e
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to______
Commission file number 001-40016
VINTAGE WINE ESTATES, INC.
(Exact name of registrant as specified in its charter)
Nevada |
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| 87-1005902 |
(State or other jurisdiction of incorporation or organization) |
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| (I.R.S. Employer Identification No.) |
______________________________
937 Tahoe Boulevard, Suite 210
Incline Village, Nevada 89451
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (877) 289-9463
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common stock, no par value per share |
| VWE |
| The Nasdaq Stock Market LLC |
Warrants to purchase common stock |
| VWEWW |
| The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer.” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
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| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of December 31, 2021, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $429,562,948.
As of September 1, 2022, 61,691,054 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the registrant's next Annual Meeting of Stockholders (the "Proxy Statement"). The Proxy Statement, or an amendment to this Report, shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
EXPLANATORY NOTE
The registrant was previously a smaller reporting company under applicable Securities and Exchange Commission rules and regulations. As of the December 31, 2021 determination date, the registrant no longer qualifies as a smaller reporting company. However, the registrant is not required to reflect the change in its smaller reporting company status or comply with the non-scaled disclosure obligations until the registrant’s first quarterly report on Form 10-Q for the three-month period ending September 30, 2022. In accordance with applicable rules, the registrant is permitted to use the scaled disclosure requirements applicable to smaller reporting companies in this Annual Report on Form 10-K and has elected to do so.
TABLE OF CONTENTS
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Item 1. | 1 | |
Item 1A. | 8 | |
Item 1B. | 19 | |
Item 2. | 19 | |
Item 3. | 19 | |
Item 4. | 19 | |
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Item 5. | 20 | |
Item 6. | 21 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 |
Item 7A. | 32 | |
Item 8. | 33 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | 74 |
Item 9A. | 74 | |
Item 9B. | 75 | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Present Inspections | 75 |
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| 76 | |
Item 10. | 76 | |
Item 11. | 76 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 76 |
Item 13. | Certain Relationships and Related Transactions and Director Independence | 76 |
Item 14. | 76 | |
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Item 15. | 77 | |
Item 16. | 79 | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Investors are cautioned that statements that are not strictly historical statements of fact constitute forward-looking statements, including, without limitation, statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and are identified by words like “believe,” “expect,” “may,” “will,” “should,” “seek,” “anticipate,” or “could” and similar expressions.
Forward-looking statements are not assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed or implied by forward-looking statements include those discussed under the heading “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K and in future Quarterly Reports on Form 10-Q or other reports filed with the Securities and Exchange Commission ("SEC").
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly revise or update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
References to a fiscal year refer to our fiscal year ended June 30 of the specified year.
Part I.
Item 1. Business
Our Company
Vintage Wine Estates, Inc. (“VWE”, “we”, “us”, "our" or “the Company”) is a leading vintner in the United States ("U.S."), offering a collection of wines produced by award-winning, heritage wineries, popular lifestyle wines, innovative new wine brands, packaging concepts, as well as craft spirits. Our name brands include Layer Cake, Cameron Hughes, Clos Pegase, B.R. Cohn, Firesteed, Bar Dog, Kunde, Cherry Pie and many others. Since our founding over 20 years ago, we have grown organically through wine brand creation and through acquisitions to become the 14th largest wine producer based on cases of wine shipped in California. We sell over 2.5 million cases annually.
Our key differentiator is our diversification—what we call our three-legged stool business model.
We are diversified in our brand collection, producing nearly 60 brands ranging in retail price from $10 to $150, with a focus on the growing segment between $10 and $20. More than eighty percent of our business is done in this critical segment.
We are diversified in our omni-channel sales strategy balanced between Direct-to-Consumer, 31.5% of sales, traditional Wholesale, 28.8% of sales and Business-to-Business at 38.8% of sales. Our Direct-to-Consumer segment is particularly robust. Where most wine companies have two direct sales levers to pull: tasting rooms and wine clubs, we have seven: tasting rooms, wine clubs, ecommerce, Cameron Hughes, Vinesse, Windsor/custom label design and engraving, and QVC/HSN and The Sommelier Company.
We are diversified in our sourcing with a strong asset base of 3,300 owned and leased vineyard acres located in the premier wine growing regions of the U.S. and 10 owned winery estates. These properties extend from the Central Coast of California to storied appellations in Napa Valley and Sonoma County, north to Oregon and Washington. We obtain fruit for our wines from owned and leased vineyards, as well as other sources, including independent growers and the spot wine market. During 2022, we expanded our production capabilities with the acquisition of Meier's Beverage Group ("Meier's"), a leading producer, bottler, importer and marketer of specialty beverage alcohol and non-alcohol products and added a ready-to-drink ("RTD") product line with the acquisition of ACE Cider, The California Cider Company ("ACE Cider").
We have completed over 20 acquisitions in the past 10 years and completed over 10 acquisitions in the past 5 years. We generally acquire the brands and inventories of a targeted business, eliminating redundant corporate overhead. We then integrate the acquired assets into our highly efficient production, distribution and omni channel selling networks, quickly increasing the sales and margins of the acquired business.
Our growth has allowed us to reinvest in our business and create the scale and infrastructure needed to successfully manage a variety of different wine brands and channels and reduce costs. Our owned winery facilities have the capacity to store up to 9.0 million gallons of wine per year. In addition, we have a high-speed bottling facility with the capacity to bottle over 13.5 million cases annually.
Additional bottling capacity is not only used for our products, but also allows us to further expand our bottling and fulfillment services offered to third parties on a contract basis. The additional capacity of the bottling facility may not be fully utilized but provides us with capacity consistent with our growth plans. Our scale and consolidated operations are expected to enable us to increase margins of the businesses that we acquire, providing
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accretive value promptly after the acquisition. We intend to continue to grow our business organically and through acquisitions, with a view towards making two to three acquisitions per year over the next five years.
Our acquisition strategy is to acquire brands and inventories while eliminating redundant corporate overhead, increasing gross margins of the acquired businesses by leveraging scale economies, and driving revenue growth through our distribution network. Gross margins improve by incorporating brands into a more efficient operating system. In addition, operating margins improve from synergies of acquisitions.
There are more than 11,000 wineries in the U.S., with the largest 50 wine companies controlling approximately 80% of the market share by volume, and 60% of consumer spending. We plan to use our financial capacity to: (i) continue to acquire family-owned brands from small wineries, (ii) acquire non-core brands from medium sized and large competitors, and (iii) potentially acquire one or more large businesses in our industry.
Our primary unique selling proposition for a seller is that we have a strong track record of closing once the price and structure are agreed upon. We also believe our managers are perceived as excellent brand stewards. We intend to be a disciplined acquirer, exercising cost discipline, with a focus on the industry’s growth in premium and super-premium wines. We expect that the fragmented nature of the wine industry, coupled with our infrastructure and experience, will enable us to continue to gain market share.
Our innovation strategy is focused on creating and building new wine brands for today’s wine consumer. In the past five years, we have launched over 35 new wine brands, which are primarily sold to major national retail accounts and through direct-to-consumer channels. We also develop private labels and produce wine for major retail clients, including Costco and Target, to sell as proprietary brands. The ability to create new wine brands and quickly bring them to market allows us to respond swiftly to trends and changing consumer tastes and needs.
Our mission is to maintain an entrepreneurial spirit, stay humble and focus on the customer. We respect the ways people buy wine—at the estate wineries, at retail, in restaurants, on the telephone, on the internet, on television and by mail.
Our Business Combination
We were formed in 2019 as Bespoke Capital Acquisition Corp. (“BCAC”), a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia. BCAC was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or any other similar business combination involving BCAC.
On June 7, 2021, BCAC consummated its business combination (the “Business Combination”) with Vintage Wine Estates, Inc., a California corporation ("Legacy VWE"), pursuant to a transaction agreement dated February 3, 2021. As a result of the Business Combination and the related transactions, BCAC changed its jurisdiction of incorporation from the Province of British Columbia to the State of Nevada, BCAC changed its name to “Vintage Wine Estates, Inc.” and Legacy VWE became our wholly-owned subsidiary.
For accounting purposes, and in accordance with generally accepted accounting principles, BCAC was treated as the acquired company and Legacy VWE was treated as the acquirer.
Core Business Segments
We report our results of operations through the following segments: Wholesale, Business-to-Business ("B2B"), Direct-to-Consumer ("DTC") and Corporate and Other.
Fundamentally, we are an omni-channel consumer goods business that happens to operate in the wine industry. Unlike wine companies that solely or mainly sell to wholesale distributors, we sell our products through a number of different channels.
A description of our segments follows:
Wholesale
Our wholesale operations generate revenue from products sold to distributors, who then sell them to off-premise retail locations such as grocery stores, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars.
We have longstanding relationships with our distribution network and marketing companies, including with industry leaders such as Deutsch Family Wine and Spirits, Republic National Distributing Company and Southern Glazer’s Wine & Spirits. Through these relationships, our products are sold in all 50 states and in 41 countries outside the U.S. In addition to our geographical reach, our products are available for purchase at over 33,000 off-premise locations as of June 30, 2022 including leading national chains such as Costco, Kroger, Target, Albertsons and Total Wine & More. Our products were also sold at over 20,500 restaurants and bars as of June 30, 2022.
Our wholesale segment generated $84.5 million and $72.9 million of revenue for the fiscal years ended June 30, 2022 and June 30, 2021, respectively.
Business-to-Business
Our B2B sales segment generates revenue from the sale of private label wines and custom winemaking services.
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We work with national retailers, including Costco, Albertsons, Target and other major retailers, to provide private label wines incremental to their existing beverage alcohol business. Retailers generally earn higher margins on sales of their private label wines than on sales of third-party wines. Consequently, retailers are increasingly offering more private label products in their stores. We expect retailers’ demand for private labels to continue to increase and believe that our private label business will continue to grow. Retailers frequently request brand, label and product line extensions.
Our custom winemaking services are governed by long-term contracts with other wine industry participants and include services such as fermentation, barrel aging, procurement of dry goods, bottling and cased goods storage. Additionally, we believe that our custom winemaking services business allows us to maximize our production assets’ throughput and efficiency and thus improves profit margins for our proprietary brands.
Our B2B segment generated $113.9 million and $77.4 million of revenue for the fiscal years ended June 30, 2022 and June 30, 2021, respectively.
Direct-to-Consumer
Our DTC segment generates revenue from sales made directly to the consumer. DTC sales have higher gross profit margins than wholesale sales because DTC sales allow us to capture the profit margin that otherwise would go to our distribution partners on sales in the wholesale segment. As a result, our gross margins in the DTC segment are significantly higher than in our other segments while operating margins are consistent with other segments.
Our DTC sales are made primarily through our tasting rooms, wine clubs and e-commerce.
Tasting Rooms — We currently operate 12 tasting rooms that served over 233,000 visitors during the fiscal year ended June 30, 2022, up from over 135,000 for the fiscal year ended June 30, 2021 as a result of COVID-19 restrictions being lifted. Our tasting rooms are designed to provide a welcoming atmosphere where we can introduce the consumer to our brands with a view towards developing an authentic relationship over time. These tasting rooms feature our exclusive, low-production wines, at higher-than-average price points, as well as our more accessible, higher-production, wines. Visitors are encouraged to taste, and then purchase, our wines.
Wine Clubs — We currently offer 21 branded wine clubs and had more than 95,000 wine club members as of June 30, 2022. Our wine club members sign up to purchase regular shipments of our wines and receive additional benefits such as volume discounts, exclusive visits to our tasting rooms, invitations to member-only events, access to winemakers and the ability to try each of our wines before they are widely sold in stores. We leverage digital technology through virtual tastings and mixers, giving members new ways to network with one another.
E-Commerce — Sales through our various brand websites are a growing part of DTC sales. We have an active email list with over 1,070,000 subscribers. Our digital marketing team drafted and sent over 5,116 unique emails that generated over 69.0 million impressions for the fiscal year ended June 30, 2022. We have used digital marketing since the early 2000s, recently achieved an e-commerce customer conversion rate of 8.0%, which is substantially above the food and drink industry’s e-commerce conversion rate of 1.8%, as of July 2022.
Custom Label Design and Engraving — We also offer custom label design and engraving services whereby customers can design and engrave wine bottles to their specifications. We believe that we are the only wine producer with the ability to do custom engraving on wine bottles. As a result, we are able to offer our services profitably at a lower price than competitors that need to outsource bottle engraving. In addition to our core private label customers, we have created custom bottles for weddings, major corporate events and other promotional opportunities.
Our DTC segment generated $92.4 million and $66.6 million of revenue for the fiscal years ended June 30, 2022 and June 30, 2021, respectively.
Corporate and Other
Our Corporate and Other segment generates revenue from grape and bulk wine sales and storage services. We record corporate level expenses, non-direct selling expenses and other expenses not specifically allocated to the results of operations in our Corporate and Other segment.
Our Corporate and Other segment generated $2.9 million and $3.8 million of revenue for the years ended June 30, 2022 and 2021, respectively.
Our Diversified Portfolio
Our asset base and product portfolio have been strategically built to provide significant flexibility throughout the business cycle. Our wine portfolio has three tiers: lifestyle brands, luxury brands, and digitally native brands. In addition to wine production and distribution, which is our core business, we also produce and sell craft spirits and ciders.
Lifestyle Brands
Our lifestyle wines primarily sell through off-premise channels at retail prices ranging from $10.00 to $25.00 per bottle. The lifestyle tier accounts for more of our branded case volume than the luxury tier due to the lifestyle tier’s wider distribution and lower pricing. Our lifestyle brands are designed
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to deliver a compelling price-to-quality ratio. We believe our infrastructure, sourcing network and bottling-on-demand capabilities allow us to adjust production in line with market demand.
Luxury Brands
Our super-premium to ultra-premium wines are generally smaller-production, estate-based wines. We also have a tier of more widely sourced and available appellation wines. Our luxury wines consistently garner 90+ scores, awards and accolades from top wine industry publications. They appeal to the wine aficionado who is intensely interested in the winemaker’s craft, the influence that vineyards and sites have on the wine, and the details of the vintage from budbreak to bottle.
Our luxury brands sell primarily at wine retailers, on-premise and through wine clubs and tasting rooms at prices ranging from $16.00 to $150.00 per bottle.
Craft Spirits
We own the brand No. 209 Gin and Splinter Group Spirits, whose brands consists of Straight Edge Bourbon Whiskey, Slaughterhouse American Whiskey, and Whip Saw Rye. We also team with leading spirits manufacturers and distributors to develop products for our customers. We have collaborated with another spirits manufacturer to create Partner Vermouth, which is a sweet vermouth from the gardens and vineyards of California wine country.
We believe that we can use the spirits business to further expand our private label business with existing B2B customers. We expect that interest in selling private label products (due to the increased margins that we earn relative to sales of third party products) will lead to more retailers selling private label spirits. We believe that we can use our significant distribution network and production capabilities to increase our spirits private label business with both existing and new B2B customers.
Cider
We added a RTD product line with the acquisition of ACE Cider. ACE Cider has a diverse and balanced product portfolio with award-winning, fruit-forward ciders featuring no artificial ingredients, less calories and significantly less sugar than the average hard cider.
Our Competitive Strengths
We believe that our strengths include a diversified brand portfolio and infrastructure, a customer-centric and innovation-driven culture, a demonstrated success in acquiring and integrating new assets into our platform, strong working relationships with distributor and retail networks, access to low-cost and flexible debt financing, and an experienced management team assembled and led by Patrick Roney.
Diversified Brand Portfolio and Infrastructure
Our diversified wine sourcing, brand positioning and omni-channel sales strategy result in a nimble, scalable business model, enabling us to bring our products to market rapidly and navigate ever-changing consumer demand flexibly. We believe the efficiencies of our infrastructure have been reflected in our historical results.
Strong Relationships with Distributors and Retailers
We have longstanding working relationships with many of the wine industry’s largest distributors and retailers, which facilitates the distribution of our products to customers in as many locations as possible.
We believe that our existing arrangements with distributors also provide a scalable platform for us to introduce new products into the market and further expand our revenue and market share. The distribution market has experienced and continues to undergo significant consolidation. As a result, it is harder for newer or smaller wine and alcohol businesses to gain traction with major distributors, which limits their ability to get their products into the major wholesale and retail markets. We believe that our longstanding working relationships with the largest distributors and retailers—forged over many years—give us an advantage over newer and smaller competitors.
We also have powerful, long-standing relationships with national retailers, including Costco, Albertson’s, Target and others.
Customer-Centric and Innovation-Driven Culture
We have created more than 35 new brands over the last 5 years to address specific consumer needs and market opportunities. We take a holistic approach with new brands, evaluating key attributes such as price points, packaging format, demographic and psychographic trends. We create new brands organically through an efficient concept-to-launch process, which generally requires less than eight months and can often be completed in less than three months. We believe that our efficient new product development and rapid speed to market gives us and our private label retailers an advantage over competitors because it enables us to quickly address actual or perceived unmet consumer needs and can help us better align brand strategy with consumer demand.
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Demonstrated Success Acquiring and Integrating New Assets
We believe we have completed more brand mergers and acquisitions in the U.S. wine industry over the last 10 years than any other company in the industry. As illustrated in the following chart, we have completed more than 25 acquisitions since 2010.
Historically, our acquisitions have generated a strong return on equity. We review, on average, over 20 acquisitions per year, submit an average of four letters of intent and complete an average of two acquisitions per year. We have historically targeted a significant increase in the target company’s EBITDA within three years of the acquisition. To achieve these results, our acquisitions are subject to a rigorous, data-driven, due diligence and underwriting process, to assure that minimum financial thresholds with meaningful upside can be satisfied in each transaction.
Experienced Management Team
Our senior leaders have decades of experience in the wine and spirits industry and have gone through numerous economic and consumer cycles, providing them with unique insight and historical perspectives that less experienced leaders do not have. Vintage Wine Estates was founded by Patrick Roney and Leslie Rudd, who passed away in 2018. Mr. Roney has spent more than 30 years in the wine, spirits and food industries and has held senior leadership roles at leading brands such as Seagram’s, Chateau St. Jean, Dean & Deluca and the Kunde Family Winery. Throughout his career, Mr. Roney has demonstrated a keen understanding of and ability to anticipate market trends and consumer behaviors. Mr. Roney has also been able to attract some of the top talent in the industry, including President, Terry Wheatley. Ms. Wheatley has spent her entire career in the wine and spirits industry at leading firms, including at E.J. Gallo and the Sutter Home/Trinchero Family Estate. Ms. Wheatley also started her own wine brand, creation, sales and marketing company, Canopy Management, leveraging her long-term relationships with the wine industry’s top buyers to bring a portfolio of innovative wine brands to market. We acquired Canopy Brands in 2014.
Our Strategy
We are currently the 14th largest wine producer by cases shipped in California. We have been able to grow our business despite economic recessions. We intend to continue to grow our business by prioritizing the following goals: (i) increasing sales of our existing brands, (ii) continuing to develop new and innovative products, (iii) executing on our acquisition pipeline, (iv) continuing to grow our private label business, and (v) continuing to invest in and expand production capacity to meet the needs of our brands and our customers.
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Increasing Sales of Existing Brands
We seek to grow our existing brands by increasing penetration within existing on-premise and off-premise retailers, selling into new retailers and distributors and investing in and expanding our DTC segment. Given the strength of our brands and our strong reputation with consumers, we believe we can increase the number of varietals and blends that are offered in retail and on-premise locations. As consumer shopping behaviors continue to evolve and change, we believe we are well positioned to continue to increase sales and conversions through our off-premise retailers’ digital channels with the investment in a dedicated eGrocery team to manage and support the digital shelf online as well as in popular delivery apps and services. We will continue to invest in our DTC business and intend to capitalize on the consumer’s willingness to purchase more products online. Additionally, regulatory authorities across the U.S. have relaxed regulations regarding delivery of alcohol directly to consumers in response to COVID-19 related restrictions. As consumers have grown more used to obtaining alcoholic beverages this way, we expect DTC sales to continue to increase. While it is too soon to know if these relaxed regulations will be permanently enacted in each state, we believe we are well-positioned to take advantage of a consumer shift to DTC sales.
Developing New Brands and Innovative Products
We believe that we can continue to develop new brands and products that address consumer demand and sell these new products into our omni-channel distribution system. These new products are expected to diversify our revenue further and expand our addressable market to additional categories beyond wine. We believe our integrated infrastructure allows us to capitalize on emerging trends faster than many of our competitors, giving us an advantage in new product development. Additionally, upon federal legalization of cannabis, we expect to seek to produce and sell cannabis infused beverages through our distribution channels. We are at the early stage of developing this strategy and no material assets have been created from this initiative as of the date hereof. We do not intend to enter this sector unless cannabis is federally legalized in the U.S. and there is no assurance if or when cannabis will be federally legalized.
Executing our Acquisition Pipeline
There continues to be consolidation of distributors and retailers in the wine industry, creating uncertainty for smaller wine companies and further limiting their ability to garner attention in the wholesale channel. As a result, we expect more brands to look for buyers of their businesses, which may create more attractive acquisition opportunities for us in the future. Given our scale and infrastructure, we are generally able to increase margins of acquired businesses relatively quickly, adding value to the enterprise from the outset. While other, larger wine companies have recently been preoccupied with other strategic initiatives, we remain committed and highly active with our merger and acquisition ("M&A") strategy.
Growing Private Label Sales
We intend to expand our private label business by increasing sales of existing products, creating product line extensions and developing new brands for new customers. We believe the largest retailers will continue to increase their private label offerings. We also believe that, in addition to private label wine sales, we are well-positioned to expand our private label options to include spirits and other products.
Expanded Production Capacity
We believe we have opportunities to make capital investments that satisfy our financial return objectives while expanding our capacity to meet additional demand for our private brands and private label customers over time. We completed a $45.0 million investment in state-of-the-art technology upgrades to our Ray’s Station production facility. The upgraded facility, together with existing facilities, will allow us to produce and ship approximately 13.5 million cases of wine per year and store over 3 million cases of wine. The recently completed facility put our production and distribution capacity at levels comparable to the top 10 wine producers in the U.S. This facility also allows us to automate a number of processes that were previously completed manually, leading to increased efficiencies and margins.
We have also expanded our production capabilities and capacity with the acquisition of Meier's. Meier's has nearly 40,000 square feet of production, bottling, warehouse and office space. Along with enhanced production capabilities and supply chain efficiencies, Meier’s offers significant additional warehouse and storage space. The central Midwest location provides more efficient access to Midwest, Northeast, and Southeast markets, allowing for rapid expansion of points of distribution for products such as recently acquired ACE Cider.
We are one of a few vertically integrated winery companies that has our own DTC pick-and-pack capabilities, leading to substantial per case cost savings. Notably, we have recently added a second warehouse facility in Cincinnati, Ohio. This is significantly more efficient than outsourcing this work and is currently the fastest growing portion of the wine business versus wholesale or private label.
Our capital expenditures have been at elevated levels in recent years, and as projects are completed, we expect to see increased margins with modest platform investments required going forward.
Competition
The wine industry and alcohol markets generally are intensely competitive. Our wines compete domestically and internationally with premium or higher quality wines produced in Europe, South America, South Africa, Australia and New Zealand, as well as North America. We compete on the
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basis of quality, price, brand recognition and distribution capability. The ultimate consumer has many choices of products from both domestic and international producers. Our wines may be considered to compete with all alcoholic and nonalcoholic beverages.
At any given time, there are more than 400,000 wine choices available to U.S. consumers, differing with one another based on vintage, variety or blend, location and other factors. Accordingly, we experience competition from nearly every segment of the wine industry. Additionally, some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of products, and have greater name recognition, which may give them greater negotiating leverage with distributors and allow them to offer their products in more locations and/or on better terms than us. Nevertheless, we believe that our diverse brand offerings, scalable infrastructure and relationships with the largest wholesalers and retailers will allow us to continue growing our business.
Seasonality
There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenue and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during our second fiscal quarter (October through December) due to the usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.
Human Capital Management
Diversity, Equity and Inclusion
We are strongly committed to creating opportunities at our Company to find, hire and promote diverse voices and lead with responsibility to the principles of Diversity, Equity and Inclusion ("DEI"). Almost half of our positions at the Director level and above are women; with women strongly represented at the highest leadership positions, including as President and Chief Financial Officer. We are committed to fostering a work environment that values diversity and inclusion. This commitment includes providing equal access to and participation in, equal employment opportunities, programs and services without regard to race, religion, color, origin, disability, sex, sexual orientation, gender identity, veteran status, age or stereotypes based thereon. We welcome team members' differences, experiences, and beliefs, and we are investing in a more productive, engaged, diverse and inclusive workforce.
Employees
We monitor human capital metrics to ensure we are executing on our core values and making progress towards our diversity and inclusion commitments. As of June 30, 2022, we had 586 full-time employees. Among our employees, 37% identify as female, 60% identify as male and 3% are not specified. None of our employees are represented by a labor union, and none of our employees have entered into a collective bargaining agreement with us. We offer a highly competitive compensation and benefits program to attract and retain top talent.
Our talented employees drive our mission and share core values that both stem from and define our culture, which plays an invaluable role in our execution at all levels in our organization. Our culture is based on these shared core values which we believe contribute to our success and the continued growth of the organization. Our core values help reinforce their importance in our organization:
Employee Heath, Wellness & Safety
We work to prioritize the health, wellness and safety of our team members, and our environment. We continue to focus on workplace safety by providing training and bringing awareness to workplace best practices in our continuous efforts to prevent workplace injuries and accidents. The core elements of our employee health. wellness and safety strategy are risk analysis, incident management, documented processes, environmental programs, training and occupational health. We look to optimize safe operations, setting a new sustainability ambition and continued commitment to the governance of workplace health, safety and wellbeing, and a culture of leadership on safety across the Company. We provide bilingual feedback forms at all of our locations for employees to electronically submit safety recommendations or report unsafe work conditions. Additionally, our multilingual Whistleblower Hotline is available to report risks to health, wellness and safety. We continually strive to improve processes across safety training and incident training, among other areas.
Our comprehensive compensation and benefits package includes physical, emotional, financial and wellness programs including (for those eligible) a 401k match program, employer contribution to a Health Reimbursement Account, counseling through our Employee Assistance Program, and a flexible work program for hybrid or fully remote opportunities. We also encourage our employees and their families to lead a healthy lifestyle with a gym reimbursement program.
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Trademarks
Trademarks are an essential part of our business. We sell our products under a number of trademarks, which we own or use under license. We also have multiple licenses and distribution agreements for the import, sale, production and distribution of our products. Depending on the jurisdiction, trademarks are valid as long as the trademarks are in use and their registrations are properly maintained. These licenses and distribution agreements have varying terms and durations.
Government Regulation
The alcoholic beverage industry is subject to extensive regulation by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) (and other federal agencies), each state’s liquor authority and potentially local authorities as well, depending on location. As a result, there is a complex multi-jurisdictional regime governing alcoholic beverage manufacturing, distribution, and sales and marketing in the U.S. Regulatory agencies issue permits and licenses for manufacturing, distribution and retail sale (with requirements varying depending on location), govern “trade practice” activity at each tier and also regulate how each tier of the alcohol industry may interact with another tier. In addition, these laws, rules, regulations, and interpretations are constantly changing as a result of litigation, legislation and agency priorities. We take regulatory compliance very seriously, and to facilitate compliance with applicable requirements, we have a team of eight compliance professionals. We also use leading compliance software providers (Avalara and SOVOS) to assist the compliance team with data management and reporting cycles. Additionally, we consult with outside regulatory counsel on compliance issues on a regular basis and utilize Compliance Connection, an outside compliance company, on an as needed basis.
We maintain licenses and permits to produce and sell wholesale wine and cider with state regulatory agencies and TTB. We maintain licenses and permits to import, produce, and to import, rectify and wholesale distilled spirits with California and Ohio regulatory authorities and TTB. In addition to licenses for our primary production activity, we maintain hundreds of ancillary permits to support our wholesale and DTC segments. Most states require permitting and registrations with the state for shipments to wholesalers or consumers within the state, and these permits often also require local registration and tax reporting. We manage our permit compliance internally, with our team responsible for managing renewals, tax payments and reporting in a timely manner. Specifically, we complete the following to satisfy our regulatory obligations: (i) prepare TTB’s monthly Report of Wine Premises Operations, (ii) complete monthly TTB export division reports which coincide with the monthly Report of Wine Premises Operations, (iii) complete bi-weekly excise TTB tax returns, (iv) prepare and complete California Department of Tax and Fee Administration’s (CDTFA) winegrower, beer/wine importer, and distilled spirits reports and tax returns, (v) prepares and completes Washington state’s winegrower, beer/wine importer, and distilled spirits reports and tax returns, (vi) file annual grape crush and purchase reports with the U.S. Food and Drug Administration (“FDA”), (vii) regularly update corporate filings with the TTB, as well as state Alcohol Beverage regulatory agencies as required, and (viii) complete biennial registrations with the FDA.
In California, we maintain licenses with: (i) the California Department of Food and Agriculture to purchase grapes, (ii) a potable water system permit with the California Division of Drinking Water, (iii) a hazardous material business plan permit with the County of Mendocino California Division of Environmental Health, and (iv) a storm water pollution prevention plan permit with the State of California State Water Resources Control Board. Additionally, food processing facilities, which includes wineries and cideries, must register with the FDA, and we maintain such registrations for our facilities.
We believe that we possess all licenses and permits material to operating our business.
Sale of our products are subject to federal and state alcohol tax, payable at the time our products are removed from the bonded area of the production sites. In December 2017, the federal government passed comprehensive tax legislation that included the Craft Beverage Modernization and Tax Reform Act. This legislation modified federal alcohol tax rates by expanding the lower $1.07 per gallon tax rate to wines up to 16.0% alcohol content with wines containing higher alcohol levels being taxed at $1.57 per gallon. We are also subject to certain taxes at the state and local levels.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge on our website, www.vintagewineestates.com, under "Investors — Overview — SEC Filings" as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website, www.sec.gov, where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.
Item 1A. Risk Factors
In addition to the other information in this report and our other filings with the Securities and Exchange Commission ("SEC"), you should carefully consider the risks and uncertainties described below, which could materially and adversely affect our business, financial condition and results of operations. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us.
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Risks Related to Our Operations
The strength of our reputation is critical to our success and may be adversely effected by contamination or other quality control issues or other factors outside of our control.
