
   
1,000
     
750
     
700
     
0
     
700
 
Bid 2
   
100
     
75
     
0
     
100
     
100
 
Bid 3
   
900
     
675
     
600
     
100
     
700
 
Total
   
2,000
     
1,500
     
1,300
     
200
     
1,500
 
 
Requirements for Valid Bids
 
In order to participate in an OpenIPO offering, all bidders must have an account with WR Hambrecht + Co or one of the participating dealers. Valid bids are those that meet the requirements, including eligibility, account status and size, established by WR Hambrecht + Co or participating dealers. In order to open a brokerage account with WR Hambrecht + Co, a potential investor must deposit $2,000 in its account. This brokerage account will be a general account subject to WR Hambrecht + Co’s customary rules, and will not be limited to this offering. Bidders will be required to have sufficient funds in their accounts to pay for the shares they are allocated in the auction at the closing of the offering, which is generally on the third business day following the pricing of the offering. WR Hambrecht + Co reserves the right, in its sole discretion and on our and the selling stockholders’ behalf, to reject or reduce any bids that they deem manipulative or disruptive or not creditworthy in order to facilitate the orderly completion of the offering. For example, in previous transactions for other issuers in which the auction process was used, WR Hambrecht + Co has rejected or reduced bids when, in its sole discretion, it deems the bids not creditworthy or had reason to question the bidder’s intent or means to fund its bid. In the absence of other information, we, the selling stockholders and WR Hambrecht + Co or participating dealer may assess a bidder’s creditworthiness based solely on the bidder’s history with WR Hambrecht + Co or participating dealer. WR Hambrecht + Co has also rejected or reduced bids in past OpenIPO offerings that it deemed, in its sole discretion, to be potentially manipulative or disruptive or because the bidder had a history of alleged securities law violations. Suitability and eligibility standards of participating dealers may vary. As a result of these varying requirements, a bidder may have its bid rejected by WR Hambrecht + Co or a participating dealer while another bidder’s identical bid is accepted.  Any funds in a bidder’s brokerage account will remain in the bidder’s control and will be subject to withdrawal by the bidder without restriction at all times before an offer is accepted.
 
The Closing of the Auction and Allocation of Shares
 
The auction will close on a date and at a time estimated and publicly disclosed in advance by WR Hambrecht + Co at www.wrhambrecht.com and www.openipo.com. The auction may close in as little as one hour following effectiveness of the registration statement.
 
WR Hambrecht + Co or a participating dealer will notify successful bidders that we and the selling stockholders have accepted their bid by sending a notice of acceptance by email, telephone, facsimile or mail (according to any preference indicated by a bidder) informing bidders that the auction has closed and that their bids have been accepted. The notice will indicate the price and number of shares that have been allocated to the successful bidder. Other bidders will be notified that their bids have not been accepted.
 
Each participating dealer has agreed with WR Hambrecht + Co to conduct its solicitation efforts in accordance with the auction process described above, unless WR Hambrecht + Co otherwise consents. WR Hambrecht + Co does not intend to consent to the sale of any shares in this offering outside of the auction process. WR Hambrecht + Co reserves the right, in its sole discretion, to reject or reduce any bids that it deems manipulative or disruptive in order to facilitate the orderly completion of this offering, and it reserves the right, in exceptional circumstances, to alter this method of allocation as it deems necessary to ensure a fair and orderly distribution of the shares of our Class A common stock. For example, large orders may be reduced to ensure a public distribution and bids may be rejected or reduced based on eligibility or creditworthiness criteria. Once WR Hambrecht + Co has closed the auction and we and the selling stockholders have accepted a bid, the allocation of shares sold in this offering will be made according to the process described in “— Allocation of Shares” above, and no shares sold in this offering will be allocated on a preferential basis or outside of the allocation rules to any institutional or retail bidders. In addition, WR Hambrecht + Co or the participating dealers may reject or reduce a bid by a prospective investor who has engaged in practices that could have a manipulative, disruptive or otherwise adverse effect on this offering.
 
 
32

 
 
Investors who receive notice of acceptance of their bids must make payment through the escrow agent for the applicable number of shares by the close of business on the third business day (the “closing date”) following notice of acceptance of their bids. In the event that an investor fails to pay for shares that it purchased in the auction by the closing date, we and the selling stockholders may reoffer those shares to other bidders in the auction that indicated a willingness to purchase additional shares at or above the clearing price. The clearing price will be based upon the number of shares offered by us and the selling stockholders in the auction. To the extent that a bidder's failure to pay results in our failure to sell all the shares offered, we will promptly refund any funds in the escrow account.
 
WR Hambrecht + Co and dealers participating in the selling group may submit firm bids that reflect indications of interest from their customers that they have received at prices within the initial public offering price range. Some participating dealers or WR Hambrecht + Co may also manage bids on behalf of their bidding customers. In these cases, the dealer submitting the bid is treated as the bidder for the purposes of determining the clearing price and allocation of shares.
 
Price and volume volatility in the market for our Class A common stock may result from the somewhat unique nature of the proposed plan of distribution. Price and volume volatility in the market for our Class A common stock after the completion of this offering may adversely affect the market price of our Class A common stock.
 
 
33

 

USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from this offering will be $26.5 million, at an assumed initial public offering price of $13.00 per share, which is the mid-point of the range listed on the cover of this prospectus, after deducting estimated placement agents fees and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share would increase or decrease the net proceeds from this offering by approximately $2.1 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated placement agents fees and estimated offering expenses payable by us. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease the net proceeds to us from this offering, after deducting estimated placement agents fees and estimated offering expenses payable by us, by $1.2 million, assuming an initial public offering price of $13.00 per share, which is the midpoint of the range reflected on the cover of this prospectus. 
   
