MGP INGREDIENTS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of MGP Ingredients, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting as of December 31, 2021 was effective. On April 1, 2021, we completed the merger with Luxco, Inc. and its affiliated companies (“Luxco”). We are currently integrating Luxco into our operations and internal control process and, pursuant to the Securities and Exchange Commission Staff interpretative guidance that assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of the Company’s assessment of the internal controls over financial reporting at December 31, 2021 does not include Luxco. At December 31, 2021, the total assets of Luxco, excluding goodwill and intangible assets, represent approximately 21 percent of consolidated assets. The total revenues of Luxco represents approximately 28 percent of consolidated revenues for the year ended December 31, 2021. KPMG, LLP, the independent registered public accounting firm that audited the Company’s financial statements contained herein, has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2021. The combined report on the consolidated financial statements of MGP Ingredients, Inc. and subsidiaries and audit report is included in Item 8 of this Form 10-K. 36 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors MGP Ingredients, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of MGP Ingredients, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company acquired Luxco, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Luxco, Inc.’s internal control over financial reporting associated with total assets, excluding goodwill and intangible assets, of approximately 21 percent of consolidated assets and total revenues of approximately 28 percent of consolidated revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Luxco, Inc. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures 37 that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates. Revenue recognition under bill and hold arrangements As discussed in Note 1 to the consolidated financial statements, the Company’s Distillery Products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells aged and unaged distillate to customers. As discussed in Note 3 to the consolidated financial statements, brown goods premium beverage alcohol revenue was $162,074 thousands for the year ended December 31, 2021, a portion of which was for bill and hold arrangements. We identified the evaluation of revenue recognized under bill and hold arrangements as a critical audit matter because of the extent of additional audit effort required to test the incremental bill and hold revenue recognition criteria. The incremental bill and hold revenue recognition criteria include the evaluation of: 1) the reason for the bill and hold arrangement; 2) the identification of the product as separately belonging to the customer; 3) the product being currently ready for physical transfer to the customer; and 4) the Company’s inability to use the product or direct it to another customer. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue recognition process, including controls related to bill and hold revenue recognition criteria being met. We examined a sample of bill and hold revenue transactions to assess the incremental bill and hold revenue recognition criteria. Specifically, we inspected documentation received from the customer directing the Company to warehouse distillate after production. Additionally, we observed a sample of customer-owned barrels to determine they were marked with unique identifiers separating them from Company-owned inventory and were ready for physical transfer to the customer upon request. Also, to evaluate that the Company does not have the ability to use the product or direct to another customer, we inspected underlying documentation for the same sample of bill and hold transactions to determine legal title to the product had transferred to the customer. Initial measurement of Luxco distributor relationships and certain trade name indefinite-lived intangible assets As discussed in Note 4 to the consolidated financial statements, on April 1, 2021, the Company acquired Luxco, Inc. and its affiliated companies (Luxco) in a business combination. As a result of the transaction, the Company acquired certain intangible assets, including distributor relationships and trade names with acquisition-date fair values of $41,400 thousands and $178,100 thousands, respectively. We identified the evaluation of the acquisition-date fair values of distributor relationships and certain trade names as a critical audit matter. A high degree of subjective auditor judgment was required to evaluate certain significant assumptions used in the valuation models that were applied to determine the fair value of these intangible assets, specifically the forecasted revenue growth rates, including the terminal growth rates, and the royalty rates. Changes in these assumptions could have had a significant impact on the fair values of these intangible assets. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s acquisition-date valuation process, 38 including controls related to the development of the above significant assumptions. We evaluated the reasonableness of the revenue growth rates by comparing the Company’s estimates of forecasted revenue growth to Luxco’s historical actual results and industry reports. We performed sensitivity analyses over the revenue growth rates to assess the effect of changes in those assumptions on the Company’s determination of fair value. We involved valuation professionals with specialized skills and knowledge, who assisted in: • evaluating the revenue terminal growth rates by comparing the forecasted rates to publicly available market and industry data • evaluating the trade name royalty rates by comparing the rates determined by the Company to publicly available market data for comparable transactions. /s/ KPMG LLP We have served as the Company’s auditor since 2008. Kansas City, Missouri February 24, 2022 39 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share and per share amounts) Year Ended December 31, 2021 2020 2019 Sales $ 626,720 $ 395,521 $ 362,745 Cost of sales 427,755 296,715 286,213 Gross profit 198,965 98,806 76,532 Advertising and promotion expenses 16,098 2,712 2,827 Selling, general, and administrative expenses 72,829 41,853 26,463 Insurance recoveries ( 16,325 ) — — Operating income 126,363 54,241 47,242 Interest expense ( 4,037 ) ( 2,267 ) ( 1,305 ) Other income (loss), net ( 1,230 ) 627 — Income before income taxes 121,096 52,601 45,937 Income tax expense 30,279 12,256 7,144 Net income 90,817 40,345 38,793 Net loss attributable to noncontrolling interest 490 — — Net income attributable to MGP Ingredients, Inc. 91,307 40,345 38,793 Income attributable to participating securities ( 712 ) ( 261 ) ( 253 ) Net income used in Earnings Per Share calculation $ 90,595 $ 40,084 $ 38,540 Weighted average common shares Basic 20,719,663 16,937,125 17,012,288 Diluted 20,982,453 16,937,125 17,012,288 Earnings Per Share Basic $ 4.37 $ 2.37 $ 2.27 Diluted $ 4.34 $ 2.37 $ 2.27 See Accompanying Notes to Consolidated Financial Statements 40 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Year Ended December 31, 2021 2020 2019 Net income attributable to MGP Ingredients, Inc. $ 91,307 $ 40,345 $ 38,793 Other comprehensive income (loss), net of tax: Unrealized loss on foreign currency translation adjustment ( 151 ) — — Changes in Company-sponsored post-employment benefit plan 19 732 ( 151 ) Other comprehensive income (loss) ( 132 ) 732 ( 151 ) Comprehensive income attributable to MGP Ingredients, Inc. 91,175 41,077 38,642 Comprehensive loss attributable to noncontrolling interest ( 490 ) — — Comprehensive income $ 90,685 $ 41,077 $ 38,642 See Accompanying Notes to Consolidated Financial Statements 41 MGP INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts and par value) December 31, 2021 2020 Current Assets Cash and cash equivalents $ 21,568 $ 21,662 Receivables (less allowance for credit loss at $ 150 and $ 24 at December 31, 2021 and 2020, respectively) 92,537 56,966 Inventory 245,944 141,011 Prepaid expenses 1,510 2,644 Refundable income taxes 5,539 — Total current assets 367,098 222,283 Property, plant, and equipment, net 207,286 131,992 Operating lease right-of-use assets, net 9,671 5,151 Investment in joint venture 4,944 — Intangible assets, net 218,838 890 Goodwill 226,294 2,738 Other assets 7,336 3,521 Total assets $ 1,041,467 $ 366,575 Current Liabilities Current maturities of long-term debt $ 3,227 $ 1,600 Accounts payable 53,712 30,273 Federal and state excise taxes payable 6,992 107 Income taxes payable — 704 Accrued expenses and other 24,869 20,645 Total current liabilities 88,800 53,329 Long-term debt, less current maturities 35,266 38,271 Convertible senior notes 194,906 — Long-term operating lease liabilities 6,997 3,057 Other noncurrent liabilities 5,132 7,094 Deferred income taxes 66,101 2,298 Total liabilities 397,202 104,049 Commitments and Contingencies – Note 10 Stockholders’ Equity Capital stock Preferred, 5 % non-cumulative; $ 10 par value; authorized 1,000 shares; issued and outstanding 437 shares 4 4 Common stock No par value; authorized 40,000,000 shares; issued 23,125,166 and 18,115,965 shares at December 31, 2021 and 2020, respectively; 21,964,314 and 16,915,862 shares outstanding at December 31, 2021 and 2020, respectively 6,715 6,715 Additional paid-in capital 315,802 15,503 Retained earnings 344,237 262,943 Accumulated other comprehensive income 354 486 Treasury stock, at cost, 1,160,852 and 1,200,103 shares at December 31, 2021 and 2020, respectively ( 22,357 ) ( 23,125 ) Total MGP Ingredients, Inc. stockholders equity 644,755 262,526 Noncontrolling interest ( 490 ) — Total equity 644,265 262,526 Total liabilities and equity $ 1,041,467 $ 366,575 See Accompanying Notes to Consolidated Financial Statements 42 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31, 2021 2020 2019 Cash Flows from Operating Activities Net income $ 90,817 $ 40,345 $ 38,793 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,092 12,961 11,572 Gain on insurance recoveries ( 16,325 ) — — Share-based compensation 5,555 3,002 3,304 Equity method investment loss 1,611 — — Deferred income taxes, including change in valuation allowance 6,772 593 252 Other, net 145 494 ( 116 ) Changes in operating assets and liabilities, net of effects of acquisitions: Receivables, net ( 6,031 ) ( 16,173 ) ( 2,134 ) Inventory ( 14,214 ) ( 3,886 ) ( 28,162 ) Prepaid expenses 2,586 ( 748 ) ( 728 ) Income taxes payable (refundable) ( 6,242 ) 1,750 ( 275 ) Accounts payable 5,301 1,817 2,107 Accrued expenses and other 738 11,537 ( 4,687 ) Federal and state excise taxes payable ( 1,467 ) ( 34 ) 140 Other, net ( 75 ) 1,597 ( 344 ) Net cash provided by operating activities 88,263 53,255 19,722 Cash Flows