Our reputation as a premier producer of wine and spirits among our customers and the wine industry is critical to the success of our business and our growth strategy. The wine market is driven by a relatively small number of active and well-regarded wine critics within the industry who have disproportionate influence over the perceived quality and value of wines. If we are unable to maintain the actual or perceived quality of our wines and other alcoholic beverage products, or if our wines otherwise do not meet the subjective expectations or tastes of one or more of a relatively small number of wine critics, the actual or perceived quality and value of one or more of our wines could be harmed, which could negatively impact not only the value of that wine, but also the value of the vintage, the particular brand or our broader portfolio. The winemaking process is a long and labor-intensive process that is built around yearly vintages, which means that once a vintage has been released we are not able to make further adjustments to satisfy wine critics or consumers. As a result, we are dependent on our winemakers and tasting panels to ensure that our wine products meet our exacting quality standards.
Any contamination or other quality control issue could have an adverse effect on sales of the impacted wine or our broader portfolio of winery brands. If any of our wines become unsafe or unfit for consumption, cause injury or are otherwise improperly packaged or labeled, we may have to engage in a product recall and/or be subject to liability and incur additional costs. A widespread recall, multiple recalls, or a significant product liability judgment against us could cause our wines to be unavailable for a period of time, depressing demand and our brand reputation. Even if a product liability claim is unsuccessful or is not fully pursued, any resulting negative publicity could adversely affect our reputation with existing and potential customers and accounts, as well as our corporate and individual winery brands image in such a way that current and future sales could be diminished. In addition, should a competitor experience a recall or contamination event, we could face decreased consumer confidence by association as a producer of similar products.
Additionally, third parties may sell wines or inferior brands that imitate our winery brands or that are counterfeit versions of our labels, and customers could confuse these imitation labels with our authentic wines. A negative consumer experience with such a wine could cause them to refrain from purchasing our brands in the future and damage our brand integrity. Any failure to maintain the actual or perceived quality of our wines could materially and adversely affect our business, results of operations and financial results.
Damage to our reputation or loss of consumer confidence in our wines for any of these or other reasons could result in decreased demand for our wines and could have a material adverse effect on our business, operational results and financial results, as well as require additional resources to rebuild our reputation, competitive position and winery brand strength.
Consumer demand for wine and alcoholic beverages could decline, which could adversely affect our results of operations.
We rely on consumers’ demand for our wine and other products. Consumer demand may decline due to a variety of factors, including a general decline in economic conditions, changes in the spending habits of consumers generally, a generational or demographic shift in consumer preferences, increased activity of anti-alcohol groups, increased state or federal taxes on alcoholic beverage products and concerns about the health consequences of consuming alcoholic beverage products. Furthermore, our ability to effectively manage production and inventory is inherently linked to actual and expected consumer demand for our products, particularly given the long product lead time and agricultural nature of the wine business. Unanticipated changes in consumer demand or preferences could have adverse effects on our ability to manage supply and capture growth opportunities, and substantial declines in the demand for one or more of our product categories could harm our results of operations, financial condition and prospects.
We are subject to significant competition, which could adversely affect our profitability.
VWE’s wines compete for sales with thousands of other domestic and foreign wines. VWE’s wines also compete with other alcoholic beverages and, to a lesser degree, non-alcoholic beverages. As a result of this intense competition, we have been subject to, and may continue to be subject to, upward pressure on selling and promotional expenses. In addition, some of our competitors have greater financial, technical, marketing and public relations resources available to them than we do. These circumstances could adversely impact our revenues, margins, market share and profitability.
Our wholesale operations and wholesale revenues largely depend on independent distributors whose performance and continuity is not assured.
Our wholesale operations and wholesale revenues depend largely on independent distributors whose performance and continuity is not assured. Our wholesale operations generate revenue from products sold to distributors, who then sell them to off-premise retail locations such as grocery stores, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars. Sales to distributors are expected to continue to represent a substantial portion of our revenues in the future. A change in relationships with one or more significant distributors could harm our business and reduce sales. The laws and regulations of several states prohibit changes of distributors except under certain limited circumstances, which makes it difficult to terminate a distributor for poor performance without reasonable cause as defined by applicable statutes. Difficulty or inability with respect to replacing distributors, poor performance of major distributors or inability to collect accounts receivable from major distributors could harm our business. There can be no assurance that existing distributors and retailers will continue to purchase our products or
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provide ours products with adequate levels of promotional support. Consolidation at the retail tier, among club and chain grocery stores can be expected to heighten competitive pressure to increase marketing and sales spending or constrain or reduce prices.
The loss or significant decline of sales to one or more of our more important distributors, marketing companies or retailers could have adverse effects on our results of operations, financial condition and prospects.
We derive significant revenue from distributors and marketing companies such as Deutsch Family Wine and Spirits, Republic National Distributing Company and Southern Glazer’s Wine & Spirits, and from retail business customers such as Costco, Albertson’s and Target. The loss of one or more of these customers, or significant decline in the volume of sales made to them, could have adverse effects on our results of operations, financial condition and prospects.
Decreases in brand quality ratings by important rating organizations could adversely affect our business.
Many of VWE’s brands are issued ratings by local or national wine rating organizations. In the wine industry, higher product ratings usually translate into greater demand and higher pricing. Although some VWE brands have been rated highly in the past, and VWE believes its farming and winemaking activities are of a quality to generate good ratings in the future, VWE has no control over ratings issued by third parties, which may or may not be favorable in the future. Significant or persistent declines in the ratings issued to VWE wines could have adverse effects on its business.
We may not be fully insured against catastrophic events and losses, which may adversely affect our financial condition.
A significant portion of our activities are in California and the Pacific Northwest, which regions are increasingly prone to seismic activity, landslides, wildfires and other natural disasters (collectively, “catastrophes”). Although VWE insures against catastrophes, including through our use of a wholly-owned captive insurance company and by carrying insurance to cover our own property damage, business interruption and certain production assets, we may not be fully insured against all catastrophes, the occurrence of which may (i) disrupt our operations, (ii) delay production, shipments and revenue and (iii) result in significant expenses to repair or replace damaged vineyards or facilities. Any disruption caused by a catastrophe could adversely affect our business, results of operations or financial condition.
Our inability to protect trademarks and other intellectual property rights could adversely affect its business.
VWE’s business relies on intellectual property, mainly consisting of trademarks, customer lists and business practices. VWE does not register its business practices or customer lists, but they are kept highly confidential and considered trade secrets and, as such, are accessible to a very limited number of people within VWE. Although VWE believes that it does not rely significantly on any individual intellectual property right, a breach of confidentiality with respect to the customer lists or business practices, or loss of access to them, or the future expiration of intellectual property trademark rights, could have adverse impacts on VWE’s business.
VWE relies in part on confidentiality agreements, ownership of intellectual property, and non-competition agreements with employees, vendors and third parties in order to protect its intellectual property. It is possible that these agreements could be breached and that VWE might lack an adequate remedy for breach. Disputes may arise concerning the ownership of intellectual property or the extent to which the confidentiality agreements remain in force. Furthermore, VWE’s trade secrets may become revealed to its competitors or developed independently by them, in which case VWE will not be able to enjoy exclusive use of some of its formulas or maintain confidentiality concerning its products.
The ongoing COVID-19 pandemic and its variants has had, and will likely continue to have, adverse effects on the economy and on our business.
The COVID-19 pandemic and it variants, are likely to adversely affect the economies and financial markets and could result in an economic downturn and a recession. It is uncertain how this would affect demand for our products. While VWE continues to see robust demand in its industry, and has seen little impact to its results of operations from the COVID-19 pandemic, the environment remains uncertain and it may not be sustainable over the longer term. The degree to which the pandemic ultimately impacts our business and results of operations will depend on future developments beyond our control, including the severity of the pandemic, the extent of actions to contain the virus, the availability and efficacy of a vaccine or other treatment, how quickly and to what extent normal economic and operating conditions can resume, and the severity and duration of the economic downturn that results from the pandemic.
Rising inflation may result in increased costs of operations and negatively impact the credit and securities markets generally, which could have a material adverse effect on our results of operations and the market price of our common stock.
Inflation has accelerated in the U.S. and globally due in part to global supply chain issues, a rise in energy prices, and strong consumer demand as economies continue to reopen from restrictions related to the COVID-19 pandemic. An inflationary environment can increase our cost of labor as well as our energy and other operating costs which may have a material adverse impact on our financial results. In addition, economic conditions could impact and reduce the number of customers who purchase our products as credit becomes more expensive or unavailable. Although interest rates have increased and are expected to increase further, inflation may continue. Further, increased interest rates could have a negative effect on the securities markets generally which may, in turn, have a material adverse effect on the market price of our common stock.
New lines of business or new products and services could subject us to additional risks.
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VWE may invest in new lines of business, or may offer new products, such as within its spirits business or, upon federal legalization of cannabis, cannabis-infused beverages. There are risks and uncertainties associated with such efforts, particularly in instances where the markets are not fully developed or are evolving. In developing and marketing new lines of business and new products and services, VWE may invest significant time and resources. External factors, such as regulatory compliance obligations, competitive alternatives, lack of market acceptance and shifting consumer preferences, may also affect the successful implementation of a new line of business or a new product or service. With respect to cannabis-infused beverages, even if the federal government legalizes medical and/or adult-use cannabis, significant delays in the drafting and implementation of industry regulations and licensing and the costs associated with burdensome regulations and taxes could adversely impact VWE’s ability to operate profitably in the cannabis-infused beverage industry. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have adverse effects on VWE’s business, results of operations and financial condition.
Litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.
Increased public attention has been directed at the beverage alcohol industry, which we believe is due to concern over problems related to alcohol abuse, including drinking and driving, underage drinking and health consequences from the misuse of alcohol. Adverse developments in these or similar lawsuits or a significant decline in the social acceptability of beverage alcohol products that could result from such lawsuits could materially adversely affect our business.
Risks Related to Our Production Activities
Increases in the cost, disruption of supply or shortage of energy could adversely affect our business.
Our production facilities use a significant amount of energy in their operations, including electricity, propane and natural gas. Increases in the price, disruption of supply or shortage of energy sources, which may result from increased demand, natural disasters, power outages or other causes could increase our operating costs and negatively impact our profitability. VWE has experienced increases in energy costs in the past, and energy costs could rise in the future. In addition, we incur costs in connection with the transportation and distribution of our materials and products. Higher fuel costs will result in higher transportation, freight, and other operating costs, which could significantly increase our production costs and, correlatively, decrease our operating margins and profit.
If we are unable to obtain adequate supplies of grapes or other raw materials, or if there is an increase in the cost of such materials, or contamination to ingredients or products, our profitability and production of wine could be negatively impacted, which could materially and adversely affect our business, results of operations and financial condition.
We source our grapes from the vineyards that we own and control and from independent growers. Our production activities also require adequate supplies of other quality agricultural, raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies. A shortage of, or contamination to grapes of the required variety and quality, or an inability to obtain or significant increase in the price of other requisite raw materials, could impair our ability to produce wines in the quantity and quality demanded by our customers and reduce our profitability.
Any such occurrences could adversely affect our business, results of operations and financial condition.
Drought or inclement weather could reduce the amount of water available for use in our growing and production activities, which could materially and adversely affect our business, results of operations and financial condition.
Water supply and adequate rainfall are critical to the supply of grapes, other agricultural raw materials and generally our ability to operate our business. If climate patterns change or droughts occur, there may be a scarcity of water or poor water quality, which could affect production costs, consistency of yields or impose capacity constraints. VWE depends on enough quality water for operation of its wineries, as well as to irrigate its vineyards and conduct other operations. The suppliers of the grapes and other agricultural raw materials purchased by VWE also depend upon sufficient supplies of quality water for their vineyards and fields. Prolonged or severe drought conditions or restrictions imposed on irrigation options by governmental authorities could have an adverse effect on our business, results of operations and financial condition.
Impacts from climate change and related government regulations may adversely affect our financial condition.
Our business depends upon agricultural activity and natural resources. There has been much public discussion related to concerns that carbon dioxide and other GHGs in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. Severe weather events and natural disasters, such as our experiences with drought, flooding, and/or wildfires in California, Oregon, or Washington, and climate change may negatively affect agricultural productivity in the regions from which we presently source our various agricultural raw materials or the energy supply powering our production facilities. Decreased availability of our raw materials may increase our cost of product sold. Severe weather events and natural disasters or changes in the frequency or intensity of weather events or natural disasters can also impact product quality and disrupt our supply chains, which may affect production operations, insurance cost and coverage, as well as delivery of our products to wholesalers, retailers, and consumers. Natural disasters such as severe storms, floods, and earthquakes may also negatively impact the ability of consumers to purchase our products.
We may experience significant future increases in the costs associated with environmental regulatory compliance, including fees, licenses, and the cost of capital improvements for our operating facilities to meet environmental regulatory requirements. In addition, we may be party to various
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environmental remediation obligations arising in the normal course of our business or relating to historical activities of businesses we acquire. Due to regulatory complexities, governmental or contractual requirements, uncertainties inherent in litigation, and the risk of unidentified contaminants in our current and former properties, the potential exists for remediation, liability, indemnification, and other costs to differ materially from the costs that we have estimated. We may incur costs associated with environmental compliance arising from events we cannot control, such as unusually severe droughts, floods, hurricanes, earthquakes, or fires, which could have a material adverse effect upon our business, liquidity, financial condition, and/or results of operations.
We could be negatively impacted by the occurrence of wine contamination.
We are subject to certain hazards and product liability risks, such as potential contamination, through tampering or otherwise, of ingredients or products. Contamination of our wine could result in destruction of our wine held in inventory and could cause the need for a product recall, which could significantly damage VWE’s reputation for product quality. We maintain insurance against certain of these kinds of risks, and others, under various insurance policies. However, our insurance may not be sufficient to fully cover any resulting liability or may not continue to be available at a price or on terms that are satisfactory to us.
Risks Related to Information Technology and Cybersecurity
A failure of one or more of our key IT systems, networks, processes, associated sites or service providers could have a material adverse impact on business operations, and if the failure is prolonged, our financial condition.
We rely on IT systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided and used by third-parties or their vendors, to assist us in the operation of our business. The various uses of these IT systems, networks and services include, but are not limited to: hosting our internal network and communication systems; tracking bulk wine; supply and demand; planning; production; shipping wines to customers; hosting our winery websites and marketing products to consumers; collecting and storing customer, consumer, employee, stockholder, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing and sharing confidential and proprietary research, business plans and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes necessary to manage our business.
Increased IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking and other types of attacks pose a potential risk to the security of our IT systems, networks and services, as well as the confidentiality, availability, and integrity of our data, and we have in the past, and may in the future, experience cyberattacks and other unauthorized access attempts to our IT systems. Because the techniques used to obtain unauthorized access are constantly changing and often are not recognized until launched against a target, we or our vendors may be unable to anticipate these techniques or implement sufficient preventative or remedial measures.
If we are unable to maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access. In the event of a ransomware or other cyber-attack, the integrity and safety of our data could be at risk or we may incur unforeseen costs impacting our financial position. If the IT systems, networks or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information due to any number of causes ranging from catastrophic events, power outages, security breaches, unauthorized use or usage errors by employees, vendors or other third parties and other security issues, we may be subject to legal claims and proceedings, liability under laws that protect the privacy and security of personal information (also known as personal data), litigation, governmental investigations and proceedings and regulatory penalties, and we may suffer interruptions in our ability to manage our operations and reputation, competitive or business harm, which may adversely affect our business, results of operations and financial results. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our employees, stockholders, customers, suppliers, consumers or others. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or technological failure and the reputational damage resulting therefrom, to pay for investigations, forensic analyses, legal advice, public relations advice or other services, or to repair or replace networks and IT systems.
As a result of the growing normalization of hybrid and remote work, a greater number of our employees are working remotely and accessing our IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase the stress on our technology infrastructure and systems. Although we maintain cyber risk insurance, this insurance may not be sufficient to cover all of our losses from any future breaches or failures of our IT systems, networks and services.
Our failure to adequately maintain and protect personal information of our customers or our employees in compliance with evolving legal requirements could have a material adverse effect on our business.
We collect, use, store, disclose or transfer (collectively, “process”) personal information, including from employees and customers, in connection with the operation of our business. A wide variety of local and international laws as well as regulations and industry guidelines apply to the privacy and collecting, storing, use, processing, disclosure and protection of personal information and may be inconsistent among countries or conflict with other
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rules. Data protection and privacy laws and regulations are changing, subject to differing interpretations and being tested in courts and may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.
Compliance with applicable privacy and data protection laws and regulations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms ensuring compliance. Our actual or alleged failure to comply with any applicable privacy and data protection laws and regulations, industry standards or contractual obligations, or to protect such information and data that we process, could result in litigation, regulatory investigations, and enforcement actions against us, including fines, orders, public censure, claims for damages by employees, customers and other affected individuals, public statements against us by consumer advocacy groups, damage to our reputation and competitive position and loss of goodwill (both in relation to existing customers and prospective customers) any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Additionally, if third parties that we work with, such as vendors or developers, violate applicable laws or our policies, such violations may also place personal information at risk and have an adverse effect on our business. Even the perception of privacy concerns, whether valid, may harm our reputation, subject us to regulatory scrutiny and investigations, and inhibit adoption of our wines by existing and potential customers.
Risks Related to Regulation of Our Business
VWE’s failure to obtain or maintain necessary licenses or otherwise fail to comply with applicable laws and regulations could have adverse effects on its results of operations, financial condition and business.
A complex multi-jurisdictional regime governs alcoholic beverage manufacturing, distribution, sales, and marketing in the United States. The alcoholic beverages industry in which VWE operates is subject to extensive regulation by the Alcohol and Tobacco Tax and Trade Bureau (and other federal agencies), each state’s liquor authority, and potentially local authorities depending on location. These regulations and laws dictate such matters as licensing requirements, production, importation, ownership restrictions, trade, and pricing practices, permitted distribution channels, delivery, and prohibitions on sales to minors, permitted, and required labeling, and advertising and relations with wholesalers and retailers. These laws, regulations and licensing requirements may, and sometimes are, interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other legal mandates or with VWE’s business practices. Further, these laws, rules, regulations, and interpretations are constantly changing because of litigation, legislation, and agency priorities, and could result in increased regulation. VWE’s actual or asserted non-compliance with any such law, regulation or requirement could expose VWE to investigations, claims, litigation, injunctive proceedings and other criminal or civil proceedings by private parties and regulatory authorities, as well as license suspension, license revocation, substantial fines, and negative publicity, any of which could adversely affect VWE’s results of operations, financial condition, and business.
Failure to comply with environmental, health and safety laws and regulations would expose us to civil and criminal liability.
The laws and regulations concerning the environment, health and safety may subject us to civil liability for non-compliance or environmental pollution. Such laws may include criminal sanctions (including substantial penalties) for violations. Some environmental laws also include provisions imposing strict liability for the release of hazardous substances into the environment, which could result in VWE becoming liable for clean-up efforts without any negligence or fault on our part. Other environmental laws impose liability jointly and severally, which could expose us to responsibility for cleaning up environmental pollution caused by others.
In addition, some environmental, health and safety laws are applied retroactively such that they could impose liability for acts done in the past even if such acts were carried out in accordance with the law in force at the time. Civil or criminal liability under such laws could have adverse effects on our business, results of operations and financial condition.
We may also become subject to claims for personal injury or property damage arising from exposure to hazardous substances if personal injury or environmental contamination was ostensibly caused by activity at one of its production sites. Such legal proceedings could be instituted by private individuals or non-governmental organizations.
In addition, any expansion of our existing facilities or development of new vineyards or wineries, or any expansion of our business into new product lines or new geographic markets, may be limited by present and future environmental restrictions, zoning ordinances and other legal requirements.
New and changing environmental requirements, and new market pressures related to climate change, could materially and adversely affect our business, results of operations and financial results.
There has been significant public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Federal regulations govern, among other things, air emissions, wastewater and stormwater discharges, and the treatment, handling and storage and disposal of materials and wastes. State environmental regulations and authorities intended to address and oversee environmental issues are largely state-level analogs to federal regulations and authorities intended to perform the similar purposes. We are subject to state and local environmental regulations that address a number of elements of our wine production process, including air quality, the handing of hazardous waste, recycling, water use and discharge, emissions and traffic impacts. Compliance with these and other environmental regulation requires significant resources. Continued regulatory and market trends towards sustainability may require or incentivize us to make changes to our current business operations. We may experience future increases in the costs associated with environmental regulatory compliance, including fees, licenses and the cost of capital improvements to meet environmental regulatory requirements. In addition, we may be party to various environmental remediation obligations arising
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in the normal course of our business or relating to historical activities of businesses we acquire. We cannot assure that our costs in relation to these matters will not have a material adverse effect on our business, results of operations and financial results.
Risks Related to Our Financial Condition
We have identified a material weakness in our internal control over financial reporting, and if our remediation of such material weakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
In the course of our financial close process for the fiscal years ended June 30, 2022 and 2021, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to our process and controls over financial reporting related to balance sheet account reconciliations, which includes the prior year identification of certain inventory-related account balances and the current year identification of interest rate swap derivatives account balances. Management concluded that this material weakness arose because we did not have effective business processes and controls to perform reconciliations of balance sheet account balances.
See Part II, Item 9A “Controls and Procedures” for additional information about this material weakness and our remediation efforts.
If we are unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. If we are unable to assert that our internal control over financial reporting is effective, or, if and when required, our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected, our common stock could become subject to delisting and we could become subject to litigation or investigations by the stock exchange or exchanges on which our securities are listed, the SEC or other regulatory authorities, any of which could require additional financial and management resources.
Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of financial statements for prior periods.
We may be unable to obtain additional financing to fund the operations and growth of our business on terms favorable to us, or at all.
We may require additional financing to fund our operations or growth. The failure to secure additional financing could have a material adverse effect on our continued development or growth. Such financings may result in dilution to stockholders, issuance of securities with priority as to liquidation and dividend and other rights more favorable than our common stock, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe that we have sufficient funds for current or future operating plans. There can be no assurance that financing will be available to us on favorable terms, or at all. The inability to obtain financing when needed may make it more difficult for us to operate its business or implement its growth plans.
The terms of the VWE credit facility may restrict our flexibility, and failure to comply with such terms would have a variety of adverse effects.
The VWE credit facility contains various covenants and restrictions that may, in certain circumstances and subject to carve-outs and exceptions, limit VWE’s ability to, among other things:
14
Under the VWE credit facility, VWE also is required to maintain compliance with a minimum fixed charge coverage ratio covenant (not less than 1.10:1.00).
As a result of the covenants and other restrictions contained in its credit facility, VWE is limited in how it may choose to conduct its business. VWE cannot guarantee that it will be able to remain in compliance with these covenants and other restrictions or be able to obtain waivers for noncompliance in the future. Failure to comply with the covenants and other restrictions contained in its debt instruments would likely have adverse effects on its financial condition and business by impairing its ability to continue financing its business.
Of particular significance, VWE could be forced to repay immediately and in full any outstanding borrowings under its credit facility if it were to breach its covenants and not cure the breach, even if it could otherwise satisfy its debt service obligations. Also, if VWE were to experience a change of control, as defined in its credit facilities, it could be required to repay in full all loans outstanding thereunder, plus accrued interest and fees.
VWE may be adversely affected by the phase-out of, or changes in the method of determining, the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with different reference rates.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on U.S. dollar-denominated loans globally. The VWE credit facility uses LIBOR as a reference rate such that the interest due to VWE’s creditors under this facility is calculated using LIBOR.
On July 27, 2017, the U.K.’s Financial Conduct Authority (the authority that administers LIBOR) announced that it intends to phase out LIBOR by the end of 2021. The replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. VWE cannot predict the effect of the potential changes to the establishment and use of alternative rates or benchmarks. VWE may need to renegotiate its credit facility or incur other indebtedness. The use of an alternative rate or benchmark, could negatively impact the terms of such renegotiated credit facility or such other indebtedness. If LIBOR ceases to exist, VWE might need to amend certain contracts and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to VWE interest expense.
If VWE’s intangible assets or goodwill become impaired, then VWE may be required to record charges to earnings, which could be significant.
VWE has substantial intangible assets and goodwill on its balance sheet resulting from acquisitions that VWE has completed. VWE reviews intangible assets and goodwill for impairment annually or more frequently if events or circumstances indicate that these assets might be impaired. Application of impairment tests requires judgment. A significant deterioration in a key estimate or assumption or a less significant deterioration to a combination of assumptions or the sale of a part of a reporting unit could result in an impairment charge in the future, which could have an impact, possibly significant, on VWE’s reported earnings.
We may not realize the benefits anticipated from our recent business combination, which could adversely affect our common stock price.
The anticipated benefits from the recently completed business combination are, necessarily, based on projections and assumptions that may not materialize as expected or which may prove to be inaccurate. Our ability to achieve the anticipated benefits will depend on our ability to successfully implement our growth strategies, as well as the availability of cash. We may encounter significant challenges with recognizing the anticipated benefits of the business combination, including the following:
15
If we do not successfully manage these issues and the other challenges inherent in operating a business of our scale, then we may not achieve the anticipated benefits of the business combination, could incur unanticipated expenses and charges and the results of operations and the market price of our common stock could be adversely affected.
A significant aspect of VWE’s expansion plan is to grow through strategic acquisitions. If the liabilities VWE assumes as part of making strategic acquisitions are greater than anticipated, VWE’s financial results could be adversely affected.
When VWE acquires the equity, i.e., the stock of a corporation or the membership interests in a limited liability company, rather than the assets, of a target company, it also generally assumes the liabilities of the target company, which often include known, unknown, and contingent liabilities. VWE’s ability to accurately identify and assess the magnitude of these assumed liabilities may be limited by, among other things, the information available to VWE and the limited operating experience VWE has with these acquired businesses. If VWE is unable to accurately assess the scope of these liabilities or if these liabilities are neither probable nor estimable at the time of the acquisition, VWE’s projected financial results for the acquired company could be adversely affected. To the extent that VWE’s overall results of operations are affected by any of these events, the price of VWE common stock could decrease.
General Risk Factors
Mergers and acquisitions in which VWE might engage involve risks that could adversely affect its business.
As part of its growth strategy, VWE will continue considering and entering into discussions, negotiations and agreements regarding possible transactions such as mergers, acquisitions and other business combinations. The purchase price for possible acquisitions of brands, other assets and businesses might be paid in cash, through the issuance of common stock or other securities, borrowings or a combination of these methods. Business combinations entail numerous risks, including:
There can be no assurance that VWE will continue to be able to identify, consummate and successfully integrate business combinations.
A failure to comply with anti-corruption laws, trade sanctions and restrictions, or similar laws or regulations may have a material adverse effect on our business and financial results.
Some of the countries where we do business have a higher risk of corruption than others. While we are committed to doing business in accordance with all applicable laws, including anti-corruption laws and global trade restrictions, we remain subject to the risk that an employee, or one of our many direct or indirect business partners, may take action determined to be in violation of international trade, money laundering, anti-corruption, or other laws, sanctions, or regulations, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010, or equivalent local laws. Because the COVID-19 pandemic has negatively impacted numerous local economies, government intervention in local economies and businesses has increased, which has elevated the risk of and opportunity for corruption. Any determination that our operations or activities are not in compliance with applicable laws or regulations, particularly those related to anti-corruption and international economic or trade sanctions, could result in investigations, interruption of business, loss of business partner relationships, suspension or termination of licenses and permits (our own or those of our partners), imposition of fines, legal or equitable sanctions, negative publicity, and management distraction or departure. Further, our continued compliance with applicable anti-corruption, economic and trade sanctions, or other laws or regulations, and our other policies could result in higher operating costs, delays, or even competitive disadvantages.
We compete for skilled management and labor and our future success depends in large part on key personnel.
Our future success depends in large part on our ability to retain and motivate to a high degree our senior management team. Our ability to deliver high-quality products also depends on retaining and motivating proficient winemakers, grape growers and other skilled management and operations personnel. The loss of such personnel or a labor shortage could adversely affect our business and our ability to implement our strategy.
VWE is an emerging growth company and can offer no assurance that the reduced reporting requirements applicable to emerging growth companies will not make its shares less attractive to investors.
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VWE is an emerging growth company as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as VWE continues to be an emerging growth company, it may take advantage of exemptions from various reporting requirements that apply to public companies other than emerging growth companies, including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. VWE will remain an emerging growth company until the earlier of (1) the date (a) December 31, 2026, (b) on which VWE has total annual gross revenue of at least $1.07 billion, or (c) on which VWE is deemed to be a large accelerated filer, which means the market value of shares of VWE’s common stock that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which VWE has issued more than $1.0 billion in non-convertible debt during the prior three-year period.
VWE can offer no assurance that investors will not find its common stock less attractive because VWE may rely on these exemptions. If some investors find such less attractive as a result, then there may be a less active trading market for such stock and its market price may be more volatile.
VWE will continue to incur significant expenses and administrative burdens as a public company, which could have an adverse effect on its business, financial condition and results of operations.
VWE, as a public company, faces significant legal, accounting, administrative and other costs and expense. VWE also is a reporting issuer in all of the provinces and territories of Canada, other than Quebec. The Sarbanes-Oxley Act, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the Public Company Accounting Oversight Board (United States), and Nasdaq impose additional reporting and other obligations on public companies. Compliance with public company requirements will increase costs and make certain activities more time-consuming. In addition, expenses associated with public company reporting requirements will be incurred. Furthermore, if any issues in complying with those requirements are identified (for example, if the auditors identify a material weakness or a significant deficiency in the internal control over financial reporting), then VWE could incur additional costs rectifying those issues, and the existence of those issues could adversely affect VWE’s reputation or investor perceptions of it. It may also be more expensive to obtain director and officer liability insurance in such a situation. Risks associated with VWE’s status as a public company may make it more difficult to attract and retain qualified persons to serve on the board of directors or as executive officers. The additional reporting and other obligations imposed by these rules and regulations will increase legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased costs will require VWE to divert a significant amount of money that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase costs.
VWE is subject to financial reporting and other requirements that places increased demands on its accounting and other management systems and resources and for which VWE may not be adequately prepared.