The net proceeds from this offering will be used by Truett-Hurst, Inc. to purchase newly-issued LLC Units from the LLC, as described under "History and Formation Transactions—Organizational Structure—Offering Transactions." In connection with the waiver we received from Bank of the West, we intend to cause the LLC to use 11% to 19% of the proceeds to pay down amounts owed on our credit facility.  See “Management’s Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources—Indebtedness.” We also intend to cause the LLC to use the remaining proceeds as follows: 40% to 55% for working capital, 5% to 7% for capital expenditures, 5% to 7% for hiring additional personnel, establishment of a 401(k) plan and related programs to ensure competitiveness in the marketplace, and the remainder for general corporate purposes. We may also identify and pursue opportunistic acquisitions of labels or vineyards.  We currently anticipate making aggregate capital expenditures of $900,000 to $1,900,000 during the years ending June 30, 2013 and 2014, and we currently expect the largest portions of these anticipated capital expenditures will be allocated for production equipment.  
 
We will have broad discretion in the way that we allocate the net proceeds of this offering among the purposes described above. The amounts and timing of our actual expenditures for the purposes described above may vary significantly and will depend on numerous factors, including the timing and amount of our future revenues, our future expenses, the status of our product development efforts, our sales and marketing activities, the amount of cash generated or used by our operations, competitive pressures and any potential acquisitions. We expect that our current resources, together with the proceeds from this offering and future operating revenue, will be sufficient to fund operations, including the expenditures described above, for at least the next two years.
 
Pending any use, as described above, we plan to invest the net proceeds in a variety of capital preservation instruments, including short- and long-term interest-bearing investments, direct or guaranteed obligations of the U.S. government, certificates of deposit and money market funds. We cannot predict whether the proceeds invested will yield a favorable return for us.
 
Some of the other principal purposes of this offering are to create a public market for our Class A common stock, increase our visibility in the marketplace and provide liquidity to existing stockholders. Creating a public market for our Class A common stock will facilitate our ability to raise additional equity in the future and to use our Class A common stock as a means of attracting and retaining key employees and as consideration for acquisitions.
 
We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.
 
 
34

 

DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our 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 our board of directors may deem relevant.
 
Following the offering, Truett-Hurst, Inc. will be a holding company and will have no material assets other than its ownership of LLC Units in the LLC.  We intend to cause the LLC to make distributions to us in an amount sufficient to cover cash dividends, if any, declared by us. If the LLC makes such distributions to Truett-Hurst, Inc., the other holders of LLC Units will be entitled to receive equivalent distributions.
 
 
 
 
 
 
 
35

 

CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2012:
 
• on a historical basis for the LLC; and
• on an as adjusted basis for Truett-Hurst, Inc. giving effect to the transactions described under "History and Formation Transactions," including the application of the proceeds from this offering as described in "Use of Proceeds."
 
You should read this table together with the information contained in this prospectus, including "History and Formation Transactions," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus.
 
   
As of December 31, 2012
 
   
Actual
   
As Adjusted(2)
 
   
(unaudited)
 
   
(in thousands, except share data)
 
Cash and cash equivalents
 
$
117
   
$
26,593  
Capital leases, including current portion
   
-
      -  
Total debt, including current portion
   
12,652
      17,076  
                 
Total members’ equity (deficit)
               
Class A common stock, par value $0.001 per share, 7,000,000 shares authorized on an as adjusted basis; 2,902,557 shares issued and outstanding on an as adjusted basis
   
-
      3  
Class B common stock, par value $0.001 per share, 1,000 shares authorized on an as adjusted basis; 9 shares issued and outstanding on an as adjusted basis
   
-
      -  
                 
Additional paid-in capital(1) 
   
8,166
      17,754  
                 
Accumulated deficit
   
(3,087
)     (3,087 )
                 
Total members’/stockholders’ equity attributable to the Company
   
5,079
      14,670  
Non-controlling interest
   
277
      17,412  
Total Equity
   
5,356
      32,082  
Total capitalization
 
$
18,008
   
$
49,158  

 
36

 

(1)
Includes redeemable contributed capital, which will be treated as equity for all financial statements effective as of December 31, 2012.
(2)
A $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus would increase or decrease, as applicable, cash and cash equivalents, additional paid-in capital, total members’/stockholders’ equity attributable to us, total equity and total capitalization by $2.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated placement agents’ fees and the estimated offering expenses payable by us. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease, as applicable, cash and cash equivalents, additional paid-in capital, total members’/stockholders’ equity attributable to us, total equity and total capitalization by $1.2 million, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting estimated placement agents’ fees and the estimated offering expenses payable by us.
 
 
 
 
 
 
 
37

 

DILUTION
 
If you invest in shares of our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma net tangible book value per share of Class A common stock after this offering. Dilution results from the fact that the per share offering price of the shares of Class A common stock is substantially in excess of the pro forma net tangible book value per share attributable to our existing owners.
 
Our pro forma net tangible book value as of December 31, 2012 was approximately $4.476 million, or $1.09 per share of Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share of Class A common stock represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, after giving effect to the Recapitalization described under “History and Formation Transactions” and assuming that all of the holders of LLC Units (other than Truett-Hurst, Inc.) exchanged their LLC Units for newly-issued shares of Class A common stock on a one-for-one basis.