from Investing Activities Additions to property, plant, and equipment ( 47,389 ) ( 19,701 ) ( 16,730 ) Purchase of business, net of cash acquired ( 149,005 ) ( 2,750 ) — Contributions to equity method investments ( 1,470 ) — — Proceeds from property insurance recoveries 16,325 — — Proceeds from sale of property and other — 2,906 — Other, net ( 1,080 ) ( 102 ) ( 1,201 ) Net cash used in investing activities ( 182,619 ) ( 19,647 ) ( 17,931 ) Cash Flows from Financing Activities Payment of dividends and dividend equivalents ( 10,017 ) ( 8,188 ) ( 6,856 ) Purchase of treasury stock ( 767 ) ( 4,411 ) ( 5,489 ) Loan fees incurred with borrowings ( 7,050 ) ( 1,148 ) — Proceeds from long-term debt — — 20,000 Principal payments on long-term debt ( 1,620 ) ( 1,208 ) ( 386 ) Proceeds from credit agreement - revolver 242,300 54,700 17,440 Payments on credit agreement - revolver ( 242,300 ) ( 55,000 ) ( 28,140 ) Proceeds from convertible senior notes 201,250 — — Payment on assumed debt as part of the Merger ( 87,509 ) — — Other, net — — ( 76 ) Net cash provided by (used in) financing activities 94,287 ( 15,255 ) ( 3,507 ) Effect of exchange rate changes on cash and cash equivalents ( 25 ) — — Increase (decrease) in cash and cash equivalents ( 94 ) 18,353 ( 1,716 ) Cash and cash equivalents, beginning of year 21,662 3,309 5,025 Cash and cash equivalents, end of year $ 21,568 $ 21,662 $ 3,309 See Accompanying Notes to Consolidated Financial Statements 43 MGP INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Dollars in thousands) Capital Stock Preferred Issued Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Non-Controlling Interest Total Balance, December 31, 2018 $ 4 $ 6,715 $ 15,375 $ 198,914 $ ( 164 ) $ ( 19,403 ) $ — $ 201,441 Comprehensive income (loss): Net income — — — 38,793 — — — 38,793 Other comprehensive loss — — — — ( 151 ) — — ( 151 ) Dividends and dividend equivalents of $ 0.40 per common share and per restricted stock unit, net of estimated forfeitures — — — ( 6,854 ) — — — ( 6,854 ) Share-based compensation — — 2,453 — — — — 2,453 Stock shares awarded, forfeited or vested — — ( 3,799 ) — — 4,650 — 851 Stock shares repurchased — — — — — ( 5,489 ) — ( 5,489 ) Adjustment related to Accounting Standards Update 2018-02 adoption — — — ( 69 ) 69 — — — Balance, December 31, 2019 4 6,715 14,029 230,784 ( 246 ) ( 20,242 ) — 231,044 Comprehensive income: Net income — — — 40,345 — — — 40,345 Other comprehensive income — — — — 732 — — 732 Dividends and dividend equivalents of $ 0.48 per common share and per restricted stock unit, net of estimated forfeitures — — — ( 8,186 ) — — — ( 8,186 ) Share-based compensation — — 2,067 — — — — 2,067 Stock shares awarded, forfeited or vested — — ( 593 ) — — 1,528 — 935 Stock shares repurchased — — — — — ( 4,411 ) — ( 4,411 ) Balance, December 31, 2020 4 6,715 15,503 262,943 486 ( 23,125 ) — 262,526 Comprehensive income (loss): Net income — — — 91,307 — — ( 490 ) 90,817 Other comprehensive loss — — — — ( 132 ) — — ( 132 ) Dividends and dividend equivalents of $ 0.48 per common share and per restricted stock unit, net of estimated forfeitures — — — ( 10,013 ) — — — ( 10,013 ) Share-based compensation — — 5,555 — — — — 5,555 Stock shares awarded, forfeited or vested — — ( 1,535 ) — — 1,535 — — Stock shares repurchased — — — — — ( 767 ) — ( 767 ) Equity consideration for Merger — — 296,279 — — — — 296,279 Balance, December 31, 2021 $ 4 $ 6,715 $ 315,802 $ 344,237 $ 354 $ ( 22,357 ) $ ( 490 ) $ 644,265 See Accompanying Notes to Consolidated Financial Statements 44 MGP INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, unless otherwise noted) NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company. MGP Ingredients, Inc. (“Company”) is a Kansas corporation headquartered in Atchison, Kansas and is a leading producer and supplier of premium distilled spirits, branded spirits and food ingredients. Distilled spirits include premium bourbon and rye whiskeys and grain neutral spirits, including vodka and gin. The Company’s distilled spirits are either packaged and sold under our own brands to distributors, sold, directly or indirectly to manufactures of other branded spirits, or direct to consumers. MGP is also a top producer of high quality industrial alcohol for use in both food and non-food applications. The Company’s protein and starch food ingredients provide a host of functional, nutritional, and sensory benefits for a wide range of food products to serve the consumer packaged goods industry. The Company’s industrial alcohol and ingredients products are sold directly, or through distributors, to manufacturers and processors of finished packaged goods or to bakeries. The Company’s distillery products are derived from corn and other grains (including rye, barley, wheat, barley malt, and milo), and its ingredient products are derived primarily from wheat flour. On April 1, 2021, the Company acquired Luxco, Inc. and its affiliated companies (“Luxco”) which is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. Luxco’s operations predominately involve the producing, importing, bottling and rectifying of distilled spirits. See Note 4, Business Combination, for further details. As a result of the merger with Luxco, during 2021, the Company established a new reportable segment structure that separates Branded Spirits from the Distillery Products segment. The Ingredient Solutions segment remains unchanged. The new segment presentation reflects how management is now operating the business and making resource allocations. The Company now reports three operating segments: Distillery Products, Branded Spirits and Ingredient Solutions. Prior periods have been revised to reflect the new operating segment structure. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the 2019 and 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation. Use of Estimates. The financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The application of certain of these policies places demands on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain, inclusive of effects related to the COVID-19 pandemic. For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment. Inventory. Inventory includes finished goods, raw materials in the form of agricultural commodities used in the production process, as well as bottles, caps and labels used in the bottling process, and certain maintenance and repair items. Bourbons and whiskeys, included in inventory, are normally aged in barrels for several years, following industry practice; all barreled bourbon and whiskey is classified as a current asset. The Company includes warehousing, insurance, and other carrying charges applicable to barreled whiskey in inventory costs. Inventories are stated at the lower of cost or net realizable value on the first-in, first-out, or FIFO, method. Inventory valuations are impacted by constantly changing prices paid for key materials, primarily corn. Properties, Depreciation, and Amortization. Property, plant, and equipment are typically stated at cost. Additions, including those that increase the life or utility of an asset, are capitalized and all properties are depreciated over their estimated remaining useful lives. Depreciation and amortization are computed using the straight line method over the following estimated useful lives: 45 Buildings and improvements (a) 10 – 35 years Machinery and equipment 3 – 10 years Office furniture and equipment 5 – 10 years Computer equipment and software 3 – 5 years Motor vehicles 5 years (a) Leasehold improvements are the shorter of economic useful life or life of lease Maintenance costs are expensed as incurred. The cost of property, plant, and equipment sold, retired, or otherwise disposed of, as well as related accumulated depreciation and amortization, are eliminated from the property accounts with related gains and losses reflected in the Consolidated Statements of Income. The Company capitalizes interest costs associated with significant construction projects. Total interest incurred for 2021, 2020, and 2019 is noted below: Year Ended December 31, 2021 2020 2019 Interest costs charged to expense $ 4,037 $ 2,267 $ 1,305 Plus: Interest cost capitalized 339 246 575 Total $ 4,376 $ 2,513 $ 1,880 Revenue Recognition. Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to receive in exchange for the performance obligations. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less. Revenue is recognized for the sale of products at the point in time finished products are delivered to the customer in accordance with shipping terms. This is a faithful depiction of the satisfaction of the performance obligation because, at that point control passes to the customer, the customer has legal title and the risk and rewards of ownership have transferred, and the customer has present obligation to pay. The Company’s Distillery Products segment routinely enters into bill and hold arrangements, whereby the Company produces and sells aged and unaged distillate to customers, and the product is barreled at the customer’s request and warehoused at a Company location for an extended period of time in accordance with directions received from the Company’s customers. Even though the aged and unaged distillate remains in the Company’s possession, a sale is recognized at the point in time when the customer obtains control of the product. Control is transferred to the customer in bill and hold transactions when: customer acceptance specifications have been met, legal title has transferred, the customer has a present obligation to pay for the product and the risk and rewards of ownership have transferred to the customer. Additionally, all the following bill and hold criteria have been met in order for control to be transferred to the customer: the reason for the bill and hold arrangement is substantive -the customer has requested the product be warehoused, the product has been identified as separately belonging to the customer, the product is currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or direct it to another customer. Warehouse service revenue is recognized over the time that warehouse services are rendered and as they are rendered. This is a faithful depiction of the satisfaction of the performance obligation because control of the aging products has already passed to the customer and there are no additional performance activities required by the Company, except as requested by the customer. The performance of the service activities, as requested, is invoiced as satisfied and revenue is concurrently recognized. Contract bottling is recognized over the time contract bottling services are rendered and as they are rendered. Sales in the Branded Spirits segment reflect reductions attributable to consideration given to customers in incentive programs, including discounts and allowances for certain volume targets. These allowances and discounts are not estimated, are not for distinct goods, and paid only when the depletion volume targets are achieved. The amounts reimbursed to customers is determined based on agreed-upon amounts and are recorded as a reduction of revenue. Excise Tax. 