VWE is subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404(a) of the Sarbanes-Oxley Act and similar legislation imposed on reporting issuers under Canadian law, as applicable. Section 404 requires annual management assessments of the effectiveness of VWE’s internal controls over financial reporting and, after VWE is no longer an “emerging growth company,” its independent registered public accounting firm may be required to express an opinion on the effectiveness of VWE’s internal controls over financial reporting. To the extent applicable, these reporting and other obligations will place significant demands on VWE’s management, administrative, operational, and accounting resources and will cause VWE to incur significant expenses. VWE is in the process of creating systems, implementing financial and management controls, reporting systems and procedures, and hiring additional accounting and finance staff. If VWE is unable to accomplish these objectives in a timely and effective manner, then its ability to comply with the financial reporting requirements and other rules that apply to public reporting companies could be impaired. Any failure to maintain effective internal controls could have adverse effects on our business, results of operations and stock price.
VWE’s management has limited experience operating a public company. This could lead to diversion of time otherwise spent on business operations and could necessitate the incurrence of additional costs to staff for regulatory expertise.
Although several of the directors of the Company have substantial public market experience, as well as our new recently appointed CFO, VWE’s other executive officers have limited experience in the management of a publicly traded company subject to significant regulatory oversight and reporting obligations under federal securities laws. VWE’s management team may struggle to manage VWE successfully or effectively as a public company. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities, which will result in less time being devoted to the management and growth of VWE. It is possible that VWE will be required to expand its employee base and hire additional qualified personnel, or engage additional outside consultants and professionals, to support its operations as a public company, increasing its operating costs in future periods.
The terms of the investor rights agreement, VWE’s organizational documents and Nevada law could inhibit a takeover that VWE shareholders might consider favorable.
17
Features of the investor rights agreement, the VWE articles of incorporation and bylaws and Nevada law will make it difficult for any party to acquire control of VWE in a transaction not approved by the VWE board of directors. These features include:
These features may have an anti-takeover effect and could delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a VWE shareholder might consider in its best interest, including those attempts that might result in a premium over the market price of their common stock.
The VWE articles of incorporation provide that the Second Judicial District Court in the State of Nevada, located in Washoe County, Nevada will be the sole and exclusive forum for substantially all disputes between VWE and its shareholders, which could limit VWE shareholders’ ability to obtain a favorable judicial forum for disputes with VWE or its directors, officers or employees.
The VWE articles of incorporation provide that, unless VWE consents in writing to the selection of an alternative forum, the Second Judicial District Court, in and for the State of Nevada, located in Washoe County, Nevada, will, to the fullest extent permitted by law, be the exclusive forum for (i) any derivative action, suit or proceeding brought on behalf of VWE, (ii) any action, suit or proceeding asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or stockholder of VWE to VWE or to its stockholders, or (iii) any action, suit or proceeding arising pursuant to any provision of the NRS or the VWE articles of incorporation or bylaws (as either may be amended and/or restated from time to time). Subject to the foregoing, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Such exclusive forum provision will not relieve VWE of its duties to comply with the federal securities laws and the rules and regulations thereunder, and its shareholders will not be deemed to have waived VWE’s compliance with such laws, rules and regulations.
The VWE articles of incorporation further provide that any person or entity purchasing or otherwise acquiring any interest in any VWE securities will be deemed to have notice of and consented to these provisions. Such articles provide that if any action whose subject matter is within the scope of clause (i), (ii) or (iii) above is filed in a court other than the courts in the State of Nevada (a “foreign action”) in the name of any stockholder, such stockholder will be deemed to have consented to (1) the personal jurisdiction of the state and federal courts in Nevada in connection with any action brought in any such court to enforce the provisions of such clause and (2) having service of process made upon any such stockholder’s counsel in the foreign action as agent for such stockholder. These exclusive forum provisions may limit a shareholder’s ability to bring an action, suit or proceeding in a judicial forum of its choosing for disputes with VWE or its directors, officers, employees or stockholders, which may discourage such actions, suits and proceedings. None of the aforementioned provisions of the VWE articles of incorporation will apply to suits to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.
If a court were to find the exclusive forum provision contained in the VWE articles of incorporation to be inapplicable or unenforceable in an action, suit or proceeding, then VWE may incur additional costs associated with resolving such action, suit or proceeding in other jurisdictions, which could harm its business, results of operations, and financial condition. Even if VWE is successful in defending against such actions, suits and proceedings, litigation could result in substantial costs and be a distraction to management and other employee.
We cannot guarantee that we will repurchase our common stock or warrants pursuant to our repurchase program or that our repurchase program will enhance long-term stockholder value. Share and warrant repurchases could also increase the volatility of the price of our common stock and warrants and could diminish our cash reserves.
On March 8, 2022, our Board authorized a share repurchase program (the "Repurchase Program"), pursuant to which we may repurchase up to $30.0 million in aggregate value of shares of our common stock and/or warrants through September 8, 2022. The timing and amount of any repurchases will depend upon a number of factors, including price, trading volume, general market conditions and legal requirements, among others.
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The Company is not obligated to repurchase any specific number or amount of shares of common stock or warrants pursuant to the Repurchase Program, and it may modify, suspend or discontinue the Repurchase Program at any time. Repurchases pursuant to the Repurchase Program could affect our common stock price and warrant price and increase their volatility. The existence of the Repurchase Program could cause our common stock price and warrant price to be higher than they would be in the absence of such a program and, if securities are repurchased in the Repurchase Program, it will reduce the market liquidity for such securities. Additionally, the Repurchase Program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities. There can be no assurance that any repurchases will enhance long-term stockholder value and the market price of our common stock or warrants may decline below the levels at which we repurchased any such securities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Corporate Office
Our corporate headquarters are located in Incline Village, Nevada, where we occupy approximately 1,200 square feet under a lease that expires January 31, 2024, with two options to extend for additional terms with a duration of thirty six (36) months each.
Vineyards
We own or control approximately 1,100 acres of planted vineyards located in the premier winegrowing regions of the U.S. We currently own ten winery estates and lease three winery estates.
Wine, Spirits and Cider Production Facilities
Our revamped Ray’s Station facility has a footprint exceeding 700,000 square feet in size. Located in Hopland, California, the facility contains areas for receiving grapes and bulk wine, as well as processing, fermenting and aging. The property also has bottling, laboratory facilities and offices. Approximately 150,000 square feet of outside production area is used for crushing, pressing and fermenting wine grapes.
We expanded our production into a cidery with the acquisition of ACE Cider. Located in Sebastopol, California, ACE Cider has approximately 15,000 square feet of production, warehouse and office space. The cidery will not only produce its own brand, but also adds an innovative product line to our ready-to-drink category, giving us access to a significant new sales channel for distribution.
We have also expanded our production capabilities and capacity with the acquisition of Meier's. Located in Silverton, Ohio, Meier's has nearly 40,000 square feet of production, bottling, warehouse and office space. Along with enhanced production capabilities and supply chain efficiencies, Meier’s offers significant additional warehouse and storage space. The central Midwest location provides more efficient access to Midwest, Northeast, and Southeast markets, allowing for rapid expansion of points of distribution for products such as recently acquired ACE Cider.
We are focused on sustainability, the environment and reducing our environmental impact. Towards that end, we have increased our solar power generation capacity at Ray’s Station from 750 kilowatts to 2.23 megawatts and have started to use the Tesla battery for energy storage to further reduce our carbon footprint. We have also improved the efficiency of our water and wastewater treatment facilities at Ray’s Station in anticipation of the increased output from the new high-speed bottling line. Similarly, we have reduced the amount of water used and improved our recycling capacity by purchasing new equipment at our Clos Pegase and Girard properties. In addition, we have installed a computerized tank control system at the Girard winery to control the timing and demand for electricity from our chilling equipment.
Properties are used by all segments, excluding ACE Cider which is specifically used by our Wholesale segment.
Item 3. Legal Proceedings
From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business that could have a material adverse effect on our business, results of operations or financial condition. As of the date of this Annual Report on Form 10-K, the Company is not currently a party to any material pending legal proceedings, to our knowledge, in which we believe would have a material effect on our business, results of operations or financial condition.
Item 4. Mine Safety Disclosures
None.
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Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock began trading on The Nasdaq Global Market under the symbol “VWE” on June 8, 2021. Prior to such date and before the completion of the Business Combination between BCAC and Legacy VWE, the Class A restricted voting shares of BCAC traded on the Nasdaq under the symbol "BSPE".
Stock Performance Graph
The following graph compares the performance of our common stock to the Nasdaq Composite Index (ticker symbol: IXIC) and Crimson Wine Group, Ltd. (ticker symbol CWGL), a peer issuer in the business of producing and selling luxury wines, assuming $100 was invested as of February 8, 2021, which was our first day of trading on the Nasdaq.
The following graph also compares the performance of our common stock to Duckhorn Portfolio, Inc., (ticker symbol: NAPA), a peer issuer in the business of producing and selling luxury and ultra-luxury wines, assuming $100 was invested on March 22, 2021, which was its first day of trading on the New York Stock Exchange. Prior to this date there was no public trading market for its common stock.
Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of pre-tax amount of all dividends; however, no dividends have been declared on our common stock to date.
|
| February 8, 2021 |
|
| March 22, 2021 |
|
| June 30, 2021 |
|
| June 30, 2022 |
| ||||
VWE ("BSPE" prior to June 8, 2021) |
| $ | 100 |
|
| $ | 99 |
|
| $ | 118 |
|
| $ | 78 |
|
Crimson Wine Group, Ltd. (CWGL) |
| $ | 100 |
|
| $ | 107 |
|
| $ | 146 |
|
| $ | 114 |
|
Duckhorn Portfolio, Inc. (NAPA) |
| $ | - |
|
| $ | 100 |
|
| $ | 114 |
|
| $ | 109 |
|
Nasdaq Composite Index (IXIC) |
| $ | 100 |
|
| $ | 96 |
|
| $ | 104 |
|
| $ | 79 |
|
Holders of Common Stock
As of June 30, 2022, there were twenty-nine (29) holders of record of our common stock.
Dividend Policy
We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will
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be at the discretion of our Board, and will depend on our results of operations, financial conditions, capital requirements and other factors that our Board deems relevant.
Sale of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
The following table presents information with respect to our repurchases of our equity securities during the fiscal quarter ended June 30, 2022:
Repurchases |
| Total number of shares purchased |
|
| Average price paid per share |
|
| Total number of warrants purchased |
|
| Average price paid per warrant |
|
| Total number of shares and warrants purchased as part of publicly announced plans or programs (1) |
|
| Approximate dollar value of shares and warrants that may yet be purchased under the plans or programs |
| ||||||
April 1, 2022 - April 30, 2022 |
|
| 417,429 |
|
| $ | 10.12 |
|
|
| - |
|
| $ | - |
|
|
| 417,429 |
|
| $ | 22,966,310 |
|
May 1, 2022 - May 31, 2022 |
|
| 885,897 |
|
|
| 8.50 |
|
|
| - |
|
|
| - |
|
|
| 885,897 |
|
|
| 15,436,185 |
|
June 1, 2022 - June 30, 2022 |
|
| 1,255,029 |
|
|
| 9.06 |
|
|
| 181,553 |
|
|
| 1.46 |
|
|
| 1,436,582 |
|
|
| 3,800,555 |
|
Total |
|
| 2,558,355 |
|
| $ | 9.04 |
|
|
| 181,553 |
|
| $ | 1.46 |
|
|
| 2,739,908 |
|
|
|
| |
(1) On March 8, 2022, the Company announced that our board of directors approved a repurchase plan authorizing us to purchase up to $30.0 million in aggregate value of our common stock and/or warrants through September 8, 2022. The repurchase program is more fully disclosed in Note 13.
Item 6.
Reserved.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report on Form 10-K. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “us”, “our” and “the Company” are intended to mean the business and operations of Vintage Wine Estates, Inc. ("VWE") and its consolidated subsidiaries.
Overview
Vintage Wine Estates is a leading vintner in the United States ("U.S."), offering a collection of wines produced by award-winning, heritage wineries, popular lifestyle wines, innovative new wine brands, packaging concepts, as well as craft spirits and cider. Our name brand wines include Layer Cake, Cameron Hughes, Clos Pegase, B.R. Cohn, Firesteed, Bar Dog, Kunde, Cherry Pie and many others. Since our founding over 20 years ago, we have grown organically through wine brand creation and through acquisitions to become the 14th largest wine producer based on cases of wine shipped in California. We sell over 2.5 million cases annually.
Our key differentiator is our diversification—what we call our three-legged stool business model.
We are diversified in our brand collection, producing nearly 60 brands ranging in retail price from $10 to $150, with a focus on the fastest growing $10 to $20 segment. Over eighty percent of our business is done in this critical segment.
We are diversified in our omni-channel sales strategy balanced between direct-to-consumer, 31.5% of sales, traditional wholesale, 28.8% of sales and business-to-business at 38.8% of sales. Our direct-to-consumer segment is particularly robust. Where most wine companies have two direct sales levers to pull: tasting rooms and wine clubs, we have seven: tasting rooms, wine clubs, ecommerce, Cameron Hughes, Windsor/custom label design and engraving, QVC/HSN and The Sommelier Company.
We are diversified in our sourcing with a strong asset base of 3,300 owned and leased vineyard acres in located in the premier winegrowing regions of the U.S. and 10 owned winery estates. These properties extend from the Central Coast of California to storied appellations in Napa Valley and Sonoma County, north to Oregon and Washington. We obtain fruit for our wines from owned and leased vineyards, as well as other sources, including independent growers and the spot wine market.
We have completed over 20 acquisitions in the past 10 years and completed over 10 acquisitions in the past 5 years. We generally acquire the brands and inventories of a targeted business, eliminating redundant corporate overhead. We then integrate the acquired assets into our highly efficient production, distribution and omni channel selling networks, quickly increasing the sales and margins of the acquired business.
Our growth has allowed us to reinvest in our business and create the scale and infrastructure needed to successfully manage a variety of different wine brands and channels and reduce costs. Our owned winery facilities have the capacity to store up to 9.0 million gallons of wine per year. In addition, we have a high-speed bottling facility with the capacity to bottle over 13.5 million cases annually.
Additional bottling capacity is not only used for our products, but also allows us to further expand our bottling and fulfillment services offered to third parties on a contract basis. The additional capacity of the bottling facility may not initially be fully utilized but provides us with capacity consistent with our growth plans. Our scale and consolidated operations are expected to enable us to increase margins of the businesses that we acquire, providing accretive value promptly after the acquisition.
Strategy
Our strategy is to continue to grow organically and through acquisitions with a view towards making two to three acquisitions per year over the next five years. We believe we have completed more brand mergers and acquisitions in the U.S. wine industry over the last 10 years than any other company in the industry. These acquisitions have allowed us to diversify our wine sourcing into regions outside of California, expand our portfolio of brands, increase our vineyard assets and provide our DTC and retail customers with a range of products to choose from.
To achieve these results, our acquisitions are subject to a rigorous, data-driven, due diligence and underwriting process, to assure that minimum financial thresholds with meaningful upside can be satisfied in each transaction. In accordance with GAAP, the results of the acquisitions we have completed are reflected in our consolidated financial statements. We typically incur minimal transaction costs in connection with identifying and completing acquisitions and ongoing integration costs as we integrate acquired companies and seek to achieve synergies.
Key Measures to Assess the Performance of our Business
We consider a variety of financial and operating measures in assessing the performance of our business, formulating goals and objectives and making strategic decisions. The key GAAP measures we consider are net revenues; gross profit; selling, general and administrative expenses; and income from operations. The key non-GAAP measure we consider is Adjusted EBITDA. We also monitor our case volume sold and depletions from our distributors to retailers to help us forecast and identify trends affecting our growth.
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Net Revenues
We generate revenue from our segments: Wholesale, Business-to-Business ("B2B"), Direct-to-Consumer ("DTC") and Corporate and Other. We recognize revenue from sales when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when the product is shipped, and title passes to the customer, and when control of the promised product or service is transferred to the customer. Our standard terms are free on board, or FOB, shipping point, with no customer acceptance provisions. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. We recognize revenue net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We account for shipping and handling as activities to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and classify such costs as a component of costs of sales. Our products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been significant to us.
Gross Profit
Gross profit is equal to net revenues less cost of sales. Cost of sales includes the direct cost of manufacturing, including direct materials, labor and related overhead, and physical inventory adjustments, as well as inbound and outbound freight and import duties.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenues, but are expected to increase over time to support the needs of the Company.
Income from Operations
Income from operations is gross profit less selling, general and administrative expenses; acquisition and restructuring related expense or income and amortization of intangible assets. Income from operations excludes interest expense, income tax expense, and other expenses, net. We use income from operations as well as other indicators as a measure of the profitability of our business.
Case Volumes
In addition to acquisitions, the primary drivers of net revenue growth in any period are attributable to changes in case volumes and changes in product mix and sales price. Case volumes represents the number of 9-liter equivalent cases of wine that we sell during a particular period. Case volumes are an important indicator of what is driving gross margin. This metric also allows us to develop our supply and production targets for future periods.
The following table summarize 9-liter equivalent cases by segment:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Wholesale |
|
| 1,561 |
|
|
| 969 |
|
B2B |
|
| 582 |
|
|
| 558 |
|
DTC |
|
| 401 |
|
|
| 348 |
|
Total case volume |
|
| 2,544 |
|
|
| 1,875 |
|
Case volumes were up 35.7% for the fiscal year driven by volume increases in the Wholesale and DTC segments. Wholesale volumes grew 61.1% for the year due to increased volumes of core brands as well as volumes associated with the acquisition of ACE Cider. DTC volumes were up 15.2% driven by increased tasting room, wine club, and event activity coupled with volumes related to the acquisition of Vinesse. B2B volumes remained relatively flat for the year.
Depletions
Within our three tier distribution structure, depletion measures the sale of our inventory from the distributor to the retailer. Depletions are an important indicator of customer satisfaction, which management uses for evaluating performance of our brands and for forecasting.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we use EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies. These metrics are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.
Adjusted EBITDA is defined as earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, casualty losses or gains, impairment losses, changes in the fair value of derivatives, restructuring related income or expenses, acquisition and
23
integration costs, and certain non-cash, non-recurring, or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance, including non-cash inventory write downs and COVID related adjustments. COVID related adjustments relate to the delayed GAZE brand launch and nonrecurring costs of implementing safety protocols for production facilities, warehouse, tasting rooms and offices. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net revenues.
The following is a reconciliation of net income to Adjusted EBITDA for the periods presented:
| June 30, 2022 |
|
|
| June 30, 2021 |
| |||
Net (loss) income |
| (679 | ) |
|
| $ | 10,088 |
| |
Interest expense |
| 13,910 |
|
| - |
|
| 11,581 |
|
Income tax provision |
| 1,061 |
|
|
|
| 766 |
| |
Depreciation and amortization |
| 25,297 |
|
|
|
| 11,900 |
| |
Gain on litigation proceeds |
| (3,000 | ) |
|
|
| (3,845 | ) | |
Stock-based compensation expense |
| 6,914 |
|
|
|
| 3,334 |
| |
Inventory adjustment for wildfire impact - vineyard |
| - |
|
|
|
| 3,302 |
| |
Inventory adjustment for wildfire impact - winery overhead |
| - |
|
|
|
| 9,000 |
| |
Inventory write down |
| 19,100 |
|
|
|
| - |
| |
PPP loan forgiveness |
| - |
|
|
|
| (6,604 | ) | |
Net unrealized (gain)/loss on interest rate swap agreements |
| (22,950 | ) |
|
|
| (6,136 | ) | |
Loss/(gain) on disposition of assets |
| 485 |
|
|
|
| (1,001 | ) | |
Deferred rent adjustment |
| 375 |
|
|
|
| 352 |
| |
Transaction expenses |
| - |
|
|
|
| 4,339 |
| |
Impairment of intangible assets |
| - |
|
|
|
| 1,081 |
| |
Remeasurement of contingent consideration liabilities |
| (3,570 | ) |
|
|
| (329 | ) | |
Post-acquisition accounts receivable write-down |
| - |
|
|
|
| 109 |
| |
Incremental public company costs |
| 5,000 |
|
|
|
| - |
| |
Acquisition integration costs |
| 934 |
|
|
|
| - |
| |
Deferred gain on sale leaseback |
| (1,334 | ) |
|
|
| (1,335 | ) | |
COVID related adjustments |
| - |
|
|
|
| 1,563 |
| |
Inventory acquisition basis adjustment |
| 5,275 |
|
|
|
| 401 |
| |
Adjusted EBITDA | $ | 46,818 |
|
|
| $ | 38,566 |
| |
Revenue | $ | 293,770 |
|
|
| $ | 220,742 |
| |
Adjusted EBITDA margin |
| 15.9 | % |
|
|
| 17.5 | % | |
Adjusted EBITDA and Adjusted EBITDA Margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance.
Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms Adjusted EBITDA and Adjusted EBITDA Margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as indicators of our operating performance in isolation from, or as a substitute for, net income (loss), which is prepared in accordance with GAAP. We have presented Adjusted EBITDA and Adjusted EBITDA Margin solely as supplemental disclosure because we believe it allows for a more complete analysis of our results of operations. In the future, we may incur expenses such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
COVID-19
The COVID-19 pandemic ("COVID-19"), which the World Health Organization declared a pandemic in March 2020, continues to disrupt the U.S. and global economies, resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. While many measures implemented by governments in an effort to slow the spread of COVID-19 have been lifted or eased, some are continuing despite vaccines due to the emergence of variants of the virus.
24
In the longer-term, the COVID-19 pandemic is likely to adversely affect the economies and financial markets, and could result in an economic downturn and a recession. It is uncertain how this would affect demand for our products. While we continue to see robust demand in our industry, and have seen little impact to our business from the COVID-19 pandemic, we are unable to predict the full impact the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across the U.S., the impact to our customers, employees and suppliers, and other factors described in the section titled “Risk Factors” in this Annual Report on Form 10-K. These factors are beyond our knowledge and control and, as a result, at this time, we are unable to predict the ultimate impact, both in terms of severity and duration, that the COVID-19 pandemic will have on our business, operating results, cash flows and financial condition.
Invasion of Ukraine
Russia's invasion of Ukraine has not had a direct impact on the Company. The Company does not have assets, operations or human capital resources located in Russia or Ukraine, does not invest or hold securities that trade in those areas and does not rely on goods or services sourced in Russia or Ukraine. However, the Company receives its capsules for wine bottles from a supplier in Italy, who has plants located in Ukraine, Italy and Poland. While the Company has not been impacted directly by supply chain disruptions as a result of the invasion, including potential cybersecurity risks and other indirect operational or supply chain challenges, the competition has increased from suppliers due to the closing of the plant in Ukraine.
Seasonality
There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenues and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during or second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.
Weather Conditions
Our ability to fulfill the demand for wine is restricted by the availability of grapes. Climate change, agricultural and other factors, such as wildfires, disease, pests, extreme weather conditions, water scarcity, biodiversity loss and competing land use, impact the quality and quantity of grapes available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenues and costs from year to year.
In addition, extreme weather events, such as wildfires can result in potentially significant expenses to repair or replace a vineyard or facility as well as impact the ability of grape suppliers to fulfill their obligations to us.
Industry Conditions
The wine industry is recession resistant, with sustained growth over the past 25 years despite downturns in economic conditions from time to time. Consumers are increasingly purchasing higher priced wines and other alcoholic beverages, which has accelerated throughout the COVID-19 pandemic. Consumption increases are largely in the $10.00 or more retail price per bottle premium and luxury wine categories. Approximately 80% of our wine sales are in the premium segment.
U.S. Wildfires
Significant wildfires in California, Oregon and Washington states, have historically engulfed the affected regions in smoke and flames. The long-term trend is that wildfires are increasing resulting from drought conditions. Drought conditions due to global climate change have increased the severity of destructive wildfires which have affected the U.S. grape harvest. When vineyards and grapes are exposed to smoke, it can result in an ashy, burnt, or smoky aroma, described as "smoke tainted”. Industry grape suppliers have also experienced smoke and fire damage from the wildfires. Damage to our grape harvest and vineyards caused from the wildfires has impacted our revenues, costs of revenues and winery overhead for the periods presented.
Casualty Gains
We suffered smoke-tainted inventory damage resulting from the October 2017 Napa and Sonoma County wildfires. We filed an insurance claim for this damage, which was settled in fiscal 2021 for approximately $3.8 million, net of legal costs. In fiscal 2022, we received an additional $2.7 million, net of legal costs, related to wildfire claims. The gain of litigation proceeds consists of payments we received from our insurer.
25
Results of Operations
Comparison of the years ended June 30, 2022 and 2021
The following table summarizes our operating results for the periods presented:
|
| Year Ended June 30, |
|
| Dollar Change |
|
| Percent Change |
| |||||||
|
| 2022 |
|
| 2021 |
|
|
|
|
|
|
| ||||
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Wine, spirits and cider |
| $ | 208,954 |
|
| $ | 177,331 |
|
| $ | 31,623 |
|
|
| 17.8 | % |
Nonwine |
|
| 84,816 |
|
|
| 43,411 |
|
|
| 41,405 |
|
|
| 95.4 | % |
|
|
| 293,770 |
|
|
| 220,742 |
|
|
| 73,028 |
|
|
| 33.1 | % |
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Wine, spirits and cider |
|
| 151,117 |
|
|
| 119,350 |
|
|
| 31,767 |
|
|
| 26.6 | % |
Nonwine |
|
| 52,698 |
|
|
| 26,041 |
|
|
| 26,657 |
|
|
| 102.4 | % |
|
|
| 203,815 |
|
|
| 145,391 |
|
|
| 58,424 |
|
|
| 40.2 | % |
Gross profit |
|
| 89,955 |
|
|
| 75,351 |
|
|
| 14,604 |
|
|
| 19.4 | % |
Selling, general, and administrative expenses |
|
| 105,296 |
|
|
| 72,505 |
|
|
| 32,791 |
|
|
| 45.2 | % |
Impairment of intangible assets |
|
| - |
|
|
| 1,081 |
|
|
| (1,081 | ) |
| * |
| |
Loss (gain) on sale of property, plant, and equipment |
|
| 485 |
|
|
| (1,001 | ) |
|
| 1,486 |
|
|
| -148.5 | % |
Deferred gain on sale leaseback |
|
| (1,334 | ) |
|
| (1,335 | ) |
|
| 1 |
|
|
| -0.1 | % |
Gain on litigation proceeds |
|
| (3,000 | ) |
|
| (4,750 | ) |
|
| 1,750 |
|
|
| -36.8 | % |
Gain on remeasurement of contingent consideration liabilities |
|
| (3,570 | ) |
|
| (329 | ) |
|
| (3,241 | ) |
| * |
| |
(Loss) income from operations |
|
| (7,922 | ) |
|
| 9,180 |
|
|
| (17,102 | ) |
| * |
| |
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
| (13,910 | ) |
|
| (11,581 | ) |
|
| (2,329 | ) |
|
| 20.1 | % |
Net unrealized gain on interest rate swap agreements |
|
| 22,950 |
|
|
| 6,136 |
|
|
| 16,814 |
|
| * |
| |
Gain on Paycheck Protection Program loan forgiveness |
|
| - |
|
|
| 6,604 |
|
|
| (6,604 | ) |
| * |
| |
Other, net |
|
| (736 | ) |
|
| 515 |
|
|
| (1,251 | ) |
| * |
| |
Total other income, net |
|
| 8,304 |
|
|
| 1,674 |
|
|
| 6,630 |
|
| * |
| |
Income before provision for income taxes |
|
| 382 |
|
|
| 10,854 |
|
|
| (10,472 | ) |
|
| -96.5 | % |
Income tax provision |
|
| 1,061 |
|
|
| 766 |
|
|
| 295 |
|
|
| 38.5 | % |
Net (loss) income |
|
| (679 | ) |
|
| 10,088 |
|
|
| (10,767 | ) |
|
| -106.7 | % |
Net (loss) income attributable to the noncontrolling interests |
|
| (108 | ) |
|
| 218 |
|
|
| (326 | ) |
|
| -149.5 | % |
Net (loss) income attributable to Vintage Wine Estates, Inc. |
|
| (571 | ) |
|
| 9,870 |
|
|
| (10,441 | ) |
|
| -105.8 | % |
Accretion on redeemable Series B stock |
|
| - |
|
|
| 5,785 |
|
|
| (5,785 | ) |
| * |
| |
Net (loss) income allocable to common stockholders |
| $ | (571 | ) |
| $ | 4,085 |
|
| $ | (4,656 | ) |
|
| -114.0 | % |
*Not meaningful
Net Revenues
Net revenues for the year ended June 30, 2022 increased $73.0 million, or 33.1%, to $293.8 million, from $220.7 million for the year ended June 30, 2021. The increase was driven by an increase in B2B net revenues of approximately $36.5 million, of which $7.3 million related to acquisitions, DTC net revenues of approximately $25.8 million, of which $11.0 million related to acquisitions, and Wholesale net revenues of $11.6 million, of which $13.4 million related to acquisitions, partially offset by a decrease in Other net revenues of approximately $0.9 million.
Gross Profit
Gross profit for the year ended June 30, 2022 increased $14.6 million, or 19.4%, to $90.0 million, from $75.4 million for the year ended June 30, 2021. The increase in gross profit was primarily driven by the strong DTC post-COVID growth of $10.6 million. Acquisitions contributed an additional $13.1 million of gross profit. These increases were partially offset by $19.1 million of non-cash inventory write-downs identified through material weakness remediation efforts.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year ended June 30, 2022 increased $32.8 million, or 45.2%, to $105.3 million, from $72.5 million for the year ended June 30, 2021. The increase in selling, general and administrative expenses was driven primarily by our acquisitions, increased compensation and benefits due to staffing increases and inflation.
26
(Loss) Income from Operations
Loss from operations for the year ended June 30, 2022 was $7.9 million, a decrease of $17.1 million from income of $9.2 million for the year ended June 30, 2021. The decrease was driven by $19.1 million non-cash inventory write-downs identified through material weakness remediation efforts, offset by increased growth in our B2B and DTC segments.
Other Income
Total other income was $8.3 million for the year ended June 30, 2022 compared to income of $1.7 million for the year ended June 30, 2021, a net increase of $6.6 million. The change was due primarily to an unrealized gain on our interest rate swap agreements of $23.0 million, partially offset by increased interest expense on increased outstanding debt balances and $6.6 million related to the forgiveness of the Paycheck Protection Program (“PPP”) loan in the prior year period.