After giving effect to the Offering Transactions, including the application of the proceeds from this offering as described in "Use of Proceeds," our pro forma net tangible book value as of December 31, 2012 would have been $31.202 million, or $4.91 per share of Class A common stock. This represents an immediate increase in net tangible book value of $3.82 per share of Class A common stock to our existing owners and an immediate dilution in net tangible book value of $8.09 per share of Class A common stock to investors in this offering.
 
Assumed initial public offering price per share of Class A common stock
        $ 13.00  
Pro forma net tangible book value per share as of December 31, 2012,
before giving effect to this offering
  $ 1.09          
Increase in pro forma net tangible book value per share attributable to
investors purchasing shares in this offering
  $ 3.82          
                 
Pro forma net tangible book value per share after giving effect to this offering
          $ 4.91  
                 
Dilution in pro forma net tangible book value per share to investors
purchasing shares in this offering
          $ 8.09  

A $1.00 increase in the initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase our pro forma net tangible book value per share after this offering by approximately $0.33 and would increase dilution per share to new investors by approximately $2,092,500, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.
 
A $1.00 decrease in the initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease our pro forma net tangible book value per share after this offering by approximately $0.33 and would decrease dilution per share to new investors by approximately $2,092,500, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.
 
A $2.00 increase in the initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase our pro forma net tangible book value per share after this offering by approximately $0.66 and would increase dilution per share to new investors by approximately $4,185,000, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.
 
A $2.00 decrease in the initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease our pro forma net tangible book value per share after this offering by approximately $0.66 and would decrease dilution per share to new investors by approximately $4,185,000, assuming that the number shares offered by us, as set forth on the cover of this prospectus, remains the same.

 
38

 
 
The following table summarizes, on the same pro forma basis as of December 31, 2012, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share of Class A common stock paid by our existing owners and by new investors purchasing shares of Class A common stock in this offering, assuming that all of the holders of LLC Units (other than Truett-Hurst, Inc.) exchanged their LLC Units for shares of our Class A common stock on a one-for-one basis.
 
   
Shares Purchased
   
Total Consideration
   
Average Price
 
   
Number
   
Percent
   
Amount
   
Percent
    Per Share  
Existing stockholders
    3,450,087       54.3 %   $ 3,763,956       9.0 %   $ 1.09  
New investors
    2,902,557       45.7       37,733,241       91.0     $ 13.00  
                                         
    Total
    6,352,644       100.0 %   $ 41,497,197       100.0 %   $ 6.53  
 
A $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the total consideration paid to us by new investors by $2.90 million and increase or decrease the percent of total consideration paid to us by new investors by approximately 7.7%, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.
 
Sales by the selling stockholders in this offering will reduce the number of LLC Units held by our existing owners by 652,557, or approximately 15.9% of the total number of LLC Units outstanding prior to this offering, and will increase the total number of shares of Class A common stock outstanding after the offering by 652,557, or approximately 22.5% of the total number of shares of our Class A common stock to be offered in this offering.
 
Except as otherwise indicated, the amounts set forth above reflect a 1-for-14 stock split to be effected immediately prior to the offering and do not reflect:
 
 
·
42,000 shares of restricted Class A common stock granted to James D. Bielenberg, our Chief Financial Officer, and 210,000 shares of restricted Class A common stock granted to Kevin Shaw, an independent contractor who acts as our creative director, in each case pursuant to the 2012 Plan; these shares of restricted Class A common stock were granted in December 2012 and February 2013, respectively, and vest over a three-year period;
 
·
shares available for future grant under the 2012 Plan; and
 
·
shares available for grant under the automatic increase provisions of the 2012 Plan (see “Executive Compensation—Employee Benefit and Stock Plans—2012 Stock Incentive Plan”).
 
 
39

 
 
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
The unaudited pro forma consolidated statements of operations for the fiscal year ended June 30, 2012 and for the six month period ended December 31, 2012 present our consolidated results of operations giving pro forma effect to the Recapitalization and Offering Transactions described under "History and Formation Transactions—Organizational Structure" and the use of the estimated net proceeds from this offering as described under "Use of Proceeds," as if such transactions occurred on July 1, 2011. The unaudited pro forma consolidated balance sheet as of December 31, 2012 presents our consolidated financial position giving pro forma effect to the Recapitalization and Offering Transactions described under "History and Formation Transactions—Organizational Structure" and the use of the estimated net proceeds from this offering as described under "Use of Proceeds," as if such transaction occurred on December 31, 2012.  The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of the LLC.
 
The unaudited pro forma consolidated financial information should be read together with "History and Formation Transactions—Organizational Structure," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated Financial Statements and related notes, all included elsewhere in this prospectus.
 
The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Truett-Hurst, Inc. that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Recapitalization and Offering Transactions described under  "History and Formation Transactions—Organizational Structure" and the use of the estimated net proceeds from this offering as described under "Use of Proceeds" occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.  
 
The pro forma adjustments principally give effect to:
 
· 
the purchase by Truett-Hurst, Inc. of LLC Units with the proceeds of this offering calculated at the midpoint of the range listed on the cover of this prospectus and the related effects of the tax receivable agreement. See "Certain Relationships and Related Party Transactions—Tax Receivable Agreement”; and

· 
in the case of the unaudited pro forma consolidated statements of operations, a provision for corporate income taxes on the income attributable to Truett-Hurst, Inc. at a statutory rate of 39.8%, which includes a provision for U.S. federal income taxes and assumes the highest statutory California rate.
 
