Mgp Ingredients Inc 8-K/A, filed Jun 17, 2021
Mgp Ingredients Inc (MGPI)
8-K/A
2021-06-17
For: 2021-04-01
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Added on
April 07, 2026
About this 8-K/A
Mgp Ingredients Inc filed this 8-K/A on June 17, 2021, reporting on events of April 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 1, 2021
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||
(Address of principal executive offices) (Zip Code)
(913 ) 367-1480
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
EXPLANATORY NOTE
On April 1, 2021, MGP Ingredients, Inc. (the "Company", or "MGP") filed with the United States Securities and Exchange Commission (the "SEC") on Form 8-K (the "Initial 8-K") to report the completion of its previously-announced merger pursuant to the Agreement and Plan of Merger with London HoldCo, Inc. (“HoldCo”), Luxco Group Holdings, Inc., LRD Holdings LLC, LDL Holdings DE, LLC, and KY Limestone Holdings LLC (together with their subsidiaries, “Luxco” or “Luxco, Inc. and Affiliates”), the shareholders of HoldCo (the “Sellers”), and Donn S. Lux, as Sellers’ Representative, pursuant to which the Company agreed to merge HoldCo with and into the Company with the Company surviving the merger.
The purpose of this amendment to the Initial 8-K is to provide the historical audited combined financial statements of Luxco required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K, which information was excluded from the Initial 8-K in reliance upon the instructions to such items.
The pro forma financial information included in this Current Report on Form 8-K/A has been presented for informational purposes only, as required by Form 8-K. It does not purport to represent the actual results of operations that the Company and Luxco would have achieved had the companies been combined during the period presented in the pro forma financial information and is not intended to project the future results of operations that the combined company may achieve after the merger.
Item 9.01. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The audited combined financial statements of Luxco, Inc. and Affiliates for the years ended December 31, 2020 and 2019, are filed herewith as Exhibit 99.1
(b) Pro forma financial information.
The Unaudited Pro Forma Combined Balance Sheet of the Company as of December 31, 2020, the Unaudited Pro Forma Combined Statement of Income for the year ended December 31, 2020 and the notes to the unaudited pro forma combined financial information, all giving effect to the merger of Luxco, are filed herewith as Exhibit 99.2
(d) Exhibits
| Exhibit Number | Description | |||||||
| 23.1 | ||||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 104 | The cover page from this Current Report on Form 8-K, formatted in iXBRL (Inline Extensible Business Reporting Language) | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MGP INGREDIENTS, INC.
| Date: June 16, 2021 | By: | /s/ Brandon M. Gall | ||||||
| Brandon M. Gall, Vice President, Finance and Chief Financial Officer | ||||||||
The Board of Directors
MGP Ingredients, Inc.
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-196383, 333-196384, 333-196385) of our report dated April 28, 2021, relating to the December 31, 2020 combined financial statements of Luxco, Inc. and Affiliates appearing in this Current Report on Form 8-K/A of MGP Ingredients, Inc.
/s/ BKD, LLP
St. Louis, Missouri
June 16, 2021
Luxco, Inc. and Affiliates
Independent Auditor’s Report and Combined Financial Statements
December 31, 2020 and 2019
Contents
Independent Auditor’s Report................................................................................................ 1
Combined Financial Statements
Balance Sheets..................................................................................................................................... 3
Statements of Income and Comprehensive Income............................................................................ 5
Statements of Equity............................................................................................................................ 6
Statements of Cash Flows.................................................................................................................... 7
Notes to Financial Statements............................................................................................................. 9
Independent Auditor’s Report
Board of Directors Luxco, Inc.
St. Louis, Missouri
We have audited the accompanying combined financial statements of Luxco, Inc. (a wholly-owned subsidiary of Luxco Group Holdings, Inc.) and its Affiliates (collectively the “Company”), which comprise the combined balance sheets as of December 31, 2020 and 2019, and the related combined statements of income and comprehensive income, equity and cash flows for the years then ended, and the related notes to the combined financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Board of Directors Luxco, Inc.
Page 2
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Luxco, Inc. and its Affiliates as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 1 to the combined financial statements, in 2020, the reporting entity changed to include LRD Holdings LLC, KY Limestone Holdings, LLC, LDL DE LLC, and Dos Primos Tequila, LLC, as part of its combined financial statements. Our opinion is not modified with respect to this matter.
St. Louis, Missouri April 28, 2021
Luxco, Inc and Affiliates
Combined Balance Sheets
December 31, 2020 and 2019
(In Thousands)
Assets
| 2020 | 2019 | ||||||||||
| Current Assets | |||||||||||
| Cash | $ | 2,826 | $ | 2,078 | |||||||
| Debt investments | 1,777 | — | |||||||||
| Accounts receivable | |||||||||||
| Trade, net of allowance | 31,295 | 35,487 | |||||||||
| Other | 423 | 878 | |||||||||
| Notes receivable | 182 | 3,009 | |||||||||
| Inventories | 33,747 | 30,543 | |||||||||
| Prepaid expenses | 2,073 | 2,563 | |||||||||
| Total current assets | 72,323 | 74,558 | |||||||||
| Investments and Long-Term Receivables | |||||||||||
| Investment in whiskey, at cost | 38,096 | 39,021 | |||||||||
| Investments in life insurance | 5,497 | 4,920 | |||||||||
| Investment in joint venture | 4,978 | 3,091 | |||||||||
| 48,571 | 47,032 | ||||||||||
| Property and Equipment, At Cost | 84,099 | 79,792 | |||||||||
| Less accumulated depreciation | 26,320 | 23,157 | |||||||||
| 57,779 | 56,635 | ||||||||||
| Other Assets | |||||||||||
| Trademarks | 92,927 | 95,562 | |||||||||
| Other intangible assets | 1,617 | 1,826 | |||||||||
| Notes receivable | 2,893 | 1,255 | |||||||||
| Due from shareholders | — | 5,653 | |||||||||
| Other | 313 | 343 | |||||||||
| 97,750 | 104,639 | ||||||||||
| $ | 276,423 | $ | 282,864 | ||||||||
See Notes to Combined Financial Statements 3
Liabilities and Equity
| 2020 | 2019 | ||||||||||
| Current Liabilities | |||||||||||
| Note payable to bank | $ | 68,386 | $ | 90,113 | |||||||
| Current maturities of long-term debt | 1,927 | 25 | |||||||||
| Interest rate swap agreement short-term | 761 | — | |||||||||
| Accounts payable | |||||||||||
| Trade | 12,373 | 11,117 | |||||||||
| Federal and state liquor taxes payable | 4,978 | 5,028 | |||||||||
| Accrued liabilities | |||||||||||
| Expenses, including payroll taxes and income taxes | 3,447 | 3,963 | |||||||||
| Salaries, wages and commissions | 3,259 | 2,209 | |||||||||
| Distributions payable | 6,279 | 190 | |||||||||
| Total current liabilities | 101,410 | 112,645 | |||||||||
| Long-Term Liabilities | |||||||||||
| Deferred compensation | 533 | 387 | |||||||||
| Long-term debt | 6,292 | 229 | |||||||||
| Interest rate swap agreement long-term | — | 750 | |||||||||
| Deferred income taxes | 1,475 | 1,439 | |||||||||
| Other long term liability | 547 | 1,347 | |||||||||
| 8,847 | 4,152 | ||||||||||
| Equity | |||||||||||
| Class A voting common stock, $.10 par value; authorized and | |||||||||||
| issued 30 shares | 3 | 3 | |||||||||
| Class B non-voting common stock, $.10 par value; authorized | |||||||||||
| and issued 270 shares | 27 | 27 | |||||||||
| Retained earnings | 174,237 | 171,360 | |||||||||