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 46 in varying amounts. The Company calculates its Federal and state excise tax expense based upon units shipped and on its understanding of the applicable excise tax laws. Excise taxes that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are excluded from revenue and expense. Recognition of Insurance Recoveries. Estimated loss contingencies are recognized as charges to income when they are probable and reasonably estimable. Insurance recoveries are not recognized until all contingencies related to the insurance claim have been resolved and settlement has been reached with the insurer. Insurance recoveries, to the extent of costs and losses, are reported as a reduction to costs on the Consolidated Statements of Income. Insurance recoveries, in excess of costs and losses, if any, would be reported as a separate caption in Operating income on the Consolidated Statements of Income. Income Taxes. The Company accounts for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized if it is “more likely than not” that at least some portion of the deferred tax asset will not be realized. Earnings Per Share (“EPS”). Basic and diluted EPS is computed using the two class method, which is an earnings allocation formula that determines net income per share for each class of Common Stock and participating security according to dividends declared and participation rights in undistributed earnings. Basic EPS amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each year or period. Diluted EPS is computed using the if-converted method by dividing the net income attributable to common shareholders by the weighted average shares outstanding, inclusive of the impacts of the conversion feature of the Convertible Senior Notes. Translation of Foreign Currencies. Assets and liabilities of Niche Drinks, Co., ltd. (“Niche”), a wholly-owned subsidiary of the Company whose functional currency is the British pound sterling, are translated to U.S. dollars using the exchange rate in effect at the consolidated balance sheet date. Results of operations are translated using average rates during the period. Adjustments resulting from the translation process are included as a component of Accumulated other comprehensive income. Business Combinations. Assets and liabilities assumed during a business combination are generally recorded at fair market value as of the acquisition date. Goodwill is recognized to the extent that the purchase consideration exceeds the value of 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. Goodwill and Other Intangible Assets. The Company records goodwill and other indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and other indefinite-lived intangible assets to its respective reporting units. The Company evaluates goodwill for impairment at least annually, in the fourth quarter, or on an interim basis if events and circumstances occur that would indicate it is more likely than not that the fair value of a reporting unit is less than the carrying value. To the extent that the carrying amount exceeds fair value, an impairment of goodwill is recognized and allocated to the reporting units. Judgment is required in the determination of reporting units, the assignment of assets and liabilities to reporting units, including goodwill, and the determination of fair value of the reporting units. The Company separately evaluates indefinite-lived intangible assets for impairment. As of December 31, 2021, the Company determined that goodwill and indefinite-lived intangible assets were not impaired. Fair Value of Financial Instruments. The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short-term financial instruments approximates the fair value due to their short-term nature. 47 These financial instruments have no stated maturities or the financial instruments have short-term maturities that approximate market. The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $ 272,971 and $ 44,548 at December 31, 2021 and 2020, respectively. The financial statement carrying value (including unamortized loan fees) was $ 233,399 and $ 39,871 at December 31, 2021 and 2020, respectively. These fair values are considered Level 2 under the fair value hierarchy. See Note 4, Business Combination, for discussion related the the fair value of tangible and intangible assets acquired and liabilities assumed as part of the merger with Luxco. Derivative Instruments. Certain commodities the Company uses in its production process, or input costs, exposes it to market price risk due to volatility in the prices for those commodities. Through the Company’s grain supply contracts for its Atchison and Lawrenceburg facilities, its wheat flour supply contract for the Atchison facility, and its natural gas contracts for both facilities, it purchases grain, wheat flour, and natural gas, respectively, for delivery from one to 24 months into the future at negotiated fixed prices. The Company has determined that the firm commitments to purchase grain, wheat flour, and natural gas under the terms of its supply contracts meets the normal purchases and sales exception as defined under ASC 815, Derivatives and Hedging , because the quantities involved are for amounts to be consumed within the normal expected production process. Equity Method Investments. The consolidated financial statements include the results of Luxco and its affiliated companies since April 1, 2021, when the Company obtained control through the Merger. The Company holds 50 percent interest in DGL Destiladores, S.de R.L. de C.V. (“DGL”) and Agricola LG, S.de R.L. de C.V. (“Agricola”) (combined “LMX”), which are accounted for as equity method investments. At December 31, 2021, the investment in LMX was $ 4,944 , which is recorded in Investment in joint ventures on the Consolidated Balance Sheet. During the year ended December 31, 2021, the Company recorded a $ 1,611 loss from equity method investments, which is recorded in Other income (loss), net on the Consolidated Statement of Income. Recently Adopted Accounting Standard Updates. Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by eliminating the beneficial conversion feature and cash conversion models. Certain convertible instruments will be accounted for as a single unit of account, unless the conversion feature requires bifurcation and recognition as a derivative. Additionally, this ASU simplifies the earnings per share calculation, by eliminating the treasury stock method and requiring entities to use the if-converted method. This guidance is effective for annual periods beginning after December 31, 2021 with early adoption permitted. The Company adopted ASU 2020-06 on January 1, 2021. Recently Issued Accounting Pronouncements. ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue Recognition . This ASU is effective for annual and interim periods beginning after December 15, 2022. Early adoption is permitted. The Company is still evaluating the effect that ASU 2021-08 will have on its consolidated financial statements and related disclosures. 48 NOTE 2: OTHER BALANCE SHEET CAPTIONS Inventory. December 31, 2021 2020 Finished goods $ 35,362 $ 16,414 Barreled distillate (bourbons and whiskeys) 174,080 105,445 Raw materials 24,981 6,954 Work in process 1,261 1,805 Maintenance materials 9,179 8,634 Other 1,081 1,759 Total $ 245,944 $ 141,011 Property, plant, and equipment, net. December 31, 2021 2020 Land, buildings, and improvements $ 158,178 $ 114,374 Transportation equipment 865 664 Machinery and equipment 252,473 181,990 Construction in progress 16,733 16,702 Property, plant, and equipment, at cost 428,249 313,730 Less accumulated depreciation and amortization ( 220,963 ) ( 181,738 ) Property, plant, and equipment, net $ 207,286 $ 131,992 Accrued expenses. December 31, 2021 2020 Employee benefit plans $ 1,427 $ 3,033 Salaries and wages 16,466 12,607 Property taxes 1,495 1,461 Current operating lease liabilities 2,865 2,112 Other 2,616 1,432 Total $ 24,869 $ 20,645 NOTE 3: REVENUE The Company generates revenues from the Distillery Products segment by the sale of products and by providing warehouse services related to the storage and aging of customer products. The Company generates revenue from the Branded Spirits segment by the sale of products and by providing contract bottling services. The Company generates revenue from the Ingredient Solutions segment by the sale of products. Revenue related to sales of products is recognized at a point in time whereas revenue generated from warehouse services and contract bottling services are recognized over time. Contracts with customers include a single performance obligation (either the sale of products or the provision of warehouse services and contract bottling service). 49 Disaggregation of Sales. The following table presents the Company’s sales disaggregated by segment and major products and services. Year Ended December 31, 2021 2020 2019 Distillery Products Brown Goods $ 162,074 $ 121,384 $ 104,195 White Goods 75,818 63,873 62,862 Premium beverage alcohol 237,892 185,257 167,057 Industrial alcohol 62,628 80,682 79,833 Food grade alcohol 300,520 265,939 246,890 Fuel grade alcohol 14,916 5,630 5,949 Distillers feed and related co-products 19,545 26,109 26,743 Warehouse services 17,523 15,631 14,656 Total Distillery Products 352,504 313,309 294,238 Branded Spirits Ultra premium 34,030 3,772 2,625 Premium 19,663 334 370 Mid 51,890 — — Value 58,514 — — Other 19,469 43 — Total Branded Spirits 183,566 4,149 2,995 Ingredient Solutions Specialty wheat starches 47,758 41,631 30,816 Specialty wheat proteins 31,485 26,960 22,359 Commodity wheat starch 10,014 7,630 9,628 Commodity wheat protein 1,393 1,842 2,709 Total Ingredient Solutions 90,650 78,063 65,512 Total sales $ 626,720 $ 395,521 $ 362,745 NOTE 4: BUSINESS COMBINATION 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 (the “Merger”). Luxco is a leading branded beverage alcohol company across various categories, with a more than 60-year business heritage. As a result of the Merger, MGP increased its scale and market position in the branded-spirits sector and believes it strengthened its platform for future growth of higher valued-added products. Following the Merger, Luxco became a wholly-owned subsidiary of MGP and is included within the Branded Spirits segment. The aggregate 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 and represented approximately 22.8 percent of the Company’s outstanding common stock immediately following the closing of the Merger. The Merger Consideration was subject to customary purchase price adjustments related to, among other things, net working