| Basis of presentation and significant accounting policies | Basis of presentation and significant accounting policies Basis of presentation The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP and regulation of the SEC. Principles of consolidation The consolidated financial statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated VIE of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation. Functional currency The Company and all subsidiary legal entities are domiciled in the U.S. The functional and reporting currency of the Company and its subsidiaries is the U.S. dollar. Accounting estimates The preparation of consolidated financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of long-lived assets, inventory obsolescence and reserves, capitalized indirect inventory costs, allowance for credit losses, calculation of accrued liabilities, customer incentive reserves, uncertain tax positions, contingent liabilities, fair value of assets and liabilities acquired in connection with business combinations, equity-based compensation and deferred revenues. Actual results could differ from those estimates. Operating segment The Company has one operating segment and one reportable segment. The Company's Chief Operating Decision Maker reviews operating performance and makes decisions to allocate resources at the consolidated company level. Revenue recognition The Company’s net sales reflect the sale of wine domestically in the U.S. to wholesale distributors, wholesale accounts or DTC, as well as sales of wine to export distributors that sell internationally. The Company recognizes revenue when that performance obligation is fulfilled and control of the promised good is transferred to the customer in an amount that reflects the consideration for which the Company is expected to be entitled to receive in exchange for those products. Each contract includes a single performance obligation to transfer control of the product to the customer. Control is transferred when the product is either shipped or delivered, depending on the shipping terms, at which point the Company recognizes the transaction price for the product as revenue. The Company has elected to account for shipping and handling costs that are billed to customers as a fulfillment activity rather than as separate performance obligations. Shipping and handling costs are included in net sales. The Company has elected to record excise taxes as a reduction to revenue, which are recognized in the Consolidated Statements of Operations when the related product sale is recognized. When the Company receives payment from a customer prior to transferring the product under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company’s deferred revenue is primarily comprised of cash collected from DTC members for purchases ahead of the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance obligation is met. The transaction price includes reductions attributable to consideration given to customers through various incentive programs, including depletion-based incentives paid to distributors, volume discounts and pricing discounts on single transactions. This variable consideration is estimated and recognized as a reduction of the transaction price based on the expected amounts at the time of revenue recognition for the related sale. The determination of the reduction of the transaction price for variable consideration requires certain estimates and judgements that affect the amounts of revenue recognized and if a change to an estimate occurs in a future period, it is recorded as identified. The Company estimates this variable consideration using the expected value method by taking into account factors such as the nature of the incentive program, historical information, current consumer product trends and availability of actual results. Due to the nature of the arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. Consideration given to customers totaled $66.3 million, $63.8 million and $44.5 million for the fiscal years ended July 31, 2022, 2021 and 2020, respectively, and there were no material constraints on estimates for the periods then ended. • The Company pays depletion-based incentives to its distributors for meeting specific depletion targets and reviews the allowances using a portfolio approach, grouping contracts with similar attributes, which does not result in a materially different outcome than would be obtained by applying assumptions to each individual contract within the portfolio. The allowances are reassessed at each reporting date to reflect changes in facts and circumstances that could impact allowance estimates. • Volume pricing discounts are given for meeting volume levels on an individual contract basis. Each incentive is treated as a reduction to the transaction price at the time of revenue recognition. Products are sold for cash or on credit terms. Credit terms are established in accordance with local and industry practices, and typically require payment within 30-90 days of delivery or shipment, as dictated by the terms of each agreement. The Company does not account for significant financing components as its payment terms are less than one year, and the Company determines the terms at contract inception. The Company’s sales terms do not allow for the right of return except for matters related to manufacturing defects, which are not material. The Company expenses the cost of obtaining a contract that is short term in nature when incurred. The Company does not have any contract costs capitalized as of July 31, 2022 and 2021. Cost of sales Cost of sales includes all bulk wine production costs, winemaking, bottling, packaging, warehousing, and shipping and handling costs. Costs associated with the Company’s leased vineyards or owned estates include annual farming costs and amortization of vineyard development expenditures. Costs incurred for wines that age longer than one year prior to sale, including winemaking and processing costs, continue to be capitalized into inventory until the wine is bottled and available for sale. Advertising costs Advertising costs, including promotional discounts, are expensed as incurred and were $6.6 million, $6.0 million and $4.5 million for the fiscal years ended July 31, 2022, 2021 and 2020, respectively. Advertising costs are recognized in selling, general and administrative expenses. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of July 31, 2022 and 2021. Accounts receivable trade, net Accounts receivable consists of amounts owed to the Company for sales of the Company’s products on credit and are reported at net realizable value. Interest is accrued on past-due amounts when required by trade laws in a given jurisdiction. The Company maintains an allowance for credit losses for estimated losses resulting from the inability of its customers to make required payments. The Company determines this allowance based on historical credit loss experience, adjusted for asset-specific risk characteristics, current economic conditions, and reasonable forecasts. Accounts receivable are written off when determined to be uncollectible. Recoveries of accounts receivable previously written off are recorded to income when received. Charges related to credit loss on accounts receivable were $0.5 million and $0.2 million in the fiscal years ended July 31, 2021 and 2020, respectively. Recoveries and reductions in the allowance for credit loss were $0.4 million in the fiscal year ended July 31, 2022. Charges related to credit loss in Fiscal 2022 and recoveries and reductions related to credit loss in Fiscal 2021 and 2020 were immaterial. The allowance for credit losses as of July 31, 2022 and 2021 was $0.4 million and $0.8 million, respectively. Inventories Inventory primarily includes bulk and bottled wine and is carried at the lower of cost (calculated using the first-in-first-out method) or net realizable value. The cost basis for inventory includes the costs related to winemaking. Consistent with industry practices, the Company classifies inventory as a current asset, although a substantial portion of inventory may be aged for periods longer than one year prior to being sold due to the specific aging requirements for a given wine varietal and vintage. On an ongoing basis, the Company evaluates the cost estimate and assumptions. As required, the Company records valuation adjustments to the carrying value of its inventories based on periodic reviews of slow-moving, obsolete and excess inventory to determine the need for reserves by comparing inventory carrying values with their net realizable values upon ultimate sale or disposal. Aging inventory, prior to bottling, is classified as work in process. The Company reduces the carrying value of inventories that are obsolete or for which market conditions indicate cost will not be recovered to estimated net realizable value. The Company’s estimates of net realizable value are based on analysis and assumptions including, but not limited to, historical experience, as well as Management's judgement with respect to future demand and market conditions. Reductions to the carrying value of inventories are recorded in cost of sales in the period Management determines the conditions first arise which indicate the cost may not be recoverable. Inventory also includes deferred crop costs, which consist of vineyard and related farming costs incurred each harvest season. Such costs begin aggregating when one harvest is completed and end at the completion of the next harvest, spanning a period that can range from November to October of the subsequent calendar year, but may vary due to the variable nature of agriculture, including weather and other events. Property and equipment Property and equipment are reported at cost and are depreciated using the straight-line method over the expected useful lives of the assets, with the exception of leasehold improvements, which are depreciated over the term of the lease. Expenditures for major repairs and maintenance which extend the useful lives of property and equipment are capitalized. All other maintenance expenditures, including planned major maintenance activities, are expensed as incurred. Gains or losses from property disposals are included in income or loss from operations. The Company capitalizes vineyard development costs when developing new vineyards or improving existing vineyards, whether owned or leased. These costs principally consist of the costs of the vines and expenditures related to labor and materials to prepare the vineyard and construct vine trellises. Amortization of such costs is recorded on a straight-line basis over the estimated economic useful life of the vineyard, which can range from 5 to 20 years. Interest is capitalized during the active construction period for major capital projects. The Company evaluates the recoverability of capitalized costs and records impairment charges if conditions or events indicate that such costs will not be recovered. No such impairment charges were required to be recorded during the years ended July 31, 2022, 2021 or 2020. Goodwill and intangible assets Goodwill arising from business combinations is determined as the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in an acquiree, over the fair value of the identifiable net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets determined to have an indefinite useful life are not amortized but are tested for impairment at least annually or if events and circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Management may elect not to perform the qualitative assessment and perform only a quantitative impairment test as of the measurement date. The Company selected June 30th of each fiscal year as the date to perform annual impairment testing. Indefinite-lived intangible assets include trade names and lane rights. The Company's trade names provide value from the utility of the brands for the foreseeable future. Lane rights represent the Company's rights to storage capacity at the Wine Service Cooperative for the life of the facility at guaranteed pricing. Customer relationships are amortized on a straight-line basis over their estimated useful lives and that amortization is recognized in selling, general and administrative expenses. For the fiscal year ended July 31, 2020, the Company recognized a non-cash impairment charge for certain trade name intangible assets as described in Note 7 (Goodwill and other intangible assets). The charges were primarily the result of market impacts associated with the COVID-19 pandemic. The charges were determined in connection with the Company’s annual impairment test. No other impairments were identified through July 31, 2020, nor were any impairments identified related to goodwill or other intangible assets for the year ended July 31, 2022 or 2021. Long-lived asset impairment Long-lived assets deemed to have definite lives, which principally consist of property and equipment, customer relationships, and operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The assessment of impairment is based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the asset. If the undiscounted future cash flows of an asset are less than the carrying value, a write-down will be recorded, measured by the amount of the difference between the carrying value and the fair value of the asset. No impairments were identified related to definite-lived assets for the fiscal years ended July 31, 2022, 2021 and 2020. Deferred offering costs The Company capitalizes, within other assets, certain legal, accounting, underwriting fees and other third-party fees that are directly related to in-process equity financings until such financings are consummated. Upon closing, these costs are recorded as a reduction of the proceeds received from the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately recognized in operating expenses. In connection with the offering in March 2021, the Company charged deferred offering costs of $0.3 million and $6.7 million to stockholders' equity in Fiscal 2022 and 2021, respectively. There were no deferred offering costs as of July 31, 2020. Debt issuance costs The Company incurred debt issuance costs associated with the debt facilities, including the revolving line of credit, further described in Note 9 (Debt). The Company treats the revolving line of credit debt issuance costs