| Members equity | 27,697 | 28,407 | |||||||||
| Accumulated other comprehensive loss | |||||||||||
| Cumulative translation adjustment | 209 | (431) | |||||||||
| Unrealized loss on interest swap agreement | (761) | (750) | |||||||||
| Treasury stock, at cost | |||||||||||
| Common; 15 A shares; 135 B shares | (35,309) | (35,309) | |||||||||
| Total Luxco, Inc. and Affiliates equity | 166,103 | 163,307 | |||||||||
| Noncontrolling interest | 63 | 2,760 | |||||||||
| Total equity | 166,166 | 166,067 | |||||||||
| Total liabilities and equity | $ | 276,423 | $ | 282,864 | |||||||
4
Luxco, Inc and Affiliates
Combined Statements of Income and Comprehensive Income
Years Ended December 31, 2020 and 2019 (In Thousands)
| 2020 | 2019 | ||||||||||
| Gross Sales | $ | 320,647 | $ | 285,251 | |||||||
| Less federal excise taxes | 122,251 | 113,141 | |||||||||
| Net Sales | 198,396 | 172,110 | |||||||||
| Cost of Goods Sold | 124,775 | 115,925 | |||||||||
| Gross Profit | 73,621 | 56,185 | |||||||||
| Impairment Loss | 5,035 | 3,630 | |||||||||
| Operating Expenses | 44,704 | 40,392 | |||||||||
| Operating Income | 23,882 | 12,163 | |||||||||
| Other Income (Expenses) | |||||||||||
| Interest income | 46 | 106 | |||||||||
| Interest expense | (2,399) | (3,368) | |||||||||
| Donations | (467) | (328) | |||||||||
| Other | (139) | (574) | |||||||||
| (2,959) | (4,164) | ||||||||||
| Income Before Income Taxes | 20,923 | 7,999 | |||||||||
| Provision for Income Taxes | 305 | 619 | |||||||||
| Net Income | 20,618 | 7,380 | |||||||||
| Other Comprehensive Income (Loss) | |||||||||||
| Net translation adjustment | 680 | 147 | |||||||||
| Change in fair value of interest rate swap agreement | (11) | (541) | |||||||||
| 669 | (394) | ||||||||||
| Comprehensive Income | $ | 21,287 | $ | 6,986 | |||||||
| Amounts Attributable to Noncontrolling Interest | |||||||||||
| Net income | $ | 20,618 | $ | 7,380 | |||||||
| Less net income (loss) attributable to the noncontrolling interest | (163) | 481 | |||||||||
| Net income attributable to Luxco, Inc. and Affiliates | $ | 20,781 | $ | 6,899 | |||||||
| Comprehensive income | $ | 21,287 | $ | 6,986 | |||||||
| Less comprehensive income (loss) attributable to the | |||||||||||
| noncontrolling interest | (123) | 510 | |||||||||
| Comprehensive income attributable to Luxco, Inc. and Affiliates | $ | 21,410 | $ | 6,476 | |||||||
See Notes to Combined Financial Statements 5
Luxco, Inc. and Affiliates
Combined Statements of Equity
Years Ended December 31, 2020 and 2019
(In Thousands)
| Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Retained | Members' | Comprehensive | Noncontrolling | Treasury | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Earnings | Equity | Loss | Interest | Stock | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2019 | $ | 3 | $ | 27 | $ | 164,425 | $ | 27,158 | $ | (758) | $ | 2,568 | $ | (35,309) | $ | 158,114 | |||||||||||||||||||||||||||||||
| Contributions | — | — | — | 1,354 | — | — | — | 1,354 | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | 7,004 | (105) | — | 481 | — | 7,380 | |||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | (69) | — | — | (318) | — | (387) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (423) | 29 | — | (394) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 3 | 27 | 171,360 | 28,407 | (1,181) | 2,760 | (35,309) | 166,067 | |||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | 3,339 | — | — | — | 3,339 | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | 19,148 | 1,633 | — | (163) | — | 20,618 | |||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | (7,277) | (844) | — | (39) | — | (8,160) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 629 | 40 | — | 669 | |||||||||||||||||||||||||||||||||||||||
| Purchase of NCI - Limestone | — | — | — | (4,354) | — | (891) | — | (5,245) | |||||||||||||||||||||||||||||||||||||||
| Purchase of NCI - Niche | — | — | — | (484) | — | (1,644) | — | (2,128) | |||||||||||||||||||||||||||||||||||||||
| Non-cash distribution to shareholders | — | — | (8,994) | — | — | — | — | (8,994) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 3 | $ | 27 | $ | 174,237 | $ | 27,697 | $ | (552) | $ | 63 | $ | (35,309) | $ | 166,166 | |||||||||||||||||||||||||||||||
See Notes to Combined Financial Statements 6
Luxco, Inc. and Affiliates
Combined Statements of Cash Flows
Years Ended December 31, 2020 and 2019
(In Thousands)
| 2020 | 2019 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 20,618 | $ | 7,380 | |||||||
| Items not requiring (providing) cash | |||||||||||
| Depreciation | 5,271 | 5,458 | |||||||||
| Impairment of trademarks and amortization of intangible assets and deferred financing costs | 5,312 | 3,906 | |||||||||
| Deferred compensation | 267 | 251 | |||||||||
| Deferred income taxes | 10 | 113 | |||||||||
| Equity in net loss of joint venture | 917 | 638 | |||||||||
| Loss (gain) on disposal of property and equipment | 156 | (508) | |||||||||
| Gain on forgiveness of Paycheck Protection Program Loan | (324) | — | |||||||||
| Changes in | |||||||||||
| Accounts receivable | 4,891 | (2,504) | |||||||||
| Inventories | 6,745 | 1,884 | |||||||||
| Prepaid expenses | 491 | (1,341) | |||||||||
| Accounts payable | 1,097 | (313) | |||||||||
| Accrued liabilities | (1,539) | (3,121) | |||||||||
| Net cash provided by operating activities | 43,912 | 11,843 | |||||||||
| Investing Activities | |||||||||||
| Proceeds from payment of notes receivable | 1,189 | 1,209 | |||||||||
| Advances to shareholders | (3,339) | (1,353) | |||||||||
| Proceeds from sale of property and equipment | 1,316 | 1,594 | |||||||||
| Purchase of trademark | (2,400) | — | |||||||||
| Purchase of property and equipment | (7,778) | (7,705) | |||||||||
| Proceeds from sale of held-to-maturity securities | 1,200 | — | |||||||||
| Purchase of held-to-maturity securities | (2,977) | — | |||||||||
| Payments for investment in whiskey | (8,889) | (5,144) | |||||||||
| Purchase of joint venture | — | (2,214) | |||||||||
| Purchase of noncontrolling interest | (6,278) | — | |||||||||
| Contributions to joint ventures | (2,598) | — | |||||||||
| Payments for investments in life insurance | (578) | (578) | |||||||||
| Net cash used in investing activities | (31,132) | (14,191) | |||||||||
| Financing Activities | |||||||||||
| Repayments on line of credit | (348,752) | (275,246) | |||||||||
| Proceeds from line of credit | 327,062 | 278,056 | |||||||||
| Proceeds from issuance of long-term debt | 8,314 | — | |||||||||
| Principal payments of long-term debt | (25) | (1,122) | |||||||||
| Distributions paid | (2,071) | (196) | |||||||||
| Contributions received | 3,339 | 1,354 | |||||||||
| Net cash provided by (used in) financing activities | (12,133) | 2,846 | |||||||||
| Effect of Exchange Rate Changes on Cash | 101 | (55) | |||||||||
| Increase in Cash | 748 | 443 | |||||||||
| Cash, Beginning of Year | 2,078 | 1,635 | |||||||||
| Cash, End of Year | $ | 2,826 | $ | 2,078 | |||||||
See Notes to Combined Financial Statements 7
Luxco, Inc. and Affiliates
Combined Statements of Cash Flows Years Ended December 31, 2020 and 2019 (In Thousands)
| 2020 | 2019 | ||||||||||
| Supplemental Cash Flows Information | |||||||||||
| Investment in whiskey converted to merchandise inventory | $ | 9,815 | $ | 8,075 | |||||||
| Non-cash distribution to shareholders | $ | 8,994 | $ | — | |||||||
| Distributions payable | $ | 6,279 | $ | 190 | |||||||
| Deferred consideration from purchase of noncontrolling interest | $ | 1,095 | $ | — | |||||||
| Interest paid | $ | 2,399 | $ | 3,368 | |||||||
| Income taxes paid (net of refunds) | $ | 193 | $ | 80 | |||||||
(Continued)
See Notes to Combined Financial Statements 8
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The revenues of Luxco, Inc. (“Luxco”), a wholly-owned subsidiary of Luxco Group Holdings, Inc., and Affiliates (collectively the “Company”) are predominately earned from importing, bottling and rectifying of distilled spirits and wine. The Company sells to and extends unsecured credit to liquor distributors and state governments primarily throughout the United States.