Income Tax Provision
Income tax expense was $1.1 million for the year ended June 30, 2022 compared to income tax expense of $0.8 million for the year ended June 30, 2021. The income tax expense in fiscal 2022 was primarily due to changes in pre-tax income and non-deductible stock based compensation. The income tax expense for the year ended June 30, 2021 was primarily due to an increase in annual net income and costs related to the transaction, partially offset by the PPP Loan forgiveness, stock based compensation and research and development tax credits.
Segment Results
Our financial performance is classified into the following segments: Wholesale, B2B, DTC and Corporate and Other. Our corporate operations, including centralized selling, general and administrative expenses and other factors, such as the re-measurements of contingent consideration and impairment of intangible assets and goodwill are not allocated to the segments, as management does not believe such items directly reflect our core operations. Other than our long-term property, plant and equipment for wine tasting facilities, and customer lists, trademarks and trade names specific to acquired companies, our revenue generating assets are utilized across segments. Accordingly, the foregoing items are not allocated to the segments and are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above.
We evaluate the performance of our segments on income from operations, which management believes is indicative of operational performance and ongoing profitability. Management monitors income from operations to evaluate past performance and identify actions required to improve profitability. Income from operations assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define income from operations as gross margin less operating expenses that are directly attributable to the segment. Selling expenses that can be directly attributable to the segment are allocated accordingly.
Segment Results for the Years Ended June 30, 2022 and 2021
Wholesale Segment Results
|
| Year Ended June 30, |
|
| Dollar |
|
| Percent | ||||||
(in thousands, except %) |
| 2022 |
|
| 2021 |
|
| Change |
|
| Change | |||
Net revenues |
| $ | 84,534 |
|
| $ | 72,908 |
|
| $ | 11,626 |
|
| 15.9% |
Income from operations |
| $ | 5,507 |
|
| $ | 15,044 |
|
| $ | (9,537 | ) |
| -63.4% |
Wholesale net revenues for the year ended June 30, 2022 increased by approximately $11.6 million, or 15.9%, from the year ended June 30, 2021. The increase was attributable to $13.4 million in net revenues related to acquisitions, partially offset by discontinued brands.
Wholesale income from operations for the year ended June 30, 2022 decreased by approximately $9.5 million from the year ended June 30, 2021. The decrease was attributable to increased cost of sales of $5.8 million primarily related to non-cash inventory write-downs identified through material weakness remediation efforts, increased cost of sales of $1.6 million related to inflation and supply chain challenges as well as an operating loss of $0.2 million related to acquisitions driven by $1.6 million of amortization of intangible assets acquired.
B2B Segment Results
|
| Year Ended June 30, |
|
| Dollar |
|
| Percent | ||||||
(in thousands, except %) |
| 2022 |
|
| 2021 |
|
| Change |
|
| Change | |||
Net revenues |
| $ | 113,934 |
|
| $ | 77,440 |
|
| $ | 36,494 |
|
| 47.1% |
Income from operations |
| $ | 16,920 |
|
| $ | 17,944 |
|
| $ | (1,024 | ) |
| -5.7% |
B2B net revenues for the year ended June 30, 2022 increased by approximately $36.5 million, or 47.1% from the year ended June 30, 2021. The increase was primarily attributable to bulk distilled alcohol sales and $7.3 million in net revenues related to acquisitions.
27
B2B income from operations for the year ended June 30, 2022 decreased by $1.0 million, or 5.7%, from the year ended June 30, 2021. The decrease was attributable to increased cost of sales of $34.3 million primarily related to cost of sales attributed from bulk distilled alcohol sales and non-cash inventory write-downs identified through material weakness remediation efforts, $1.0 million in net losses related to acquisitions, driven by $0.6 million of amortization of intangible assets acquired.
DTC Segment Results
|
| Year Ended June 30, |
|
| Dollar |
|
| Percent | ||||||
(in thousands, except %) |
| 2022 |
|
| 2021 |
|
| Change |
|
| Change | |||
Net revenues |
| $ | 92,416 |
|
| $ | 66,605 |
|
| $ | 25,811 |
|
| 38.8% |
Income from operations |
| $ | 15,047 |
|
| $ | 11,437 |
|
| $ | 3,610 |
|
| 31.6% |
DTC net revenues for the year ended June 30, 2022 increased by approximately $25.8 million, or 38.8%, from the year ended June 30, 2021. The increase was primarily attributable to increased case volumes from tasting rooms, wine clubs, revenues earned from events as restrictions related to COVID-19 have been lifted and $11.0 million in net revenues related to acquisitions.
DTC income from operations for the year ended June 30, 2022 increased by approximately $3.6 million, or 31.6%, from the year ended June 30, 2021. The increase was due to increased margin contribution from improved traffic in tasting rooms, wine club shipments, events and $0.9 million of income related to acquisition, net of $1.1 million of amortization of acquired customer lists.
Corporate and Other Segment Results
|
| Year Ended June 30, |
|
| Dollar |
|
| Percent | ||||||
(in thousands, except %) |
| 2022 |
|
| 2021 |
|
| Change |
|
| Change | |||
Net revenues |
| $ | 2,886 |
|
| $ | 3,789 |
|
| $ | (903 | ) |
| 23.8% |
Loss from operations |
| $ | (45,396 | ) |
| $ | (35,245 | ) |
| $ | (10,151 | ) |
| -28.8% |
Other net revenues for the year ended June 30, 2022 decreased by approximately $0.9 million, or 23.8%, from the year ended June 30, 2021. The decrease was primarily attributable to fewer bulk wine sales in the year compared to the year prior.
Other losses from operations for the year ended June 30, 2022 increased by $10.2 million, or 28.8%, from the year ended June 30, 2021. The increase was due to costs related to increased infrastructure required to be a public company and the continued increased costs of labor, warehousing, freight and insurance.
Liquidity and Capital Resources
Our ongoing operations have, to date, been funded by a combination of cash flow from operations, the Business Combination with BCAC, borrowings under our credit facility and other debt financing. As of June 30, 2022, we had cash and cash equivalents on hand of $50.3 million and $22.0 million in borrowing capacity available under our credit facility. We had $328.2 million in total debt as of June 30, 2022.
Our principal uses of cash have been to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including acquisitions. We continuously reinvest in our properties and production assets. Our capital expenditures are expected to be between $12.0 million and $15.0 million over the next twelve months.
We believe our existing cash and cash equivalents, cash flow from operations, and availability under our credit facility will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements. We may also seek to finance capital expenditures under capital leases or other debt arrangements that provide liquidity or favorable borrowing terms. COVID-19 and inflation has negatively impacted the global economy and financial markets which could interfere with our ability to access sources of liquidity at favorable rates and generate operating cash flows. In fiscal 2021, we took advantage of the Paycheck Protection Program (the “PPP”) established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).
We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. While we have in the past financed certain acquisitions with internally generated cash, term loans and our credit facility, if suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings.
Our future capital requirements will depend on many factors, including funding needs to support our business growth and to respond to business opportunities, challenges or unforeseen circumstances. If our forecasts prove inaccurate, we may be required to seek additional equity or debt financing from outside sources, which we may not be able to raise on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected.
28
Indebtedness
Credit Facility
On April 13, 2021, we entered into an amended and restated loan and security agreement to increase the credit facility from an aggregate of $350.0 million to $480.0 million, consisting of an accounts receivable and inventory revolving facility up to $230.0 million, a term loan in a principal amount of up to $100.0 million, a capital expenditures facility in an aggregate principal of up to $50.0 million, and a new delay draw term loan facility in an aggregate principal amount of up to $100.0 million. All other terms of the original agreement generally remained the same.
The credit facility can be used to fund acquisitions, real estate purchases, capital equipment purchases and for other general corporate purposes.
The credit facility is collateralized by our eligible inventory and accounts receivable and matures as follows:
(in thousands) |
| Maximum Funding |
|
| Maturity | |
Term loan |
| $ | 100,000 |
|
| July 18, 2026 |
Revolving credit facility |
| $ | 230,000 |
|
| July 18, 2024 |
Delay draw term loan |
| $ | 100,000 |
|
| July 18, 2024 |
Capital expenditure facility |
| $ | 50,000 |
|
| July 18, 2026 |
Repayments of the term loan and the capital expenditure facility are calculated based on whether the purpose of the original loan or draw was for real estate or capital equipment purchases or draw and are subject to periodic third-party valuations. For real estate purchases, quarterly repayments are equal to 1.0% of the original principal balance at closing. For capital equipment purchases, quarterly repayments are equal to 1/28th of the original balance. Any unpaid principal is due upon the termination of these loans at maturity. Repayment of the revolving credit facility is required if the borrowing base (as defined in the credit facility) does not support the amount of borrowing on the facility. Borrowings under the credit facility bear interest at a rate per annum equal to, at our option, either (a) a LIBOR rate determined by reference to the LIBOR rate for dollar deposits with a term equivalent to the interest period relevant to such borrowing as administered by the ICE Benchmark Administration, plus an applicable margin or (b) an adjusted base rate, or ABR, determined by reference to the highest of (i) 0.50% above the federal funds effective rate, (ii) the rate of interest established by the administrative agent as its “prime rate” and (iii) 1.0% above the LIBOR rate for dollar deposits with a one-month term commencing that day, plus an applicable margin. See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our interest rate swap transactions.
In addition, we pay certain recurring fees with respect to the credit facility, including (i) a fee for the unused commitments of the lenders under the revolving credit facility and the capital expenditure facility as of the end of each month, accruing at a rate equal to 0.125% per annum, which may be reduced to 0.0% if the average availability under the revolving credit facility is less than 50%, (ii) letter of credit fees, including a fronting fee and processing fees to each issuing bank, which vary depending on the applicable margin rate based on the average availability under the revolving credit facility and (iii) administration fees. Amortization expense related to debt issuance fees was $0.1 million and $0.1 million for the years ended June 30, 2022 and 2021, respectively.
The credit facility contains various covenants and restrictions.
We are required to maintain compliance with a minimum fixed charge coverage ratio covenant of not less than 1.10:1.00.
We may prepay, in full or in part, borrowings under the credit facility without premium or penalty, subject to notice requirements, minimum prepayment amounts and increment limitations, provided that prepayments on all LIBOR loans will be subject to customary “breakage” costs.
Paycheck Protection Program
Our Paycheck Protection Program loan (the “PPP Loan”), under Division A, Title I of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act on April 14, 2020, of approximately $6.5 million required monthly amortized principal and interest payments to begin six months after the date of disbursement. In October 2020, the deferral period associated with the monthly payments was extended from six to ten months. While the PPP Loan had a two-year maturity, the amended law permitted the borrower to request a five-year maturity from its lender.
Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, we were eligible to apply for and receive forgiveness for all or a portion of the PPP Loan. Such forgiveness was determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during the twenty-four week period following the funding of the PPP Loan.
On June 25, 2021, the Company received notification from the Small Business Association that the Company’s Forgiveness Application of the PPP Loan and accrued interest, totaling approximately $6.6 million, was approved in full, and the Company had no further obligations related to the PPP Loan. Accordingly in fiscal 2021, the Company recorded a gain on the forgiveness of the PPP Loan.
29
Cash Flows
Information about our cash flows, by category, is presented in our consolidated statements of cash flows and is summarized below:
|
| June 30, |
|
|
|
| ||||||
(in thousands) |
| 2022 |
|
| 2021 |
|
| Change |
| |||
Operating activities |
| $ | 15,982 |
|
| $ | 9,117 |
|
| $ | 6,865 |
|
Investing activities |
| $ | (98,505 | ) |
| $ | (60,288 | ) |
| $ | (38,217 | ) |
Financing activities |
| $ | 9,136 |
|
| $ | 173,099 |
|
| $ | (163,963 | ) |
Cash Flows provided by (used in) Operating Activities
Net cash provided by operating activities was $15.9 million for the year ended June 30, 2022 compared to net cash provided in operating activities of $9.0 million for the year ended June 30, 2021, representing an increase of net cash provided of $6.9 million. The increase in net cash provided was primarily attributable to the decrease in net income of $10.8 million, net changes in certain non-cash adjustments of $21.4 million to reconcile net income to operating cash flow and net changes in other operating assets and liabilities as detailed on the consolidated statement of cashflows.
Cash Flows provided by (used in) Investing Activities
Net cash used in investing activities was $98.5 million for the year ended June 30, 2022, compared to net cash used in investing activities of $60.3 million for the year ended June 30, 2021, representing an increase of net cash used of $38.2 million. Cash flows from investing activities are utilized primarily to fund acquisitions, capital expenditures for improvements to existing assets and other corporate assets. The increase in net cash used was primarily attributable to an increase in business acquisitions of $50.1 million, partially offset by a reduction in purchases of plant, property and equipment of $13.2 million.
Cash Flows provided by (used in) Financing Activities
Net cash provided by financing activities was $9.1 million for the year ended June 30, 2022 compared to net cash provided of $173.1 million for the year ended June 30, 2021, representing a decrease of net cash provided of $164.0 million. The decrease in net cash provided consisted primarily of cash used of $26.0 million to repurchase shares of the Company's common stock and decrease in proceeds of $250.1 million related to the Merger and PIPE financing in the prior year, partially offset by proceeds, net of payments on our line of credit and long-term debt of $137.7 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in more detail in Note 1 to our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue from the sale of wine, spirits and cider, including private label wines, to wholesale distributors and to consumers. We also recognize revenue from custom winemaking and production services, grape and bulk sales, private events held at its winery estates and storage services, as well as the sale of other merchandise and services.
We recognize revenue when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when the product is shipped, and title passes to the customer, and when control of the promised product or service is transferred to the customer. Our standard terms are free on board (“FOB”) shipping point, with no customer acceptance provisions. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We account for shipping and handling as activities to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and classify such costs as a
30
component of costs of sales. Our products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been significant to us.
Income Taxes
Deferred income taxes are determined using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the expected recognition of a deferred income tax asset is considered to be unlikely.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to income tax matters as a component of income tax expense.
Inventories
Inventories of bulk and bottled wines and spirits and inventories of non-wine products and bottling and packaging supplies are valued at the lower of cost using the FIFO method or net realizable value. Costs associated with winemaking, and other costs associated with the manufacturing of products for resale, are recorded as inventory. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. Inventories are classified as current assets in accordance with recognized industry practice, although most wines and spirits are aged for periods longer than one year.
Goodwill and Intangible Assets
Goodwill represents the excess of consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. We have three reporting units under which goodwill has been allocated. We conduct a goodwill impairment analysis annually for impairment, as of the end of the respective fiscal year, or sooner if events or circumstances indicate the carrying amount of the asset may not be recoverable.
Our intangible assets represent purchased intangible assets consisting of both indefinite and finite lived assets. Certain criteria are used in determining whether intangible assets acquired in a business combination must be recognized and reported separately. Our indefinite lived intangible assets, representing trade names, trademarks and winery use permits, are initially recognized at fair value and subsequently stated at adjusted costs, net of any recognized impairments. The indefinite lived assets are not subject to amortization. Our finite-lived intangible assets, comprised of trade names, trademarks, customer relationships and Sommelier relationships, are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. If that pattern cannot be reliably determined, the intangible assets are amortized using the straight-line method over their estimated useful lives and are tested for impairment along with other long-lived assets. Amortization related to the finite-lived assets is included in selling, general and administrative expenses. Intangible assets are reviewed annually for impairment, as of the end of the reporting period, or sooner if events or circumstances indicate the carrying amount of the asset may not be recoverable.
Stock-Based Compensation
Stock-based compensation provided to employees is recognized in the consolidated statement of operations based on the grant date fair value of the awards. The fair value of restricted stock units is determined by the grant date market price of our common shares. The fair value of stock options is determined on the grant date using a Monte Carlo simulation model. The determination of the grant date fair value of stock option awards granted is affected by a number of variables, including the fair value of the Company's common stock, the expected common stock price volatility over the life of the awards, the expected term of the stock option, risk-free interest rates and the expected dividend yield of the Company's common stock. Due to the Company's limited trading history since becoming a public company on June 7, 2021, the Company derived its volatility from the average historical stock volatilities of several peer public companies over a period equivalent to the expected term of the awards.
The compensation expense recognized for stock-based awards is net of estimated forfeitures and is recognized ratably over the service period of the awards. All income tax effects of stock-based awards are recognized in the consolidated statements of operations as awards vest or are settled. We classify stock-based compensation expense in selling, general and administrative ("SG&A") expenses in the consolidated statement of operations.
Emerging Growth Company Election
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. We expect to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and non-public companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. This may make it difficult or impossible to compare our financial
31
results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act and compliance with applicable laws, if, as an emerging growth company, we rely on such exemptions, we are not required to, among other things: (a) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002; (b) provide all of the compensation disclosures that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (c) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and (d) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.
We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2026, (b) the last date of our fiscal year in which we had total annual gross revenue of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
Recent Accounting Pronouncements
See Note 1 of notes to the consolidated financial statements for a discussion of recent accounting standards and pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
We are exposed to risk from changes in interest rates primarily on borrowings due under our credit facility, which consists of (i) a $100.0 million term loan; (ii) a $50.0 million capital expenditure facility; (iii) a $230.0 million dollar revolving credit facility; and (iv) a $100.0 million delay draw term loan and bears interest rates based on LIBOR plus applicable margins.
Annually, we perform sensitivity analysis on our forecasted exposure to interest rates. This analysis assumes a hypothetical 100 basis point change in interest rates. For the year ended June 30, 2022, the effect of a hypothetical 100 basis point increase or decrease in overall interest rates would have changed our interest expense by approximately $1.3 million.
While we have not designated our interest rate swap agreements as cash-flow hedges, we have entered into interest rate swap agreements to mitigate our exposure to interest rate movements. See Note 10.
We had cash of $43.7 million as of year ended June 30, 2022, exclusive of restricted cash. Our cash is held in demand deposits and is not subject to market risk.
32
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page |
Report of Independent Registered Public Accounting Firm (PCAOB ID: 00677) | 34 |
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, PCAOB ID: 00659) | 35 |
36 | |
Consolidated Statements of Operations and Comprehensive Income (Loss) | 37 |
38 | |
39 | |
41 |
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Vintage Wine Estates, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vintage Wine Estates, Inc.(the “Company”) as of June 30, 2022, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit 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 audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Cherry Bekaert LLP
We have served as the Company's auditor since 2021.
Raleigh, North Carolina
September 13, 2022
34
To the Stockholders and the Board of Directors of Vintage Wine Estates, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vintage Wine Estates, Inc. (the “Company”) as of June 30, 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of the audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Moss Adams LLP
Santa Rosa, California
October 13, 2021
We served as the Company’s auditor from 2013 to 2021.
35
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts and par value)
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash |
| $ | 43,692 |
|
| $ | 118,879 |
|
Restricted cash |
|
| 6,600 |
|
|
| 4,800 |
|
Accounts receivable, net |
|
| 38,192 |
|
|
| 21,193 |
|
Other receivables |
|
| 3,866 |
|
|
| 7,490 |
|
Inventories |
|
| 192,102 |
|
|
| 221,145 |
|
Interest rate swap asset |
|
| 2,877 |
|
|
| - |
|
Prepaid expenses and other current assets |
|
| 13,394 |
|
|
| 8,538 |
|
Total current assets |
|
| 300,723 |
|
|
| 382,045 |
|
Property, plant, and equipment, net |
|
| 236,100 |
|
|
| 213,673 |
|
Goodwill |
|
| 154,951 |
|
|
| 109,895 |
|
Intangible assets, net |
|
| 64,377 |
|
|
| 36,079 |
|
Interest rate swap asset |
|
| 6,280 |
|
|
| - |
|
Other assets |
|
| 3,464 |
|
|
| 1,806 |
|
Total assets |
| $ | 765,895 |
|
| $ | 743,498 |
|
Liabilities, redeemable noncontrolling interest, and stockholders' equity |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Line of credit |
| $ | 144,215 |
|
| $ | 87,351 |
|
Accounts payable |
|
| 13,947 |
|
|
| 17,301 |
|
Accrued liabilities and other payables |
|
| 24,204 |
|
|
| 25,078 |
|
Current maturities of long-term debt |
|
| 14,909 |
|
|
| 22,964 |
|
Total current liabilities |
|
| 197,275 |
|
|
| 152,694 |
|
Other long-term liabilities |
|
| 6,491 |
|
|
| 2,767 |
|
Long-term debt, less current maturities |
|
| 169,095 |
|
|
| 183,541 |
|
Interest rate swap liabilities |
|
| - |
|
|
| 13,807 |
|
Deferred tax liability |
|
| 29,979 |
|
|
| 16,752 |
|
Deferred gain |
|
| 10,666 |
|
|
| 12,000 |
|
Total liabilities |
|
| 413,506 |
|
|
| 381,561 |
|
Commitments and contingencies (Note 18) |
|
|
|
|
|
| ||
Redeemable noncontrolling interest |
|
| 1,663 |
|
|
| 1,682 |
|
Stockholders' equity: |
|
|
|
|
|
| ||
Preferred stock, no par value, 2,000,000 shares authorized, and none issued and outstanding at June 30, 2022 and June 30, 2021. |
|
| - |
|
|
| - |
|
Common stock, no par value, 200,000,000 shares authorized, 61,691,054 issued and 58,819,160 outstanding at June 30, 2022 and 60,461,611 issued and outstanding at June 30, 2021. |
|
| - |
|
|
| - |
|
Additional paid-in capital |
|
| 377,897 |
|
|
| 360,732 |
|
Treasury stock, at cost: 2,871,894 and zero shares held at June 30, 2022 and June 30, 2021, respectively. |
|
| (26,034 | ) |
|
| - |
|
Retained earnings |
|
| (571 | ) |
|
| - |
|
Total Vintage Wine Estates, Inc. stockholders' equity |
|
| 351,292 |
|
|
| 360,732 |
|
Noncontrolling interests |
|
| (566 | ) |
|
| (477 | ) |
Total stockholders' equity |
|
| 350,726 |
|
|
| 360,255 |
|
Total liabilities, redeemable noncontrolling interest, and stockholders' equity |
| $ | 765,895 |
|
| $ | 743,498 |
|
The accompanying notes are an integral part of these consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
|
| Year Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net revenues |
|
|
|
|
|
| ||
Wine, spirits and cider |
| $ | 208,954 |
|
| $ | 177,331 |
|
Nonwine |
|
| 84,816 |
|
|
| 43,411 |
|
|
|
| 293,770 |
|
|
| 220,742 |
|
Cost of revenues |
|
|
|
|
|
| ||
Wine, spirits and cider |
|
| 151,117 |
|
|
| 119,350 |
|
Nonwine |
|
| 52,698 |
|
|
| 26,041 |
|
|
|
| 203,815 |
|
|
| 145,391 |
|
Gross profit |
|
| 89,955 |
|
|
| 75,351 |
|
Selling, general, and administrative expenses |
|
| 105,296 |
|
|
| 72,505 |
|
Impairment of intangible assets |
|
| - |
|
|
| 1,081 |
|
Loss (gain) on sale of property, plant, and equipment |
|
| 485 |
|
|
| (1,001 | ) |
Deferred gain on sale leaseback |
|
| (1,334 | ) |
|
| (1,335 | ) |
Gain on litigation proceeds |
|
| (3,000 | ) |
|
| (4,750 | ) |
Gain on remeasurement of contingent consideration liabilities |
|
| (3,570 | ) |
|
| (329 | ) |
(Loss) income from operations |
|
| (7,922 | ) |
|
| 9,180 |
|
Other income (expense) |
|
|
|
|
|
| ||
Interest expense |
|
| (13,910 | ) |
|
| (11,581 | ) |
Net unrealized gain on interest rate swap agreements |
|
| 22,950 |
|
|
| 6,136 |
|
Gain on Paycheck Protection Program loan forgiveness |
|
| - |
|
|
| 6,604 |
|
Other, net |
|
| (736 | ) |
|
| 515 |
|
Total other income, net |
|
| 8,304 |
|
|
| 1,674 |
|
Income before provision for income taxes |
|
| 382 |
|
|
| 10,854 |
|
Income tax provision |
|
| 1,061 |
|
|
| 766 |
|
Net (loss) income |
|
| (679 | ) |
|
| 10,088 |
|
Net (loss) income attributable to the noncontrolling interests |
|
| (108 | ) |
|
| 218 |
|
Net (loss) income attributable to Vintage Wine Estates, Inc. |
|
| (571 | ) |
|
| 9,870 |
|
Accretion on redeemable Series B stock |
|
| - |
|
|
| 5,785 |
|
Net (loss) income allocable to common stockholders |
| $ | (571 | ) |
| $ | 4,085 |
|
|
|
|
|
|
|
| ||
Net earnings per share allocable to common stockholders |
|
|
|
|
|
| ||
Basic |
| $ | (0.01 | ) |
| $ | 0.14 |
|
Diluted |
| $ | (0.01 | ) |
| $ | 0.14 |
|
Weighted average shares used in the calculation of earnings per share allocable to common stockholders |
|
|
|
|
|
| ||
Basic |
|
| 60,673,789 |
|
|
| 24,696,828 |
|
Diluted |
|
| 60,673,789 |
|
|
| 25,179,502 |
|
The accompanying notes are an integral part of these consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
|
| Redeemable Non-Controlling |
|
|
| Common Stock |
|
| Treasury Stock |
|
| Additional |
|
| Retained |
|
| Non-Controlling |
|
| Total Stockholders' Equity |
| |||||||||||||||
|
|
|
|
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance, June 30, 2020 |
| $ | 1,382 |
|
|
|
| 26,460,375 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
| $ | 92,940 |
|
| $ | 15,191 |
|
| $ | (395 | ) |
| $ | 107,736 |
|
Accretion on redeemable stock (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 25,061 |
|
|
| (25,061 | ) |
|
|
|
|
| - |
| ||||||
Issuance of Series A Stock in business combination (2) |
|
|
|
|
|
| 2,589,503 |
|
|
|
|
|
|
|
|
|
|
|
| 25,831 |
|
|
|
|
|
|
|
|
| 25,831 |
| ||||||
Conversion of convertible promissory note |
|
|
|
|
|
| 668,164 |
|
|
|
|
|
|
|
|
|
|
|
| 4,818 |
|
|
|
|
|
|
|
|
| 4,818 |
| ||||||
Purchase of Series B redeemable Stock (1) |
|
|
|
|
|
| (2,889,786 | ) |
|
|
|
|
|
|
|
|
|
|
| (32,000 | ) |
|
|
|
|
|
|
|
| (32,000 | ) | ||||||
Merger and PIPE financing |
|
|
|
|
|
| 33,633,355 |
|
|
|
|
|
|
|
|
|
|
|
| 248,691 |
|
|
|
|
|
|
|
|
| 248,691 |
| ||||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,334 |
|
|
|
|
|
|
|
|
| 3,334 |
| |||||||
Settlement of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (7,943 | ) |
|
|
|
|
|
|
|
| (7,943 | ) | |||||||
Net income (loss) |
|
| 300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9,870 |
|
|
| (82 | ) |
|
| 9,788 |
| |||||
Balance, June 30, 2021 |
| $ | 1,682 |
|
|
|
| 60,461,611 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
| $ | 360,732 |
|
| $ | - |
|
| $ | (477 | ) |
| $ | 360,255 |
|
Issuance of Common Stock in business combination |
|
|
|
|
|
| 1,229,443 |
|
|
| - |
|
|
|
|
|
|
|
|
| 10,521 |
|
|
|
|
|
|
|
|
| 10,521 |
| |||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,914 |
|
|
|
|
|
|
|
|
| 6,914 |
| |||||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
| 2,871,894 |
|
|
| (26,034 | ) |
|
|
|
|
|
|
|
|
|
|
| (26,034 | ) | ||||||
Repurchase of public warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (270 | ) |
|
|
|
|
|
|
|
| (270 | ) | |||||||
Net income (loss) |
|
| (19 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (571 | ) |
|
| (89 | ) |
|
| (660 | ) | |||||
Balance, June 30, 2022 |
| $ | 1,663 |
|
|
|
| 61,691,054 |
|
| $ | - |
|
|
| 2,871,894 |
|
| $ | (26,034 | ) |
| $ | 377,897 |
|
| $ | (571 | ) |
| $ | (566 | ) |
| $ | 350,726 |
|
(1) Accretion and purchase of Series B Redeemable Stock has been retroactively restated to give effect to the recapitalization transaction
(2) Issuance of Series A Stock has been retroactively restated to give effect to the recapitalization transaction
The accompanying notes are an integral part of the consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| Year Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash flows from operating activities |
|
|
|
|
|
| ||
Net (loss) income |
| $ | (679 | ) |
| $ | 10,088 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
| ||
Gain on forgiveness of PPP loan |
|
| - |
|
|
| (6,604 | ) |
Depreciation and amortization |
|
| 23,930 |
|
|
| 11,436 |
|
Goodwill and intangible assets impairment expense |
|
| - |
|
|
| 1,081 |
|
Amortization of deferred loan fees and line of credit fees |
|
| 394 |
|
|
| 79 |
|
Amortization of label design fees |
|
| 973 |
|
|
| 464 |
|
Litigation proceeds |
|
| (3,000 | ) |
|
| (4,750 | ) |
Stock-based compensation expense |
|
| 6,915 |
|
|
| 3,334 |
|
Provision for doubtful accounts |
|
| (22 | ) |
|
| 48 |
|
Impairment of inventory |
|
| 3,667 |
|
|
| 3,302 |
|
Inventory write down |
|
| 15,433 |
|
|
| - |
|
Remeasurement of contingent consideration liabilities |
|
| (3,570 | ) |
|
| (329 | ) |
Net unrealized gain on interest rate swap agreements |
|
| (22,950 | ) |
|
| (6,136 | ) |
Provision for deferred income tax |
|
| 981 |
|
|
| 851 |
|
Loss (gain) on disposition of assets |
|
| 485 |
|
|
| (1,001 | ) |
Deferred gain on sale leaseback |
|
| (1,334 | ) |
|
| (1,335 | ) |
Noncash interest expense |
|
| - |
|
|
| 68 |
|
Deferred rent |
|
| 375 |
|
|
| 352 |
|
Change in operating assets and liabilities (net of effect of business combinations): |
|
|
|
|
|
| ||
Accounts receivable |
|
| (13,183 | ) |
|
| (3,137 | ) |
Related party receivables |
|
| - |
|
|
| 325 |
|
Other receivables |
|
| 3,624 |
|
|
| (4,456 | ) |
Litigation receivable |
|
| 3,000 |
|
|
| 4,750 |
|
Inventories |
|
| 18,075 |
|
|
| 2,311 |
|
Prepaid expenses and other current assets |
|
| (4,656 | ) |
|
| (4,115 | ) |
Other assets |
|
| (2,464 | ) |
|
| 1,498 |
|
Accounts payable |
|
| (7,795 | ) |
|
| (4,983 | ) |
Accrued liabilities and other payables |
|
| (2,217 | ) |
|
| 8,191 |
|
Related party liabilities |
|
| - |
|
|
| (2,215 | ) |
Net cash provided by operating activities |
|
| 15,982 |
|
|
| 9,117 |
|
Cash flows from investing activities |
|
|
|
|
|
| ||
Proceeds from disposition of assets |
|
| 153 |
|
|
| 1,044 |
|
Purchases of property, plant, and equipment |
|
| (24,835 | ) |
|
| (38,032 | ) |
Label design expenditures |
|
| (143 | ) |
|
| (492 | ) |
Proceeds on related party notes receivable |
|
| - |
|
|
| 756 |
|
Acquisition of businesses |
|
| (73,680 | ) |
|
| (23,564 | ) |
Net cash used in investing activities |
|
| (98,505 | ) |
|
| (60,288 | ) |
Cash flows from financing activities |
|
|
|
|
|
| ||
Principal payments on line of credit |
|
| (144,706 | ) |
|
| (181,411 | ) |
Proceeds from line of credit |
|
| 201,570 |
|
|
| 106,217 |
|
Outstanding checks in excess of cash |
|
| 1,759 |
|
|
| 2,509 |
|
Purchase of Series B redeemable stock |
|
| - |
|
|
| (32,000 | ) |
Settlement of stock options |
|
| - |
|
|
| (7,944 | ) |
Borrowings on long-term debt |
|
| - |
|
|
| 76,067 |
|
Loan fees |
|
| - |
|
|
| (492 | ) |
Principal payments on long-term debt |
|
| (22,763 | ) |
|
| (28,374 | ) |
Merger and PIPE financing, net of transaction costs |
|
| - |
|
|
| 250,126 |
|
Principal payments on related party debt |
|
| - |
|
|
| (10,000 | ) |
Debt issuance costs |
|
| - |
|
|
| (918 | ) |
Repurchase of common stock |
|
| (26,034 | ) |
|
| - |
|
39
Repurchase of public warrants |
|
| (270 | ) |
|
| - |
|
Payments on acquisition payable |
|
| (420 | ) |
|
| (681 | ) |
Net cash provided by financing activities |
|
| 9,136 |
|
|
| 173,099 |
|
Net change in cash and restricted cash |
|
| (73,387 | ) |
|
| 121,928 |
|
Cash and restricted cash, beginning of year |
|
| 123,679 |
|
|
| 1,751 |
|
Cash and restricted cash, end of year |
| $ | 50,292 |
|
| $ | 123,679 |
|
Supplemental cash flow information |
|
|
|
|
|
| ||
Cash paid during the year for: |
|
|
|
|
|
| ||
Interest |
| $ | 13,199 |
|
| $ | 13,373 |
|
Income taxes |
| $ | 23 |
|
| $ | 222 |
|
Noncash investing and financing activities: |
|
|
|
|
|
| ||
Accretion Series A |
| $ | - |
|
| $ | 156,467 |
|
Accretion Series B |
| $ | - |
|
| $ | 5,785 |
|
Conversion of promissory note to common stock |
| $ | - |
|
| $ | 4,818 |
|
Contingent consideration in a business combination |
| $ | 8,534 |
|
| $ | 4,000 |
|
Issuance of Common Stock in a business combination |
| $ | 10,521 |
|
| $ | - |
|
Issuance of Series A stock in a business combination |
| $ | - |
|
| $ | 25,831 |
|
Note payable for acquisition of business |
| $ | - |
|
| $ | 11,668 |
|
The accompanying notes are an integral part of the consolidated financial statements.