capital, acquired cash and assumed debt. The consideration paid at closing included a preliminary estimated purchase price adjustment. In September 2021, the parties finalized the purchase price adjustment, which decreased the cash consideration paid by approximately $ 608 and increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing. 50 The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with borrowings under the Company’s existing Credit Agreement which was drawn down on April 1, 2021. See Note 6, Corporate Borrowings, for further details. For tax purposes, the transaction was structured partially as a tax-free reorganization and partially as a taxable acquisition, as defined in the Internal Revenue Code. The Company anticipates the amount transferred in a tax deferred manner, under the tax-free reorganization rules, will not create additional tax basis for the Company. The taxable component of the transaction will create additional tax basis and a corresponding future tax deduction for the Company. Purchase Price Allocation. The Merger was accounted for as a business combination in accordance with Financial Accounting Standards Board Accounting Standard Codification 805, Business Combinations (“ASC 805”), and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The following table summarizes the allocation of the consideration paid for Luxco to the 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 $ 149,484 Value of MGP Common Stock issued at close (a) 296,279 Fair value of total consideration transferred $ 445,763 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash $ 479 Receivables 29,675 Inventory 90,854 Prepaid expenses 1,454 Property, plant and equipment, net 41,279 Investments in joint ventures 5,085 Intangible assets (b) 219,500 Other assets 4,257 Total assets 392,583 Current maturities of long-term debt (c) 87,509 Accounts payable 14,453 Federal and state excise taxes payable 8,352 Accrued expenses and other 2,832 Other noncurrent liabilities 196 Deferred income taxes 57,034 Total liabilities 170,376 Goodwill 223,556 Total $ 445,763 (a) The Company issued 5,007,833 shares of MGP Common Stock which was valued at $ 59.15 per share on April 1, 2021. In September 2021, the parties finalized the purchase price adjustments which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing. (b) Intangible assets acquired includes trade names with an estimated fair value of $ 178,100 and distributor relationships with an estimated fair value of $ 41,400 . (c) The fair value of Luxco’s debt that was assumed by MGP in the transaction and repaid on the closing date. In accordance with ASC 805 assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable in the market and represent Level 3 measurements within the fair value hierarchy. Level 3 inputs include discount rates that would be used by a market participant in valuing these assets and liabilities, projections of revenues and cash flows, distributor attrition rates, royalty rates and market comparable, among others. The fair value of work-in-process and finished goods inventory was determined using the comparative sales method and raw materials was determined 51 using the replacement cost method. The fair value of personal property assets was determined using the market approach and the indirect and direct method of the cost approach, and the fair value of real property was determined using the cost approach and and the sales comparison approach. Goodwill of $ 223,556 , all of which is expected to be deductible for tax purposes, represents the excess of the consideration transferred over the estimated fair value of assets acquired net of liabilities assumed. The Intangible assets acquired includes indefinite-lived intangible assets, trade names, with an estimated fair value of $ 178,100 and definite-lived intangible assets, distributor relationships, with an estimated fair value of $ 41,400 and a useful life of 20 years. The trade names and distributor relationships acquired by the Company have been recorded at the estimated fair values using the relief from royalty method and multi-period earnings method, respectively. Management engaged a third party valuation specialist to assist in the valuation analysis of certain acquired assets including trade name and distributor relationship. Operating Results . The operating results of Luxco were consolidated with the Company’s operating results subsequent to the merger date. During the year ended December 31, 2021, the Company recorded $ 177,607 and $ 17,027 , of Sales and Income before income taxes, respectively, attributable to Luxco on it’s Consolidated Statement of Income. During the year ended December 31, 2021, the Company has incurred $ 8,927 of transaction related costs, which are included in Selling, general and administrative expenses on the Consolidated Statements of Income. Pro Forma Information . The following table summarizes the unaudited pro forma financial results for the year ended December 31, 2021 and 2020, as if the Merger had occurred on January 1, 2020: Pro Forma Financial Information Year Ended December 31, 2021 2020 Sales $ 671,090 $ 592,025 Net income 100,597 46,200 Basic earnings per share 4.84 2.09 The pro forma results are adjusted for items that are non-recurring in nature and directly attributable to the Merger, including the income tax effect of the adjustments. Merger related costs incurred by the Company of $ 8,927 for the year ended December 31, 2021 were excluded and $ 7,037 is assumed to have been incurred on January 1, 2020. Merger related costs incurred by Luxco of $ 3,132 were excluded from the year ended December 31, 2021 pro forma results. A non-recurring expense of $ 2,529 for the year ended December 31, 2021 related to the fair value adjustment of finished goods inventory estimated to have been sold was removed and included in the results for the year ended December 31, 2020. Other acquired tangible and intangible assets are assumed to be recorded at estimated fair value on January 1, 2020 and are amortized or depreciated over their estimated useful lives. The summary pro forma financial information is for informational purposes only, is based on estimates and assumptions, and does not purport to represent what the Company’s consolidated results of operations actually would have been if the Merger had occurred at an earlier date, and such data does not purport to project the Company’s results of operations for any future period. The basic shares outstanding used to calculate the pro forma net income per share amounts presented above have been adjusted to assume shares issued at the closing of the Merger were outstanding since January 1, 2020. NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS Definite-Lived Intangible Assets The Company has a definite-lived intangible asset which was acquired as a result of the Merger. The distributor relationships have a carrying value of $ 39,848 , net of accumulated amortization of $ 1,552 . The distributor relationships have a useful life of 20 years. The amortization expense for the year ended December 31, 2021 was $ 1,552 . 52 As of December 31, 2021, the expected future amortization expense related to definite-lived intangibles assets are as follows: 2022 $ 2,070 2023 2,070 2024 2,070 2025 2,070 2026 2,070 Thereafter 29,498 Total $ 39,848 Goodwill and Indefinite-Lived Intangible Assets The Company records goodwill and indefinite-lived intangible assets in connection with various acquisitions of businesses and allocates the goodwill and indefinite-lived intangible assets to its respective reporting units. Changes in carrying amount of goodwill by business segment were as follows: Distillery Products Branded Spirits Ingredient Solutions Total Balance at December 31, 2020 $ — $ 2,738 $ — $ 2,738 Acquisitions — 223,556 — 223,556 Balance at December 31, 2021 $ — $ 226,294 $ — $ 226,294 Changes in carrying amount of indefinite-lived intangible assets by business segment were as follows: Distillery Products Branded Spirits Ingredient Solutions Total Balance at December 31, 2020 $ — $ 890 $ — $ 890 Acquisitions — 178,100 — 178,100 Balance at December 31, 2021 $ — $ 178,990 $ — $ 178,990 NOTE 6: CORPORATE BORROWINGS Indebtedness Outstanding. The following table presents the Company’s outstanding indebtedness December 31, Description (a) 2021 2020 Credit Agreement - Revolver, 1.09 % (variable rate) due 2025 $ — $ — Convertible Note, 1.88 % (fixed rate) due 2041 201,250 — Prudential Note Purchase Agreement, 3.53 % (fixed rate) due 2027 18,400 20,000 Prudential Note Purchase Agreement, 3.80 % (fixed rate) due 2029 20,000 20,000 Other long-term borrowings 203 — Total indebtedness outstanding 239,853 40,000 Less unamortized loan fees (b) ( 6,454 ) ( 129 ) Total indebtedness outstanding, net 233,399 39,871 Less current maturities of long-term debt ( 3,227 ) ( 1,600 ) Long-term debt $ 230,172 $ 38,271 (a) Interest rates are as of December 31, 2021. (b) Loan fees are being amortized over the life of the Credit Agreement and Note Purchase Agreement. Credit Agreement. On February 14, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with multiple participants led by Wells Fargo Bank, National Association (“Wells Fargo Bank”), which provided for a $ 300,000 revolving credit facility. On May 14, 2021, the Company amended the Credit Agreement to increase the principal amount to $ 400,000 and to increase the amount of the revolving credit facility by up to an additional $ 100,000 provided certain conditions are satisfied and at the discretion of the lender. The Credit Agreement matures on February 14, 2025. The Credit Agreement is 53 secured by substantially all assets, excluding real property. The cash portion of the Merger Consideration, the repayment of assumed debt, and transaction-related expenses were financed with $ 242,300 borrowings under the Credit Agreement which was drawn on April 1, 2021. The Credit Agreement includes certain requirements and covenants, which the Company was in compliance with at December 31, 2021. The Company incurred $ 666 new loan fees related to the Credit Agreement during 2021. The unamortized balance of total loan fees related to the Credit Agreement was $ 1,529 at December 31, 2021, which were included in Other assets, net on the Consolidated Balance Sheet. The unamortized loan fees are being amortized over the life of the Credit Agreement. As of December 31, 2021, the Company had no outstanding borrowings under the Credit Agreement leaving $ 400,000 available. The interest rate for the borrowings of the Credit Agreement at December 31, 2021 was 1.1 %. Note Purchase Agreements . On August 23, 2017, the Company also entered into a Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc. (“Prudential Capital Group”), an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. The Note Purchase Agreement was amended by the First Amendment to Private