The unaudited pro forma consolidated financial information presented assumes that the shares of our Class A common stock to be sold in this offering are sold at $13.00 per share of Class A common stock, which is the midpoint of the price range indicated on the front cover of this prospectus. See “Dilution” to see how certain aspects of the Offering Transactions would be affected by an initial public offering price per share of our Class A common stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus.
 
 
40

 
   
Truett-Hurst, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Fiscal Year Ended June 30, 2012
 
   
H.D.D. LLC
Actual
   
Pro Forma
Adjustments
   
Truett-Hurst, Inc.
Pro Forma
 
Sales
  $ 13,148,953     $     $ 13,148,953  
Less excise taxes
    (455,558 )           (455,558 )
Net Sales
    12,693,395             12,693,395  
Cost of Sales
    9,618,065             9,618,065  
Gross Profit
    3,075,330             3,075,330  
Operating Expenses:
                       
Sales and marketing
    1,387,321             1,387,321  
General and administrative
    1,194,353             1,194,353  
Gain on sale of assets
    (6,945 )           (6,945 )
Total operating expenses
    2,574,729             2,574,729  
Income (loss) from operations
    500,601             500,601  
Other expenses:
                       
Interest expense
    (463,339 )           (463,339 )
Warrant re-valuation
    (10,000 )           (10,000 )
Total other expense
    (473,339 )           (473,339 )
Income (loss) before income taxes
    27,262             27,262  
Income tax expense
    800       4,959 (1)     5,759  
                         
Net income (loss) before noncontrolling interest
    26,462       (4,959 )     21,503  
Net income (loss) attributable to noncontrolling interest
          14,803 (2)     14,803  
Net income (loss) attributable to Truett-Hurst, Inc.
  $ 26,462       (19,762 )     6,700  
Weighted average shares of Class A common stock
outstanding(3)(4)
                       
Basic
                  2,902,557  
Diluted
                  2,902,557  
Net income available to Class A common stock per share(3)(4)
                       
Basic
                $ .00  
Diluted
                $ .00  
Pro forma net income available to Class A common stock per share
                       
Basic
                  $ .00  
Diluted
                  $ .00  
_______________________
 
(1)
Following the Recapitalization and the Offering Transactions, we will be subject to U.S. federal income taxes, in addition to state taxes, with respect to our allocable share of any net taxable income of the LLC, which will result in higher income taxes. As a result, the pro forma statements of operations reflect an adjustment to our provision for corporate income taxes to reflect a statutory rate of 39.8%, which includes provision for U.S. federal income taxes and California statutory rates.

(2)
As described in "History and Formation Transactions," Truett-Hurst, Inc. will become the sole managing member of the LLC. Truett-Hurst, Inc. will initially own less than 100% of the economic interest in the LLC, but will have 100% of the voting power and control the management of the LLC. Immediately following this offering, the non-controlling interest will be 54.3%. Net income attributable to the non-controlling interest represents approximately 54.3% ($14,803) of income before income taxes ($27,262).
 
 
41

 
 
(3)
The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income (loss) available per share.

(4)
The assumed exchange of 3,450,087 LLC Units for Class A common stock is expected to have an anti-dilutive effect as a result of the allocation of income associated with the exchange of LLC Units for Class A common stock, and, accordingly, the effect of such exchange has been excluded from pro forma net income available to Class A common stock per share. Giving effect to the exchange of all LLC Units for shares of Class A common stock, adjusted pro forma net income available to Class A common stock per share would be computed as follows:

         
Pro forma income before income taxes
 
$
27,262
 
Adjusted pro forma income taxes
   
10,850
(a)
Adjusted pro forma net income
 
$
16,412
(b)
Weighted average shares of Class A common stock outstanding
(assuming the exchange of all LLC Units for shares of Class A common stock)
   
6,352,644
 
Adjusted pro forma net income available to Class A common stock per share
 
$
0.00
 
_______________________
(a) Represents the implied provision for income taxes assuming full exchange using the same methodology applied in calculating pro forma tax provision.
(b) Assumes elimination of the non-controlling interest.
 
 
 
 
 
42

 
 
Truett-Hurst, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Six Months Ended December 31, 2012
 
   
H.D.D. LLC
Actual
   
Pro Forma
Adjustments
   
Truett-Hurst, Inc.
Pro Forma
 
Sales
  $ 8,820,255     $     $ 8,820,255  
Less excise taxes
    (249,939 )           (249,939 )
Net Sales
    8,570,316             8,570,316  
Cost of Sales
    5,850,463             5,850,463  
Gross Profit
    2,719,853             2,719,853  
Operating Expenses:
                       
Sales and marketing
    1,146,316             1,146,316  
General and administrative
    1,581,239             1,581,239  
Gain on sale of assets
                 
Total operating expenses
    2,727,555             2,727,555  
Income (loss) from operations
    (7,702 )           (7,702 )
Other expenses:
                       
Interest expense
    (179,762           (179,762
Warrant re-valuation
    (4,000           (4,000
Unrealized loss on interest rate swap
    (70,830           (70,830
Total other expense
    (254,592           (254,592
Loss before income taxes
    (262,294 )           (262,294 )
Income tax expense
    1,600       (38,999 )(1)     (37,399 )
Net loss before noncontrolling interest
    (263,894 )     38,999       (224,895 )
Net loss attributable to noncontrolling interest
    (47,877 )     (116,428 )(2)     (164,305 )
Net loss attributable to Truett-Hurst, Inc.
  $ (216,017 )     155,427       (60,590 )
Weighted average shares of Class A common stock
outstanding(3)(4)
                       
Basic
                  2,902,557  
Diluted
                  2,902,557  
Net loss available to Class A common stock per share(3)(4)
                       
Basic
                $ (0.02
Diluted
                $ (0.02
Pro forma net income available to Class A common stock per share
                       
Basic
                  $ (0.02
Diluted
                  $ (0.02 )
_______________________
 
(1)
Following the Recapitalization and the Offering Transactions, we will be subject to U.S. federal income taxes, in addition to state taxes, with respect to our allocable share of any net taxable income of the LLC, which will result in higher income taxes. As a result, the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect a statutory rate of 39.8 %, which includes provision for U.S. federal income taxes and California statutory income tax rates.