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of Business
Vintage Wine Estates, Inc., a Nevada corporation (the "Company”, "we", "us", "our"), owns and operates winery and hospitality facilities in Northern California, Washington and Oregon. The Company produces a variety of wines under its own or custom labels, which are sold to consumers, retailers, and distributors located throughout the United States, Canada, and other export markets. The Company also provides bottling, fulfillment, and storage services to other companies on a contract basis.
We have wholly-owned subsidiaries that include Vintage Wine Estates, Inc., a California corporation ("Legacy VWE"), Girard Winery LLC, Mildara Blass, Inc., Grove Acquisition LLC, Sales Pros LLC, and Master Class Marketing, LLC and majority controlling financial interests in Sabotage Wine Company, LLC, and Splinter Group Napa, LLC.
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.
Merger and Reverse Recapitalization
We were formed in 2019 as Bespoke Capital Acquisition Corp. (“BCAC”), a special purpose acquisition company incorporated under the laws of the Province of British Columbia. BCAC was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or any other similar business combination involving BCAC.
On June 7, 2021, BCAC completed its business combination (the "Merger") with Vintage Wine Estates, Inc., a California corporation ("Legacy VWE") pursuant to a transaction agreement dated February 3, 2021 (as amended, the “Transaction Agreement”) by the merger of VWE Acquisition Sub Inc., a wholly owned subsidiary of BCAC (“merger sub”) with and into Legacy VWE, with Legacy VWE continuing as the surviving entity and as a wholly owned subsidiary of BCAC. In connection with the Merger, BCAC changed its jurisdiction of incorporation from the Province of British Columbia to the State of Nevada and BCAC changed its name to Vintage Wine Estates, Inc. Upon the consummation of the Merger, the Company received approximately $248.7 million, net of fees and expenses. See Note 2 for additional details regarding the transaction.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Significant estimates include, but are not limited, to depletion allowance, allowance for doubtful accounts, the net realizable value of inventory, expected future cash flows including growth rates, discount rates, and other assumptions and estimates used to evaluate the recoverability of long-lived assets, estimated fair values of intangible assets in acquisitions, intangible assets and goodwill for impairment, amortization methods and periods, amortization period of label and package design costs, the estimated fair value of long-term debt, the valuation of interest rate swaps, contingent consideration, common stock, stock-based compensation, and accounting for income taxes. Actual results could differ materially from those estimates.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. Specifically, we reclassified accrued trade commissions to other accrued expenses and reclassified custom production and other receivables to Wholesale trade accounts receivables.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheet that sums to the total of the same such amounts as shown in the consolidated statement of cash flows:
(in thousands) |
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Cash and cash equivalents |
| $ | 43,692 |
|
| $ | 118,879 |
|
Restricted cash |
|
| 6,600 |
|
|
| 4,800 |
|
Total cash, cash equivalents and restricted cash as shown in the consolidated statement of cash flows |
| $ | 50,292 |
|
| $ | 123,679 |
|
Restricted cash consists of $4.8 million that was deposited into a restricted cash account as collateral for the credit facility, subject to release upon the completion of certain construction costs (see Note 11) and $1.8 million that was deposited into a restricted cash account as collateral for our captive insurance letter of credit (see Note 9).
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, less estimated returns, allowances, and discounts. We determine the provision based on historical write-off experience. Account balances are written-off against the provision when we feel it is probable the receivable will not be recovered. The provision for doubtful accounts was $120.0 thousand and $97.0 thousand, at June 30, 2022 and 2021, respectively. We do not accrue interest on past-due amounts. Bad debt expense was insignificant for all reporting periods presented. Other receivables include insurance related receivables, income tax receivable and other miscellaneous receivables.
Inventories
Inventories of bulk and bottled wines, spirits, and ciders and inventories of non-wine products and bottling and packaging supplies are valued at the lower of cost using the FIFO method or net realizable value. Costs associated with winemaking, and other costs associated with the manufacturing of products for resale, are recorded as inventory. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. Inventories are classified as current assets in accordance with recognized industry practice, although most wines and spirits are aged for periods longer than one year.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the asset’s estimated useful life or the life of the related lease. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Vineyard development costs, including interest and certain cultural costs for continuing cultivation of vines not yet bearing fruit, are capitalized. Depreciation of vineyard development costs commences when commercial grape yields are achieved, generally in the third year after planting. Estimated useful lives are as follows:
Buildings and improvements |
| 10 - 39 years |
Cooperage |
| 3 - 5 years |
Furniture and equipment |
| 3 - 10 years |
Machinery and equipment |
| 5 - 20 years |
Vineyards |
| 20 years |
Business Combinations
Business combinations are accounted for under Accounting Standards Codification (“ASC”) 805—Business Combinations, using the acquisition method of accounting under which all acquired tangible and identifiable intangible assets and assumed liabilities and applicable noncontrolling interests are recognized at fair value as of the respective acquisition date, while the costs associated with the acquisition of a business are expensed as incurred.
The allocation of purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, a market participant’s expectation of future cash flows from acquired customers, acquired trade names, useful lives of acquired assets, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from such estimates. During the measurement period, which is no longer than one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recognized in operations.
Goodwill
42
Goodwill represents the excess of consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination.
The Company reviews goodwill for impairment annually, during the fourth quarter of each fiscal year or whenever events or changes in circumstances indicate that an impairment may exist. In conducting our annual impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that the fair value of the reporting unit is less than its carrying amount, the Company performs a quantitative assessment and the fair value of the reporting unit is determine by analyzing the expected present value of future cash flows. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit's goodwill is calculated and an impairment loss equal to the excess if recorded.
Intangible Assets
Intangible assets represent purchased intangible assets consisting of both indefinite and finite lived assets. Certain criteria are used in determining whether intangible assets acquired in a business combination must be recognized and reported separately. Our indefinite lived intangible assets, representing trade names, trademarks and winery use permits, are initially recognized at fair value and subsequently stated at adjusted costs, net of any recognized impairments. The indefinite lived assets are not subject to amortization. Finite-lived intangible assets, comprised of customer and Sommelier relationships, trade names and trademarks, are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. If that pattern cannot be reliably determined, the intangible assets are amortized using the straight-line method over their estimated useful lives and are tested for impairment along with other long-lived assets. Amortization related to the finite-lived assets is included in selling, general and administrative expenses. Intangible assets are reviewed annually for impairment, as of the end of the reporting period, or sooner if events or circumstances indicate the carrying amount of the asset may not be recoverable.
Label and Package Design Costs
Label and package design costs are capitalized and amortized over an estimated useful life of two years. Amortization of label and packaging design costs are included in selling, general and administrative expenses and were approximately $973.0 thousand and $464.0 thousand for the years ended June 30, 2022 and 2021, respectively.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of such assets or intangible assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. No impairment loss was recognized for long-lived assets during the years ended June 30, 2022 and 2021, respectively.
Contingent Consideration Liabilities
Contingent consideration liabilities are recorded at fair value when incurred in a business combination. The fair value of these estimates are based on available historical information and on future expectations of actions we may undertake in the future. These estimated liabilities are re-measured at each reporting date with the change in fair value recognized as an operating expense in the Company’s consolidated statements of operations. Subsequent changes in the fair value of the contingent consideration are classified as an adjustment to cash flows from operating activities in the consolidated statements of cash flows because the change in fair value is an input in determining net loss. Cash paid in settlement of contingent consideration liabilities are classified as cash flows from financing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities.
Changes in the fair value of contingent consideration liabilities associated with the acquisition of a business can result from updates to assumptions such as the expected timing or probability of achieving customer related performance targets, specified sales milestones, changes in unresolved claims, projected revenue or changes in discount rates. Significant judgment is used in determining those assumptions as of the acquisition date and for each subsequent reporting period. Therefore, any changes in the fair value will impact our results of operations in such reporting period, thereby resulting in potential variability in our operating results until such contingencies are resolved.
Deferred Financing Costs
Deferred financing costs incurred in connection with obtaining new term loans are amortized over the term of the arrangement, and recognized as a direct reduction in the carrying amount of the related debt instruments. Amortization of deferred loan fees is included in interest expense on the consolidated statements of operations and are amortized to interest expense over the term of the related debt using the effective interest method. Debt issuance costs capitalized were zero and $0.9 million for the years ended June 30, 2022 and 2021, respectively. Amortization expense related to debt issuance fees were $262.0 thousand and $26.0 thousand for the years ended June 30, 2022 and 2021, respectively. If existing financing is settled or replaced with debt instruments from the same lender that do not have substantially different terms, the new debt agreement is accounted for as a modification for the prior debt agreement and the unamortized costs remain capitalized, the new original issuance discount costs are capitalized, and any new third-party costs are charged to expense.
Line of Credit Fees
43
Costs incurred in connection with obtaining new debt financing specific to the line of credit are deferred and amortized over the life of the related financing. If such financing is settled or replaced prior to maturity with debt instruments that have substantially different terms, the settlement is treated as an extinguishment and the unamortized costs are charged to gain or loss on extinguishment of debt. Similar to the treatment of deferred financing costs, if existing financing is settled or replaced with debt instruments from the same lender that do not have substantially different terms, the new debt agreement is accounted for as a modification for the prior debt agreement and the unamortized costs remain capitalized, the new original issuance discount costs are capitalized, and any new third-party costs are charged to expense. See Note 9. Deferred line of credit fees are recognized as a component of prepaid expenses and other current assets and are amortized to interest expense over the term of the related debt using the effective interest method. There were zero and $492.0 thousand of line of credit fees capitalized for the year ended June 30, 2022 and 2021, respectively. Amortization expense related to line of credit fees were $132.0 thousand and $53.0 thousand for the year ended June 30, 2022 and 2021, respectively.
Fair Value Measurements
We determine fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In arriving at fair value, we use a hierarchy of inputs that maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of June 30, 2022 and 2021, the carrying value of the current assets and liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of our long-term variable rate debt approximates carrying value, excluding the effect of unamortized debt discount, as they are based on borrowing rates currently available to the Company for debt with similar terms and maturities (Level 2 inputs). Our contingent consideration and interest rate swap agreement are remeasured at fair value on a recurring basis as of June 30, 2022 and 2021, respectively.
Interest Rate Swap Agreements
GAAP requires that an entity recognize all derivatives (including interest rate swaps) as either assets or liabilities on the consolidated balance sheets and measure these instruments at fair value. The Company has entered into interest rate swap agreements as a means of managing its interest rate exposure on its debt obligations. These agreements mitigate our exposure to interest rate fluctuations on our variable rate obligations. We have not designated these agreements as cash-flow hedges.
Accordingly, changes in the fair value of the interest rate swaps are included in the consolidated statements of operations as a component of other income (expense). We do not enter into financial instruments for trading or speculative purposes.
Comprehensive Income or Loss
We had no items of comprehensive income or loss other than net income (loss) for the years ended June 30, 2022 and 2021. Therefore, a separate statement of comprehensive income (loss) has not been included in the accompanying consolidated financial statements.
Revenue Recognition
Point in Time — Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
We recognize revenue when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when the product is shipped and title passes to the customer, and when control of the promised product or service is transferred to the customer. Our standard terms are free on board (“FOB”) shipping point, with no customer acceptance provisions. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
We account for shipping and handling as activities to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and classify such costs as a component of costs of sales. Our products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been significant to the Company.
44
Over Time — Certain long-term contracts in our Business-to-Business ("B2B") segment are for custom wine making services and include services such as fermentation, barrel aging, procurement of dry goods, bottling and cased goods. Additionally, we provide storage services for wine inventory of various customers.
We recognize revenue over time as the contract specific performance obligations are met. The Company elected to apply the "as-invoiced" practical expedient to such revenues, and as a result, will bypass estimating the variable transaction price.
Disaggregation of Revenue
The following tables summarize the revenue by segment and region for the years ended June 30, 2022 and 2021, respectively:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Geographic regions: |
|
|
|
|
|
| ||
United States |
| $ | 287,349 |
|
| $ | 215,122 |
|
International |
|
| 6,421 |
|
|
| 5,620 |
|
Total net revenue |
| $ | 293,770 |
|
| $ | 220,742 |
|
The following table provides a disaggregation of revenue based on the pattern of revenue recognition for the years ended June 30, 2022 and 2021, respectively:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Point in time |
| $ | 253,677 |
|
| $ | 186,906 |
|
Over a period of time |
|
| 40,093 |
|
|
| 33,836 |
|
Total net revenue |
| $ | 293,770 |
|
| $ | 220,742 |
|
Concentrations of Risk
Financial instruments that potentially expose us to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. We maintain the majority of our cash balances at multiple financial institutions that management believes are of high-credit quality and financially stable. At times, we have cash deposited with major financial institutions in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance limits. At June 30, 2022 and 2021, we had $49.0 million and $121.6 million respectively, in four major financial institutions in excess of FDIC insurance limits. We sell the majority of our wine through U.S. distributors and the Direct-to-Consumer channel. Receivables arising from these sales are not collateralized. We attempt to limit our credit risk by performing ongoing credit evaluations of our customers and maintaining adequate allowances for potential credit losses.
The following table summarizes customer concentration:
|
| June 30, | ||
|
| 2022 |
| 2021 |
Customer A |
|
|
|
|
Revenue as a percent of total revenue |
| 21.0% |
| 32.0% |
Receivables as a percent of total receivables |
| 26.0% |
| 35.0% |
Customer B |
|
|
|
|
Revenue as a percent of total revenue |
| * |
| 13.1% |
Receivables as a percent of total receivables |
| * |
| 21.0% |
Customer C |
|
|
|
|
Revenue as a percent of total revenue |
| * |
| 10.9% |
Receivables as a percent of total receivables |
| * |
| * |
Customer D |
|
|
|
|
Revenue as a percent of total revenue |
| * |
| * |
Receivables as a percent of total receivables |
| * |
| 10.4% |
Customer E |
|
|
|
|
Revenue as a percent of total revenue |
| 22.9% |
| * |
Receivables as a percent of total receivables |
| * |
| * |
* Customer revenue or receivables did not exceed 10% in the respective periods.
Revenues for sales from Customer A are included within the Wholesale and Business-to-Business reporting segments, Customer B and Customer E are included within the Business-to-Business reporting segment and Customer C and Customer D are included within the Wholesale reporting segment. See Note 20.
45
Shipping
Shipping and handling revenues are classified as wine, spirits and cider revenues. Shipping and handling costs are included in wine, spirits and cider cost of revenues.
Excise Taxes
Excise taxes are levied by government agencies on beverages containing alcohol, including wine and spirits. These taxes are not collected from customers but are instead the responsibility of the Company. Applicable excise taxes are included in net revenues and were $10.9 million and $12.3 million for the years ended June 30, 2022 and 2021, respectively.
Sales Taxes
Sales taxes that are collected from customers and remitted to governmental agencies are not reflected as revenues.
Stock-Based Compensation
Stock-based compensation provided to employees is recognized in the consolidated statement of operations based on the grant date fair value of the awards. The fair value of restricted stock units is determined by the grant date market price of our common shares. The fair value of stock options is determined on the grant date using a Monte Carlo simulation model. The determination of the grant date fair value of stock option awards granted is affected by a number of variables, including the fair value of the Company's common stock, the expected common stock price volatility over the life of the awards, the expected term of the stock option, risk-free interest rates and the expected dividend yield of the Company's common stock. Due to the Company's limited trading history since becoming a public company on June 7, 2021, the Company derived its volatility from the average historical stock volatilities of several peer public companies over a period equivalent to the expected term of the awards.
The compensation expense recognized for stock-based awards is net of estimated forfeitures and is recognized ratably over the service period of the awards. All income tax effects of stock-based awards are recognized in the consolidated statements of operations as awards vest or are settled. We classify stock-based compensation expense in selling, general and administrative ("SG&A") expenses in the consolidated statement of operations.
Advertising
Advertising costs are expensed either as the costs are incurred or the first time the advertising takes place. Advertising expense was $5.2 million and $2.2 million for the years ended June 30, 2022 and 2021, respectively.
Income Taxes
Deferred income taxes are determined using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the expected recognition of a deferred income tax asset is unlikely.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to income tax matters as a component of income tax expense.
Sale-leaseback Transaction
We account for the sale and leaseback of vineyards under ASC 840, Sale-Leaseback Accounting of Real Estate. Given we were considered to retain more than a minor part, but less than substantially, all of the use of the property, a gain could be recognized to the extent it exceeded the present value of the leaseback payments. Any gain that was less than or equal to the present value of the leaseback payments was deferred and is amortized on a straight-line basis over the leaseback term. The gain is essentially recognized as a reduction to offset the future lease payment. We derecognize the asset from our consolidated balance sheet at the sale closing.
Segment Information
We operate in three reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker (“CODM”), our Chief Executive Officer, allocates resources and assesses performance based upon discrete financial information at the segment level.
Noncontrolling Interests and Redeemable Non-controlling Interest
Non-controlling interests represent the portion of profit or loss, net assets and comprehensive loss that is not allocable to the Company. The redeemable non-controlling interest is contingently redeemable by the holders. The redeemable non-controlling interests are not being accreted to
46
their redemption amount as we do not deem redemption probable; notwithstanding, should the instruments redemption become probable, we will thereupon begin to accrete, to the earliest date the holders can demand redemption, the redemption amount.
Redeemable Series A and Series B Stock
Prior to the Merger, Legacy VWE had Series A and B stock outstanding. All of the Series B stock and the majority of the Series A stock was classified as temporary equity due to the shares being redeemable at the option of the holder. See Notes 12 and 13. The carrying value of the redeemable Series A stock and redeemable Series B stock was being accreted to their respective redemption values, using the effective interest method, from the date of issuance to the earliest date the holders can demand redemption. Accretion of redeemable Series B stock included the accretion of dividends and issuance costs. Increases to the carrying value of redeemable Series A stock and redeemable Series B stock were charged to retained earnings or, in its absence, to additional-paid-in-capital. Upon any repurchase of redeemable stock, the excess consideration paid over the carrying value at the time of repurchase is accounted for as a deemed dividend to the stockholders.
In conjunction with the closing of the Merger, a majority of the redeemable Series B stock was redeemed with the remaining redeemable Series B shares, along with all redeemable Series A shares, were converted into shares of the Company's common stock. All Series A and Series B shares which were converted into shares of the Company's common stock were retroactively adjusted using the exchange ratio and reclassified into permanent equity as a result of the Merger.
Earnings Per Share
Basic and diluted net income (loss) per share allocable to common stockholders is presented in conformity with the two-class method required for participating securities. We considered our Series B stock to be participating securities as, in the event a dividend is paid on Series A stock, the holders of Series B stock would be entitled to receive dividends on a basis consistent with the Series A stockholders. The two-class method determines net income per share for each class of common and participating securities according to dividends declared or accumulated as well as participation rights in undistributed earnings. The two-class method requires income available to stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Legacy VWE’s redeemable Series B stock was a participating security. Under the two-class method, any net loss attributable to common stockholders is not allocated to the Series B stock as the holders of the Series B stock did not have a contractual obligation to share in losses.
Basic net income (loss) per share is calculated by dividing the net income (loss) allocable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. For purposes of the calculation of diluted net income (loss) per share, stock options and warrants to purchase common stock are considered potentially dilutive securities but are excluded from the calculation of diluted net income (loss) per share when their effect is antidilutive. As a result, in certain periods, diluted net loss per share is the same as the basic net loss per share for the periods presented.
The computation of net income (loss) available to Series A stockholders is computed by deducting the dividends declared, if any, and cumulative dividends, whether or not declared, in the period on Series B stock (whether paid or not) from the reported net income (loss).
As the Merger has been accounted for as a reverse recapitalization, the consolidated financial statements of the merged entity reflect the continuation of Legacy VWE’s consolidated financial statements, with the Legacy VWE Equity, which has been retroactively adjusted to the earliest period presented to reflect the legal capital of the legal acquirer, BCAC. As a result, net income (loss) per share was also restated for periods ended prior to the Merger.
Self-Insurance
On September 9, 2021, the Company formed VWE Captive, LLC, a wholly-owned captive insurance company ("Captive"), which became operational on October 1, 2021. The Company formed Captive to self-insure the first $10.0 million of claims, above which limit, Captive has secured insurance. The insurance policy protects us against a portion of our risk of loss related to earthquakes, flood and named wildfires and windstorms.
Emerging Growth Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.
Recently Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be discontinued, to alternative reference rates. The guidance in this ASU was effective upon its issuance; if elected, it is to be applied prospectively through December 31, 2022. The impact this ASU will have on our
47
condensed consolidated financial statements will not be known until we have a modification to our financial instruments converting from LIBOR to another interest rate.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), which supersedes the guidance in ASC 840, Leases. The new standard, as amended by subsequent ASUs on Topic 842 and recent extensions issued by the FASB in response to COVID-19, requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Topic 842 will be effective for the Company for fiscal year ending June 30, 2023 and for interim periods within the year beginning July 1, 2022.
The Company will adopt Topic 842 using the modified retrospective approach, whereby it will recognize a transition adjustment at the effective date of Topic 842, July 1, 2022 rather than at the beginning of the earliest comparative period presented. Prior period information will not be restated. In addition, the Company will apply the package of transition practical expedients, which allows the Company to carryforward its population of existing leases, the classification of each lease and the treatment of initial direct costs as of the period of adoption. The Company also elected not to separate lease components from non-lease components and to exclude short-term leases (leases with a term of 12 months or less) from its Consolidated Balance Sheet.
The Company has identified the population of real estate and equipment leases to which the guidance applies and has implemented changes in its systems, procedures and controls relating to how lease information is obtained, processed and analyzed. Based on our preliminary assessment, the Company expects that the adoption of Topic 842, excluding the impact of new leases entered into after the adoption date, will result in recognition of approximately $35.0 million to $40.0 in lease-related assets and approximately $37.0 million to $42.0 million in liabilities, on our Consolidated Balance Sheet, subject to the completion of our assessment. We do not expect the adoption will not have a material impact on the Consolidated Statement of Operations and Comprehensive Income (Loss) and Consolidated Statement of Cash Flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses. The guidance is effective for the Company for fiscal year ending on June 30, 2023 and interim periods beginning for the fiscal year commencing on July 1, 2022. Early adoption is permitted. We do not expect the adoption of this standard will have a significant impact on the consolidated financial statements given our historically low bad debt expense.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in the updated guidance simplify the accounting for income taxes by removing certain exceptions and improving consistent application of other areas of the topic by clarifying the guidance. The amendments in this update are effective for the Company for fiscal year ending June 30, 2023 and interim periods within the fiscal years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact and timing of adopting ASU 2019-12, however at this time, the adoption is not expected to have a significant impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in the updated guidance require that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in this update are effective for the Company for fiscal years ending June 30, 2024 and for interim periods in the year beginning July 1, 2023. Early adoption is permitted including adoption at an interim period. We are currently evaluating the impact and timing of adopting ASU 2021-08, however at this time, the adoption is not expected to have a significant impact on the consolidated financial statements.
2. Merger and Reverse Recapitalization
On June 7, 2021, Legacy VWE and BCAC consummated the Merger, with Legacy VWE surviving the Merger as a wholly owned subsidiary of BCAC, which was renamed Vintage Wine Estates, Inc. Immediately prior to the closing of the Merger, the Company purchased 2,889,507 shares of Series B stock from TGAM Agribusiness Fund Holdings LP for $32.0 million, including unpaid cumulative dividends and all remaining shares of outstanding Series B stock of Legacy VWE were converted into shares of Legacy VWE Series A common stock. Upon the consummation of the Merger, each share of Legacy VWE Series A and Series B common stock issued and outstanding was canceled and converted into the right to receive 2.85708834472042 shares (the “Exchange Ratio”) of common stock of the Company. For periods prior to the Merger, the reported share and per share amounts have been retroactively converted (“Retroactive Conversion”) by applying the Exchange Ratio. VWE Legacy shareholders were issued 26,828,256 shares of the Company’s common stock of which 1,000,002 shares were placed in escrow to cover potential adjustments to the purchase price.
48
To satisfy the requirements of full repayment of the Company’s Paycheck Protection Program loan (the “PPP Loan”) upon a change of control, we placed into escrow $6.6 million in advance of the pending merger and reverse recapitalization. Funds held in escrow were released back to the Company upon receiving notification of the full forgiveness of the PPP loan prior to June 30, 2021.
In September 2021, upon finalization of the purchase price, all 1,000,002 shares of the shares in escrow were released to the VWE Legacy shareholders.
Upon the closing of the Merger, the Company's certificate of incorporation authorized 200,000,000 shares of common stock, no par value per share and 2,000,000 shares of preferred stock, no par value per share. As of June 7, 2021 (the "Closing Date"), there were 60,461,611 shares of the Company’s common stock issued and outstanding and warrants to purchase 26,000,000 shares of the Company’s common stock outstanding. There was no preferred stock outstanding as the Closing Date.
In connection with the Merger, BCAC entered into subscription agreements (each, a “Subscription Agreement”) with two investors (each a “Subscriber”), pursuant to which the Subscribers agreed to purchase, and BCAC agreed to sell to the Subscribers, an aggregate of 10,000,000 shares of common stock (the “PIPE Shares”), for a purchase price of $10 per share and an aggregate purchase price of $100.0 million, in a private placement pursuant to the subscription agreements (the “PIPE”). The PIPE investment closed just prior to the consummation of the Merger.
The Merger is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, BCAC was treated as the “acquired” company and Legacy VWE was treated as the acquirer company for financial reporting purposes. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Legacy VWE issuing stock for the net assets of BCAC, accompanied by a recapitalization. The net assets of BCAC are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of Legacy VWE.
The following table reconciles the elements of the Merger to the consolidated statement of cash flows and the consolidated statement of stockholders’ equity for the year ended June 30, 2021:
(in thousands, except share data) | Shares |
|
| Recapitalization |
| ||
Cash - BCAC's trust and cash, net of redemptions |
| 23,633,355 |
|
| $ | 178,942 |
|
Cash - PIPE |
| 10,000,000 |
|
|
| 100,000 |
|
Non-cash net liabilities assumed from BCAC |
|
|
|
| (579 | ) | |
Less: transaction costs and advisory fees paid by Legacy VWE |
|
|
|
| (3,739 | ) | |
Less: transaction costs and advisory fees paid by BCAC |
|
|
|
| (25,933 | ) | |
Net contributions from merger and PIPE financing |
| 33,633,355 |
|
| $ | 248,691 |
|
Earnout Shares
The VWE Legacy shareholders are entitled to receive up to an additional 5,726,864 shares of the Company’s common stock (the “Earnout Shares”) if at any point during the Earnout Period, from June 7, 2021 to June 7, 2023, the Company's closing share price on the Nasdaq on 20 trading days out of 30 consecutive trading days:
The Earnout Shares will be adjusted to reflect any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible common shares), reorganization, recapitalization, reclassification, combination and, exchange of shares or other like change. The Earnout Shares are indexed to the Company’s equity and meet the criteria for equity classification. The fair value of the Earnout Shares, $32.4 million, was recorded as a dividend to additional paid in capital due to the absence of retained earnings.