Principles of Combination
During 2020, the reporting entity changed to include Luxco Group Holdings Inc. (“LGHI”), KY Limestone Holdings, LLC (“Limestone”), LDL DE LLC (“LDL”), Dos Primos Tequila, LLC (“DPTC”), and LRD Holdings LLC (“LRD”), (collectively “the Affiliates”), due to the pending sale of Luxco and the Affiliates. This change was made retrospectively to include the accounts of the Affiliates as of January 1, 2019.
Luxco and the Affiliates are affiliated through common ownership and management. All significant intercompany accounts and transactions have been eliminated in combination.
Investment in Joint Venture
Luxco holds 50 percent interests in DGL Destiladores, S.A. de CU (“DGL”) and Agricola LG, S DE RL DE CV (“Agricola”). The investments are accounted for under the equity method which includes the cost of the initial investment plus earnings (losses) of the investments.
Use of Estimates
The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
At December 31, 2020, one of the Company’s U.S. cash accounts did exceed federally insured limits. The cash accounts exceeded federally insured limits by $2,233. Foreign cash accounts totaling $421 as of December 31, 2020, are guaranteed by the United Kingdom’s Financial Service Compensation Scheme up to $116.
9
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Accounts and Notes Receivable
Accounts receivable are stated at the amount of consideration from customers of which the Company has an unconditional right to receive. The Company provides a nominal allowance for doubtful accounts, which is based upon a review of outstanding receivables. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. Notes receivable are stated at their outstanding principal amount. The Company has determined no allowance is necessary for uncollectible notes, based upon a review of outstanding receivables, historical collection information and existing economic conditions. Outstanding notes accrue interest based on the terms of the respective note agreements. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the borrower.
Inventory Pricing
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first- in, first-out method.
Property and Equipment
Property and equipment acquisitions are stated at cost, less accumulated depreciation. Depreciation is charged to expense using straight-line or accelerated methods over the estimated useful life of each asset. Leasehold improvements are depreciated over the shorter of the lease term or respective estimated useful lives.
The estimated useful lives for each major depreciable classification of property and equipment are as follows:
Buildings and improvements 15 years
Office furniture and equipment 5-8 years
Equipment 8 years
Whiskey barrels 4 years
Leasehold improvements 10 years
Income Taxes
The LGHI stockholders have elected to have Luxco’s income taxed as an “S” Corporation under provisions of the Internal Revenue Code and a similar section of certain state income tax law.
Therefore, taxable income or loss is reported to the individual stockholders for inclusion in their respective tax returns and no provision for federal income taxes is included in these statements. State and local income taxes and the related deferred tax assets and liabilities are provided for certain states and cities, which do not recognize an “S” Corporation tax status.
LDL’s income from foreign operations is subject to corporate income tax and is provided for in the combined financial statements. Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
10
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
The LRDH, KYLH, and DPTC members have elected to have their income taxed as a partnership under provisions of the Internal Revenue Code and similar sections of state income tax law.
Therefore, taxable income or loss is reported to the individual members for inclusion in their respective tax returns and no provision for federal and state income taxes on United States income is included in these statements.
Excise Taxes
The Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department (the “TTB”) regulations which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its Federal excise tax expense based upon units shipped and on its understanding of the applicable excise tax laws.
Interest Rate Swap
The Company has elected the private company accounting alternative for certain interest rate swaps. The election to use the alternative accounting for interest rate swaps is made on a swap-by- swap basis. During 2020 and 2019, the Company had one interest rate swap in effect, for which it elected to apply the alternative accounting and use the simplified hedge accounting approach.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the unrealized loss on the interest rate swap agreement and gains and losses from foreign currency transactions.
Translation of Foreign Currencies
Assets and liabilities of Niche Drinks Co Ltd (“Niche”), a wholly-owned subsidiary of LDL whose functional currency is other than the U.S. dollar are translated to U.S. dollars using the exchange rate in effect at the combined balance sheet date. Results of operations are translated using average rates during the year. Adjustments resulting from the translation process are included as a component of accumulated other comprehensive income (loss).
Foreign Assets
As of December 31, 2020 and 2019, the Company has approximately $6,983 and $7,212 of its inventory and $11,443 and $13,074, respectively, of its investment in whiskey held at its suppliers located in foreign countries.
Niche is located in Northern Ireland, United Kingdom. Total assets of Niche were $19,776, and $19,674 as of December 31, 2020 and 2019, respectively.
11
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Tariffs
On October 18, 2019, import tariffs were enacted for select European Union (EU) products brought into the United States. Although involving several EU countries, Luxco is primarily impacted by its import of finished goods products from Northern Ireland which included both St. Brendan’s Irish Cream and The Quiet Man Irish Whiskey. These products are subject to a 25 percent import duty on the customer invoice price which is paid at the time the excise tax is due to Customs and Border Patrol. As of December 31, 2020 and 2019, the Company import duty paid was $1,626 and
$237, respectively.
Trademarks
Trademarks are tested annually for impairment. If the implied fair value of the trademarks are lower than their carrying amounts, an intangible impairment is indicated and the trademarks are written down to their implied fair value. Subsequent increases in trademark value are not recognized in the combined financial statements.
Intangible Assets
Intangible assets with finite lives related to Niche are being amortized on the straight-line basis over 10 years. Amortization expense for the periods ended December 31, 2020 and 2019, was approximately $248 and $245, respectively.
Deferred Financing Costs
Expenses associated with the acquisition of debt are capitalized. The Company amortizes financing costs over the life of the loan on a straight-line basis. These costs are included in other assets on the combined balance sheets.
Debt Investments
Debt securities held by the Company generally are classified and recorded in the combined financial statements as held-to-maturity as management has the positive intent and ability to hold to maturity. The securities are recorded at amortized cost, which approximates fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The amount and timing of revenue recognition varies based on the nature of the goods or services provided and the terms and conditions of the customer contract. See Note 2 for additional information about the Company’s revenue.
12
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Subsequent Events
On January 22, 2021 the Company entered into a Merger Agreement with MGP Ingredients, Inc. The merger was executed on April 1, 2021. Purchase accounting for the transaction is in process.
Prior to the merger, certain excluded assets totaling $14,890 were transferred to shareholders through distributions or bonuses.
Subsequent events have been evaluated through April 28, 2021, which is the date the combined financial statements were available to be issued.
Paycheck Protection Program (PPP) Loan
The Company received PPP loans established by the CARES Act and has elected to account for the funding as loans in accordance with ASC Topic 470, Debt. Any forgiveness of the loans is recognized as a gain in the financial statements in the period the debt is legally released. PPP loans are subject to audit and acceptance by the U.S. Department of Treasury, Small Business Administration (SBA), or lender. As a result of such audit, adjustments could be required to any gain recognized.
Economic Uncertainties
As a result of the spread of the SARS-CoV-2 virus and the incidence of COVID-19, economic uncertainties have arisen which may affect the financial position, results of operations and cash flows of the Company. The duration of these uncertainties and the ultimate financial effects cannot be reasonably estimated at this time.
Note 2: Revenue from Contracts with Customers
Performance Obligations
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring distinct goods or providing services to customers. The Company’s revenue consists substantially of product sales and is reported net of incentives, returns and other allowances offered to customers. The Company recognizes revenue when performance obligations under the terms of contracts, generally purchase orders, with its customers are satisfied, which occurs when control passes to a customer to enable them to direct the use of and obtain benefit from a product. This typically occurs upon shipment, when a customer obtains legal title, obtains the risks and rewards of ownership, has received the goods according to the contractual shipping terms and is obligated to pay for the product. For certain international customers, deposits are required in advance of shipment. Contract bottling is recognized over a period of time, based upon the output method.
13
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Contract Balances
The following table provides information about the Company’s receivables from contracts with customers:
| 2020 | 2019 | ||||||||||
| Accounts receivable, beginning of year | $ | 35,487 | $ | 33,849 | |||||||
| Accounts receivable, end of year | $ | 31,295 | $ | 35,487 | |||||||
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by the timing of such revenue recognized during the year ended December 31, 2020 and 2019:
| 2020 | 2019 | ||||||||||
| Timing of revenue recognition | |||||||||||
| At a point in time | $ | 315,548 | $ | 280,787 | |||||||
| Over a period of time | 5,099 | 4,464 | |||||||||
| Total | $ | 320,647 | $ | 285,251 | |||||||
The Company has determined that the nature, amount, timing and uncertainty of revenues and cash flows are affected by the performance of the distilled spirits and wine industry and various customer payment practices.