(2)
As described in "History and Formation Transactions—Organizational Structure," Truett-Hurst, Inc. will become the sole managing member of the LLC. Truett-Hurst, Inc. will initially own less than 100% of the economic interest in the LLC, but will have 100% of the voting power and control the management of the LLC. Immediately following this offering, the non-controlling interest will be 54.3%. Net loss attributable to the non-controlling interest represents approximately 54.3% ($116,428) of loss before income taxes ($262,294), less beginning non-controlling interest ($47,877).
 
 
43

 
 
(3)
The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income (loss) available per share.

(4)
The assumed exchange of 3,450,087 LLC Units for Class A common stock is expected to have an anti-dilutive effect as a result of the allocation of income or loss associated with the exchange of LLC Units for Class A common stock, and, accordingly, the effect of such exchange has been excluded from pro forma net income (loss) available to Class A common stock per share. Giving effect to the exchange of all LLC Units for shares of Class A common stock, adjusted pro forma net income (loss) available to Class A common stock per share would be computed as follows:

         
Pro forma income before income taxes, less beginning noncontrolling interest
 
$
(214,417)
 
Adjusted pro forma income tax benefit
   
85,338
(a)
Adjusted pro forma net income
 
$
(129,079)
(b)
Weighted average shares of Class A common stock outstanding (assuming the exchange of all LLC Units for shares of Class A common stock)
   
6,394,644
(c)
Adjusted pro forma net income (loss) available to Class A common stock per share
 
$
(0.02)
 
_______________________
(a) Represents the implied provision for income taxes assuming full exchange using the same methodology applied in calculating pro forma tax provision.
(b) Assumes elimination of the non-controlling interest.
(c) Assumes conversion of 3,450,087 LLC Units and 42,000 shares of restricted stock granted to our Chief Financial Officer on December 28, 2012.
 
 
 

 
 
44

 
  
Truett-Hurst, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
As of December 31, 2012
 
   
H.D.D. LLC
Actual
   
Pro Forma
Adjustments
   
Truett-Hurst, Inc.
Pro Forma
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 116,472       26,476,361  (1)   $ 26,592,833  
Accounts receivable
    1,041,354             1,041,354  
Inventories
    10,275,867             10,275,867  
IPO costs and fees
    40,831       (40,831 ) (1)      
Other current assets
    18,265             18,265  
Total Current Assets
    11,492,789       26,435,530       37,928,319  
Property and equipment, net
    5,509,504             5,509,504  
Goodwill
    134,327             134,327  
Intangible assets, net
    745,639             745,639  
Deferred Tax Asset
          4,713,716  (2)     4,713,716  
Other assets, net
    126,118             126,118  
Total Assets
  $ 18,008,377     31,149,246     49,157,623  
LIABILITIES,
CONTRIBUTED CAPITAL
AND MEMBERS’ EQUITY
(DEFICIT)
                   
Current liabilities:
                   
Line of credit
  $ 5,713,205           $ 5,713,205  
Accounts payable
    1,456,269             1,456,269  
Accrued expenses
    297,211             297,211  
Grapes payable
    253,362             253,362  
Due to related parties
    905,646             905,646  
Current maturities of related party notes
    68,656             68,656  
Current maturities of long-term debt
    235,901             235,901  
Warrant obligation
    210,000             210,000  
Interest rate swap
    70,830             70,830  
Total current liabilities
    9,211,080             9,211,080  
Deferred rent liability
    55,696             55,696  
Related party notes, net of current maturities
    102,696             102,696  
Long-term debt, net of current maturities
    3,283,060             3,283,060  
Payable to related parties pursuant to tax receivable agreement
          4,423,643  (2)     4,423,643  
Total Liabilities
    12,652,532       4,423,643       17,076,175  
Commitments and contingencies
                   
                     
Members’ equity (deficit):
                   
Contributed capital
     8,165,550  (4)           (8,165,550 ) (6)      —  
Accumulated deficit
     (3,086,787 )      -          (3,086,787 )
Class A authorized to issue 7,000,000 shares, par value $0.001 per
share; 2,902,557 shares issued and outstanding on a pro forma basis
     —        2,903  (6)     2,903  
Class B authorized to issue 1,000 shares, par value $0.001 per share;
9 shares issued and outstanding on a pro forma basis
         
 —
     
 —
 
Preferred stock authorized to issue 5,000,000 shares, par value $0.001
per share; no shares issued and outstanding on a pro forma basis
         
 —
     
 —
 
Additional paid in capital
       —      
17,753,818
 (6)    
17,753,818
 
Total members’ / stockholder's equity (deficit) attributable to the
Company
    5,078,763       9,591,171      
14,669,934
 
Non-controlling interest
    277,082      
17,134,432
 (3)    
17,411,514
 
Total equity
    5,355,845      
      26,725,603
 (5)    
32,081,448
 
Total liabilities, contributed capital and equity
  $
18,008,377
    $
      31,149,246
    $
49,157,623
 
 
 
45

 
_______________________
 
(1) 
Reflects the net effect on cash and cash equivalents of the receipt of offering proceeds of $26.5 million described in "History and Formation Transactions," and the uses of proceeds described in "Use of Proceeds" at an assumed initial public offering price of $13.00 per share, which is the midpoint of the range listed on the cover of this prospectus, after deducting estimated placement agents’ fees and estimated offering expenses payable by us. If the initial public offering price is $11.00 per share, which is the low end of the range, the offering proceeds will be $22,250,530.