No Earnout Shares were issued as of June 30, 2022.
3. Business Combinations
Vinesse
On October 4, 2021, the Company acquired 100% of the members' interest in Vinesse, LLC, a California limited liability company ("Vinesse"). Vinesse is a direct-to-consumer platform company that specializes in wine clubs with over 60,000 members. Founded in 1993, Vinesse has developed a long-time following by offering boutique wines to a broader audience and making wine accessible and easy to love. The operations of Vinesse align with those of the Company, which management believes provides for expanded synergies and growth through the acquisition.
The purchase price totaling $17.0 million was comprised of cash of $14.0 million, consulting fees of $0.2 million per year for three years totaling $0.6 million and a three-year earnout payable of up to $2.4 million. To fund the cash portion of the purchase consideration, we utilized the line of credit under the amended and restated loan and security agreement.
49
The preliminary allocation of the consideration for the net assets acquired from the acquisition of Vinesse were as follows:
(in thousands) |
|
|
| |
Sources of financing |
|
|
| |
Cash |
| $ | 14,000 |
|
Accrued other |
|
| 600 |
|
Contingent consideration |
|
| 2,400 |
|
Fair value of consideration |
|
| 17,000 |
|
|
|
|
| |
Assets acquired: |
|
|
| |
Fixed assets |
|
| 121 |
|
Inventory |
|
| 2,502 |
|
Trade Names and Trademarks |
|
| 1,200 |
|
Customer relationships |
|
| 3,700 |
|
Total identifiable assets acquired |
|
| 7,523 |
|
|
|
|
| |
Goodwill |
| $ | 9,477 |
|
The Company used the carrying value as of the acquisition date to value fixed assets, as we determined that they represented the fair value at the acquisition date.
Inventory was comprised of finished goods, bulk and raw materials. The fair value of finished goods inventory and bulk inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.
The trade names and trademarks fair value was derived using the Relief-From-Royalty Method (“RFR”). Key assumptions in valuing trade names and trademarks included (i) a royalty rate of 1.8% and (ii) discount rate of 17.5%.
Customer relationships fair value was derived using the Multiple-Period Excess Earnings Method (“MPEEM”), utilizing a discount rate of 18.0%, and Cost Approach. Customer relationships were weighted; 50.0% using the MPEEM model and 50.0% using the Cost Approach.
The results of operations of Vinesse for the period from the October 4, 2021 acquisition date through June 30, 2022, are included in the accompanying consolidated statements of operations. Transaction costs incurred in the acquisition were insignificant.
ACE Cider
On November 16, 2021, the Company acquired 100% of the capital stock of ACE Cider, the California Cider Company, Inc., a California corporation ("ACE Cider"). ACE Cider is a wholesale platform and specializes in hard cider, an alcoholic beverage fermented from apples. The operations of ACE Cider allow the Company to enter into the beer distribution category.
The purchase price totaling $47.4 million was comprised of a cash payment and contingent consideration.
The preliminary allocation of the consideration for the net assets acquired from the acquisition of ACE Cider were as follows:
(in thousands) |
|
|
| |
Sources of financing |
|
|
| |
Cash |
| $ | 46,880 |
|
Accrued other |
|
| 60 |
|
Contingent consideration |
|
| 500 |
|
Fair value of consideration |
|
| 47,440 |
|
|
|
|
| |
Assets acquired: |
|
|
| |
Fixed assets |
|
| 4,205 |
|
Inventory |
|
| 1,350 |
|
Trademarks |
|
| 6,600 |
|
Customer relationships |
|
| 14,300 |
|
Deferred tax liability |
|
| (6,554 | ) |
Total identifiable assets acquired |
|
| 19,901 |
|
|
|
|
| |
Goodwill |
| $ | 27,539 |
|
The Company used the carrying value as of the Acquisition Date to value fixed assets, as we determined that they represented the fair value at the Acquisition Date.
50
Inventory was comprised of finished goods, bulk cider and raw materials. The fair value of finished goods inventory and bulk cider inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.
The trademarks fair value was derived using the RFR. Key assumptions in valuing trademarks included (i) a royalty rate of 2.75% and (ii) discount rate of 12.5%.
Customer relationships fair value was derived using the MPEEM, utilizing a discount rate of 13.0%, and Cost Approach. Customer relationships were weighted; 90.0% using the MPEEM model and 10.0% using the Cost Approach.
The results of operations of ACE Cider for the period from the November 16, 2021 acquisition date through June 30, 2022, are included in the accompanying consolidated statements of operations. Transaction costs incurred in the acquisition were insignificant.
Meier's
On January 18, 2022, the Company acquired 100% of the capital stock in Meier's Wine Cellars, Inc., DBA Meier's Beverage Group, an Ohio company ("Meier's"). Meier's is a wholesale and business-to-business company that specializes in custom blending, contract storage, contract manufacturing, and private labeling for wine, beer, and spirits. Over the years, Meier's continued extending their winemaking skills by producing table wines, sparkling wines, dessert wines, vermouths and carbonated grape juice.
The purchase price totaling $25.0 million was comprised of cash of $12.5 million and 1,229,443 shares of common stock with a value of $12.5 million.
The terms of the acquisition also provide for the possibility of additional contingent consideration of up to $10.0 million based on Meier's exceeding current EBITDA levels over each of the next three years.
The preliminary allocation of the consideration for the net assets acquired from the acquisition of Meier's were as follows:
(in thousands) |
|
|
| |
Sources of financing |
|
|
| |
Cash |
| $ | 12,500 |
|
Shares of common stock |
|
| 10,521 |
|
Contingent consideration |
|
| 4,900 |
|
Settlement of pre-existing relationship |
|
| (125 | ) |
Fair value of consideration |
|
| 27,796 |
|
|
|
|
| |
Assets acquired: |
|
|
| |
Accounts receivable |
|
| 3,669 |
|
Fixed assets |
|
| 12,859 |
|
Inventory |
|
| 4,280 |
|
Other assets |
|
| 356 |
|
Trademarks |
|
| 700 |
|
Customer relationships |
|
| 6,400 |
|
Accounts payable and accrued expenses |
|
| (2,682 | ) |
Deferred tax liability |
|
| (6,033 | ) |
Total identifiable assets acquired |
|
| 19,549 |
|
|
|
|
| |
Goodwill |
| $ | 8,247 |
|
The number of shares of common stock were valued based on the Closing Date share price, resulting in a fair value of $12.0 million, less a discount of $1.5 million due to lack of marketability for shares of common stock, resulting in the shares of common stock valued at $10.5 million.
The contingent consideration was fair valued using the Monte Carlo simulation model, resulting in fair value earnout payments of $4.9 million.
The Company valued the fair value of accounts receivable, other assets, accounts payable and accrued expenses and fixed assets at the acquisition date.
Inventory was comprised of finished goods, work in process and raw materials. The fair value of finished goods inventory and work in process inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.
The trade names and trademarks fair value was derived using the RFR. Key assumptions in valuing trade names and trademarks included (i) a royalty rate of 1.1% and (ii) discount rate of 27.0%.
Customer relationships fair value was derived using the MPEEM, utilizing a discount rate of 28.0%. Customer relationships were weighted 100.0% using the MPEEM model.
51
The results of operations of Meier's for the period from the January 18, 2022 acquisition date through June 30, 2022, are included in the accompanying consolidated statements of operations. Transaction costs incurred in the acquisition were insignificant.
The allocations of the fair value of the acquired businesses were based on preliminary valuations of the estimated net fair value of the assets acquired. The fair value estimates are subject to adjustment during the measurement period (up to one year from the acquisition date). The primary areas of accounting for the acquisitions that are not yet finalized relate to the fair value of certain intangible assets acquired and residual goodwill. Goodwill created in the acquisitions were structured as stock sales and therefore, is non tax deductible and non amortizable. The fair values of the net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, we will evaluate any necessary information prior to finalization of the fair value. During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date, if any, that, if known, would have resulted in revised values for these items as of that date. The net working capital adjustments related to the acquisitions are estimated as of the closing date and will be adjusted based on that estimate. Net working capital adjustments of $5.3 million are recorded in other assets on the condensed consolidated balance sheet. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.
Other Acquisitions
On February 14, 2022, the Company purchased certain intellectual property pertaining or related to a canned cannabis beverage brand. The Company purchased the intellectual property at a purchase price of $0.4 million. The value of the assets acquired were based on the estimated fair value and are subject to adjustment during the measurement period (up to one year from the acquisition date). An executive of the Company has a related party relationship and serves as a member of the board of directors.
The Sommelier Company
On June 22, 2021, we acquired the net assets of The Sommelier Company consisting of customer relationships, independent Sommelier relationships and brand trademarks, for total consideration of $12.0 million. Consideration transferred consisted of a cash payment of $8.0 million and contingent consideration of up to $4.0 million, whereby the Company will pay the seller three annual Earn-Out payments over three years, determined as a percentage of EBITDA.
The following table summarizes the allocation of the purchase price to the fair value of the assets acquired at the date of acquisition:
(in thousands) |
|
|
| |
Sources of financing |
|
|
| |
Cash |
| $ | 8,000 |
|
Contingent consideration |
|
| 4,000 |
|
Fair value of consideration |
|
| 12,000 |
|
|
|
| - |
|
Assets acquired |
|
|
| |
Customer relationships |
|
| 1,500 |
|
Sommelier relationships |
|
| 1,000 |
|
Trademark |
|
| 600 |
|
Accrued liabilities |
|
| (92 | ) |
Total identifiable assets acquired |
|
| 3,008 |
|
|
|
|
| |
Goodwill |
| $ | 8,992 |
|
Goodwill represents the excess of the purchase price over the fair value of the net intangible assets acquired. The acquisition of The Sommelier Company resulted in the recognition of approximately $9.0 million of goodwill. The Company believes this goodwill is attributable to its investment in synergies for expanding its reach in its direct-to-consumer and business-to-business customer base. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually.
Intangible assets associated with the customer relationships and Sommelier relationships acquired as a result of the Sommelier acquisition are being amortized over their estimated useful life using the straight-line method of amortization, which materially approximates the distribution of the economic value of the identified intangible asset. Amortization of the customer relationships and Sommelier relationships was not significant to the consolidated statements of operations. Key assumptions in valuing the customer relationships utilizing an Income Approach, specifically the excess earnings method included (1) a discount rate of twenty percent (20%), (2) an annual customer attrition rate of fifty percent (50%), and contributory asset charges of three-point eight percent (3.8%). Key assumptions in valuing the Sommelier relationships utilizing a Cost Approach, included (1) a replacement period of 5 years and (2) an annual return on investment of nineteen percent (19%). Key assumptions in valuing the acquired trademarks and indefinite lived assets, using the Income Approach include (1) discount rate of nineteen percent (19%) and (2) assumed pre-tax royalty rate of one point five percent (1.5%).
52
The results of operations of The Sommelier Company for the period from the June 22, 2021 acquisition date through June 30, 2021, are included in the accompanying consolidated statements of operations. Transaction costs associated with the acquisition were immaterial.
Kunde Vineyards and Winery
On April 19, 2021, the Company acquired 100% of the outstanding equity of Kunde Enterprise Inc. (“Kunde”) for total consideration, including amounts to acquire the combined 33.3% ownership held by two of the Company stockholders, of which one is an executive officer of the Company, of approximately $53.0 million, net of pre-existing relationship net liabilities due to Kunde of $5.9 million. Kunde produces and sells premium Sonoma Valley varietal wines via the wholesale channel as well as internationally and locally through its tasting room, wine club, and internet site. In addition, Kunde provides wine storage, processing, and bottling services for other wineries, including the Company. The operations of Kunde align with those of the Company, providing for expanded synergies and growth through the acquisition. Kunde met the definition of a business, and therefore is accounted for as a business combination. Prior to the acquisition, effective January 1, 2021, the Company provided distribution and marketing services for Kunde products. See Note 15.
The $53.0 million purchase consideration was comprised of approximately $21.5 million of cash, approximately $11.7 million of notes payable to the sellers, and the issuance of 906,345 shares (2,589,507 shares retroactively restated giving effect to the recapitalization transaction discussed in Note 1) of the Company’s Series A stock, with a value of $25.8 million, which totaled $58.9 million less the release of pre-existing net liabilities between the Company and Kunde of $5.9 million. Two of the three notes payable issued to the sellers as purchase consideration have a stated interest rate of Prime plus 1.00%, compounded quarterly, and mature on January 5, 2022, while the third note has a stated interest rate of 1.61%, compounded quarterly, and matures on December 31, 2021. To fund the cash portion of the purchase consideration, we utilized the April 2021 increase in the line of credit and delay draw term loan under the amended and restated loan and security agreement.
The following table summarizes the allocation of the purchase price to the fair value of the assets acquired at the date of acquisition:
(in thousands) |
|
|
| |
Sources of financing |
|
|
| |
Cash |
| $ | 21,464 |
|
Note payable to sellers |
|
| 11,668 |
|
Stock |
|
| 25,831 |
|
Fair value of consideration |
|
| 58,963 |
|
Pre-existing relationship, net liability to Kunde |
|
| (5,900 | ) |
Fair value of consideration |
|
| 53,063 |
|
|
|
|
| |
Assets acquired |
|
|
| |
Accounts receivable, prepaid expenses and other current assets |
|
| 858 |
|
Inventories |
|
| 20,300 |
|
Land and vineyards |
|
| 3,351 |
|
Buildings |
|
| 15,524 |
|
Winery equipment |
|
| 5,976 |
|
Trademarks |
|
| 3,500 |
|
Customer relationships |
|
| 3,300 |
|
Winery use permits |
|
| 1,250 |
|
Current liabilities |
|
| (4,562 | ) |
Deferred tax liability |
|
| (10,007 | ) |
Total identifiable assets acquired |
|
| 39,490 |
|
|
|
|
| |
Goodwill |
| $ | 13,573 |
|
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. The acquisition of Kunde resulted in the recognition of $13.6 million of goodwill. We believe this goodwill is attributable to our investment in synergies for expanding our brands in each of the three operating segments. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually.
Intangible assets associated with the customer relationships acquired as a result of the Kunde acquisition is being amortized over their estimated useful life using the straight-line method of amortization, which materially approximates the distribution of the economic value of the identified intangible asset. Amortization of the acquired customer relationships was not significant to the consolidated statements of operations. Key assumptions in valuing the customer relationships utilizing the Excess Earning Method include (1) future cash flow projections, (2) a repeat business probability assumption of sixty percent (60%), and (3) a discount rate of 19.0%. Key assumptions in valuing the acquired trademarks and indefinite lived assets, using the relief-from-royalty method include (1) a royalty rate of 2.75%, and (2) a discount rate of 19.0%.
53
The results of operations of Kunde for the period from the April 19, 2021 acquisition date through June 30, 2021, are included in the accompanying consolidated statements of operations since the acquisition date. Transaction costs associated with the acquisition were not significant.
4. Inventory
Inventory consists of the following:
(in thousands) |
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Bulk wine, spirits and cider |
| $ | 89,038 |
|
| $ | 119,333 |
|
Bottled wine, spirits and cider |
|
| 85,905 |
|
|
| 90,083 |
|
Bottling and packaging supplies |
|
| 16,328 |
|
|
| 10,482 |
|
Nonwine inventory |
|
| 831 |
|
|
| 1,247 |
|
Total inventories |
| $ | 192,102 |
|
| $ | 221,145 |
|
For the year ended June 30, 2022, the Company recorded a $19.1 million non-cash inventory write down. Specifically, the inventory write down related to physical inventory count adjustments of $12.4 million, $3.7 million related to the establishment of inventory reserves and $3.0 million related to the impact of additional remediation efforts.
For the years ended June 30, 2022 and 2021, the Company's inventory balances are presented net of inventory reserves of $5.1 million and $0.1 million, respectively, for bulk wine, spirits and cider inventory, $1.8 million and $4.1 million, respectively, for bottled wine, spirits and cider inventory and $0.4 million and zero, respectively, for bottling and packaging supplies inventory.
During the year ended June 30, 2021, we recognized impairment of $3.3 million on raw materials inventory.
We received $3.0 million and $4.8 million in fiscal 2022 and fiscal 2021, respectively, in connection with litigation settlements for damaged inventory.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
(in thousands) |
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Buildings and improvements |
| $ | 141,324 |
|
| $ | 129,288 |
|
Land |
|
| 36,215 |
|
|
| 33,734 |
|
Machinery and equipment |
|
| 76,916 |
|
|
| 58,227 |
|
Cooperage |
|
| 13,015 |
|
|
| 10,551 |
|
Vineyards |
|
| 21,177 |
|
|
| 21,364 |
|
Furniture and fixtures |
|
| 1,754 |
|
|
| 1,343 |
|
|
|
| 290,401 |
|
|
| 254,507 |
|
Less accumulated depreciation and amortization |
|
| (71,697 | ) |
|
| (52,791 | ) |
|
|
| 218,704 |
|
|
| 201,716 |
|
Construction in progress |
|
| 17,396 |
|
|
| 11,957 |
|
|
| $ | 236,100 |
|
| $ | 213,673 |
|
Depreciation and amortization expense related to property and equipment was approximately $19.0 million and $11.3 million for the years ended June 30, 2022 and 2021 respectively.
During the year ended June 30, 2020, we sold a vineyard for $35.2 million. As part of the transaction, we disposed of long-lived assets, including land, vineyards, and winery equipment, with a net book value of $20.7 million. Simultaneously, with the close of the transaction, we entered into a lease with the purchaser for 10 years, with options to extend the lease for two additional periods of ten years each. The sale of the land, vineyards, and winery equipment, and immediate leaseback of the facility qualified for sale-leaseback accounting. The lease was evaluated and classified as an operating lease. The gain on disposal of assets of $14.4 million was deferred and is being recognized over the 10-year lease as a reduction of rent expense over the life of the lease. We recognized $1.3 million and $1.3 million on property, plant, and equipment for the years ended June 30, 2022 and 2021, respectively, as a component of gain (loss) within income from operations.
54
6. Goodwill and Intangible Assets
The Company has three reporting units under which goodwill has been allocated.
We completed our qualitative goodwill impairment analysis for our reporting units during the fourth quarter and concluded it was not more-likely-than-not that the fair value of the goodwill exceeded its carrying value and no further testing was required.
The following is a rollforward of the Company’s goodwill by segment:
(in thousands) |
| Wholesale |
|
| Direct-to-Consumer |
|
| Business-to-Business |
|
| Total |
| ||||
Balance at June 30, 2020 |
| $ | 85,940 |
|
| $ | 1,183 |
|
| $ | - |
|
| $ | 87,123 |
|
Kunde |
|
| 2,868 |
|
|
| 10,167 |
|
|
| 745 |
|
|
| 13,780 |
|
Sommelier |
|
| - |
|
|
| 8,992 |
|
|
| - |
|
|
| 8,992 |
|
Balance at June 30, 2021 |
|
| 88,808 |
|
|
| 20,342 |
|
|
| 745 |
|
|
| 109,895 |
|
Vinesse |
|
| - |
|
|
| 9,477 |
|
|
| - |
|
|
| 9,477 |
|
ACE Cider |
|
| 27,539 |
|
|
| - |
|
|
| - |
|
|
| 27,539 |
|
Meier's |
|
| - |
|
|
| - |
|
|
| 8,247 |
|
|
| 8,247 |
|
Measurement period adjustments |
|
| (43 | ) |
|
| (153 | ) |
|
| (11 | ) |
|
| (207 | ) |
Balance at June 30, 2022 |
| $ | 116,304 |
|
| $ | 29,666 |
|
| $ | 8,981 |
|
| $ | 154,951 |
|
As of June 30, 2022 and 2021, the gross goodwill balance and accumulated impairment losses are $155.0 million and $109.9 million, and $246.0 thousand and $246.0 thousand, respectively.
Intangible assets are comprised of indefinite and definite lived assets. The definite lived assets are amortized on a straight-line basis, which reflects the expected pattern in which the economic benefits of the intangible assets are being obtained, over an estimated useful life of three to six years.
The components of finite-lived intangible assets, accumulated amortization, and indefinite-lived assets are as follows:
|
| June 30, 2022 | ||||||||||||
(in thousands) |
| Gross |
|
| Accumulated |
|
| Net Intangible |
|
| Weighted Average Remaining Amortization Period (in years) | |||
Indefinite-life intangibles |
|
|
|
|
|
|
|
|
|
|
| |||
Trade names and trademarks |
| $ | 30,203 |
|
| $ | - |
|
| $ | 30,203 |
|
| N/A |
Winery use permits |
|
| 6,750 |
|
|
| - |
|
|
| 6,750 |
|
| N/A |
Total Indefinite-life intangibles |
|
| 36,953 |
|
|
| - |
|
|
| 36,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Definite-life intangibles |
|
|
|
|
|
|
|
|
|
|
| |||
Customer and Sommelier relationships |
|
| 30,700 |
|
|
| (4,922 | ) |
|
| 25,778 |
|
| 4.4 |
Trade names and trademarks |
|
| 1,900 |
|
|
| (254 | ) |
|
| 1,646 |
|
| 3.5 |
Total definite-life intangibles |
|
| 32,600 |
|
|
| (5,176 | ) |
|
| 27,424 |
|
|
|
Total other intangible assets |
| $ | 69,553 |
|
| $ | (5,176 | ) |
| $ | 64,377 |
|
|
|
55
|
| June 30, 2021 | ||||||||||||
(in thousands) |
| Gross |
|
| Accumulated |
|
| Net Intangible |
|
| Weighted Average Remaining Amortization Period (in years) | |||
Indefinite-life intangibles |
|
|
|
|
|
|
|
|
|
|
| |||
Trade names and trademarks |
| $ | 23,229 |
|
| $ | - |
|
| $ | 23,229 |
|
| N/A |
Winery use permits |
|
| 6,750 |
|
|
| - |
|
|
| 6,750 |
|
| N/A |
Total Indefinite-life intangibles |
|
| 29,979 |
|
|
| - |
|
|
| 29,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Definite-life intangibles |
|
|
|
|
|
|
|
|
|
|
| |||
Customer and Sommelier relationships |
|
| 6,300 |
|
|
| (200 | ) |
|
| 6,100 |
|
| 4.7 |
Total definite-life intangibles |
|
| 6,300 |
|
|
| (200 | ) |
|
| 6,100 |
|
|
|
Total other intangible assets |
| $ | 36,279 |
|
| $ | (200 | ) |
| $ | 36,079 |
|
|
|
We recognized trademark impairments of zero and $1.1 million for the years ended June 30, 2022 and 2021, respectively, resulting from a decline in projected future cash inflows for specific trademarks. We estimate the fair value of our trademarks using the relief-from-royalty method. Impairment losses are recognized as a component of non-allocable costs in each applicable reporting period.
Amortization expense of definite-lived intangible assets was $5.0 million and $0.1 million for the years ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, the estimated future amortization expense for finite-lived intangible assets is as follows:
(in thousands) |
|
|
|
|
| |
2023 |
|
|
| $ | 6,822 |
|
2024 |
|
|
|
| 6,811 |
|
2025 |
|
|
|
| 5,291 |
|
2026 |
|
|
|
| 4,527 |
|
Thereafter |
|
|
|
| 3,973 |
|
Total estimated amortization expense |
|
|
| $ | 27,424 |
|
7. Accrued Liabilities
The major classes of accrued liabilities are summarized as follows:
(in thousands) |
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Accrued purchases |
| $ | 7,478 |
|
| $ | 10,790 |
|
Accrued employee compensation |
|
| 5,886 |
|
|
| 3,981 |
|
Other accrued expenses |
|
| 7,115 |
|
|
| 6,754 |
|
Non related party accrued interest expense |
|
| 429 |
|
|
| 202 |
|
Contingent consideration |
|
| 2,204 |
|
|
| 2,151 |
|
Unearned Income |
|
| (949 | ) |
|
| 1,200 |
|
Captive insurance liabilities |
|
| 2,041 |
|
|
| - |
|
Total Accrued liabilities and other payables |
| $ | 24,204 |
|
| $ | 25,078 |
|
56
8. Fair Value Measurements
The following tables present assets and liabilities measured at fair value on a recurring basis:
|
| June 30, 2022 |
| |||||||||||||
(in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds |
| $ | 36,616 |
|
| $ | - |
|
| $ | - |
|
| $ | 36,616 |
|
Interest rate swaps (2) |
|
| - |
|
|
| 9,157 |
|
|
| - |
|
|
| 9,157 |
|
Total |
| $ | 36,616 |
|
| $ | 9,157 |
|
| $ | - |
|
| $ | 45,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Contingent consideration liabilities (1) |
| $ | - |
|
| $ | - |
|
| $ | 8,515 |
|
| $ | 8,515 |
|
Total |
| $ | - |
|
| $ | - |
|
| $ | 8,515 |
|
| $ | 8,515 |
|
|
| June 30, 2021 |
| |||||||||||||
(in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds |
| $ | 6,525 |
|
| $ | - |
|
| $ | - |
|
| $ | 6,525 |
|
Total |
| $ | 6,525 |
|
| $ | - |
|
| $ | - |
|
| $ | 6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Contingent consideration liabilities (1) |
| $ | - |
|
| $ | - |
|
| $ | 4,631 |
|
| $ | 4,631 |
|
Interest rate swaps (2) |
|
| - |
|
|
| 13,807 |
|
|
| - |
|
|
| 13,807 |
|
Total |
| $ | - |
|
| $ | 13,807 |
|
| $ | 4,631 |
|
| $ | 18,438 |
|
(1) We assess the fair value of contingent consideration to be settled in cash related to acquisitions using probability weighted models for the various contractual earn-outs. These are Level 3 measurements. Significant unobservable inputs used in the estimated fair values of these contingent consideration liabilities include probabilities of achieving customer related performance targets, specified sales milestones, consulting milestones, changes in unresolved claims, projected revenue or changes in discount rates.
(2) The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated Level 2 inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by discounting future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the non-performance risk of the Company and the respective counterparty.
The following table provides a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
(in thousands) |
| Contingent |
| |
Balance at June 30, 2020 |
| $ | 1,641 |
|
Acquisitions |
|
| 4,000 |
|
Payments |
|
| (681 | ) |
Change in fair value |
|
| (329 | ) |
Balance at June 30, 2021 |
|
| 4,631 |
|
Acquisitions |
|
| 7,874 |
|
Payments |
|
| (420 | ) |
Change in fair value |
|
| (3,570 | ) |
Balance at June 30, 2022 |
|
| 8,515 |
|
Less: current portion |
|
| (2,204 | ) |
Long term portion |
| $ | 6,311 |
|
57
The current and long-term portion of contingent consideration is included within the accrued liabilities and other payables and other long-term liabilities, respectively, in the consolidated balance sheets.
On June 22, 2021, we acquired the net assets of The Sommelier Company. Consideration transferred consisted of a cash payment of $8.0 million and contingent consideration of $4.0 million, whereby the Company would pay the seller three annual Earn-Out payments over three years, determined as a percentage of EBITDA. During the reporting period, management estimated the fair value of the contingent Earn-Out was $0.5 million, and adjusted the contingent consideration liability associated with the acquisition.
9. Line of Credit
In July 2019, we executed a $335.0 million loan and security agreement. See Note 11. Included as a component of the $335.0 million loan and security agreement was a new accounts receivable and inventory revolving facility in an aggregate principal amount of up to $185.0 million. In November 2019, the allowable aggregate borrowings under the July 2019 revolving facility were increased to $200.0 million, thereby increasing the total permitted borrowing under the loan and security agreement to $350.0 million. The outstanding borrowings under the revolving facility accrue interest at a rate of LIBOR plus a range of 1.25% - 1.75%, based on average availability as defined in the loan and security agreement and have a maturity of July 2024.
In April 2021, we entered into an amended and restated loan and security agreement to increase the credit facility from an aggregate $350.0 million to $480.0 million consisting of an accounts receivable and inventory revolving facility up to $230.0 million, a term loan in a principal amount of up to $100.0 million, a capital expenditures facility in an aggregate principal of up to $50.0 million, and a delay draw term loan facility up to an aggregate of $100.0 million which was limited to an aggregate of $55.0 million. Upon consummation of the merger transaction, the requirements of the delayed draw term loan were met. The effective interest rate under the revolving facility was 3.3% and 4.0% for the years ended June 30, 3022 and 2021, respectively.
As of June 30, 2022 and 2021, the Company had $22.0 million and $125.0 million, respectively, available under the line of credit.
In September 2021, the Company formed a wholly-owned captive insurance company. Upon the formation of the Captive, the Company was required to deposit $1.8 million into a restricted cash account as collateral for our captive insurance letter of credit.
10. Interest Rate Swaps
In April 2021, we executed an agreement to amend and restate, in its entirety, the June 2018 interest rate swap with a fixed notional amount of $50.0 million, increasing the fixed notional amount to $75.0 million at a fixed rate of 2.32%. The agreement, effective April 25, 2021, called for monthly interest payments until the termination in June 2028. The fair value of the $75.0 million swap agreement was an asset of $2.0 million and liability of $6.2 million at June 30, 2022 and 2021, respectively.
In March 2020, we entered into two interest rate swap agreements with fixed notional amounts of $28.8 million and $46.8 million at a fixed rate of 0.77% and 0.71%, respectively. The agreement calls for monthly interest payments until termination in July 2026 and March 2025, respectively. The fair value of the $28.8 million swap agreement was an asset of $2.3 million and liability of $0.2 million at June 30, 2022 and 2021, respectively. The fair value of the $46.8 million swap agreement was an asset of $2.7 million and liability of $0.3 million at June 30, 2022 and 2021, respectively.
In July 2019, in connection with the 2019 Loan and Security Agreement (see Note 11), we transferred an interest rate swap agreement with a fixed notional amount of $20.0 million at a fixed rate of 2.99% dated June 2018, to our new lender. Shortly thereafter, the interest rate swap of $20.0 million was amended and restated in its entirety to increase the notional amount to $50.0 million at a fixed rate of 2.34%. The agreement calls for monthly interest payments until termination in July 2026. The fair value of the 2019 swap agreement was an asset of $1.0 million and liability of $3.7 million at June 30, 2022 and 2021, respectively.