Accounting Policies Elected
For shipping and handling activities, which are generally arranged by the Company, the Company is applying an accounting policy election, which allows an entity to account for shipping and handling activities as fulfillment activities rather than a promised good or service when the activities are performed, even if those activities are performed after the control of the good has been transferred to the customer. Therefore, the Company expenses shipping and handling costs at the time revenue is recognized. The Company classifies shipping and handling revenues in net sales and the related expenses in cost of sales in the combined statements of income.
The Company is also applying an accounting policy election, which allows an entity to exclude from revenue any amounts collected from customers on behalf of state governments, such as state excise taxes collected concurrent with revenue-producing activities. Therefore, revenue is presented net of state excise taxes.
14
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 3: Accounts Receivable Other
| 2020 | 2019 | ||||||||||
| Advances to stockholders, officers and employees | $ | 7 | $ | 42 | |||||||
| Refundable federal excise taxes | 290 | 553 | |||||||||
| Other | 126 | 283 | |||||||||
| $ | 423 | $ | 878 | ||||||||
Note 4: Inventories
| 2020 | 2019 | ||||||||||
| Raw materials | $ | 12,562 | $ | 12,166 | |||||||
| Finished goods | 16,634 | 13,727 | |||||||||
| Federal tax and duty on inventories | 4,551 | 4,650 | |||||||||
| $ | 33,747 | $ | 30,543 | ||||||||
It has been the Company’s consistent accounting practice to exclude merchandise in transit from inventories and accounts payable until the merchandise has actually been received. At December 31, 2020 and 2019, merchandise in transit which had been shipped to the Company, but not received until subsequent dates totaled $1,984 and $672, respectively.
Note 5: Property and Equipment
The total cost basis of property and equipment at December 31, 2020 and 2019, was:
| 2020 | 2019 | ||||||||||
| Land and improvements | $ | 5,612 | $ | 5,564 | |||||||
| Machinery and equipment | 17,829 | 16,997 | |||||||||
| Office furniture and equipment | 3,113 | 2,962 | |||||||||
| Whiskey barrels | 19,652 | 19,167 | |||||||||
| Leasehold improvements | 3,376 | 3,285 | |||||||||
| Buildings and improvements | 25,227 | 22,527 | |||||||||
| Transportation equipment | 9,290 | 9,290 | |||||||||
| $ | 84,099 | $ | 79,792 | ||||||||
15
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 6: Acquired Trademarks
The changes in the carrying amount of trademarks for the years ended December 31, 2020 and 2019, were:
| 2020 | 2019 | ||||||||||
| Balance as of January 1 | $ | 95,562 | $ | 99,192 | |||||||
| Purchase of Castle trademark | 2,400 | — | |||||||||
| Impairment loss | (5,035) | (3,630) | |||||||||
| Balance as of December 31 | $ | 92,927 | $ | 95,562 | |||||||
The fair value of the trademarks was estimated based upon multiples of the average gross profit and contribution margin of the respective trademarks. Certain product lines within the trademarks experienced contribution margins below the projected levels at the time of their acquisitions, resulting in an impairment loss of $5,035 and $3,630 for the years ended December 31, 2020 and 2019, respectively.
Note 7: Notes Payable to Banks
Luxco has a $110,000 revolving line of credit that matures on September 16, 2021. There was
$65,116 and $85,913 borrowed against this line at December 31, 2020 and 2019, respectively. The line is collateralized by accounts receivable, inventory, equipment and trademarks. Interest varies with the one-month London Interbank Offered Rate (LIBOR) Index Rate, plus a margin of 1.20 percent to 1.70 percent, as defined, and is payable monthly. The interest rate was 1.60 percent and 3.15 percent at December 31, 2020 and 2019, respectively.
The credit agreement requires Luxco, among other things, to maintain certain financial ratios if the availability on the line is below 10 percent. This requirement did not apply as of December 31, 2020 and 2019.
Niche also has a credit agreement totaling $5,463, which has no stated maturity date. Interest varies at the bank’s UK base rate plus 2.5 percent. The interest rate was 2.53 and 3.25 percent at December 31, 2020 and 2019, respectively. On December 20, 2020, Niche obtained a temporary increase to $8,877 in availability through January 31, 2021. There was $3,270 and $4,200 borrowed against this line at December 31, 2020 and 2019 respectively.
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, Luxco entered into an interest rate swap agreement for a portion of its floating rate debt through September 1, 2021. The agreement provides for Luxco to receive interest from the counterparty at one month LIBOR plus a spread of 1.89 percent and to pay interest to the counterparty at a fixed rate of 2.63 percent on a notional amount of $40,000 as of December 31, 2020 and 2019.
16
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Management has designated the interest rate swap agreement as a cash flow hedging instrument. Under the private company accounting alternative for interest rate swaps, Luxco may assume no hedge ineffectiveness. Changes in fair value are recognized in other comprehensive income. If Luxco determines the hedge criteria are no longer met, the simplified hedge accounting will no longer apply and Luxco will apply guidance in ASC Topic 815 on a prospective basis.
The table below presents certain information regarding Luxco’s interest rate swap agreement designated as a cash flow hedge:
| 2020 | 2019 | ||||||||||
| Fair value of interest rate swap agreement | $ | (761) | $ | (750) | |||||||
| Balance sheet location of fair value amount | Current liabilities | Long-term liabilities | |||||||||
| Loss recognized in other comprehensive income | $ | (11) | $ | (541) | |||||||
| Loss reclassified from accumulated other comprehensive loss into net income (monthly settlement expense) | $ | (824) | $ | (149) | |||||||
| Location of loss reclassified from accumulated other comprehensive income | Interest Expense | Interest Expense | |||||||||
17
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 8: Long-Term Debt
Long-term debt at December 31, 2020 and 2019, consists of the following:
| 2020 | 2019 | ||||||||||
| Luxco note payable to SBA, due April 20, 2022; payable in monthly principal installments of $380, plus interest at 1%. | $ | 3,422 | $ | — | |||||||
| Limestone note payable to the David Sherman Sr. Trust FBO Ann S. Lux dated November 16, 1981, due June 2029, interest payable annually at 0.43% | 4,568 | — | |||||||||
| Limestone note payable to Marion County Industrial Foundation, due June 2028; monthly installments of $3, including interest at 4.5%. | 199 | 221 | |||||||||
| Limestone note payable to Lincoln Trail Area Development, due June 2028; monthly installments of $1, including interest at 4.5%. | 30 | 33 | |||||||||
| 8,219 | 254 | ||||||||||
| Less current maturities | (1,927) | (25) | |||||||||
| $ | 6,292 | $ | 229 | ||||||||
Aggregate annual scheduled maturities of long-term debt, at December 31, 2020, are:
| 2021 | $ | 1,927 | |||
| 2022 | 1,549 | ||||
| 2023 | 29 | ||||
| 2024 | 30 | ||||
| 2025 | 31 | ||||
| Thereafter | 4,653 | ||||
| $ | 8,219 | ||||
On April 20, 2020, Luxco received a loan in the amount of $3,422 pursuant to the PPP. Luxco expects the loan to be forgiven. Per the note agreement, the loan was originally payable in equal monthly principal and interest payments commencing in November 2020, with the final payment due in May 2022. Interest will accrue at a rate of 1.0 percent and is payable monthly. The note is guaranteed by the SBA. In October 2020, the Paycheck Protection Program Flexibility Act of 2020 extended the deferral period for PPP borrower payments to 10 months after the end of the borrower’s loan forgiveness covered period. Equal monthly payments are now scheduled to begin in August 2021 through April 2022. In addition, LRD received a PPP loan of $324 on April 16, 2020. This loan was forgiven in 2020.
18
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 9: Common Stock Agreement
Luxco has a restrictive-stock agreement, which places restrictions on transferability of the Luxco’s stock. The agreement also requires Luxco to make minimum distributions to the stockholders equal to the income taxes payable by the stockholders on their share of Luxco’s taxable income.
Note 10: Equity
The common stock, treasury stock and retained earnings reported on the combined balance sheets represent the balances of Luxco, Inc. Combined members’ equity at December 31, 2020 and 2019, consisted of the following:
| 2020 | 2019 | ||||||||||
| KY Limestone Holdings, LLC | $ | (1,453) | $ | 1,530 | |||||||
| LDL DE, LLC | 7,081 | 4,783 | |||||||||
| LRD Holding, LLC | 22,306 | 22,094 | |||||||||
| Dos Primos Tequila Company, LLC | (237) | — | |||||||||
| $ | 27,697 | $ | 28,407 | ||||||||
Note 11: Employee Benefit Plans
The Company has a 401(k) plan covering substantially all non-union employees. The Plan provides for a discretionary company contribution of 2 percent of compensation plus a matching contribution not to exceed 1.5 percent of compensation. The Company also has a 401(k) plan covering all full-time union employees. The Plan provides for a matching contribution not to exceed 1 percent of compensation. The Company contributions to all domestic plans for the years ended December 31, 2020 and 2019, totaled $343 and $342, respectively.