(2)
Reflects adjustments to give effect to the tax receivable agreement (as described in "Certain Relationships and Related Party Transactions—Tax Receivable Agreement") based on the following assumptions:

•   
we will record an increase of $4,915,159 in deferred tax assets for estimated income tax effects of the increase in the tax basis of the purchased interests, based on a statutory income tax rate of 39.8% (which includes a provision for U.S. federal and state income taxes);

•   
we will record $4,423,643, representing 90% of the estimated realizable tax benefit resulting from (i) the increase in the tax basis of the purchased interests as noted above and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement as an increase to the liability due to existing owners under the tax receivable agreement;

•   
we will record an increase to additional paid-in capital of $491,516, which is an amount equal to the difference between the increase in deferred tax assets and the increase in liability due to existing owners under the tax receivable agreement;
 
•   
we will record deferred taxes relating the newly-issued LLC Units for their share of the existing deferred tax items of the LLC.  We will record a reduction to deferred tax assets of $201,443 and a reduction to additional paid-in capital of $201,443; and

•   
there are no material changes in the relevant tax law and that we earn sufficient taxable income in each year to realize the full tax benefit of the amortization of our assets.
   
 
46

 
 
(3)
As described in "History and Formation Transactions," Truett-Hurst, Inc. will become the sole managing member of the LLC. Truett-Hurst, Inc. will initially have a less than 100% economic interest in the LLC, but will have 100% of the voting power and control the management of the LLC. As a result, we will consolidate the financial results of the LLC and will record non-controlling interest on our balance sheet. Immediately following the Offering Transactions, the non-controlling interest, based on the assumptions to the pro forma financial information, will be $17,134,432.   Pro forma non-controlling interest represents approximately 54.3% of the pro forma equity of the LLC of $31,555,124, which differs from the pro forma equity of Truett-Hurst, Inc. as the former is not affected by the adjustments relating to the tax receivable agreement described above in note (2).

(4)
Represents the investment of the existing holders of LLC Units. See the unaudited condensed consolidated balance sheet of the LLC as of December 31, 2012 included elsewhere in this prospectus.

5)
Represents an adjustment to stockholders' equity reflecting (i) par value for Class A common stock and Class B common stock to be outstanding following this offering, (ii) an increase of $26,476,361 of additional paid-in capital as a result of estimated net proceeds from this offering (iii) a decrease of $17,134,432 to allocate a portion of Truett-Hurst, Inc.'s equity to the non-controlling interest and (iv) the elimination of members' capital of $8,165,550 upon consolidation.

(6)
Represents the following adjustments to additional paid-in capital:

•   
an increase of $17,753,818, which consists of an increase of $26,476,361 from the estimated net proceeds from the Offering Transactions, less the par value of the shares Class A common stock sold in the Offering Transactions of $2,903, less the portion of the equity of Truett-Hurst, Inc. allocated to the non-controlling interest of $17,134,432, and the elimination of members' capital of $8,165,550 upon consolidation, each as described under footnote 5 above;

•    
an increase of $491,516 due to the tax receivable agreement, as described under footnote 2 above; and

•    
a decrease of $201,443 due to the establishment of deferred tax liabilities relating to newly issued LLC Units as described under footnote 2 above.
 
•   
a decrease of $40,831 in the current asset IPO costs and fees.
 
 
 
47

 
 
SELECTED CONSOLIDATED FINANCIAL DATA
 
We have derived the consolidated statement of operations data for the fiscal years ended June 30, 2011 and 2012 and our consolidated balance sheet data as of June 30, 2011 and 2012 from our audited consolidated financial statements and related notes included elsewhere in this prospectus.  We derived the consolidated statement of operations data for the six months ended December 31, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2012 from our unaudited consolidated financial statements included elsewhere in this prospectus.  Our historical results are not necessarily indicative of the results that may be expected in the future.
 
Consolidated Statement of Operations Data:
 
    Fiscal Year Ended     Six Months Ended  
    June 30,     December 31,  
          (unaudited)  
   
2011
   
2012
   
2011
   
2012
 
Net sales
  $ 5,402,045     $ 12,693,395     $
8,378,109
    $
8,570,316
 
Cost of sales
    3,900,942       9,618,065      
6,573,563
     
5,850,463
 
Gross profit
    1,501,103       3,075,330      
1,804,546
     
2,719,853
 
Operating expenses:
                               
Sales and marketing
    595,226       1,387,321      
782,142
     
1,146,316
 
Gain on sale of assets
    (111,150 )     (6,945 )    
-
     
-
 
General and administrative
    1,435,908       1,194,353      
428,318
     
1,581,239
 
Total operating expenses
    1,919,984       2,574,729      
1,210,460
     
2,727,555
 
Income (loss) from operations
    (418,881 )     500,601      
594,086
     
(7,702
)
Other income (expense):
                               