Shelf Agreement as of February 14, 2020, the Second Amendment to Private Shelf Agreement as of September 30, 2020, the Third Amendment to Private Shelf Agreement as of January 25, 2021, and the Fourth Amendment to Private Shelf Agreement as of May 14, 2021. The amended agreement provides for the issuance of up to $ 105,000 of Senior Secured Notes under the shelf facility and issuance of up $ 20,000 Senior Secured Notes. On July 29, 2021, PGIM, Inc. provided the Company notice pursuant to Section 1.2 of the Note Agreement that Prudential has authorized an increase in the amount of the senior promissory notes that may be issued under the uncommitted shelf facility under the Note Agreement from $ 105,000 to $ 140,000 , effective as of July 29, 2021. The deadline for issuing the notes under the shelf facility is August 23, 2023. The Company initially issued $ 20,000 of Senior Secured Notes with a maturity date of August 23, 2027. The Senior Secured Notes bear interest at a rate of 3.5 percent per year. On April 30, 2019, the Company issued $ 20,000 of additional Senior Secured Notes with a maturity date of April 30, 2029. The Senior Secured Notes bear interest at a rate of 3.8 percent per year. The Note Purchase Agreement includes certain requirements and covenants, which the Company was in compliance with at December 31, 2021. The Company incurred no new loan fees related to the Note Purchase Agreement during 2021. The unamortized balance of total loan fees related to the Note Purchase Agreement was $ 110 at December 31, 2021 and is being amortized over the life of the Note Purchase Agreement. The Note Purchase Agreement is secured by substantially all assets, excluding real property. Convertible Senior Notes . On November 16, 2021, the Company issued $ 201,250 in aggregate principal amount of 1.875 % convertible senior notes due in 2041 (“2041 Notes”). The total aggregate principal amount includes $ 26,250 aggregate principal amount of 2041 Notes purchased by the initial purchasers in the offering pursuant to their exercise in full of their option to purchase additional notes under the purchase agreement for the offering. The 2041 Notes were issued pursuant to an indenture, dated as of November 16, 2021 ( the “Indenture”), by and among the Company, as issuer, Luxco, Inc., MGPI Processing, Inc. and MGPI of Indiana, LLC as subsidiary guarantors, and U.S. Bank National Association, as trustee. The 2041 Notes are senior, unsecured obligations of the Company and interest is payable semi-annually in arrears at a fixed interest rate of 1.875 % on May 15 and November 15 of each year. The 2041 Notes mature on November 15, 2041 (“Maturity Date”) unless earlier repurchased, redeemed or converted, per the agreement. The Company will settle conversion by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares at the Company’s election. The Company incurred $ 6,384 of new loan fees related to the 2041 Notes during 2021. The unamortized balance of total loan fees related to the 2041 Notes was $ 6,344 at December 31, 2021 and is being amortized over the life of the 2041 Notes. The initial conversion rate for the 2041 Notes is 10.3911 shares of common stock per $1 principal amount of the 2041 Notes. Prior to the Maturity Date, holders may convert at their option only in the following circumstances: • During any calendar quarter commencing after the quarter ending March 31, 2022, if the closing sale price of common stock for at least 20 trading days in the period of 30 consecutive trading days is more than 130 % of the conversion price; • during the 5 consecutive business days following any 10 consecutive trading day period in which the trading price per $1 principal amount of the notes for each trading day was less than 98 % of the product of the closing sale price of common stock on such trading day and the conversion rate on such trading day; • upon the occurrence of specified corporate events, as defined in the Indenture; • if the Company calls the notes for redemption; and • during the period July 15, 2026 ending close of business day immediately preceding November 20, 2026 or the period 54 July 15, 2041 and close of business day immediately preceding the Maturity Date. Other long-term borrowings . As part of the Merger, the Company acquired additional long-term notes payable to certain counties in Kentucky. Debt Maturities. Aggregate amount of maturities for long-term debt as of December 31, 2021 are as follows: 2022 $ 3,227 2023 5,629 2024 6,430 2025 6,432 2026 6,433 Thereafter 211,702 Total $ 239,853 NOTE 7: INCOME TAXES Income tax expense is composed of the following: Year Ended December 31, 2021 2020 2019 Current: Federal $ 19,746 $ 10,825 $ 6,426 State 3,489 1,291 412 Foreign 294 — — 23,529 12,116 6,838 Deferred: Federal 5,345 ( 302 ) 352 State 1,405 442 ( 46 ) 6,750 140 306 Total $ 30,279 $ 12,256 $ 7,144 Income tax expense also included tax expense allocated to comprehensive income for 2021, 2020, and 2019 of $ 19 , $ 229 , and $ 14 , respectively (see the Consolidated Statements of Comprehensive Income). A reconciliation of income tax expense at the normal statutory federal rate to income tax expense included in the accompanying Consolidated Statements of Income is below: Year Ended December 31, 2021 2020 2019 “Expected” provision at federal statutory rate $ 25,435 $ 11,046 $ 9,654 State income taxes, net 5,713 2,408 1,540 Foreign income taxes 294 — — Change in valuation allowance 204 ( 422 ) ( 168 ) Share-based compensation 31 56 ( 2,877 ) Federal and state tax credits ( 1,363 ) ( 1,035 ) ( 1,302 ) Other ( 35 ) 203 297 Income tax expense $ 30,279 $ 12,256 $ 7,144 Effective tax rate 25.0 % 23.3 % 15.6 % 55 The tax effects of temporary differences giving rise to deferred income taxes shown on the Consolidated Balance Sheets are as follows: December 31, 2021 2020 Deferred income tax assets: Share-based compensation $ 1,973 $ 2,123 State tax credit carryforwards 2,343 2,986 Operating loss carryforwards 2,416 1,264 Inventories 1,923 2,077 Operating lease liabilities 2,536 1,322 Deferred compensation 1,357 1,250 Other 3,362 1,732 Gross deferred income tax assets 15,910 12,754 Less: valuation allowance ( 1,657 ) ( 862 ) Net deferred income tax assets 14,253 11,892 Deferred income tax liabilities: Property, plant and equipment ( 24,627 ) ( 12,205 ) Intangibles ( 46,956 ) — Inventory ( 4,307 ) — Operating lease right-of-use assets ( 2,487 ) ( 1,318 ) Other ( 1,977 ) ( 667 ) Gross deferred income tax liabilities ( 80,354 ) ( 14,190 ) Net deferred income tax liability $ ( 66,101 ) $ ( 2,298 ) A schedule of the change in valuation allowance is as follows: Balance at December 31, 2019 $ 1,284 Decrease ( 422 ) Balance at December 31, 2020 862 Increase 795 Balance at December 31, 2021 $ 1,657 As of December 31, 2021, the Company’s total valuation allowance of $ 1,657 related to net operating loss and tax credits carryforwards in states and foreign countries in which it is not “more likely than not” to create enough taxable income to fully utilize the carryforwards before expiration of the carryforward periods. As of December 31, 2020, the Company’s total valuation allowance of $ 862 related to net operating loss carryforwards and certain tax credits in states in which it is not “more likely than not” to create enough state taxable income to fully utilize the carryforwards before expiration of the carryforward periods. The increase of the valuation allowance year-over-year is primarily due to the acquisition of certain foreign entities that created the inability to fully utilize certain foreign tax credits and net operating losses. The Merger with Luxco was largely structured as a non-taxable merger for U.S. income tax purposes. This merger required the Company to book an additional $ 57,034 in deferred tax liabilities to its opening balance sheet. In addition, at December 31, 2021, the Company had book tax differences resulting in a net deferred tax liability balance of $ 66,101 . This increase in the Company’s deferred tax balances could make the Company more susceptible to the tax impact of tax rate changes and its effect on earnings and earnings per share in the future. 56 As of December 31, 2021 and 2020, the Company had $ 19,823 and $ 18,697 in gross state net operating loss carryforwards, respectively. Due to varying state carryforward periods, the state net operating loss carryforwards will expire in varying years between calendar years 2022 and 2042. As of December 31, 2021 and 2020, the Company had gross state tax credit carryforwards of $ 2,966 and $ 3,778 , respectively. State credits, if not used to offset income tax expense in their respective jurisdictions, will expire in varying years between 2022 and 2038. The Company treats accrued interest and penalties related to tax liabilities, if any, as a component of income tax expense. During 2021, 2020, and 2019, the Company’s activity in accrued interest and penalties was not significant. The following is a reconciliation of the total amount of unrecognized tax benefits (excluding interest and penalties) for 2021, 2020, and 2019: Year Ended December 31, 2021 2020 2019 Beginning of year balance $ 112 $ 255 $ 193 Additions based on prior year tax positions — 2 3 Additions based on current year tax positions 31 20 78 Reduction for prior year tax positions ( 30 ) — ( 19 ) Reductions for settlements — ( 165 ) — End of year balance $ 113 $ 112 $ 255 For each period presented, substantially all of the amount of unrecognized benefits (excluding interest and penalties) would impact the effective tax rate, if recognized. The Company reasonably expects that the amount of unrecognized tax benefit will not change significantly over the next 12 months. The Company is not under any federal, state or foreign income tax audits. For federal tax purpose, all tax years after 2017 remain open to adjustment. Amounts paid for income tax in foreign jurisdictions are not material to the financial statements. In addition, the Company is subject to examination for its state tax returns for years 2017, and forward, with the exception of certain net operating losses and credit carryforwards originating in years prior to 2017 that remain subject to adjustment. NOTE 8: EQUITY AND EPS Capital Stock. Common Stockholders are entitled to elect four of the nine members of the Board of Directors, while Preferred Stockholders are entitled to elect the remaining five members. All directors are elected annually for a one year term. Any vacancies on the Board are to be filled only by the shareholders and not by the Board. Shareholders who own 10 percent or more of the outstanding Common or Preferred Stock have the right to call a special meeting of stockholders. Common Stockholders are not entitled to vote with respect to a merger, dissolution, lease, exchange or sale of substantially all of the Company’s assets, or on an amendment to the Articles of Incorporation, unless such action would increase or decrease the authorized shares or par value of the Common or Preferred Stock, or change the powers, preferences or special rights of the Common or Preferred Stock so as to affect the Common Stockholders adversely. Generally, Common Stockholders and Preferred Stockholders vote as separate classes on all other matters requiring shareholder approval. 