Niche has an employee pension plan for its employees. Contributions to the plan were approximately $143 and $71 for the periods ended December 31, 2020 and 2019, respectively.
Note 12: Operating Leases
The Company leases office, plant and warehouse facilities under noncancellable operating lease agreements with related parties as more fully explained in Note 13. The Company leases additional facilities under noncancellable operating leases that expire in various years through 2028. Rent expense under all leases were $1,732 and $1,719 for the years ended December 31, 2020 and 2019, respectively.
19
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Future minimum lease payments for these leases at December 31, 2020, were:
| 2021 | 1,569 | ||||
| 2022 | 366 | ||||
| 2023 | 271 | ||||
| 2024 | 276 | ||||
| 2025 | 281 | ||||
| Thereafter | 650 | ||||
| $ | 3,413 | ||||
Note 13: Related-Party Transactions
The facilities in which the Company maintains certain of its operations are leased from a partnership affiliated through common ownership under an operating lease agreement expiring on November 30, 2021. Annual rents of $660 were paid during the years 2020 and 2019.
Investments in life insurance represent premiums paid for life insurance policies to be reimbursed by related parties under promissory notes and split-dollar agreements.
During 2020 and 2019, Luxco purchased inventory from the affiliates as part of its normal operations. All significant intercompany accounts and transactions have been eliminated in combination.
The Company has a note receivable of $900 from the related party buyer of Meier’s Wine Cellars, inc. (“Meier’s”). The note is payable at $18 of principal per quarter and the interest is accrued at
.58 percent and the maturity date is April 30, 2029. The note receivable has a balance of $620 and $700 at December 31, 2020 and 2019, respectively. The Company also converted $3,800 of an existing intercompany receivable into a note receivable from Meier’s at the time of the sale of Meier’s in 2017. Interest of .25 percent is payable quarterly and the principal is due upon the maturity date of April 30, 2023. The note receivable had a balance of $1,800 and $2,800 at December 31, 2020 and 2019, respectively.
The Company purchased finished good products from Meier’s in the amount of $2,925 and $2,400 for the years ended December 31, 2020 and 2019, respectively.
20
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 14: Joint Venture Investments
The Company invested in a 50 percent ownership of DGL and Agricola. The investments are recorded under the equity method. The entire financial position and net loss of DGL and Agricola as of and for the periods ended December 31, 2020 and 2019, are summarized below:
| 2020 | 2019 | ||||||||||
| Total assets | $ | 13,428 | $ | 9,345 | |||||||
| Total liabilities | 3,183 | 2,457 | |||||||||
| Total members' equity | $ | 10,245 | $ | 6,888 | |||||||
| Total revenues | $ | 18,793 | $ | 4,990 | |||||||
| Net loss | $ | (1,833) | $ | (1,276) | |||||||
DGL recognizes its inventory at the lower of cost or net realizable value. There was a write down adjustment of $1,423 and $331 to DGL’s inventory to net realizable value in 2020 and 2019, respectively.
Note 15: Commitments, Contingencies and Concentrations
Commitment to Purchase Whiskey
On January 1, 2019, the Company entered into a four-year contract expiring on December 31, 2023, with Canadian Lakes Distillers, to purchase whiskey through 2023. As of December 31, 2020, the Company has a remaining commitment to purchase 3,000 original proof gallons. Calculated at the most recent contract price, the commitment for these purchases is approximately $7,590.
Labor Agreement
Approximately 31 percent of Luxco’s U.S. employees are covered by a collective bargaining agreement that expires February 29, 2024.
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position, results of operations and cash flows of the Company.
21
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Note 16: Disclosures About Fair Value of Assets and Liabilities
Fair value is the price that would be received to sell an asset or paid to transfer an liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.
Recurring Measurements
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying combined balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2020 and 2019:
| Fair Value Measurement Using | |||||||||||||||||||||||
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| US Treasury Bill | $ | 1,777 | $ | 1,777 | $ | — | $ | — | |||||||||||||||
| Interest rate swap agreement | $ | (761) | $ | — | $ | (761) | $ | — | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Interest rate swap agreement | $ | (750) | $ | — | $ | (750) | $ | — | |||||||||||||||
22
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Nonrecurring Measurements
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2020 and 2019:
| Fair Value Measurement Using | |||||||||||||||||||||||
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Trademarks with impairment | $ | 42,210 | $ | — | $ | — | $ | 42,210 | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Trademarks with impairment | $ | 41,388 | $ | — | $ | — | $ | 41,388 | |||||||||||||||
Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring and nonrecurring basis and recognized in the accompanying combined balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Interest Rate Swap Agreement
The fair value is estimated using forward-looking interest rate curves and discounted cash flows that are observable or can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.
Debt Investments
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Trademarks
The fair value is estimated using internal calculations based on multiples of the average gross profit and contribution margin of the respective trademarks and, therefore, are classified within Level 3 of the valuation hierarchy.
23
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
Individual trademarks, or groups of trademarks, are only considered to be measured at fair value in a year in which an impairment loss is recognized. Three groups of trademarks and one group of trademarks were impaired at December 31, 2020 and 2019, respectively. Impairment losses related to these trademarks were recognized during 2020 and 2019.
Note 17: Acquisition of Minority Interests
On September 11, 2020, LDL, acquired 20 percent of the outstanding common stock of Niche. The acquisition of the additional 20 percent, in conjunction with the previously acquired 80 percent in 2018, means Niche is 100 percent owned by LDL.
Deferred consideration represents non-contingent payments of $548 to be paid on each of the first two anniversaries of the acquisition date.
The following table summarizes the consideration paid for the acquisition of the purchase of the minority interest of Niche.
| Consideration | |||||
| Cash | $ | 1,033 | |||
Deferred consideration | 1,095 | ||||
| $ | 2,128 | ||||
Additional deferred consideration payments related to the previously acquired 80 percent interest of Niche were made in April of $1,301, August of $1,246 and September of $1,033 during 2020 and in April 2019 of $1,354.
On January 1, 2020, KYLH LLC, acquired 44 percent of the member’s equity interest of Limestone, LLC. The acquisition of the additional 44 percent, in conjunction with the previously acquired controlling interest of 50 percent means Limestone is 94 percent owned by KYLH LLC.
The total consideration paid for the acquisition of the purchase of the minority interest of Limestone was $5,245.
Note 18: Internal Revenue Bond (IRB)
On December 22, 2017, LRDH and its wholly-owned subsidiaries, LFL and LRD, engaged in an industrial revenue bond transaction (IRB) with the County of Nelson, Kentucky (“Nelson County”). LFL which owns the fixed real and personal property assets from initial construction transferred the fee interest in those assets to Nelson County and entered into a lease with Nelson County to use the fixed assets. Nelson County issued and sold industrial revenue bonds to LRDH. The proceeds from the sale to LRDH ($35,000) were used to acquire the project. Under the IRB transaction, Nelson County has
24
Luxco, Inc. and Affiliates
Notes to Combined Financial Statements
December 31, 2020 and 2019
(In Thousands)
signed over its rights to receive payment on the bonds directly to LRDH. As such, the bond sale proceeds were paid directly by LRDH to LFL. LFL issued a payment for
$34,000 to LRDH as pre-payment of the amount due on the bonds. This left $1,000 outstanding on the bonds over the bond term. Upon full payment, the bonds will terminate in accordance with the terms of the IRB. This leaves $1,000 due to LRDH on LFL’s books and $1,000 due from LFL on LRDH books, which is being amortized over the life of the bond. This IRB activity is eliminated in combination of the financial statements as it is intercompany activity.
Note 19: Future Change in Accounting Principles
Accounting for Leases
The FASB amended its standard related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the combined balance sheet as both a right-of-use asset and a liability. The standard has two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under existing standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under existing standards. The determination of lease classification as operating or finance will be done in a manner similar to existing standards. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and nonlease components in an arrangement.