Interest expense
    (401,134 )     (463,339 )    
(198,618
   
(179,762
Warrant re-valuation
    -       (10,000 )    
-
     
(4,000
)
Unrealized loss on interest rate swap
    -       -       -       (70,830 )
Total other expense
    (401,134 )     (473,339 )    
(198,618
   
(254,592
Income (loss) before provision for income taxes
    (820,015 )     27,262      
395,468
     
(262,294
)
Provision for income taxes
    800       800      
800
     
1,600
 
Net income (loss) before noncontrolling interest
    (820,815 )     26,462      
394,668
     
(263,894
Loss attributable to noncontrolling interest
    -       -      
-
     
(47,877
)
Net income (loss) attributable to H.D.D. LLC members
  $ (820,815 )   $ 26,462     $
394,668
    $
(216,017
)

Consolidated Balance Sheet Data:
 
 
 
At June 30,
   
At December 31, 2012
 
 
 
2011
   
2012
   
(unaudited)
 
Cash and cash equivalents
  $ 274,422     $ 167,309     $
116,472
 
Total assets
    10,099,873       14,082,617      
18,008,377
 
Total liabilities
    7,394,347       8,823,364      
12,652,532
 
Total members’ equity (deficit)
    (3,540,625 )     (626,898 )    
5,355,845
 
 
 
48

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the other financial information appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.
 
Overview
 
Truett-Hurst is an innovative and fast-growing Super-premium and Ultra-premium wine sales, marketing and production company based in the acclaimed Dry Creek and Russian River Valleys of Sonoma County, California.  The core of our business is a combination of direct to consumer sales, traditional brand sales and “custom label” partnerships with major retailers, such as Trader Joe’s and Safeway.  We work closely with our retail partners to develop tailored brands to be sold to the discovery-oriented wine consumer.  We offer a top quality product at a reasonable price, a result of our competitive grape sourcing, high quality wine making and world-class packaging and label design.  Our “custom label” model allows us to own the brands that we create, which we believe differentiates us from the traditional private label model.  Our retail partners value their relationships with us because they collaborate in the development of the products and ultimately benefit from the higher margins that we offer them.   We believe that we have attracted these partners as a result of our rapid brand development cycles, our ability to quickly adjust to market demand and because we can bypass many traditional distribution layers to offer higher margin products for our partners’ key target customers.
 
In addition to our focus on our unique custom label business model, we also have business operations in the direct to consumer and traditional three-tier distribution channels.  Our direct to consumer channel consists of sales through our tasting rooms and wine clubs, which serve as strong tools for increasing brand visibility and loyalty, and through our ownership interest in The Wine Spies, an internet wine retailer specializing in short-lived “flash” sales.  Our more traditional three-tier distribution business consists of sales of our wine under four fully-owned labels, Truett-Hurst, VML, Healdsburg Ranches and Bradford Mountain, through a variety of distributor channels.
 
Segments
 
Our primary reporting segments are identified by each distribution channel: wholesale, direct to consumer and internet.  Wholesale sales include our private label model and four fully-owned brands through the three-tier distribution system.  Direct to consumer sales of our own brands occur through our tasting rooms and wine clubs.  Internet sales occur through The Wine Spies and are principally comprised of brands not owned by us.  Sales and cost of sales are reported by segment and detailed in the “Results of Operations” below and financial statements.
 
Margins and Gross Profit by Segment
 
Margins in the three-tier distribution system tend to be the lowest of the three segments but the case volume and sales and gross profit dollars the greatest.  Margins in the direct to consumer segment, even after sales discounts, are highest as we eliminate the distributor’s role and act as the retailer with a supplier’s cost of sales.
 
The internet segment margins (The Wine Spies) tend to be in the middle of the three segments due to opportunistic purchasing and supplier situations.  The short-lived “flash” sales help alleviate a supplier’s quantity of wine that due to small volume or other constraints may be difficult to sell through their normal channels.
 
Factors Affecting Our Operating Results
 
Our net sales are affected by advertising, discounts and promotions, merchandising, packaging and in the wholesale segment, the availability of wall display space at our retailer customers, all of which have a significant impact on consumers’ buying decisions.  Continued growth of our net sales and profits will depend substantially on the continued popularity of our new and existing brands, our ability to effectively manage our sales by segment and distribution networks and our ability to maintain sufficient product supply to meet expected growth in demand.
 
Our cost of sales for the wholesale and direct to consumer segments includes wine-related inputs, such as grapes and semi-finished bulk wine, bottling materials, such as bottles, caps, corks and labeling materials, labor and overhead expenses, including inbound and outbound freight, and barrel depreciation.  The internet segment cost of sales is comprised of finished cased wine.
Results of Operations
 
Comparison of the six months ended December 31, 2012 (first and second quarter fiscal year 2013) to the six months ended December 31, 2011 (first and second quarter fiscal year 2012).
 
Net Sales
 
Net sales increased $192,207, or 2%, to $8,570,316 for the six months ended December 31, 2012 from $8,378,109 for the six months ended December 31, 2011. The increase in net sales was attributable to a $536,550 increase in the direct to consumer sales channel resulting from increased wine club membership and visitor traffic sales, a $590,622 increase from the acquisition and consolidated reporting of The Wine Spies offset by a $934,965 decrease in the three-tier channel.
 