57 EPS. The computations of basic and diluted EPS: Year Ended December 31, 2021 2020 2019 Operations: Net income (a) $ 90,817 $ 40,345 $ 38,793 Net loss attributable to noncontrolling interest 490 — — Income attributable to participating securities (unvested shares and units) (b) ( 712 ) ( 261 ) ( 253 ) Net income used in EPS calculation $ 90,595 $ 40,084 $ 38,540 Share information: Basic weighted average common shares (c) 20,719,663 16,937,125 17,012,288 Diluted weighted average common shares (D) 20,982,453 16,937,125 17,012,288 Basic EPS $ 4.37 $ 2.37 $ 2.27 Diluted EPS $ 4.34 $ 2.37 $ 2.27 (a) Net income attributable to all shareholders. (b) Participating securities included RSUs of 163,024 , 110,665 , and 111,365 for the years ended December 31, 2021, 2020, and 2019, respectively. (c) Under the two class method, basic weighted average common shares exclude outstanding unvested participating securities. (d) Diluted weighted average common shares included the dilutive effect of Convertible Senior Notes of 262,790 shares for the year end December 31, 2021. There was no dilutive impact for the years ended December 31, 2020 and 2019. Share Issuance. On April 1, 2021, as part of the consideration for the Merger, the Company issued 5,007,833 shares of common stock. Additionally, in September 2021, the parties finalized the purchase price adjustments, which increased stock consideration by an additional 1,373 shares from the preliminary amounts that were paid at closing. Share Repurchase. On February 25, 2019, the Board of Directors approved a $ 25,000 share repurchase authorization commencing February 27, 2019 through February 27, 2022. Under the share repurchase program, the company can repurchase stock from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. This share repurchase program may be modified, suspended, or terminated by the company at any time without prior notice. During the year ended December 31, 2021, the Company did not repurchase any shares of MGP Common Stock and has $ 20,947 remaining under the share repurchase plan. During the year ended December 31, 2020, the Company repurchased approximately 159,104 shares of MGP Common Stock for $ 4,053 . Common Stock Share Activity. Shares Outstanding Capital Stock Preferred Common Stock Balance, December 31, 2019 437 17,028,125 Issuance of Common Stock — 57,278 Repurchase of Common Stock — ( 169,541 ) Balance, December 31, 2020 437 16,915,862 Issuance of Common Stock — 5,060,339 Repurchase of Common Stock — ( 11,887 ) Balance, December 31, 2021 437 21,964,314 58 Dividends and Dividend Equivalents. Dividend and Dividend Equivalent Information (per Share and Unit) Declaration date Record date Payment date Declared Paid Dividend payment Dividend equivalent payment (a)(b) Total payment (b) 2021 February 23 March 12 March 26 $ 0.12 $ 0.12 $ 2,033 $ 19 $ 2,052 May 3 May 21 June 4 0.12 0.12 2,635 20 2,655 August 2 August 20 September 3 0.12 0.12 2,635 20 2,655 November 1 November 19 December 3 0.12 0.12 2,635 20 2,655 $ 0.48 $ 0.48 $ 9,938 $ 79 $ 10,017 2020 February 24 March 13 March 27 $ 0.12 $ 0.12 $ 2,047 $ 13 $ 2,060 April 28 May 22 June 5 0.12 0.12 2,027 14 2,041 July 28 August 21 September 4 0.12 0.12 2,029 14 2,043 October 27 November 20 December 4 0.12 0.12 2,030 14 2,044 $ 0.48 $ 0.48 $ 8,133 $ 55 $ 8,188 2019 February 25 March 13 March 29 $ 0.10 $ 0.10 $ 1,701 $ 13 $ 1,714 April 29 May 15 May 31 0.10 0.10 1,702 11 1,713 July 29 August 14 August 30 0.10 0.10 1,703 11 1,714 October 29 November 14 November 26 0.10 0.10 1,703 12 1,715 $ 0.40 $ 0.40 $ 6,809 $ 47 $ 6,856 (a) Dividend equivalent payments on unvested participating securities (see Note 11). (b) Includes estimated forfeitures. NOTE 9: LEASES The Company has operating leases for railcars, computer equipment, office spaces, a bottling facility, a warehouse facility, fulfillment center, retail location, and certain equipment. The Company has no finance leases. Leases with terms of twelve months or less are not recorded on the Company’s Consolidated Balance Sheets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Lease components are accounted for separately from non-lease components, such as common-area maintenance, based on the relative, observable stand-alone prices of the components. The Company’s leases have remaining lease terms of one year to six years , some of which may include options to extend the lease. Options to renew the Company’s leases were not considered when assessing the value of the right-of-use assets because the Company was not reasonably certain that it will assert the options to renew the leases. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental collateralized borrowing rate based on the information available at commencement date in determining the present value of lease payments. The following table provides supplemental balance sheet classification information related to leases: December 31, Leases Balance Sheet Classification 2021 2020 Assets Operating Operating lease right-of-use-assets, net $ 9,671 $ 5,151 Total leased assets $ 9,671 $ 5,151 Liabilities Current Operating Accrued expenses $ 2,865 $ 2,112 Noncurrent Operating Long-term operating lease liabilities 6,997 3,057 Total operating lease liability $ 9,862 $ 5,169 59 The following table presents the components of lease costs: Year Ended December 31, 2021 2020 Operating lease costs $ 2,358 $ 2,704 Short-term lease costs 1,043 281 Sublease income ( 4 ) ( 99 ) Net lease costs (a) $ 3,397 $ 2,886 (a) Recorded as a component of Operating income on the Company’s Consolidated Statement of Income. The following table presents supplemental cash flow and non-cash activity related to lease information: Year Ended December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,857 $ 2,707 Right-of-use assets obtained in exchange for lease obligations Operating leases $ 7,312 $ 1,048 The following table presents weighted average discount rate and remaining lease term: December 31, 2021 2020 Weighted average discount rate Operating leases 2.26 % 5.01 % Weighted average remaining lease term Operating leases 4.1 years 2.8 years As of December 31, 2021, the maturities of operating lease liabilities were as follows: 2022 $ 3,032 2023 2,482 2024 1,837 2025 1,424 2026 1,101 Thereafter 321 Total lease payments 10,197 Less interest ( 335 ) Total operating lease liability $ 9,862 NOTE 10: COMMITMENTS AND CONTINGENCIES Commitments. We are in various stages of financing projects with industrial revenue bond transactions for our facilities located in Kentucky. The bonds allow a 30 year real property tax abatement on our renovated and newly-constructed warehouse buildings and distilleries in Kentucky. We have been approved for $ 25,000 of industrial revenue bonds with the City of Williamstown Kentucky, and have used approximately $ 11,000 . Additionally, we have been approved for $ 50,000 of industrial revenue bonds with Nelson County Kentucky and have used approximately $ 33,000 . The City of Williamstown and Nelson County issued the industrial revenue bonds to us and then used the proceeds to purchase the land and warehouse from us. The Company recorded as property, plant, and equipment, net, on its Consolidated Balance Sheet under a capital lease. The lease payment on the facilities is sufficient to pay principal and interest on the bonds. Because the Company owns all of the outstanding bonds, has a legal right to set-off, and intends to set-off the corresponding lease and interest payment, the Company netted the capital lease obligation with the bond asset and, in turn, reflected no amount for the obligation or the corresponding asset on its Consolidated Balance Sheet at December 31, 2021 and 2020. 60 Contingencies. There are various legal and regulatory proceedings involving the Company and its subsidiaries. The Company accrues estimated costs for a contingency when management believes that a loss is probable and can be reasonably estimated. Dryer Fire Incident. During November 2020, the Company experienced a fire at the Atchison facility. The fire damaged certain equipment in the facility’s feed drying operations and caused temporary loss of production time. The Company impaired $ 681 of spare parts and other inventory which was recorded in Cost of sales on the Consolidated Statements of Income for the year ended December 31, 2020. Additionally, the Company incurred $ 486 in losses from the write off of property, plant and equipment, which was recorded as a component of Operating income on the Consolidated Statements of Income for the year ended December 31, 2020. At December 31, 2021, the Company received a legally binding commitment from its insurance carrier for final settlement of $ 43,688 , $ 27,363 related to business interruption and $ 16,325 for the damaged dryer. As of December 31, 2021, $ 7,188 of the insurance recovery was recorded as Receivables on the Consolidated Balance Sheet. The Company recorded a settlement related to business interruption from its insurance carrier of $ 23,583 and $ 3,780 for the years ended December 31, 2021 and 2020, respectively. The business interruption portion of the settlement was recorded as a reduction of Cost of sales on the Consolidated Statement of Income and the insurance recoveries for the replacement of the damaged dryer was recorded as Insurance recoveries on the Consolidated Statement of Income. The Company finalized the construction of the replacement drying system and placed this dryer into service during 2021. Ransomware Cyber-Attack . In May 2020, the Company was affected by a ransomware cyber-attack that temporarily disrupted production at its Atchison facilities. The Company’s financial information was not affected and there is no evidence that any sensitive or confidential company, supplier, customer or employee data was improperly accessed or extracted from our network. The Company has insurance related to this event and partially recovered $ 633 in December 2020 and received a final recovery of $ 230 in December 2021 as a reduction of Cost of sales on the Consolidated Statement of Income. Shareholder matters. In 2020, two putative class action lawsuits were filed in the United States District Court for District of Kansas, naming the Company and certain of its current and former executive officers as defendants, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs sought to pursue claims on behalf of a class consisting of purchasers or acquirers of the Company's Common Stock during certain specified periods (the “Class Periods”). On May 28, 2020, the two lawsuits were consolidated and the Court appointed City of Miami Fire Fighters’ and Police Officers’ Retirement Trust as lead plaintiff. The consolidated action is captioned In re MGP Ingredients, Inc. Securities Litigation and the file is maintained under Master File No. 2:20-cv-2090-DDCJPO. On July 22, 2020, the Retirement Trust filed a consolidated Amended Complaint. The Consolidated Complaint alleges that the defendants made false and/or misleading statements regarding the Company’s forecasts of sales of aged whiskey, and that, as a result the Company's Common Stock traded at artificially inflated prices throughout the Class Periods. The plaintiffs sought compensatory damages, interest, attorneys’ fees, costs, and unspecified equitable relief, but did not specify the amount of damages being sought. On September 8, 2020, defendants filed a Motion to Dismiss the Consolidated Amended Complaint. On August 31, 2021, the court issued a Memorandum and Order granting the Motion to Dismiss dismissing plaintiff’s claims with prejudice. The Plaintiff had until September 30, 2021 to file a notice of appeal and the Plaintiff did not appeal. On May 11, 2020, Mitchell Dorfman, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Dorfman, derivatively on behalf of MGP Ingredients v. Griffin, et al., Case 2:20-cv-02239. On June 4, 2020, Justin Carter, a shareholder in MGP, filed an action in the United States District Court for the District of Kansas, under the caption Carter, derivatively on behalf of MGP Ingredients v. Griffin, et al. , Case 2:20-cv-02281. On June 18, 2020, Alexandra Kearns, a shareholder in MGP, filed an action in the District Court of Atchison County, Kansas, under the caption Kearns, derivatively on behalf of MGP Ingredients v. Griffin, et al. , Case 2020-CV-000042. The defendants are certain of the Company’s current and former officers and directors. The Company is a nominal defendant in each action. Plaintiffs allege that the Company was damaged as a result of the conduct of the individual defendants alleged in the MGP Ingredients, Inc. Securities Litigation , the repurchase of company stock at artificially inflated prices, and compensation paid to the individual defendants. The Complaint in Dorfman asserts claims for violations of Sections 14(a), 10(b), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Complaint in Carter asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The Petition in Kearns asserts claims for breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The pleadings pray for an award of compensatory damages, including interest, in favor of the Company, for equitable relief related to the Company’s corporate governance, for disgorgement of compensation, and for an award of attorneys’ fees and costs. On July 13, 2020, defendants filed a Motion to Dismiss in Dorfman . On August 13, 2020, defendants filed a Motion to Stay the Kearns action pending the resolution of Dorfman . On November 3, 2020, the court entered an order providing that Defendants’ response to the Carter Complaint shall be due 14 days after a ruling on the Motion to Dismiss filed in Dorfman . On March 31, 2021, the Dorfman court issued a Memorandum and Order in which it granted defendants’ Motion to Dismiss plaintiff’s federal claims, dismissed those claims without prejudice, denied without prejudice defendants’ Motion to Dismiss 61 plaintiff’s state claims, and stayed the case pending the Kansas Supreme Court’s decision in Herington v. City of Wichita. Herington involved the issue of whether a federal decision that determines federal claims and dismisses pendent state law claims for lack of supplemental jurisdiction precludes the reassertion of the state law claims in state court. On April 14, 2021, defendants in Carter filed a Motion to dismiss plaintiff’s federal claims and to stay plaintiff’s state claims until fourteen days after the Court rules on the state claims in Dorfman . On November 9, 2021, the Carter court entered a Memorandum and Order dismissing plaintiff’s federal claims with prejudice, denying the Motion to Dismiss as it applies to plaintiff’s state law claims, and staying the case pending a decision in Herington . On December 17, 2021, the Kansas Supreme Court issued its decision in Herington . The court held that where a federal court declines to exercise supplemental jurisdiction over state law claims and dismisses those claims without prejudice, the Kansas common law doctrine of res judicata does not preclude a litigant from bringing those claims in state court. On January 4, 2022, the Carter court entered a Memorandum and Order directing the clerk of the court to enter Judgment (1) dismissing plaintiff’s federal claims with prejudice (2) dismissing plaintiff’s state law claims without prejudice. On January 11, 2022, the court entered a Memorandum and Order in Dorfman directing the clerk of the court to enter Judgment (1) dismissing plaintiff’s federal claims without prejudice and (2) dismissing plaintiff’s state law claims without prejudice. The Judgment has been entered in each case. On January 10, 2022, the parties filed a joint motion in Dorfman requesting the dismissal of the action without prejudice. The Kearns court has not yet taken any action in response to the court’s Memorandum and Order in Dorfman . On November 25, 2020, Kenneth Laury filed an action in the District Court of Shawnee County, Kansas under the caption Laury v. MGP Ingredients, Inc. , Case Number: 2020-CV-000609. The Petition alleges that plaintiff commenced the action under K.S.A. 17-6510 to enforce his alleged right to inspect books and records of the Company, in order to enable him to evaluate possible misconduct by the Company’s Board of Directors and management. On January 8, 2021, the Company filed an answer to the Petition, denying that plaintiff has satisfied the statutory requirements for his demand. On May 13, 2021, the parties stipulated to the voluntary dismissal, with prejudice, of the action. 2016 Atchison Chemical Release. A chemical release occurred at the Company’s Atchison facility on October 21, 2016, which resulted in emissions venting into the air (“the Atchison Chemical Release”). Private plaintiffs have initiated, and additional private plaintiffs may initiate, legal proceedings for damages resulting from the Atchsion Chemical Release, but the Company is currently unable to reasonably estimate the amount of any such damages that might result. The Company’s insurance may provide coverage of any damages to private plaintiffs, subject to a deductible of $ 250 , but certain regulatory fines or penalties may not be covered and there can be no assurance to the amount or timing of possible insurance recoveries if ultimately claimed by the Company. NOTE 11: EMPLOYEE BENEFIT PLANS 401(k) Plans. The Company has established 401(k) plans covering all employees after certain eligibility requirements are met. Amounts charged to operations for employer contributions related to the plans totaled $ 1,826 , $ 1,733 , and $ 1,603 for 2021, 2020, and 2019, respectively. Post-Employment Benefits. The Company sponsors life insurance coverage as well as medical benefits, including prescription drug coverage, to certain retired employees and their spouses. In 2014, the Company made a change to the plan to terminate post-employment health care and life insurance benefits for retirees and employees except for a specified grandfathered group. As of December 31, 2021 and 2020, total current benefit obligation recorded in Accrued expense on the Consolidated Balance Sheets was $ 232 and $ 266 , respectively. As of December 31, 2021 and 2020, total noncurrent benefit obligation was $ 1,159 and $ 1,476 , which was recorded in Other noncurrent liabilities on the Consolidated Balance Sheets, respectively. Share-Based Compensation Plans. As of December 31, 2021, the Company was authorized to issue 40,000,000 shares of Common Stock and had a treasury share balance of 1,160,852 at December 31, 2021. The Company currently has two active share-based compensation plans: the Employee Equity Incentive Plan of 2014 (the “2014 Plan”) and the Non-Employee Director Equity Incentive Plan (the “Directors’ Plan”). The plans were approved by shareholders at the Company’s annual meeting in May 2014. Detail of activities in both plans follows below. The Company’s share-based compensation plans provide for the awarding of stock options, stock appreciation rights, and shares of restricted stock and RSUs for senior executives and salaried employees, as well as for outside directors. 62 Compensation expense related to restricted stock awards is based on the market price of the stock on the date the Board of Directors communicates the approved award and is amortized over the vesting period of the restricted stock award. The Consolidated Statements of Income for 2021, 2020, and 2019 reflect total share-based compensation costs and director fees for awarded grants of $ 2,346 , $ 2,723 , $ 2,424 , respectively, related to these plans. For long-term incentive awards to be granted in the form of RSUs in 2022 based on 2021 results, the Human Resources and Compensation Committee (“HRCC”) determined that the grants would have performance conditions that would be based on the same performance metrics as the Short-Term Incentive Plan (the “STI Plan”). The performance metrics are operating income, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and EPS. Because management determined at the beginning of 2021 that the performance metrics would most likely be met, amortization of the estimated dollar pool of RSUs to be awarded based on 2021 results was started in the first quarter over an estimated 48 month period, including 12 months to the grant date and an additional 36 months to the vesting date. The Consolidated Statements of Income for 2021, 2020, and 2019 reflects share-based compensation costs for grants to be awarded of $ 960 , $ 2,566 , and $ 123 , respectively. 