The new standard is effective for the Company’s fiscal year beginning January 1, 2022. The Company is evaluating the impact the standard will have on the combined financial statements; however, the standard may have a material impact on the financial statements due to the recognition of additional assets and liabilities for operating leases.
25
Exhibit 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information combines the individual historical audited results of MGP Ingredients, Inc. (“MGP”, “our” or “the Company”) and Luxco, Inc. and its affiliated companies (“Luxco” or “Luxco Companies”) adjusted to give effect to the April 1, 2021 merger of Luxco. The unaudited pro forma combined statement of income for the year ended December 31, 2020 gives effect to the merger as if it had occurred on January 1, 2020 and the unaudited pro forma combined balance sheet as of December 31, 2020 gives effect to the merger as if it had occurred on that day.
The transaction accounting adjustments for the acquisition consist of necessary adjustments to account for the merger. All amounts in this report, except for shares and unless otherwise noted, are shown in thousands. Subject to customary purchase price adjustments, the aggregate preliminary consideration paid by the Company in connection with the merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company (the “Company Shares,” and together with the cash portion, the “Merger Consideration”), which on April 1, 2021 were valued at $296,213. The cash portion of the Merger Consideration, the repayment of assumed debt, and the transaction-related expenses were financed with a $242,300 borrowing under the Company’s existing $300,000 Credit Agreement, dated February 14, 2020, by and among the Company, the lenders a party thereto and Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender. The assumptions and estimates for the preliminary adjustments to the unaudited pro forma combined financial information, are described in the accompanying notes, which should be read together with the unaudited pro forma combined financial information.
The unaudited pro forma combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the operating results for the future periods. The unaudited pro forma combined financial information does not purport to represent what our consolidated results of operation or consolidated financial condition would have been had the merger actually occurred on the dates indicated and does not intend to project the future consolidated results of operation or consolidated financial condition.
1
MGP INGREDIENTS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of December 31, 2020
(Dollars in thousands)
| MGP Historical | Luxco Historical | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 21,662 | $ | 2,826 | $ | (2,826) | 4(a) | $ | 21,662 | |||||||||||||||||
| Receivables, net of allowance for credit losses | 56,966 | 31,718 | 41 | 4(b) | 88,725 | |||||||||||||||||||||
| Notes receivable | — | 182 | (182) | 4(b) | — | |||||||||||||||||||||
| Debt investments | — | 1,777 | (1,777) | 4(a) | — | |||||||||||||||||||||
| Inventory | 141,011 | 33,747 | 56,261 | 4(c) | 231,019 | |||||||||||||||||||||
| Prepaid expenses | 2,644 | 2,073 | (6) | 4(d) | 4,711 | |||||||||||||||||||||
| Total current assets | 222,283 | 72,323 | 51,511 | 346,117 | ||||||||||||||||||||||
| Property, plant, and equipment, net | 131,992 | 57,779 | (14,816) | 4(e) | 174,955 | |||||||||||||||||||||
| Investments in whiskey, at cost | — | 38,096 | (38,096) | 4(c) | — | |||||||||||||||||||||
| Investments in life insurance | — | 5,497 | (5,497) | 4(a) | — | |||||||||||||||||||||
| Investments in joint venture | — | 4,978 | — | 4,978 | ||||||||||||||||||||||
| Operating lease right-of-use assets, net | 5,151 | — | — | 5,151 | ||||||||||||||||||||||
| Notes receivable | — | 2,893 | (2,893) | 4(f) | — | |||||||||||||||||||||
| Other assets | 7,149 | 313 | (735) | 4(f) | 6,727 | |||||||||||||||||||||
| Trade names | — | 92,927 | (92,927) | 4(g) | — | |||||||||||||||||||||
| Intangible assets | — | 1,617 | 213,573 | 4(g) | 215,190 | |||||||||||||||||||||
| Goodwill | — | — | 235,018 | 4(h) | 235,018 | |||||||||||||||||||||
| Total assets | $ | 366,575 | $ | 276,423 | $ | 345,138 | $ | 988,136 | ||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||||
| Notes payable to bank | $ | — | $ | 68,386 | $ | (68,386) | 4(i) | $ | — | |||||||||||||||||
| Current maturities of long-term debt | 1,600 | 1,927 | (1,927) | 4(i),4(j) | 1,600 | |||||||||||||||||||||
| Interest rate swap agreement short-term | — | 761 | (761) | 4(i) | — | |||||||||||||||||||||
| Accounts payable | 30,273 | 12,373 | 4,820 | 4(j) | 47,466 | |||||||||||||||||||||
| Federal and state liquor taxes payable | — | 4,978 | (4,978) | 4(j) | — | |||||||||||||||||||||
| Income taxes payable | 704 | — | — | 704 | ||||||||||||||||||||||
| Accrued expenses and other | 20,752 | 3,447 | 9,485 | 4(k) | 33,684 | |||||||||||||||||||||
| Salaries, wages and commissions | — | 3,259 | (3,259) | 4(k) | — | |||||||||||||||||||||
| Distributions payable | — | 6,279 | (6,279) | 4(k) | — | |||||||||||||||||||||
| Total current liabilities | 53,329 | 101,410 | (71,285) | 83,454 | ||||||||||||||||||||||
| Long-term debt, less current maturities | 38,271 | 6,292 | (6,292) | 4(i) | 38,271 | |||||||||||||||||||||
| Credit agreement - revolver | — | — | 238,217 | 4(l) | 238,217 | |||||||||||||||||||||
| Long-term operating lease liabilities | 3,057 | — | — | 3,057 | ||||||||||||||||||||||
| Deferred credits | 2,196 | — | — | 2,196 | ||||||||||||||||||||||
| Deferred compensation | — | 533 | (533) | 4(a) | — | |||||||||||||||||||||
| Other noncurrent liabilities | 4,898 | 547 | — | 5,445 | ||||||||||||||||||||||
| Deferred income taxes | 2,298 | 1,475 | 54,921 | 4(m) | 58,694 | |||||||||||||||||||||
| Total liabilities | 104,049 | 110,257 | 215,028 | 429,334 | ||||||||||||||||||||||
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| MGP Historical | Luxco Historical | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||
| Stockholders’ Equity | ||||||||||||||||||||||||||
| Capital stock, Preferred | 4 | — | — | 4 | ||||||||||||||||||||||
| Common stock | 6,715 | 30 | (30) | 4(n) | 6,715 | |||||||||||||||||||||
| Members equity | — | 27,697 | (27,697) | 4(n) | — | |||||||||||||||||||||
| Additional paid-in capital | 15,503 | — | 296,213 | 4(n) | 311,716 | |||||||||||||||||||||
| Retained earnings | 262,943 | 174,237 | (174,237) | 4(n) | 262,943 | |||||||||||||||||||||
| Accumulated other comprehensive income (loss) | 486 | (552) | 552 | 4(n) | 486 | |||||||||||||||||||||
| Treasury stock, at cost | (23,125) | (35,309) | 35,309 | 4(n) | (23,125) | |||||||||||||||||||||
| Total stockholders’ equity | 262,526 | 166,103 | 130,110 | 558,739 | ||||||||||||||||||||||
| Non-controlling interest | — | 63 | — | 63 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 366,575 | $ | 276,423 | $ | 345,138 | $ | 988,136 | ||||||||||||||||||
See accompanying notes to unaudited pro forma combined financial statements
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MGP INGREDIENTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 2020
(Dollars in thousands, except per share amounts)
| MGP Historical | Luxco Historical | Transaction Accounting Adjustments | Pro Forma Combined | ||||||||||||||||||||
| Sales | $ | 395,521 | $ | 198,396 | $ | (1,892) | 5(a) | $ | 592,025 | ||||||||||||||
| Cost of sales | 296,715 | 124,775 | 4,035 | 5(b) | 425,525 | ||||||||||||||||||
| Gross profit | 98,806 | 73,621 | (5,927) | 166,500 | |||||||||||||||||||
| Selling, general and administrative expenses | 44,565 | 44,704 | 13,139 | 5(c) | 102,408 | ||||||||||||||||||
| Impairment loss | — | 5,035 | — | 5,035 | |||||||||||||||||||
| Operating income | 54,241 | 23,882 | (19,066) | 59,057 | |||||||||||||||||||
| Interest expense, net and other | (1,640) | (2,399) | (302) | 5(d) | (4,341) | ||||||||||||||||||
| Donations | — | (467) | 467 | 5(c) | — | ||||||||||||||||||
| Interest income | — | 46 | (46) | 5(d) | — | ||||||||||||||||||
| Other income, net | — | (139) | 139 | 5(d) | — | ||||||||||||||||||
| Income before income taxes | 52,601 | 20,923 | (18,808) | 54,716 | |||||||||||||||||||
| Income tax expense | 12,256 | 305 | 2,187 | 5(e) | 14,748 | ||||||||||||||||||
| Net income | 40,345 | 20,618 | (20,995) | 39,968 | |||||||||||||||||||
| Income attributable to participating securities | 261 | — | — | 261 | |||||||||||||||||||
| Net income attributable to common shareholders and used in Earnings Per Share calculation | $ | 40,084 | $ | 20,618 | $ | (20,995) | $ | 39,707 | |||||||||||||||
| Amounts attributable to non-controlling interest | |||||||||||||||||||||||
| Net Income | $ | 40,345 | $ | 20,618 | $ | (20,995) | $ | 39,968 | |||||||||||||||
| Less: Net income (loss) attributable to non-controlling interest | — | (163) | — | (163) | |||||||||||||||||||
| Net income attributable to Company | $ | 40,345 | $ | 20,781 | $ | (20,995) | $ | 40,131 | |||||||||||||||
| Basic and diluted weighted average common shares | 16,937,125 | — | 5,007,833 | 5(f) | 21,944,958 | ||||||||||||||||||
| Basic and diluted Earnings Per Share | $ | 2.37 | $ | — | $ | — | $ | 1.81 | |||||||||||||||
See accompanying notes to unaudited pro forma combined financial statements
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MGP INGREDIENTS, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
Note 1. Description of the Transaction
On January 22, 2021, the Company entered into a definitive agreement to acquire Luxco, and subsequently completed the merger on April 1, 2021. Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Following the merger, the Luxco Companies became wholly-owned subsidiaries of the Company. The aggregate preliminary consideration paid by the Company in connection with the merger was $237,500 in cash (less assumed indebtedness) and 5,007,833 shares of common stock of the Company, subject to adjustment for fractional shares (the “Company Shares,” and together with the cash portion, the “Merger Consideration”). The Company Shares were valued at $296,213 on the closing date and represent approximately 22.8 percent of the Company’s outstanding common stock immediately following the closing of the merger. The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with a $242,300 borrowing under the Credit Agreement which was drawn down on April 1, 2021.