In May 2019, we entered into an interest rate swap agreement, with a fixed notional amount of $50.0 million at a fixed rate of 2.25%. The agreement calls for monthly interest payments until termination in May 2026. The fair value of the swap agreement was an asset of $1.1 million and liability of $3.4 million at June 30, 2022 and 2021, respectively.
Interest rate swaps consisted of the following:
58
(in thousands) |
| Fixed Notional Amount |
|
| Fixed Interest |
|
|
| Fair Value Asset (Liability) |
| ||||||||||
Date of Agreement |
| June 30, 2022 |
|
| June 30, 2021 |
|
| Rate |
| Termination Date |
| 2022 |
|
| 2021 |
| ||||
April 2021 |
| $ | 75,000 |
|
| $ | 75,000 |
|
| 2.32% |
| June 2028 |
| $ | 2,046 |
|
| $ | (6,231 | ) |
March 2020 |
| $ | 28,800 |
|
| $ | 28,800 |
|
| 0.78% |
| July 2026 |
| $ | 2,282 |
|
| $ | (191 | ) |
March 2020 |
| $ | 46,800 |
|
| $ | 46,800 |
|
| 0.71% |
| March 2025 |
| $ | 2,748 |
|
| $ | (280 | ) |
July 2019 |
| $ | 50,000 |
|
| $ | 50,000 |
|
| 2.34% |
| July 2026 |
| $ | 971 |
|
| $ | (3,699 | ) |
May 2019 |
| $ | 50,000 |
|
| $ | 50,000 |
|
| 2.25% |
| May 2026 |
| $ | 1,110 |
|
| $ | (3,406 | ) |
|
|
|
|
|
|
|
|
|
|
|
| $ | 9,157 |
|
| $ | (13,807 | ) | ||
The Company records the changes in fair value in a separate line item in the consolidated statements of operations.
11. Long-Term and Other Short-Term Borrowings
The following table summarizes long-term and other short-term obligations:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Note to a bank with interest at LIBOR (1.76%) at June 30, 2022 plus 1.75%; payable in quarterly |
| $ | 76,792 |
|
| $ | 81,055 |
|
|
|
|
|
|
|
| ||
Capital expenditures borrowings payable at LIBOR plus 1.75%, payable in quarterly installments of $1,077, rolled into capital expenditures payable at Alternate Base Rate (ABR) (3.25% at June 30, 2021) plus 0.75%. At July 26, 2021 Bank of the West converted capital expenditures payable back to Libor (0.50%) plus 1.75% to align with Company Swaps with draw expiring July, 2026. |
|
| 40,776 |
|
|
| 45,084 |
|
|
|
|
|
|
|
| ||
Note to a bank with interest fixed at 3.6%, payable in monthly installments of $60 principal with applicable interest; matures in April 2023. |
|
| 593 |
|
|
| 1,227 |
|
|
|
|
|
|
|
| ||
Note to a bank with interest fixed at 2.75%, payable in monthly installments of $61 principal with |
|
| 1,246 |
|
|
| 1,876 |
|
|
|
|
|
|
|
| ||
Delayed Draw Term Loan ("DDTL") with interest at LIBOR (2.32%) at June 2022 plus 1.75%, payable in quarterly installments of $1,260 starting March 2022. Matures in July 2024. |
|
| 65,882 |
|
|
| 29,250 |
|
|
|
|
|
|
|
| ||
DDTL with ABR (4.00% at December 2021). Matures in July 2024. Interest only through draw period. No interest payments in fiscal year 2021 (Consolidated into the DDTL above in fiscal 2022). |
|
| - |
|
|
| 37,892 |
|
|
|
|
|
|
|
| ||
Short term unsecured promissory note; principal and interest payable upon maturity with interest at the prime rate plus 1.00%; matures in January 2022; paid April 7, 2022. |
|
| - |
|
|
| 2,917 |
|
|
|
|
|
|
|
| ||
Short term unsecured promissory note; principal and interest payable upon maturity with interest at the prime rate plus 1.00%; matures in January 2022; paid April 7, 2022. |
|
| - |
|
|
| 2,917 |
|
|
|
|
|
|
|
| ||
Short term unsecured promissory note; principal and interest payable upon maturity with interest at 1.06%; matured December 31, 2021, paid January 3, 2022. |
|
| - |
|
|
| 5,834 |
|
|
|
| 185,289 |
|
|
| 208,052 |
|
Less current maturities |
|
| (14,909 | ) |
|
| (22,964 | ) |
Less unamortized deferred financing costs |
|
| (1,285 | ) |
|
| (1,547 | ) |
|
| $ | 169,095 |
|
| $ | 183,541 |
|
59
Loan and Security Agreement
In April 2021, we entered into an amended and restated loan and security agreement to increase the credit facility from an aggregate $350.0 million to $480.0 million consisting of an accounts receivable and inventory revolving facility up to $230.0 million, a term loan in a principal amount of up to $100.0 million, a capital expenditures facility in an aggregate principal of up to $50.0 million, and a delay draw term loan facility up to an aggregate of $100.0 million which was limited to an aggregate of $55.0 million. All other terms of the original agreement generally remain the same. Upon consummation of the merger transaction, the requirements of the delayed draw term loan were met. We accounted for the amendments as a debt modification in accordance with the Accounting Standards Codification (“ASC”) 470-50, Modifications and Extinguishments. As a result, the amortization period on the debt issuance costs was extended to the new April 13, 2026 maturity date.
Concurrent with the amendment, we executed approximately a $29.3 million draw on the delayed draw term loan facility. Proceeds from the loan were used to pay down $10.8 million and $12.1 million of the existing term loan and outstanding line of credit, respectively, deposit cash of $4.8 million into a restricted cash collateral account, and pay bank fees and third party expenses associated with the amendment. The loans bear interest at a rate of 1.75% above LIBOR, while the revolving facility bears interest at rates ranging from 1.25% to 1.75% above LIBOR depending upon the ratio of certain of the company’s assets to the amount borrowed.
In connection with the April 2021 Loan and Security Agreement, we also entered into a Deposit Control Agreement which required $4.8 million of the total cash received upon amendment to be placed into a restricted cash collateral account. Funds within this account are subject to release upon the completion of certain construction work associated at the Ray’s Station production facility.
Paycheck Protection Program
Our $6.5 million Paycheck Protection Program loan (the “PPP Loan”), under Division A, Title I of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act on April 14, 2020, required monthly amortized principal and interest payments to begin six months after the date of disbursement. In October 2020, the deferral period associated with the monthly payments was extended from six to ten months. While the PPP Loan had a two-year maturity, the amended law permitted the borrower to request a five-year maturity from its lender.
Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, we were eligible to apply for and received forgiveness for all or a portion of the PPP Loan. Such forgiveness was determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during the twenty-four week period following the funding of the PPP Loan.
The proceeds, and related accrued interest, had been accounted for as debt in accordance with ASC 470—Debt.
On June 25, 2021, we received notification from the Small Business Association that our Forgiveness Application of the PPP Loan and accrued interest, totaling approximately $6.6 million, was approved in full, and we had no further obligations related to the PPP Loan. Accordingly, we recorded a gain on the forgiveness of the PPP Loan.
Kunde
In connection with the acquisition of Kunde (see Note 3), we issued unsecured promissory notes to the selling Kunde shareholders totaling $11.7 million. Two of the three notes payable issued to the sellers as purchase consideration have a stated interest rate of Prime plus 1.00%, compounded quarterly, and mature on January 5, 2022, while the third note has a stated interest rate of 1.06%, compounded quarterly, and matures on December 31, 2021 Terms of the note allow for full or partial prepayment without penalty and is due in full, along with accrued interest, upon an event of default as defined by the agreement. During the period of default, the interest rate on any then outstanding balance increases to four (4) percent under two notes totaling $5.8 million and ten (10) percent on the third note until the outstanding obligation is paid in full. Upon any liquidity event of the Company, the entire outstanding balance of principal and interest of the outstanding notes automatically becomes due and payable. The three short-term unsecured promissory notes were paid in full during fiscal 2022.
As referenced above, certain notes in long term debt require compliance with financial and non-financial covenants including, among other things, covenants limiting our ability to incur certain indebtedness, limitations on disposition of assets, engage in mergers and consolidations, make acquisitions or other investments and make changes in the nature of the business. Additionally, the Loan and Security Agreement also requires us to maintain a certain fixed charge coverage ratio.
The Company was in compliance with these covenants as of June 30, 2022.
60
Maturities of Long-Term and Other Short-Term Borrowings
Maturities of long-term and other short-term borrowings for succeeding years are as follows:
Year ending June 30, |
|
|
| |
2023 |
| $ | 14,909 |
|
2024 |
|
| 14,152 |
|
2025 |
|
| 64,372 |
|
2026 |
|
| 8,571 |
|
2027 |
|
| 83,285 |
|
|
| $ | 185,289 |
|
12. Redeemable Series A and Series B Stock and Non-Controlling Interest
For periods prior to the Merger, the reported share and per share amounts have been retroactively converted (“Retroactive Conversion”) by applying the Exchange Ratio.
Series A Redeemable Stock
January 2018 Tamarack Cellars Series A Redeemable Stock
As part of the acquisition of Tamarack Cellars in January 2018, we issued 372,387 shares of our no par common stock to the seller as part of the purchase consideration. These 372,387 shares contained a put option allowing the holder to put the shares back to us, and became exercisable four years from their issuance, and only for a thirty-day period (the put option was exercisable from January 2, 2022 through February 2, 2022).
In April 2018, these 372,387 common shares with the put right were exchanged for 372,387 Series A shares. The terms of the put right carried over to the exchanged 372,387 Series A shares. Because the 372,387 shares of Series A with the put right were redeemable by the holder beginning in January 2022 (four years from their issuance), the holder may have required the Company to redeem these shares for cash at a per share purchase price equal to the fair value of the underlying shares at the exercise date. As the redemption event was not solely within the control of the Company, the 372,387 Series A shares were classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.
At each reporting date, and until the Merger, we accreted the initial carrying value of the 372,387 Series A shares to its expected redemption amount as if redemption occurred at that reporting date. The accreted amount each period for these shares was comprised solely of any change in the fair value of the underlying shares since the prior reporting date. However, the carrying value could never fall below the original issue price of the underlying 372,387 Series A shares. The amounts accreted each reporting period were recorded as a deemed dividend.
As a result of the Merger and conversion of Series A shares to shares of the Company's common stock, we recorded accretion up to the fair value on June 7, 2021. The put right associated with the Series A shares was extinguished upon conversation of the shares into common stock. The amounts accreted as deemed dividends were zero and $1.1 million for the years ended June 30, 2022 and 2021, respectively. Since accretion exceeded retained earnings for the year ended June 30, 2021, no accretion was recorded to retained earnings and $1.1 million was recorded to additional paid in capital.
April 2018 Series A Redeemable Stock
In April 2018, we amended our articles of incorporation resulting in (i) the establishment of a new class of no par Series A stock and (ii) each of the issued and outstanding shares of no par common stock being exchanged and reclassified into shares (1-for-1 exchange) of Series A stock.
In April 2018, of the 20,785,643 Series A shares issued, 17,919,218 shares were held by Major Investors who were granted a new put right. A Major Investor is any holder of Series A shares or Series B shares who, individually or together with such investor’s affiliates, holds at least five percent (5%) of the then outstanding equity securities of the Company on a fully diluted basis.
Because the 17,919,217 Series A shares with the put right were redeemable by the holder beginning in April 2025 (seven years from their issuance), the holders may have required the Company to redeem the 17,919,217 Series A shares for cash at a per share purchase price equal to the fair market value of the underlying shares at the exercise date. The put right had no expiration date (a perpetual right). Because this redemption right was not solely within the control of the Company, the 17,919,217 Series A shares were, prior to the Merger, classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.
In April 2018, using the effective interest method, we began to accrete the $12,483,700 carrying amount of the 17,919,217 Series A shares to their expected redemption amount at April 4, 2025; and at each reporting date thereafter, we re-estimated the expected redemption amount at April 4, 2025, based on any changes of (i) when the redemption event was expected to occur or its probability and (ii) the change in fair value of the Series A shares underlying the put option. Both of these two variable components represented the change to the carrying value in a reporting period.
61
However, the carrying value could never fall below the original issue price of the underlying Series A shares. The amounts accreted each reporting period were recorded as a deemed dividend.
As a result of the Merger and conversion of Series A shares to the Company’s common stock, we recorded accretion up to the fair value on June 7, 2021. The put right associated with the Series A shares was extinguished upon conversion of the shares into common stock. The amounts accreted as deemed dividends were zero million and $152.3 million for the years ended June 30, 2022 and 2021, respectively. Since accretion exceeded retained earnings for the year ended June 30, 2021, $25.1 million was recorded to retained earnings and $133.0 million was recorded to additional paid in capital.
July 2018 Issuance of Series A Redeemable Stock
Concurrent with the repurchase and cancellation of 1,134,946 Series B shares in July 2018, the Company issued 1,134,946 Series A shares to an investor for gross proceeds of $8.3 million, or $20.86 per share.
The 1,134,946 Series A shares granted the holder the right to put the shares back to us at a strike price equal to the fair value of the underlying shares at the exercise date. The put right, which had no expiration date, became exercisable only if the sole holder of the Series B shares exercised its put right to redeem its Series B shares. Therefore, the put is contingent upon the Series B holder exercising its put right. The contingent put right in the 1,134,946 Series A shares were to become exercisable in April 2025, or 6.75 years from the July 2018 issuance date (the put right held by the holder of the Series B shares and held by the holder of the 1,134,946 Series A shares, were to become exercisable on the same date, or April 4, 2025).
Because the 1,134,946 Series A shares were redeemable by the holder, beginning in April 2025, the holder may have required the Company to redeem these Series A shares for cash at a per share purchase price equal to the fair value of the underlying shares at the put exercise date. Because the redemption of these shares was not solely within the control of the Company, the 1,134,946 shares were classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.
The accreted amount each period for these shares was comprised solely of any change in fair value since the prior reporting date. However, the carrying value could never fall below the original issue price of the underlying 1,134,946 Series A shares. The amounts accreted each reporting period were recorded as a deemed dividend.
As a result of the Merger and conversion of Series A shares to the Company’s common stock, we recorded accretion up to the fair value on June 7, 2021. The amounts accreted as deemed dividends were zero and $3.1 million for the years ended June 30, 2022 and 2021, respectively. Since accretion exceeded retained earnings for the year ended June 30, 2021, no accretion was recorded to retained earnings and $133.0 million was recorded to additional paid in capital.
The put right associated with the Series A shares was extinguished upon conversation of the Series A preferred shares to common stock.
Series B Redeemable Stock
April 2018 Series B Redeemable Cumulative Series B Stock
In April 2018, we amended our articles of incorporation such that a new class of redeemable cumulative Series B stock was designated, with 28,570,883 shares authorized and no par value. Concurrent to this amendment, the Company and TGAM Agribusiness Fund Holdings LP (“TGAM”) entered into a Stock Purchase Agreement, pursuant to which the Company, in a private placement, agreed to issue and sell to TGAM 5,674,733 shares of the Company’s, non-convertible Series B stock, for gross proceeds of $40.0 million, or $39.7 million net of issuance costs. The price per share of the Series B was $7.05.
In July 2018, the Company and TGAM (the sole holder of all Series B shares) entered into a share redemption agreement, whereby the Company repurchased 1,134,947 Series B shares for gross consideration of $8,290,000, or at $7.30 per share.
Holders of Series B shares were entitled to cumulative dividends at a rate of 5.0% of their original investment per year. No dividends could be paid to Series A stockholders until the cumulative dividends were paid to the holders of Series B shares. Dividends were only paid when declared by the Board of Directors and were distributed pro rata based on the number of Series A shares and Series B shares held by each stockholder after payment of cumulative dividends in arrears if any.
The holders of the Series B shares were entitled to one vote for each share of Series B held. Series B shares that were redeemed or otherwise acquired by the Company or any of its subsidiaries would be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred.
In the event of a voluntary or involuntary liquidation or a deemed liquidation event, the holders of Series B shares were entitled to be paid, pro rata, their cumulative dividends, whether or not declared, before any payment was made to the Series A stock; however, the right of the Series B stock to receive cumulative dividends should abate and be extinguished to the extent that the sum of the cash consideration received for each Series B share and any cumulative dividends, should exceed the sum of the original issue price and an internal rate of return ("IRR") of 14.0% on the original investment, compounded annually. Remaining assets would be distributed among the holders of Series A and Series B Stock pro rata based upon the number of shares held by each.
62
Holders of Series B shares who were Major Investors have a put right to cause the Company to purchase its shares at the fair value of the underlying shares as of the exercise date. A Major Investor is any holder of Series A shares or Series B shares who, individually or together with such investor’s affiliates, holds at least five percent (5%) of the then outstanding equity securities of the Company on a fully diluted basis. The put right has no expiration date (a perpetual right) and becomes exercisable in April 2025, or seven years subsequent to the issuance of the underlying 4,539,786 Series B shares. The strike price of the put was the fair value of the underlying shares on the put exercise date, plus all accrued dividends, up to an IRR of 14%.
Because the remaining 4,539,788 shares of Series B stock with the put right were redeemable by the holder beginning in April 2025 (seven years from their issuance), the holder may have required the Company to redeem all Series B shares for cash at a per share purchase price equal to the fair value of the underlying shares at the put exercise date, plus accrued dividends. Because this redemption event was not solely within the control of the Company, the Series B stock had been classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.
At each reporting date, and until the perpetual put right was either exercised or extinguished, we accreted the initial $39.7 million carrying value of the Series B shares to its expected redemption amount using the effective interest method, from the date of issuance to the earliest date the holder could demand redemption. The accreted amount each period for Series B shares consisted of (i) any change in fair value since the prior reporting date, (ii) accretion of issuance costs and (iii) accrued dividends. However, the carrying value could never fall below the original issue price of the underlying Series B shares. The amounts accreted each reporting period were recorded as a deemed dividend. As a result of the Merger and conversion of Series B shares to the Company’s Common shares, we recorded accretion up to the fair value on June 7, 2021.
The amounts accreted as deemed dividends for the Series B stock were zero and $5.8 million for the years ended June 30, 2022 and 2021, respectively. Since accretion exceeded retained earnings for the year ended June 30, 2021, no accretion was recorded to retained earnings and $5.8 million was recorded to additional paid in capital.
In June 2021, the Company repurchased 2,889,786 Series B shares for $28.9 million at $10.00 per share plus $3.1 million of accrued dividends. In connection with the closing of the Merger, 1,650,000 shares of the Series B redeemable stock with a fair value of $16.5 million were exchanged for the Company’s Common stock.
The put right associated with the Series B shares was extinguished upon conversion of the Series B preferred shares to common stock.
Noncontrolling Redeemable Interest
July 2016 Noncontrolling Redeemable Interest
One of our consolidated subsidiaries, Splinter Group Napa, LLC (“Splinter Group”), has a member who owns a noncontrolling interest in Splinter Group. The membership interest of this member has a put option allowing the member to put its membership interest back to us for cash upon the occurrence of a contingent event. Specifically, we currently have the right, pursuant to the operating agreement with Splinter Group, to acquire all of the membership interest held by Splinter Group if we (a) sell capital stock comprising at least 25% of our then outstanding capital stock to an unaffiliated third party, (b) sell assets comprising at least 25% of the aggregate value of our then existing assets to an unaffiliated third party buyer or (c) merge with and into, an unaffiliated third party buyer. If we choose not to exercise this right following any of these events, the holder of the noncontrolling interest had the right to require us to purchase all of the noncontrolling interest holder’s membership interest at fair value, as determined via appraisal. The redemption amount is the fair value of the noncontrolling interest at the redemption date.
Because this redemption event is not solely within our control, the Splinter Group noncontrolling interest has been classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.
Upon purchase of our controlling interest in Splinter Group in July 2016, we classified the noncontrolling interest as temporary equity at its initial carrying amount of approximately $1.4 million. Because of the low probability of this redemption event occurring, we will not subsequently adjust the initial carrying amount of the noncontrolling interest to fair value at each reporting period. Should it become probable that the redemption event will occur, we will thereupon accrete the initial carrying value to its redemption amount equal to its fair value.
13. Stockholders’ Equity
Common Stock
The Company had reserved shares of stock, on an as-if converted basis, for issuance as follows:
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Warrants |
|
| 25,818,247 |
|
|
| 26,000,000 |
|
Earnout shares |
|
| 5,726,864 |
|
|
| 5,726,864 |
|
Total |
|
| 31,545,111 |
|
|
| 31,726,864 |
|
63
Warrants
There are warrants to purchase 25,818,247 shares of the Company’s common stock outstanding.
On August 15, 2019, as part of the units sold in BCAC’s initial public offering ("IPO"), and September 13, 2019, following the closing of the over-allotment option, BCAC issued warrants to purchase 18,000,000 shares of common stock at a price of $11.50 per whole share (the “public warrants”). The public warrants are exercisable commencing sixty-five (65) days after the completion of the Merger and expiring five years after the Closing Date of the Merger or earlier upon redemption. Once the public warrants become exercisable, the Company may accelerate the expiry date by providing 30 days’ prior written notice, if and only if, the closing price of the Company’s common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period. The public warrant holder’s right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of acceleration of the expiry date.
Concurrent with the closing of BCAC’s IPO in August 2019, the sponsor purchased 12,000,000 warrants (the “Private Warrants”) at $1.00 per warrant (for a total purchase price of $12.0 million), with each warrant exercisable for one common share at an exercise price of $11.50, subject to anti-dilution adjustments. The warrants are exercisable commencing 65 days after the completion of the Merger. Pursuant to the transaction agreement, 4,000,000 of the Private Warrants were cancelled upon closing of the Merger.
During the period ended June 30, 2022, the Company repurchased 181,553 warrants to purchase shares of the Company's common stock outstanding.
Earnout Shares
The Legacy VWE shareholders are entitled to receive up to an additional 5,726,864 shares of the Company’s common stock (the “Earnout Shares”). The Earnout Shares will be released if the price of our common stock meets certain thresholds in the 24 months following the closing of the Merger. See Note 2. The Earnout Shares meet the accounting definition of a derivative financial instrument, are considered to be indexed to the Company’s common stock and meet other the conditions in ASC 815-40, Derivatives and Hedging: Contracts in Entity's Own Equity, to be classified as equity.
The Company’s obligation to issue the Earnout Shares is recorded as a dividend to the Legacy VWE shareholders at fair value as of the date of the Merger.
The fair value of the Earnout Shares was determined using a Monte Carlo valuation model, which requires significant estimates including the expected volatility of our common stock. The expected annual volatility of our common stock was estimated to be 55.0% as of the date of the Merger, based on the historical volatility of comparable publicly traded companies.
Stock and Warrant Repurchase Plan
On March 8, 2022, the Company's board of directors approved a repurchase plan authorizing the Company to purchase up to $30.0 million in aggregate value of our common stock and/or warrants through September 8, 2022. Purchases under the repurchase program may be made on the open market, in privately negotiated transactions or in other manners as permitted by the federal securities laws and other legal and contractual requirements and are expected to comply with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases will depend on a number of factors, including price, trading volume, general market conditions and legal requirements, among others. The repurchase program does not require the Company to acquire a specific number of shares or warrants. The cost of the shares and warrants that are repurchased will be funded from available working capital.
For accounting purposes, common stock and/or warrants repurchased under our repurchase plan are recorded based upon the settlement date of the applicable trade. Such repurchased shares are presented using the cost method. During the fiscal year ended June 30, 2022, the Company repurchased 2,871,894 shares of common stock at an average price of $9.04 per share that are held in treasury and 181,553 warrants at an average price of $1.46 per warrant. The total cost of the shares and/or warrants repurchased was $26.2 million.
The table below summarizes the changes in repurchases of common stock and warrants:
(in thousands) |
| June 30, 2022 |
| |
Balance at June 30, 2021 |
|
|
| |
Repurchases of common stock |
|
| 2,871,894 |
|
Repurchases of warrants |
|
| 181,553 |
|
Balance at June 30, 2022 |
|
| 3,053,447 |
|
14. Stock Incentive Plan
Effective June 7, 2021, the Company adopted the 2021 Omnibus Incentive Plan (as amended, “the 2021 Plan”) which superseded the 2015 Stock Option Plan. Pursuant to the 2021 Plan, the Board of Directors may grant up to 11,200,000 shares under share-based awards to officers, directors, employees and consultants. The 2021 Plan provides for the issuance of stock options, stock appreciation rights, performance shares, performance
64
units, stock, restricted stock, restricted stock units and cash incentive awards. Shares issued under share-based payment awards may either be authorized and unissued shares or shares held in treasury. The 2021 Plan was approved by the stockholders of the Company at its Annual Meeting, on February 2, 2022. The 2021 Plan will terminate on June 7, 2031.
Incentive and non-statutory stock options may be granted with exercise prices not less than 100% of the fair value of our common stock on the date of grant. Awards granted under the 2021 Plan generally expire no later than 10 years after the date of grant.
The following table provides total share-based compensation expense by award type:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Stock option awards |
| $ | 2,551 |
|
| $ | - |
|
Restricted stock units |
|
| 4,363 |
|
|
| - |
|
Total share-based compensation |
| $ | 6,914 |
|
| $ | - |
|
Stock-based compensation expense is included as a component of selling, general and administrative expenses in the consolidated statement of operations.
Stock Options
Stock options granted under the 2021 Plan are subject to market conditions. The stock options are exercisable for ten years and only become exercisable if the volume-weighted average price per share of our common stock is at least $12.50 over a 30-day consecutive trading period following the grant date. The fair value of the stock options was estimated using a Monte Carlo simulation valuation model. Stock option awards vest in four equal installments of 25%, with the first installment vesting 18 months after the vesting commencement date with respect to an additional 25% of the total stock-based award on each of the 2nd, 3rd and 4th anniversaries of the vesting commencement date, providing in each case the employee remains in continuous employment or service with the Company or an Affiliate. Compensation expense is recognized ratably over the requisite service period.
The following table presents a summary of stock option activity under the 2021 Plan:
|
| Stock Options |
|
| Weighted-Average Exercise Price |
|
| Weighted-Average Remaining Contractual Life (Years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at June 30, 2020 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
Granted |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited or cancelled |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Outstanding at June 30, 2021 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
Granted |
|
| 3,533,627 |
|
|
| 10.50 |
|
|
| 3.22 |
|
|
| - |
|
Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited or cancelled |
|
| (30,100 | ) |
|
| 10.50 |
|
|
| - |
|
|
| - |
|
Outstanding at June 30, 2022 |
|
| 3,503,527 |
|
| $ | 10.50 |
|
|
| 3.22 |
|
| $ | - |
|
Total unrecognized compensation expense related to the stock options was $8.0 million, which is expected to be recognized over a weighted-average period of 3.2 years. No stock options were vested and exercisable as of June 30, 2022.
The weighted-average grant date fair value was $3.27. The fair value of the options was estimated at the grant date using the Monte Carlo Simulation model with the following assumptions: weighted average risk free rate 1.8%; weighted average expected term 5.5 years; weighted average expected volatility 40%; and no expected dividend yield.
Restricted Stock Units
Restricted stock units are subject only to service conditions and vest ratably over four years.
The following table presents a summary of restricted stock units activity for the periods presented:
65
|
| Restricted Stock Units |
|
| Weighted-Average Grant Date Fair Value |
| ||
Outstanding at June 30, 2020 |
|
| - |
|
| $ | - |
|
Granted |
|
| - |
|
|
| - |
|
Issued |
|
| - |
|
|
| - |
|
Forfeited or cancelled |
|
| - |
|
|
| - |
|
Outstanding at June 30, 2021 |
|
| - |
|
| $ | - |
|
Granted |
|
| 1,902,068 |
|
|
| 8.14 |
|
Issued |
|
| - |
|
|
| - |
|
Forfeited or cancelled |
|
| - |
|
|
| - |
|
Outstanding at June 30, 2022 |
|
| 1,902,068 |
|
| $ | 8.14 |
|
Total unrecognized compensation expense related to the restricted stock units was $10.1 million, which is expected to be recognized over a weighted-average period of 2.6 years. No restricted stock units were vested as of June 30, 2022.
15. Related Party Transactions and Commitments
The Company did not have any related party receivables or related party liabilities for the years ended June 30, 2022 and 2021.
The components of the related party revenue and expenses are as follows:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Revenues: |
|
|
|
|
|
| ||
Warehousing and fulfillment services |
| $ | - |
|
| $ | 815 |
|
Storage and bottling of alcoholic beverages |
|
| - |
|
|
| 65 |
|
Management fees |
|
| - |
|
|
| 407 |
|
Marketing and distribution |
|
| - |
|
|
| 1,722 |
|
|
|
|
|
|
|
| ||
Expenses: |
|
|
|
|
|
| ||
Concourse Warehouse lease |
|
| - |
|
|
| 344 |
|
Swanson lease |
|
| - |
|
|
| 605 |
|
Z.R. Waverly lease |
|
| - |
|
|
| 77 |
|
Warehousing and Fulfillment Services — Revenues from related parties for warehousing and fulfillment services for the years ended June 30, 2022 and 2021 were zero and $815.0 thousand, respectively.
Storage and Bottling of Alcoholic Beverages — We have entered into a number of transactions with a related party covering services related to the storage and bottling of alcoholic beverages. We made payments of zero and $65.0 thousand for the years ended June 30, 2022 and 2021, respectively to the related party.
Management Fees — Prior to July 1, 2021, we provided management, billing and collection services to a related party under a management fee arrangement. For the years ended June 30, 2022 and 2021, we charged this related party management fees of zero and $407.0 thousand, respectively, for these services.
Marketing and Distribution — On December 31, 2020, the Company entered into a marketing and distribution arrangement with related party, Kunde. Under that arrangement, Kunde paid us a commission for certain distribution sales. We recognized revenue of zero and $1.7 million from the arrangement for the years ended June 30, 2022 and 2021, respectively. The arrangement terminated when we acquired Kunde on April 19, 2021.
The Company is engaged in various operating lease arrangements with related parties.