2014 Plan. The 2014 Plan, with 1,500,000 shares registered for future grants, provides that vesting occurs pursuant to the time period specified in the particular award agreement approved for that issuance of RSUs, which is to be not less than three years unless vesting is accelerated due to the occurrence of certain events. As of December 31, 2021, 516,861 RSUs had been granted of the 1,500,000 shares approved for under the 2014 Plan. Directors’ Plan. The Director’s Plan, with 300,000 shares registered for future grants, provides that vesting occurs pursuant to the time period specified in the particular award agreement approved for that issuance of equity. As of December 31, 2021, 122,279 shares were granted of the 300,000 shares approved for grants under the Directors’ Plan and all 122,279 shares were vested. RSUs. Summary of unvested RSUs under the Company’s share-based compensation plans for 2021, 2020, and 2019: Year Ended December 31, 2021 2020 2019 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Unvested balance at beginning of year 118,855 $ 60.56 116,855 $ 65.73 329,205 $ 25.42 Granted 95,113 65.66 38,700 31.93 45,993 77.78 Forfeited ( 7,915 ) 62.77 ( 5,278 ) 63.17 ( 22,934 ) 57.27 Vested ( 38,059 ) 70.60 ( 31,422 ) 44.06 ( 235,409 ) 12.54 Unvested balance at end of year 167,994 $ 61.07 118,855 $ 60.56 116,855 $ 65.73 During 2021, 2020, and 2019, the total grant date fair value of RSU awards vested was $ 2,687 , $ 1,384 , and $ 2,951 , respectively. As of December 31, 2021 there was $ 3,004 of total estimated unrecognized compensation costs (net of estimated forfeitures) related to granted RSU awards. These costs are expected to be recognized over a weighted average period of approximately 0.8 years. Upon their vesting, the Company purchased restricted stock and RSUs from employees to cover associated withholding taxes. Total treasury stock purchases added 11,887 shares for $ 767 in 2021; 10,437 shares for $ 358 in 2020; and 77,481 shares for $ 5,489 in 2019. Annual Cash Incentive Plan. The STI Plan was amended and restated as of January 1, 2019. Pursuant to the STI Plan, short-term incentive compensation is dependent on the achievement of certain performance metrics by the Company, established by the Board of Directors. Each performance metric is calculated in accordance with the rules approved by the HRCC, which may adjust the results to eliminate unusual items. For 2021, 2020, and 2019, the performance metrics were operating income, EBITDA, and EPS. Operating income for the performance metric was defined as reported GAAP operating income adjusted for certain discretionary items as determined by the Company’s management, if applicable (“adjusted operating income”). The HRCC determines the officers and employees eligible to participate under the STI Plan for the plan year as well as the target annual incentive compensation for each participant for each plan year. For 2021, the Branded Spirits segment incentive plan was based on performance metrics of number of depleted cases and gross margin. Amounts expensed under the STI Plan totaled $ 11,155 , $ 9,732 , and $ 461 for 2021, 2020, and 2019, respectively. 63 Deferred Compensation Plan. The Company established an unfunded Executive Deferred Compensation Plan (“EDC Plan”) effective as of June 30, 2018, with a purpose to attract and retain highly-compensated key employees by providing participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Company's obligations under this plan will change in conjunction with the performance of the participants’ investments, along with contributions to and withdrawals from the plan. Realized and unrealized gains (losses) on deferred compensation plan investments were insignificant and were included as a component of Operating income in the Company’s Consolidated Statements of Income, because the Company’s deferred compensation investments consist of mutual funds that are considered trading securities. Plan investments are classified as Level 1 in the fair value hierarchy since the investments trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. The current portion of deferred compensation plan deferrals is comprised of estimated amounts to be paid within one year depending on timing of planned disbursements. At December 31, 2021 and 2020, the EDC Plan investments were $ 3,072 and $ 2,007 , respectively, which were recorded in Other assets on the Company’s Consolidated Balance Sheet. The EDC Plan current liabilities were $ 617 at December 31, 2021 and were included in Accrued expenses and other on the Company’s Consolidated Balance Sheet. The EDC Plan non-current liabilities were $ 2,981 and $ 3,140 as of December 31, 2021 and 2020, respectively, which were recorded in Other non-current liabilities on the Company’s Consolidated Balance Sheet. NOTE 12: CONCENTRATIONS AND RELATED PARTIES Significant customers. For 2021, 2020, and 2019, the Company had no sales to an individual customer that accounted for more than 10 percent of consolidated sales. During the years 2021, 2020, and 2019, the Company’s ten largest customers accounted for approximately 36 percent, 37 percent, and 39 percent of consolidated sales, respectively. Significant suppliers. For 2021, the Company had purchases from two grain suppliers that approximated 14 percent of consolidated purchases. In addition, the Company’s ten largest suppliers, accounted for approximately 43 percent of consolidated purchases. For 2020, the Company had purchases from two grain suppliers that approximated 30 percent of consolidated purchases. In addition, the Company’s ten largest suppliers accounted for approximately 65 percent of consolidated purchases. For 2019, the Company had purchases from two grain suppliers that approximated 31 percent of consolidated purchases. In addition, the Company’s ten largest suppliers accounted for approximately 66 percent of consolidated purchases. Related Parties. For the year ended December 31, 2021, the Company purchased $ 23,463 of bulk beverage alcohol from LMX. The Company holds 50 percent interest in LMX, which is accounted for as equity method investments. See Note 1, Nature of Operations and Summary of Significant Accounting Policies. For the year ended December 31, 2021, the Company purchased $ 2,718 of finished goods from Meier’s Wine Cellars, Inc. (“Meier’s”) and sold $ 2,411 of bulk beverage alcohol to Meier’s. The Lux Family Group owns approximately 22.8 percent of the outstanding shares of MGP. One member of the Lux Family Group has a relative that is the president of Meier’s. The members of the Lux Family Group did not have any involvement in the negotiation of transactions for either party. NOTE 13: OPERATING SEGMENTS As discussed in Note 1, the Company established a new reporting structure as a result of the Merger and prior periods have been revised to reflect the new operating segments. At December 31, 2021, the Company had three segments: Distillery Products, Branded Spirits and Ingredient Solutions. The Distillery Products segment consists of food grade alcohol and distillery co-products, such as distillers feed (commonly called dried distillers grain in the industry) and fuel grade alcohol. The Distillery Products segment also includes warehouse services, including barrel put away, barrel storage, and barrel retrieval services. The Branded Spirits segment consists of producing, importing, bottling and rectifying of distilled spirits. Ingredient Solutions segment consists of specialty starches and proteins and commodity starches and proteins. 64 Operating profit for each segment is based on sales less identifiable operating expenses. Non-direct SG&A, interest expense, and other general miscellaneous expenses are excluded from segment operations and are classified as Corporate. Receivables, inventories, and equipment have been identified with the segments to which they relate. All other assets are considered as Corporate. Year Ended December 31, 2021 2020 2019 Sales to customers: Distillery Products $ 352,504 $ 313,309 $ 294,238 Branded Spirits 183,566 4,149 2,995 Ingredient Solutions 90,650 78,063 65,512 Total (a) $ 626,720 $ 395,521 $ 362,745 Gross profit: Distillery Products $ 114,106 $ 75,773 $ 64,416 Branded Spirits 62,644 2,187 1,536 Ingredient Solutions 22,215 20,846 10,580 Total $ 198,965 $ 98,806 $ 76,532 Depreciation and amortization: Distillery Products $ 10,766 $ 9,816 $ 8,971 Branded Spirits 5,138 100 3 Ingredient Solutions 2,069 1,871 1,554 Corporate 1,119 1,174 1,044 Total $ 19,092 $ 12,961 $ 11,572 Income (loss) before income taxes: Distillery Products $ 110,317 $ 73,533 $ 62,109 Branded Spirits 20,742 ( 2,510 ) ( 2,800 ) Ingredient Solutions 19,194 18,024 8,051 Corporate ( 29,157 ) ( 36,446 ) ( 21,423 ) Total $ 121,096 $ 52,601 $ 45,937 (a) Sales revenue from foreign sources totaled $ 42,593 , $ 23,905 , and $ 19,372 for 2021, 2020, and 2019, respectively, and is largely derived from the United Kingdom, Japan, Thailand, Canada, and Mexico. The balance of total sales revenue is from domestic sources. December 31, 2021 2020 Identifiable Assets Distillery Products $ 314,816 $ 281,721 Branded Spirits 658,826 6,348 Ingredient Solutions 43,009 41,276 Corporate 24,816 37,230 Total (a) $ 1,041,467 $ 366,575 (a) The Company has $ 12,758 of assets located in Ireland. 65 NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2021 2020 2019 Non-cash investing and financing activities: Purchase of property, plant, and equipment in accounts payable $ 7,232 $ 3,375 $ 4,430 Additional cash payment information: Interest paid 3,457 2,212 1,611 Income taxes paid 29,766 10,566 7,111 See Note 9, Leases for operating lease supplemental cash flow information. NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED) Summary of selected quarterly financial data for year ended December 31, 2021 and 2020: Year Ended December 31, 2021 Fourth Quarter Third Quarter Second Quarter First Quarter Sales $ 166,847 $ 176,611 $ 174,939 $ 108,323 Cost of sales 114,094 119,525 118,112 76,024 Gross profit 52,753 57,086 56,827 32,299 Advertising and promotion expenses 6,210 5,664 3,371 853 SG&A expenses 17,552 18,538 25,793 10,946 Insurance recoveries ( 16,325 ) — — — Operating income 45,316 32,884 27,663 20,500 Interest expense ( 1,329 ) ( 1,116 ) ( 1,104 ) ( 488 ) Other income (loss), net ( 751 ) ( 421 ) ( 88 ) 30 Income before income taxes 43,236 31,347 26,471 20,042 Income tax expense 11,578 7,674 6,412 4,615 Net income $ 31,658 $ 23,673 $ 20,059 $ 15,427 Basic EPS data (a) $ 1.44 $ 1.08 $ 0.91 $ 0.90 Diluted EPS data (a) $ 1.40 $ 1.08 $ 0.91 $ 0.90 66 Year Ended December 31, 2020 Fourth Quarter Third Quarter Second Quarter First Quarter Sales $ 100,915 $ 102,964 $ 92,560 $ 99,082 Cost of sales 69,184 79,802 71,858 75,871 Gross profit 31,731 23,162 20,702 23,211 Advertising and promotion expenses 878 552 475 807 SG&A expenses 15,310 8,958 8,889 8,696 Operating income 15,543 13,652 11,338 13,708 Interest expense ( 566 ) ( 594 ) ( 628 ) ( 479 ) Other income (loss), net 275 185 330 ( 163 ) Income before income taxes 15,252 13,243 11,040 13,066 Income tax expense 3,620 2,862 2,550 3,224 Net income $ 11,632 $ 10,381 $ 8,490 $ 9,842 Basic and diluted EPS data (a) $ 0.69 $ 0.61 $ 0.50 $ 0.57 (a) Quarterly EPS amounts may not add to amounts for the year because quarterly and annual EPS calculations are performed separately. NOTE 16: SUBSEQUENT EVENTS Dividend Declaration On February 22, 2022, the Board of Directors declared a quarterly dividend payable to stockholders of record as of March 11, 2022, of our Common Stock and a dividend equivalent payable to holders of certain RSUs as of March 11, 2022, of $ 0.12 per share and per unit. The dividend payment and dividend equivalent payment will occur on March 25, 2022. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.