The preliminary Merger Consideration will increase or decrease to the extent that actual closing date working capital exceeds or is less than a $46,000 working capital target. In addition, the preliminary Merger Consideration will be increased for any acquired cash. In connection with the closing of the merger on April 1, 2021, the preliminary purchase price adjustments increased the cash consideration paid by approximately $311 and increased stock consideration by approximately $395. As of the date of this report, the final purchase price adjustment has not been determined by the Company. Any further purchase price adjustment is anticipated to be paid in a combination of cash and Company common stock.
Note 2. Basis of Presentation
The unaudited pro forma combined balance sheet as of December 31, 2020 and the unaudited pro forma combined statement of income for the year ended December 31, 2020 are based on the historical financial statements of MGP and the combined financial statements of Luxco. The unaudited pro forma combined balance sheet was prepared using the MGP audited consolidated balance sheet, the Luxco audited combined balance sheet and gives effect to the transaction as if it had occurred on December 31, 2020. The unaudited pro forma combined statement of income was prepared using the MGP audited consolidated statement of income, the Luxco audited combined statement of income and gives effect to the transaction as if it had occurred on January 1, 2020.
The unaudited pro forma combined financial statements were accounted for using the acquisition method in accordance with business combination accounting guidance as provided by Financial Accounting Standards Board Accounting Standards Codification 805, Business Combinations (“ASC 805”). Under the acquisition method of accounting, the Company allocates the purchase price of a business acquisition based on the fair value of the identifiable tangible and intangible assets. Goodwill is recognized to the extent that the purchase consideration exceeds the assets acquired and liabilities assumed. The Company uses its best estimate and third party valuation specialists to determine the fair value of the assets acquired and liabilities assumed. During the measurement period, which can be up to one year after the acquisition date, the Company can make adjustments to the fair value of the assets acquired and liabilities assumed, with the offset being an adjustment to goodwill.
The unaudited pro forma combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the operating results for the future periods. The unaudited pro forma combined financial statements were based on Transaction Accounting Adjustments and do not reflect any operating efficiencies, synergies or cost savings that the Company may achieve, or any additional operating expenses that may be incurred with respect to the combined company.
The unaudited pro forma combined financial statements should be read in conjunction with MGP’s historical audited financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 25, 2021, and the historical audited combined financial statements of Luxco which are included in Exhibit 99.1 of this filing on Form 8-K.
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Note 3. Estimated Merger Consideration and Preliminary Purchase Price Allocation
The transaction was accounted for as a business combination in accordance with ASC 805, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair value of the assets and liabilities in the unaudited pro forma combined financial statements are based upon a preliminary assessment of fair value and may change as valuations for certain tangible assets, intangible assets and contingent liabilities are finalized and the associated income tax impacts are determined. The Company expects to finalize the purchase price allocation as soon as practicable, but no longer than one year from the acquisition date.
The following table summarizes the preliminary allocation of the consideration paid for Luxco to the preliminary estimated fair value of the assets acquired and liabilities assumed at the acquisition date, with the excess recorded to goodwill.
| Consideration: | |||||
| Cash, net of assumed debt | $ | 150,003 | |||
Value of MGP Common Stock issued at close (a) | 296,213 | ||||
| Fair value of total consideration transferred | $ | 446,216 | |||
| Recognized amounts of identifiable assets acquired: | |||||
| Receivables | $ | 29,675 | |||
| Inventory | 90,954 | ||||
| Prepaid expenses | 1,454 | ||||
| Property, plant and equipment, net | 40,502 | ||||
| Investments in joint venture | 5,085 | ||||
Intangible assets (b) | 214,300 | ||||
| Other assets | 1,429 | ||||
| Total assets | 383,399 | ||||
Current maturities of long-term debt (c) | 87,497 | ||||
| Accounts payable | 18,753 | ||||
| Accrued expenses and other | 2,805 | ||||
| Other noncurrent liabilities | 784 | ||||
| Deferred income taxes | 56,396 | ||||
| Total liabilities | 166,235 | ||||
| Goodwill | 229,052 | ||||
| Total | $ | 446,216 | |||
(a) The Company issued 5,007,833 shares of MGP Common Stock which was valued at $59.15 per share on April 1, 2021.
(b) Intangible assets acquired includes trade names with an estimated fair value of $176,500 and distributor relationships with an estimated fair value of $37,800.
(c) The fair value of Luxco’s debt that was assumed by MGP in the transaction and repaid on the closing date.
The preliminary purchase price allocation above, which is as of the acquisition date of April 1, 2021, has been used to prepare the transaction accounting adjustments in the unaudited pro forma combined balance sheet and unaudited pro forma combined statement of income. Any differences between caption balances in this preliminary purchase price allocation and the unaudited pro forma balance sheet is due to additional Luxco balance sheet activity that occurred between December 31, 2020 and April 1, 2021.
Note 4. Notes to Unaudited Pro Forma Combined Balance Sheet
The following is a description of the preliminary transaction accounting adjustments reflected in the unaudited pro forma combined balance sheet.
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(a) The adjustment reflects the elimination of Luxco’s historical December 31, 2020 account balance as it was not acquired as part of the merger.
(b) The adjustment to Receivables, net of allowance for credit losses reflects transaction accounting adjustments for (i) reclassification of Luxco’s historical Notes receivable balance into Receivables, net to align with MGP’s presentation, (ii) elimination of accounts receivables related to entities not acquired as part of the merger, and (iii) the elimination of receivables owed by Luxco to the Company as of December 31, 2020.
| Reclassification of Notes receivable | $ | 182 | |||
| Elimination of entities not included in merger | (7) | ||||
| Elimination of receivables owed by Luxco to the Company | (134) | ||||
| $ | 41 | ||||
(c) The adjustment to Inventory reflects (i) the reclassification of Investments in whiskey, at cost into Inventory to align with MGP’s presentation, (ii) the reclassification of Luxco’s historical barrel inventory from Property, plant, and equipment, net into Inventory to align with MGP’s presentation, and (iii) the purchase accounting adjustment to value inventories at fair value. The fair value of work-in-process and finished goods inventory was determined using the comparative sales method and raw materials was determined using the replacement cost method.
| Reclassification of Investment in whiskey, at cost | $ | 38,096 | |||
| Reclassification of barrel inventory | 14,476 | ||||
| Purchase accounting adjustment to fair value | 3,689 | ||||
| $ | 56,261 | ||||
(d) Reflects the elimination of Prepaid expenses related to entities not acquired as part of the merger.