The gross three-tier channel decrease resulted from:—
 
 
·
the one-time sale of wines totaling $397,000 (4,623 cases) contributed by a member as their capital contribution;
 
 
·
the discontinuance of certain of our brands by Trader Joe’s (The County Fair and TJ Grand Reserve) and Total Wine & More (Simply Pure) totaling $2,262,000 (27,292 cases);
 
 
·
the phased reduction or repositioning of our Stonegate brand totaling $826,000 (12,714 cases); and
 
 
·
offset by an increase in existing brand sales in the three-tier channel of $668,000 and the introduction of new wine brands launched in our first quarter fiscal year 2013 to:
 
 
·
Safeway (Bewitched, Curious Beasts, Fuchsia, Schuck’s and Candell’s) of $1,446,000 (17,762 cases);
 
 
·
Total Wine & More (Eden Ridge and The Fugitive) of $272,000 (3,090 cases); and
 
 
·
the Cliffside brand, which we produce but is owned by a third party, of $97,000 (2,307 cases).
 
 
49

 
 
Cost of Sales
 
Cost of sales decreased $723,100, or 11%, to $5,850,463 for the six months ended December 31, 2012 from $6,573,563 for the six months ended December 31, 2011.  The cost of sales increase (decrease) by segment is associated with the brand and volume changes discussed above in “—Net Sales” and is as follows:  wholesale, $(1,421,627), direct to consumer, $323,431, and internet sales, $375,096.  The new brands we introduced in the wholesale segment  have higher margins than those that we discontinued, and than the margins associated with the one-time sales.  Direct to consumer margins decreased compared to the prior period due to an increase in the use of promotions and increased sales of brands with lower margins.  The internet segment cost of sales was consistent  with expectations.
    
Sales and Marketing Expense
 
Sales and marketing expense increased $364,174, or 47%, to $1,146,316 for the six months ended December 31, 2012 from $782,142 for the six months ended December 31, 2011. The increase in sales and marketing expense is due primarily to the acquisition and consolidated reporting of The Wine Spies ($128,783), expenses related to increased reliance on the direct-to-consumer sales channel ($107,260) and costs associated with launching new brands and opening new markets in the three-tier channel.
 
General and Administrative Expense
 
General and administrative expense increased $1,152,921, or 269%, to $1,581,239 for the six months ended December 31, 2012 from $428,318 for the six months ended December 31, 2011. The increase in general and administrative expense is due primarily to the acquisition and consolidated reporting of The Wine Spies ($141,990), professional fees pertaining to this offering and not qualifying for netting against proceeds from this offering ($445,069), and increased technology costs, operating expenses and personnel additions related to becoming a public company.
 
Interest Expense
 
Interest expense decreased $18,856, or 9%, to $179,762 for the six months ended December 31, 2012 from $198,618 for the six months ended December 31, 2011.  Although our line of credit and term borrowings are up $2,735,895 from June 30, 2012, the change in our banking relationship has resulted in a lower average interest rate.
 
Comparison of the fiscal year ended June 30, 2012 (fiscal year 2012) to the fiscal year ended June 30, 2011 (fiscal year 2011).
 
Net Sales
 
Net sales increased $7,291,000, or 135%, to $12,693,000 for fiscal year 2012, from $5,402,000 for fiscal year 2011. Sales in the three-tier channel increased 162%, or $6,563,000, while the direct to consumer and retail channels increased 54%, or $728,000, attributable to increased wine club memberships and increased visitor traffic.   The increase in net sales is also attributable to the introduction of three new brands (Dearly Beloved, introduced in our first quarter fiscal year 2012, TJ Grand Reserve, introduced in our second quarter fiscal year 2012, and The Fugitive, introduced in our fourth quarter fiscal year 2012) in the three-tier channel. We also began production of the Cliffside brand in our fourth quarter fiscal year 2012, which we produce but is owned by a third party. The increase in net sales was offset by the discontinuation of the Canard and Varietals brands.
 
The gross three-tier channel increase is a combination of:
 
 
·
the one-time sale of C. Donatiello brand wines totaling $397,000 (4,623 cases) contributed by a member as their capital contribution;
 
 
·
year-over-year existing brand sales growth of $4,586,000, or 137% (74,000 cases or 121%);
 
 
·
the introduction of three new brands: Dearly Beloved ($1,456,000 or 27,757 cases), TJ Grand Reserve ($1,051,000 or 9,569 cases) and The Fugitive ($42,000 or 350 cases);
 
 
·
sales of Cliffside brand wines totaling $37,632 (896 cases); and
 
 
·
offset by the discontinuance of the two brands: Canard ($439,000 or 5,445 cases) and Varietals ($226,000 or 2,830 cases).
 
Cost of Sales
  
Cost of sales increased $5,717,123, or 147%, to $9,618,065 for fiscal year 2012 from $3,900,942 for fiscal year 2011.  Cost of sales for fiscal year 2012 increased $5,454,300 and $262,823, respectively, in the wholesale and direct to consumer segments compared to fiscal year 2011 and total $8,810,129 and $807,936, respectively.  The increase in cost of sales for the wholesale segment is associated with the brand and volume changes discussed above in “—Net Sales.”    Margins were depressed by 1% from the sale of C. Donatiello wine (10% margin) and from the sale of some Harbor Front branded wines at a loss.  We have subsequently arranged for Harbor Front branded wines to be produced by a third party to increase profitability.  The increased cost of sales for the direct to consumer segment is associated with increased wine club memberships and increased visitor traffic due, in part, to the opening of the VML tasting room in April 2011, which generated 12 months of sales in fiscal year 2012 (compared to only three months of sales in fiscal year 2011).