Concourse Warehouse Lease — We lease 15,000 square feet (“sq. ft.”) of office space and 80,000 sq. ft. of warehouse space. Effective July 31, 2020, the lease was amended to extend the terms of the lease through September 30, 2027 with terms for renewal of the lease term for two additional terms of five years each and shall apply upon expiration of the as-extended initial term on September 30, 2027. The lease includes escalating annual rent increases of three percent for the remainder of the term. Prior to September 2020, the facility was owned by and leased from Concourse, LLC, a related-party real estate leasing entity that was wholly owned by a shareholder. We have no direct ownership in Concourse. In September 2020, an independent party purchased the facility from Concourse and assumed the lease.
66
The lease has minimum monthly lease payments of approximately $103.0 thousand, with index-related escalation provisions. We account for this lease as an operating lease. We recognized rent expense paid to Concourse of zero and $344.0 thousand for the years ended June 30, 2022 and 2021, respectively, related to this lease agreement.
Swanson Lease — We lease a property with production space and a tasting room under an operating lease with an entity that is wholly owned by a shareholder that expires in August 2030, with minimum monthly lease payments of approximately $51.0 thousand, with index-related escalation provisions every twenty four months subject to a 3.0% minimum. From inception to December 30, 2020, the terms of the lease included put and call options, whereby we could elect, at our discretion, or be required by the lessor at the lessor’s discretion, to purchase the leased property at the greater of the property’s fair market value or the amount the lessor paid of approximately $6.0 million at the earliest of January 1, 2020, or upon other events, as defined in the agreement. Effective December 31, 2020, the lease was amended to remove the put and call options from the lease terms.
On May 5, 2021, the Swanson production space and tasting room leased by us from a related party under an operating lease was sold to an independent third party. The Company elected to terminate the lease in accordance with the terms of the lease. There was no termination fee and we received cash consideration from the related party landlord in the amount of $500.0 thousand to assist with the removal and relocation of our winery equipment. We vacated the facility on May 14, 2021. We recognized rent expense of $605.0 thousand for the year ended June 30, 2021 related to this lease agreement.
ZR Waverly Lease — We leased tasting room space under an operating lease with an entity that is wholly owned by a shareholder that expires in May 2023, with minimum lease payments of approximately $12.0 thousand, with index-related escalation provisions. The terms of the lease included put and call options, whereby we could elect, at our discretion, or be required by the lessor at the lessor’s discretion, to purchase the leased property at the greater of the property’s fair market value or the amount the lessor paid of approximately $1.5 million at the earliest of January 1, 2015 or upon other events, as defined in the agreement.
In December 2020, we purchased the ZR Waverly leased facility in California from a shareholder for $1.5 million. We recognized rent expense of $65.0 thousand for the year ended June 30, 2021 related to this lease agreement.
We have lease agreements for certain winery facilities, vineyards, corporate and administrative offices, tasting rooms, and equipment under long-term non-cancelable operating leases. The lease agreements have initial terms of two to fifteen years, with two leases having multiple 5-year or ten-year renewal terms and other leases having no or up to five-year renewal terms. The lease agreements expire ranging from December 31, 2021 through November 2031.
The minimum annual payments under our lease agreements are as follows:
(in thousands) |
|
|
| |
Year Ending June 30, |
| Total |
| |
2023 |
| $ | 7,297 |
|
2024 |
|
| 7,325 |
|
2025 |
|
| 6,916 |
|
2026 |
|
| 6,852 |
|
2027 |
|
| 6,458 |
|
Thereafter |
|
| 13,481 |
|
|
| $ | 48,329 |
|
Total rent expense, including amounts to related parties, was $7.6 million and $7.4 million for the years ended June 30, 2022 and 2021, respectively.
Immediate Family Member and Other Business Arrangements
We provide at will employment to several family members of officers or directors who provide various sales, marketing and administrative services to us. Payroll and other expenses to these related parties was $398.4 thousand and $298.0 thousand for the years ended June 30, 2022 and 2021.
We pay for sponsorship and marketing services and point of sale marketing materials to unincorporated businesses that are managed by immediate family members of an executive officer. During the years ended June 30, 2022 and 2021, payments related to sponsorship and marketing services totaled $341.9 thousand and $360.0 thousand, respectively.
In April 2022, the Company entered into an arrangement with Global Leisure Partners LLC ("GLP") to act as a financial advisor to the Company in connection with its exploration of acquisitions, mergers, investments and other strategic matters. A director of the Company having the authority to establish policies and make decisions is an executive of GLP. Although members of the board of directors are typically independent from management, members of the board of directors would be considered management based on the definition of management in ASC 850, Related Party Disclosures. During the years ended June 30, 2022 and 2021, payments in respect of capital markets and mergers and acquisitions matters totaled $50.5 thousand and zero, respectively.
67
Other Commitments
Contracts exist with various growers and certain wineries to supply a significant portion of our future grape and wine requirements. Contract amounts are subject to change based upon actual vineyard yields, grape quality, and changes in grape prices.
Estimated future minimum grape and bulk wine purchase commitments are as follows:
(in thousands) |
|
|
| |
Year Ending June 30, |
| Total |
| |
2023 |
| $ | 31,236 |
|
2024 |
|
| 16,592 |
|
2025 |
|
| 10,803 |
|
|
| $ | 58,631 |
|
Grape and bulk wine purchases under contracts totaled $41.7 million and $35.5 million for the years ended June 30, 2022 and 2021, respectively. The Company expects to fulfill all of these purchase commitments.
Laetitia Development Agreement — In March 2019, in connection with our acquisition of Laetitia Vineyards and Winery, we and the seller agreed to a post close development agreement, whereby the seller would have the right to develop and sell “up to” a maximum of six homesites located on the acquired property and we would be entitled to 25.0% of all net profits realized from the sale of such homesites. The right expired March 15, 2022 and none of the homesites located on the acquired property were sold.
Firesteed Put-Call Agreement — In connection with the July 2017 acquisition of substantially all inventory and trademark assets of the Firesteed wine brand we entered into a put and call agreement, whereby, beginning May 2020 through December 2023, we can be required to purchase 200 acres of producing vineyard property at a purchase price equal to the greater of $6.1 million or fair market value. We also have a call option to purchase the vineyard beginning January 2023 through December 2023 at a purchase price equal to the greater of $6.1 million or appraised fair market value.
16. Income Taxes
The components of income from continuing operations before provision for income taxes are as follows:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
United States |
| $ | 382 |
|
| $ | 10,854 |
|
Total |
| $ | 382 |
|
| $ | 10,854 |
|
The components of the provision for income taxes are as follows:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Federal |
| $ | - |
|
| $ | - |
|
State |
|
| 80 |
|
|
| (85 | ) |
|
|
| 80 |
|
|
| (85 | ) |
|
|
|
|
|
|
| ||
Deferred tax expense (benefit) |
|
|
|
|
|
| ||
Federal |
|
| 755 |
|
|
| 475 |
|
State |
|
| 226 |
|
|
| 376 |
|
|
|
| 981 |
|
|
| 851 |
|
Total provision for income taxes |
| $ | 1,061 |
|
| $ | 766 |
|
Our effective tax rate for the year ended June 30, 2022, differs from the 21% U.S. federal statutory rate primarily due to nondeductible stock compensation, other permanent differences and state taxes.
Our effective tax rate for the year ended June 30, 2021, differs from the 21% U.S. federal statutory rate primarily due to PPP loan forgiveness, stock-based compensation, research and development tax credits, transaction costs and state taxes.
A reconciliation of income tax expense to the federal rate of 21% is as follows:
68
|
| June 30, |
|
| June 30, |
| ||||||||||
(in thousands) |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Income taxes at statutory rate |
| $ | 81 |
|
| $ | 2,282 |
|
|
| 21.0 | % |
|
| 21.0 | % |
State taxes |
|
| 289 |
|
|
| 306 |
|
|
| 75.5 | % |
|
| 2.8 | % |
Transaction costs |
|
| - |
|
|
| 494 |
|
|
| 0.0 | % |
|
| 4.6 | % |
Stock-based compensation |
|
| 464 |
|
|
| (628 | ) |
|
| 121.1 | % |
|
| -5.8 | % |
PPP loan forgiveness |
|
| - |
|
|
| (1,387 | ) |
|
| 0.0 | % |
|
| -12.8 | % |
Federal research and development tax credit |
|
| - |
|
|
| (343 | ) |
|
| 0.0 | % |
|
| -3.2 | % |
Other, net |
|
| 227 |
|
|
| 42 |
|
|
| 59.1 | % |
|
| 39.0 | % |
Total provision for income taxes |
| $ | 1,061 |
|
| $ | 766 |
|
|
| 276.7 | % |
|
| 45.6 | % |
Deferred tax assets and liabilities are summarized as follows:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Accruals |
| $ | 871 |
|
| $ | 376 |
|
Captive |
|
| 559 |
|
|
| - |
|
Operating loss carryforwards |
|
| 12,251 |
|
|
| 10,809 |
|
Inventories |
|
| 1,673 |
|
|
| 1,761 |
|
Investments |
|
| - |
|
|
| 3,464 |
|
Interest |
|
| 1,933 |
|
|
| - |
|
Stock compensation |
|
| 1,289 |
|
|
| - |
|
Research and development tax credit carry forwards, net of uncertain tax position |
|
| 3,793 |
|
|
| 4,104 |
|
Other |
|
| 747 |
|
|
| 619 |
|
Deferred tax assets |
|
| 23,116 |
|
|
| 21,133 |
|
|
|
|
|
|
|
| ||
Deferred tax liabilities: |
|
|
|
|
|
| ||
Property, plant and equipment |
|
| (29,126 | ) |
|
| (26,501 | ) |
Prepaid expenses |
|
| (626 | ) |
|
| (1,266 | ) |
Intangible assets |
|
| (17,537 | ) |
|
| (9,173 | ) |
Investments |
|
| (2,830 | ) |
|
| - |
|
Inventories |
|
| (1,530 | ) |
|
| - |
|
Change in accounting method |
|
| (1,446 | ) |
|
| (945 | ) |
Deferred tax liabilities |
|
| (53,095 | ) |
|
| (37,885 | ) |
Valuation allowance |
|
| - |
|
|
| - |
|
Deferred tax liability, net |
| $ | (29,979 | ) |
| $ | (16,752 | ) |
As of June 30, 2022, the Company has a federal R&D tax credit carryforward of $3.5 million, which will begin to expire in July 2038. In addition, the Company has a California R&D tax credit carryforward of $1.9 million, which does not expire.
As of June 30, 2022, the Company had Federal net operating losses of $49.3 million which do not expire but are limited to 80% of taxable income. In addition, the Company has California net operating losses of $26.1 million which will begin to expire in the tax year of 2040 and an immaterial amount for the other states which will begin to expire in 2038.
The Company is subject to taxation in the United States and various states and local jurisdictions. As of June 30, 2022, the Company is subject to examination by the tax authorities for fiscal 2018 through fiscal 2021. As of June 30, 2022, the Company is no longer subject to U.S. federal or state and local examinations by tax authorities for years before fiscal 2018.
69
A reconciliation of the beginning and ending balances of unrecognized tax benefit is as follows:
|
| June 30, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Balance, beginning of period |
| $ | 1,834 |
|
| $ | 1,784 |
|
Tax position taken in prior period: |
|
| - |
|
|
|
| |
Gross increases |
|
| 143 |
|
|
| - |
|
Gross decreases |
|
| - |
|
|
| (200 | ) |
Tax position taken in current period: |
|
| - |
|
|
|
| |
Gross increases |
|
| - |
|
|
| 250 |
|
Gross decreases |
|
| - |
|
|
| - |
|
Lapse of statute of limitations |
|
| - |
|
|
| - |
|
Settlements |
|
| - |
|
|
| - |
|
Balance, end of period |
| $ | 1,977 |
|
| $ | 1,834 |
|
As of June 30, 2022, the Company had $2.0 million in unrecognized income tax benefits and there were immaterial decreases to the Company’s unrecognized tax benefits during the year. An immaterial amount of unrecognized tax benefits would reduce income tax expense and the effective tax rate, if recognized. The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized. The Company does not anticipate any material decreases to the unrecognized tax benefit during the next 12 months. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no accrued interest or penalty associated with exposures as of June 30, 2022 and June 30, 2021.
17. Employee Benefit Plan
A 401(k) plan is provided that covers substantially all employees meeting certain age and service requirements. We make discretionary contributions to the 401(k) plan.
We recorded matching contributions of $1.4 million and $1.0 million, respectively for the years ended June 30, 2022 and 2021.
18. Commitments and Contingencies
We are subject to a variety of claims and lawsuits that arise from time to time in the ordinary course of business. Although management believes that any pending claims and lawsuits will not have a significant impact on the Company’s consolidated financial position or results of operations, the adjudication of such matters are subject to inherent uncertainties and management’s assessment may change depending on future events.
Indemnification Agreements
In the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. These indemnities include indemnities to our directors and officers to the maximum extent permitted under applicable state laws. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. Historically, we have not incurred any significant costs as a result of such indemnifications and are not currently aware of any indemnification claims.
19. Economic Uncertainties
Novel Coronavirus
The COVID-19 pandemic ("COVID-19") and inflation continues to disrupt the U.S. and global economies. While many measures implemented by governments in an effort to slow the spread of COVID-19 have been lifted or eased, there remains ongoing uncertainty about the impact on economic activity. We cannot estimate with any certainty the length or severity of the COVID-19 pandemic or the related financial consequences on our business and operations, including whether and when historic economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flows.
We expect the COVID-19 pandemic to have a minimal impact on sales revenues, as we believe we are well-positioned to take advantage of increased direct-to-consumer sales platforms.
70
Invasion of Ukraine
Russia's invasion of Ukraine has not had a direct impact on the Company. The Company does not have assets, operations or human capital resources located in Russia or Ukraine, does not invest or hold securities that trade in those areas and does not rely on goods or services sourced in Russia or Ukraine. However, the Company receives its capsules for wine bottles from a supplier in Italy, who has plants located in Ukraine, Italy and Poland. While the Company has not been impacted directly by supply chain disruptions as a result of the invasion, including potential cybersecurity risks and other indirect operational or supply chain challenges, the competition has increased from suppliers due to the closing of the plant in Ukraine.
U.S. Wildfires
Significant wildfires in California, Oregon and Washington state, have engulfed the affected regions in smoke and flames. The long-term trend is that wildfires are increasing resulting from drought conditions. Drought conditions due to global climate change have increased the severity of destructive wildfires which have affected the U.S. grape harvest. When vineyards and grapes are exposed to smoke, it can result in an ashy, burnt, or smoky aroma, described as "smoke tainted”. Industry grape suppliers have also experienced smoke and fire damage from the wildfires. Damage to our grape harvest and vineyards caused from wildfires have impacted our revenues, costs of revenues and winery overhead for the periods presented.
20. Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. When determining the reportable segments, we aggregated operating segments based on their similar economic and operating characteristics. Segment results are presented in the same manner as we present our operations internally to make operating decisions and assess performance. Financial performance is reported in three segments: Wholesale, Direct to Consumer, and Business to Business.
Our Corporate and Other segment generates revenue from grape and bulk wine sales and storage services. We record corporate level expenses, non-direct selling expenses and other expenses not specifically allocated to the results of operations in our Corporate and Other segment.
Wholesale Segment—We sell our wine, spirits and cider to wholesale distributors under purchase orders. Wholesale operations generate revenue from product sold to distributors, who then sell them off to off-premise retail locations such as grocery stores, wine clubs, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars.
We pay depletion and marketing allowances to certain distributors, based on sales to their customers, or the allowance is netted directly against the purchase price. When recording a sale to the distributor, a depletion and marketing allowance liability is recorded to accrued liabilities and sales are reported net of those expenses. Depletion and marketing allowance payments are made when completed incentive program payment requests are received from the customers or are net of initial pricing. Depletion and marketing allowance payments reduce the accrued liability. For the years ended June 30, 2022 and 2021 we recorded $1.4 million and $1.7 million respectively, as a reduction in sales on the consolidated statement of operations related to depletions. As of June 30, 2022 and 2021, we recorded a depletion allowance and marketing liability in the amount of $347.9 thousand and $216.0 thousand, respectively, which is included as a component of other accrued expenses in accrued liabilities and other payables on the consolidated balance sheets. Estimates are based on historical and projected experience for each type of program or customer.
Direct-to-Consumer Segment—We sell our wine and other merchandise directly to consumers through wine club memberships, at wineries’ tasting rooms, at Sommelier wine tasting events, and through the Internet. Winery estates hold various public and private events for customers and our wine club members. The certified Sommeliers provide guided tasting experiences customized for each audience through virtual and in-person events internationally. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. The Company recognizes event revenue on the date the event is held.
Business-to-Business—Our Business-to-Business sales channel generates revenue primarily from the sale of private label wines and spirits, and custom services. Annually, we work with our national retail partners to develop private label wines incremental to their wholesale channel businesses. These services are made under contracts with customers, which includes specific protocols, pricing, and payment terms. The customer retains title and control of the product during the process.
We have determined that operating income is the profit or loss measure that the CODM uses to make resource allocation decisions and evaluate segment performance. Operating income assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define operating profit as gross margin less operating expenses that are directly attributable to the segment. Selling expenses that can be directly attributable to the segment are allocated accordingly, however, centralized selling expenses, general and administrative and other factors including the re-measurements of contingent consideration and impairment of intangible assets and goodwill are not allocated to a segment as management does not believe such items directly reflect the core operations and therefore are not included in measuring segment performance. Excluding the property, plant, and equipment specific to assets located at our tasting facilities, and the customer Sommelier relationships and intangible assets specific to the Sommelier acquisition, given the nature of our business, revenue
71
generating assets are utilized across segments, therefore, discrete financial information related to segment assets and other balance sheet data is not available and the information continues to be aggregated.
Following is financial information related to operating segments:
|
| Year Ended June 30, 2022 |
| |||||||||||||||||
(in thousands) |
| Wholesale |
|
| Direct-to-Consumer |
|
| Business-to-Business |
|
| Corporate and Other |
|
| Total |
| |||||
Segment Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenues |
| $ | 84,534 |
|
| $ | 92,416 |
|
| $ | 113,934 |
|
| $ | 2,886 |
|
| $ | 293,770 |
|
Income (loss) from operations |
| $ | 5,507 |
|
| $ | 15,047 |
|
| $ | 16,920 |
|
| $ | (45,396 | ) |
| $ | (7,922 | ) |
|
| Year Ended June 30, 2021 |
| |||||||||||||||||
(in thousands) |
| Wholesale |
|
| Direct-to-Consumer |
|
| Business-to-Business |
|
| Corporate and Other |
|
| Total |
| |||||
Segment Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenues |
| $ | 72,908 |
|
| $ | 66,605 |
|
| $ | 77,440 |
|
| $ | 3,789 |
|
| $ | 220,742 |
|
Income (loss) from operations |
| $ | 15,044 |
|
| $ | 11,437 |
|
| $ | 17,944 |
|
| $ | (35,245 | ) |
| $ | 9,180 |
|
There was no inter-segment activity for any of the given reporting periods presented.
Depreciation expense recognized by operating segment is summarized below:
(in thousands) |
|
| Wholesale |
|
| Direct-to-Consumer |
|
| Business-to-Business |
|
| Corporate and Other |
|
| Total |
| ||||||
For the years ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| 2022 |
|
| $ | 130 |
|
| $ | 1,121 |
|
| $ | 1,328 |
|
| $ | 1,529 |
|
| $ | 4,108 |
|
| 2021 |
|
| $ | - |
|
| $ | 1,500 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,500 |
|
Amortization expense recognized by operating segment is summarized below:
(in thousands) |
|
| Wholesale |
|
| Direct-to-Consumer |
|
| Business-to-Business |
|
| Corporate and Other |
|
| Total |
| ||||||
For the years ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| 2022 |
|
| $ | 1,657 |
|
| $ | 3,579 |
|
| $ | 712 |
|
| $ | - |
|
| $ | 5,948 |
|
| 2021 |
|
| $ | - |
|
| $ | 100 |
|
| $ | - |
|
| $ | - |
|
| $ | 100 |
|
All of our long-lived assets are located within the United States.
72
21. Net (Loss) Income Per Share
The following table presents the calculation of basic and diluted (loss) earnings per shares:
|
| June 30, |
| |||||
(in thousands, except for per share amounts) |
| 2022 |
|
| 2021 |
| ||
Net income |
| $ | (679 | ) |
| $ | 10,088 |
|
Less: Series B dividends and accretion |
|
| - |
|
|
| 5,785 |
|
Less: income (loss) allocable to noncontrolling interest |
|
| (108 | ) |
|
| 218 |
|
Net (loss) income allocable to common shareholders |
| $ | (571 | ) |
| $ | 4,085 |
|
|
|
|
|
|
|
| ||
Numerator – Basic EPS |
|
|
|
|
|
| ||
Net (loss) income allocable to common shareholders |
| $ | (571 | ) |
| $ | 4,085 |
|
Less: net income allocated to participating securities (Series B) |
|
| - |
|
|
| 613 |
|
Net (loss) income allocated to common shareholders |
| $ | (571 | ) |
| $ | 3,472 |
|
|
|
|
|
|
|
| ||
Numerator – Diluted EPS |
|
|
|
|
|
| ||
Net (loss) income allocated to common shareholders |
| $ | (571 | ) |
| $ | 3,472 |
|
Add: net income attributable to convertible debt |
|
| - |
|
|
| 175 |
|
Reallocation of income under the two-class method |
|
| - |
|
|
| (165 | ) |
Net (loss) income allocated to common shareholders |
| $ | (571 | ) |
| $ | 3,482 |
|
|
|
|
|
|
|
| ||
Denominator – Basic Common Shares |
|
|
|
|
|
| ||
Weighted average common shares outstanding - Basic |
|
| 60,673,789 |
|
|
| 24,696,828 |
|
Denominator – Diluted Common Shares |
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
| ||
Stock options |
|
| - |
|
|
| 404,567 |
|
Convertible debt |
|
| - |
|
|
| 78,106 |
|
Weighted average common shares - Diluted |
|
| 60,673,789 |
|
|
| 25,179,502 |
|
|
|
|
|
|
|
| ||
Net (loss) income per share – basic: |
|
|
|
|
|
| ||
Common Shares |
| $ | (0.01 | ) |
| $ | 0.14 |
|
Net (loss) income per share – diluted: |
|
|
|
|
|
| ||
Common Shares |
| $ | (0.01 | ) |
| $ | 0.14 |
|
Net income (loss) per share calculations and potentially dilutive security amounts for all periods prior to the transaction on June 7 have been retrospectively adjusted to the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization.
The following securities have been excluded from the calculations of diluted earnings (loss) per share allocable to common shareholders because including them would have been antidilutive are, as follows:
|
| June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Shares subject to warrants to purchase common stock |
|
| 25,818,247 |
|
|
| - |
|
Shares subject to options to purchase common stock |
|
| 3,503,527 |
|
|
| - |
|
Total |
|
| 29,321,774 |
|
|
| - |
|
22. Subsequent Events
Restricted Cash
In connection with the April 2021 Loan and Security Agreement (see Note 11), the Company entered into a Deposit Control Agreement which required $4.8 million of the total cash received to be placed into a restricted cash collateral account, subject to release upon the completion of certain
73
construction work and certificates of occupancy associated with the Ray's Station production facility. In July 2022, the Deposit Control Agreement was terminated upon certification that the conditions to Ray's Station's were satisfied.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of a material weakness in our internal control over financial reporting and discussed below, our disclosure controls and procedures were not effective as of June 30, 2022. Management's conclusion was based on discoveries and observations made during the fiscal 2022 audit.
Management’s Annual Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was 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 in the United States of America. In designing and evaluating our internal control system, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and that the effectiveness of any system has inherent limitations including, but not limited to, the possibility of human error and the circumvention or overriding of controls and procedures. Management, including the principal executive officer and the principal financial officer, is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected in a timely manner.
An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our procedures and internal control over financial reporting using the framework and criteria described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation , our management, including our principal executive officer and our principal financial officer, concluded that as of June 30, 2022, the Company’s material weakness first identified during the audit of our fiscal 2021 consolidated financial statements related to business processes and controls to perform reconciliations of certain account balances on a regular basis, has not been fully remediated, and, as a result, our internal control over financial reporting was not effective as of June 30, 2022.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.
This Annual Report on Form 10-K does not include an attestation report of our independent register public accounting firm regarding internal control over financial reporting since the Company, as an "Emerging Growth Company," is not required to provide such report.
Material Weakness
Control Activity—The Company did not have effective business processes and controls to perform reconciliations of balance sheet accounts timely.
In the course of our financial close process for the fiscal years ended June 30, 2022 and 2021, we identified a material weakness in our internal control over financial reporting. The material weakness identified relates to our process and controls over financial reporting related to balance sheet account reconciliations, which includes the prior year identification of certain inventory-related account balances and the current year identification of interest rate swap derivatives account balances. Management concluded that this material weakness arose because we did not have effective business processes and controls to perform timely reconciliations of balance sheet account balances.
The Company has developed a comprehensive strategy in an effort to remediate this material weakness. We engaged a consulting firm to assist the Company in the continued development of improved business processes and control activities and we have engaged a separate consultant to focus specifically on inventory system processes improvements.
74
During fiscal 2022, we also conducted an assessment of staffing needs. Since this assessment, we have hired a Director of Inventory and Costing, a Controller and additional permanent and engaged temporary finance team members, each with relevant wine industry and accounting process experience. Additionally, on March 7, 2022, the Company appointed Kristina L. Johnston as Chief Financial Officer of the Company. The Company believes Ms. Johnston's experience with public company internal controls and accounting processes, as well as her significant leadership experience will further enhance our internal control environment.
Additionally, the Company has started to design and implement additional controls and procedures designed to mitigate the risk of material misstatement including the standardization of our monthly close checklists and account reconciliation templates. The Company will need to assess its staffing needs on an ongoing basis in order to implement processes to ensure the completeness and the timely preparation and review of all balance sheet accounts and the establishment of defined segregation of duties between preparation and review.
The Company acknowledges it will take time and resources to fully integrate these new controls and processes described above and confirm them to be effective and sustainable. As the Company continues to refine and improve our financial reporting process, additional controls and procedures may also be required over time.
Recent Acquisitions
On October 4, 2021, we acquired 100% of the members' interest in Vinesse, a direct-to-consumer platform company that specializes in wine clubs with over 60,000 members. On November 16, 2021, we acquired 100% of the capital stock of ACE Cider, a wholesale platform and specializes in hard cider, an alcoholic beverage fermented from apples. On January 18, 2022, we acquired 100% of the capital stock in Meier's, a wholesale and business-to-business company that specializes in custom blending, contract storage, contract manufacturing, and private labeling for wine, beer, and spirits. For additional information regarding each of these acquisitions, refer to Note 3 to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. Based on the recent completion of these acquisitions and, pursuant to the Securities and Exchange Commission’s guidance that an 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 our assessment of the effectiveness of internal control over financial reporting as of June 30, 2022 does not include Vinesse, ACE Cider, or Meier’s. We plan to include Vinesse, ACE Cider, or Meier’s within the timeframe set forth by the SEC’s guidance.
Changes in Internal Control over Financial Reporting
Other than changes intended to remediate the material weakness noted above, there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
75
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference to the sections titled "Proposal 1 - Election of Directors", "Corporate Governance", and "Executive Officers" and "Delinquent Section 16(a) Reports" in the definitive proxy statement (the “Proxy Statement”) to be filed with the SEC within 120 days after June 30, 2022 in connection with the solicitation of proxies for the Company’s next annual meeting of stockholders.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the sections titled "Executive Compensation" and "Director Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to the section titled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated by reference to the sections titled "Certain Relationships and Related Party Transactions" and "Corporate Governance - Director Independence" in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to the section titled "Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm" in the Proxy Statement.
76
Part IV.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
All schedules have been omitted because they are not applicable or not required, or because the required information is included either in the consolidated financial statements or in the notes thereto.
Exhibit |
| Description of Exhibit |
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2.1 |
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2.2 |
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3.1 |
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3.2 |
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4.1 |
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4.2 |
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4.3(a) |
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4.3(b) |
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4.4 |
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10.1 |
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10.2 |
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10.3 |
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10.5 |
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10.10 |
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10.11 |
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10.12 |
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10.14 |
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10.15 |
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10.16 |
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21.1 |
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23.1 |
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23.2 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| Cover Page Interactive Data File (embedded within the Inline XBRL document) |
_____________
* | To be filed by amendment. |
** | Previously filed. |
† | Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. |
+ | Certain portions of the exhibit have been redacted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is (i) not material and (ii) is the type that the registrant treats as private or confidential. The registrant agrees to furnish supplementally to the Commission an unredacted copy of this exhibit upon request. |
◆ | Indicates management compensatory plan, contract or arrangement. |
No financial statement schedules are provided because the information called for is not applicable or is shown in the financial statements or notes.
Item 16. Form 10-K Summary
None.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| Vintage Wine Estates, Inc. | ||
|
|
| |
Date: September 13, 2022 | By: |
| /s/ Patrick Roney |
| Name: |
| Patrick Roney |
| Title: |
| Chief Executive Officer & Director |
***
80
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
|
|
|
|
/s/ Patrick Roney |
| Chief Executive Officer and Director (Principal Executive Officer) |
| September 13, 2022 |
Patrick Roney |
|
| ||
|
|
|
|
|
/s/ Kristina Johnston |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
| September 13, 2022 |
Kristina Johnston |
|
| ||
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|
|
|
/s/ Paul Walsh |
| Director |
| September 13, 2022 |
Paul Walsh |
|
| ||
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|
/s/ Robert Berner |
| Director |
| September 13, 2022 |
Robert Berner |
|
| ||
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/s/ Mark Harms |
| Director |
| September 13, 2022 |
Mark Harms |
|
| ||
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|
/s/ Candice Koederitz |
| Director |
| September 13, 2022 |
Candice Koederitz |
|
| ||
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|
/s/ Jon Moramarco |
| Director |
| September 13, 2022 |
Jon Moramarco |
|
| ||
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/s/ Timothy Proctor |
| Director |
| September 13, 2022 |
Timothy Proctor |
|
| ||
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/s/ Lisa Schnorr |
| Director |
| September 13, 2022 |
Lisa Schnorr |
|
| ||
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|
/s/ Jonathan Sebastiani |
| Director |
| September 13, 2022 |
Jonathan Sebastiani |
|
|
81