(e) Reflects (i) the reclassification of Luxco’s historical barrel inventory from Property, plant, and equipment, net into Inventory to align with MGP’s presentation, (ii) the elimination of Property, plant, and equipment related to entities not acquired as part of the merger, and (iii) the purchase accounting adjustment to historical Property, plant, and equipment acquired by the Company to the estimated fair values.
| Reclassification of barrel inventory | $ | (14,476) | |||
| Elimination of entities not included in merger | (7,748) | ||||
| Purchase accounting adjustment to fair value | 7,408 | ||||
| $ | (14,816) | ||||
The following tables summarize the estimated fair value and estimated useful life of Luxco’s Property, plant and equipment:
| Estimated Fair Value | |||||
| Land, buildings and improvements | $ | 33,271 | |||
| Transportation equipment | 112 | ||||
| Machinery and equipment | 8,981 | ||||
| Construction in progress | 599 | ||||
| Estimated fair value of property, plant and equipment acquired | $ | 42,963 | |||
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| Estimated useful life | |||||
| Buildings and improvements | 10 - 30 years | ||||
| Transportation equipment | 5 years | ||||
| Machinery and equipment | 3 - 10 years | ||||
(f) The adjustment to Other assets includes (i) reclassification adjustment to move MGP’s historical Trade names balance out of Other assets, (ii) reclassification adjustment to move MGP’s historical Goodwill balance out of Other assets, and (iii) reclassification adjustment to move Luxco’s historical Notes receivable balance into Other assets.
| Reclassification of MGP’s trade names | $ | (890) | |||
| Reclassification of MGP’s Goodwill | (2,738) | ||||
| Reclassification of Luxco’s Notes receivable | 2,893 | ||||
| $ | (735) | ||||
(g) Reflects (i) the reclassification of MGP’s and Luxco’s historical Trade names balance into Intangible assets, and (ii) the purchase accounting adjustment to historical Intangible assets acquired by the Company to the estimated fair values.
| Reclassification of MGP’s trade names | $ | 890 | |||
| Reclassification of Luxco’s trade names | 92,927 | ||||
| Fair value adjustment to Intangible assets | 119,756 | ||||
| $ | 213,573 | ||||
The historical trade names and distributor relationships acquired by the Company have been adjusted to the estimated fair values using the income approach. Management and a third party valuation team performed a preliminarily valuation analysis to determine the fair value of each trade name and distributor relationship. The trade names have an estimated fair value of $176,500 and are classified as indefinite lived intangible assets. The distributor relationships have an estimated fair value of $37,800 and will be amortized using the straight line method over the remaining useful life of 20 years.
(h) Reflects the reclassification adjustment to move MGP’s historical Goodwill balance of $2,738 from Other assets into Goodwill. Additionally, the Goodwill adjustment reflects the purchase price paid in excess of the preliminary estimated fair value of assets acquired and liabilities assumed. See Note 3 for further details on the purchase price allocation and goodwill.
(i) Reflects the repayment of Luxco’s debt which was assumed by MGP in the transaction and repaid on the closing date.
(j) The adjustment to Accounts payable reflects (i) the reclassification adjustment to move Luxco’s historical Federal and state liquor taxes payable into Accounts payable to align with MGP’s presentation, (ii) the reclassification adjustment to move Luxco’s historical current note payable from Current maturities of long-term debt into Accounts payable to align with MGP’s presentation, (iii) the elimination of Accounts payable related to entities not acquired as part of the merger agreement, and (iv) the elimination of payables owed by Luxco to the Company as of December 31, 2020.
| Reclassification of Federal and state liquor taxes payable | $ | 4,978 | |||
| Reclassification of current notes payable | 26 | ||||
| Elimination of entities not included in merger | (50) | ||||
| Elimination of payables owed by Luxco to the Company | (134) | ||||
| $ | 4,820 | ||||
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(k) The adjustment to Accrued expenses reflects (i) the reclassification of Luxco’s historical Salaries, wages and commission, and Distributions payable balances into Accrued expenses to align with MGP’s presentation, and (ii) the elimination of accrued expenses related to entities not part of the merger agreement.
| Salaries, wages and commissions | $ | 3,259 | |||
| Distributions payable | 6,279 | ||||
| Elimination of entities not included in merger | (53) | ||||
| $ | 9,485 | ||||
(l) The cash portion of the Merger Consideration, the repayment of assumed debt and MGP’s transaction related expenses were financed with borrowings under the Company’s existing Credit Agreement.
(m) The adjustment to Deferred Income taxes reflects the transaction accounting adjustment for additional deferred tax liability of $54,921 as a result of purchase accounting. The deferred taxes recorded represents the difference between the book basis and tax basis of acquired assets and assumed liabilities on the transaction date based upon our preliminary allocation of fair value.
(n) The adjustment reflects the elimination of the Luxco stockholder’s equity balances on the Luxco’s historical combined balance sheet as a result of purchase accounting. Additionally, the adjustment reflects the issuance 5,007,833 shares of MGP’s Common Stock, subject to adjustment for fractional shares, which on April 1, 2021 were valued at $296,213.
Note 5. Notes to Unaudited Pro Forma Combined Statement of Income
The following is a description of preliminary transaction accounting adjustments reflected in the unaudited pro forma combined statement of income.
(a) The adjustment to Sales reflects the transaction accounting adjustment for MGP sales to Luxco for the year ended December 31, 2020, which would be considered intercompany sales and eliminated in consolidation.
(b) The adjustment to Cost of sales reflects transaction accounting adjustments for (i) the additional depreciation expense related to the purchase accounting adjustment of acquired Property, plant and equipment to the estimated fair value, (ii) the additional costs related to the purchase accounting adjustment of finished goods inventory to the estimated fair value, and (iii) the elimination of Cost of sales associated with MGP sales to Luxco for the year ended December 31, 2020, which would be considered intercompany and eliminated in consolidation.
| Additional depreciation of Property, plant and equipment | $ | 3,060 | |||
| Additional Cost of sales - finished goods inventory (including barrel inventory) | 2,647 | ||||
| Elimination of intercompany Cost of sales | (1,672) | ||||
| $ | 4,035 | ||||
(c) The adjustment to Selling, general and administrative expenses reflects (i) the reclassification of Luxco’s historical Donation balance into Selling, general and administrative expenses, (ii) the elimination of expenses related to entities not part of the merger agreement, (iii) the additional amortization related to the purchase accounting adjustment of Intangible assets to the estimated fair value, and (iv) the transaction accounting adjustment of additional merger transaction costs.
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| Donations | $ | 467 | |||
| Elimination of entities not included in merger | (1,027) | ||||
| Amortization on intangible assets | 1,859 | ||||
| Luxco merger related costs | 3,731 | ||||
| MGP merger related costs | 8,109 | ||||
| $ | 13,139 | ||||
Merger related costs of $1,185 were included in MGP and Luxco’s historical Selling, general and administrative expense on the unaudited pro forma combined statement of income for the year ended December 31, 2020. The merger related costs will not affect the Company’s statement of income beyond one year after the acquisition.
(d) The adjustment to Interest expense, net and other includes (i) the reclassification of Luxco’s historical Other income, net and Interest income balance into Interest expense, net and other, (ii) the elimination of other income, net related to entities not part of the merger agreement, (iii) the elimination of interest expense related to Luxco’s debt balances, and (iv) the additional interest expense incurred from the draw down on the MGP Credit Agreement.
| Other income, net | $ | (139) | |||
| Interest income | 46 | ||||
| Elimination of entities not included in merger | (181) | ||||
| Elimination of Luxco historical interest expense | 2,399 | ||||
| MGP additional interest expense | (2,427) | ||||
| $ | (302) | ||||
(e) The adjustment reflects the tax effect of the transaction accounting adjustments, which is estimated to be the combined federal and state statutory tax rate of 26.9%. The tax rates used are not necessarily indicative of the effective tax rate of the combined company.
(f) The pro froma combined basic and diluted weighted average shares outstanding has been calculated using the historical weighted average shares outstanding of MGP common stock and the additional 5,007,833 shares issued in connection with the merger for the year ended December 31, 2020.
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