consistent with its term debt facilities as it does not intend to repay the revolving line of credit in full prior to its maturity. Debt issuance costs are presented as a reduction from the corresponding liability. These costs are amortized to interest expense over the life of the loan to maturity using the straight-line method, which is not materially different from the effective interest method. Derivative instruments The Company recognizes derivative instruments as assets or liabilities on the Consolidated Statements of Financial Position and measures these instruments at fair value. The Company enters into derivative instruments to manage exposure to changes in interest rates and foreign currency fluctuations. The Company has certain derivative instruments subject to master netting agreements that provide for net-settlement of amounts payable or receivable related to multiple derivative transactions with the same counterparty. The Company presents all derivatives on a gross basis in the Consolidated Statements of Financial Position. Collateral is generally not required of the Company or of the counterparties to the master netting agreements, and no cash collateral was received or pledged under such agreements as of July 31, 2022 and 2021. Management has neither designated these instruments as cash-flow hedges nor elected hedge accounting. Changes in the consolidated fair value of these financial instruments are recognized in current period income from operations, see Note 10 (Derivative instruments) and Note 11 (Fair value measurements). The Company does not enter into derivative agreements for trading or speculative purposes. Fair value measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial instruments are measured in the financial statements in accordance with an established fair value hierarchy, which emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. See Note 11 (Fair value measurements) for the valuation methodologies used for instruments measured at fair value. Income taxes Income taxes are recognized using enacted tax rates and are accounted for based on the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement and tax bases of assets and liabilities at the applicable statutory tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. Tax benefits from uncertain tax positions are recognized if it is more likely than not the tax positions will be sustained on examination by the applicable taxing authorities based on the technical merits of the position. The tax benefit is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The Company's income tax provision includes the net impact of changes in the liability for unrecognized tax benefits. Interest related to income tax matters is recognized in interest expense and penalties are reported in operating expenses. See Note 12 (Income taxes) for further discussion. Leases Effective August 1, 2021, the Company adopted ASU No. 2016-02, Leases (Topic 842) . See "Recently adopted accounting pronouncements" for further discussion. Service arrangements are evaluated to determine whether they contain a lease at inception. Leases are classified as either finance leases or operating leases based on criteria in Topic 842. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's secured incremental borrowing rate. The Company's incremental borrowing rate for a lease is the rate of interest it would pay to borrow on a collateralized basis over a similar term to the lease in a similar economic environment. The Company applied incremental borrowing rates on a lease-by-lease basis. Right-of-use assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term operating leases that have a term of one year or less. The Company recognizes expenses for short-term operating leases on a straight-line basis over the lease term. Certain of the Company's operating leases have variable rental payments based on changes in a consumer price index or a production index that trigger rental increases. Additionally, certain of the Company's operating leases include variable payments for items such as property taxes, insurance, maintenance, and other operating expenses associated with leased assets. Certain grower purchase agreements under which we contract for grapes to meet our production needs contain variable payments based on tonnage yield, grape quality and grape prices. Variable lease payments are excluded from the calculations of the right-of-use assets and are recognized in the financial statements in the period in which the obligation is incurred and payment variability removed. Any variable payments related to grapes purchased for inventory production would generally be recognized during harvest as yield size and quality can be determined, and the Company accepts the grapes at a production facility. The cost of grapes we purchase to produce wine is recognized in inventory until the wine is sold , and amounted to $68.1 million in Fiscal 2022 and $26.5 million in Fiscal 2021 . The Company monitors for triggering events or conditions that require a reassessment of its leases. When the reassessment requires a re-measurement of the lease liability, a corresponding adjustment is made to the carrying amount of the right-of-use asset. Additionally, the Company reviews relevant impairment indicators of its right-of-use assets in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets . Stock split On March 9, 2021, the Company's Board of Managers approved a 1,017,134.6-for-1 stock split to the Company's common stock, which was immediately effective. All share and per share data included in these consolidated financial statements give effect to the stock split and have been retroactively adjusted for all periods presented. Preferred stock The Company has 100,000,000 shares of $0.01 par value preferred stock authorized, none of which are issued and outstanding. Net income per share In accordance with ASC 260, Earnings Per Share , net income per share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period, excluding forfeitures. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock option and upon the vesting of restricted stock. See Note 18 (Earnings per share) for further discussion. Variable interest entities The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations . These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. For the years ended July 31, 2022 and 2021, the Company determined that Bootlegger's Hill, which was acquired as part of the Kosta Browne acquisition, is a VIE and that the Company is the primary beneficiary of that VIE. This conclusion considers the Company's ownership percentage, which entitles the Company to receive most of the benefits and absorb most of the risk, as well as the ability to exercise significant influence over the operating and financial decisions of the VIE. The Company consolidates 100% of the operational results of Bootlegger's, while also reflecting on the face of the Consolidated Statements of Operations and Financial Position the 23.8% non-controlling interest, which is held by outside investors at both July 31, 2022 and 2021. At July 31, 2022 and 2021, the Company's ownership percentage of the sole identified VIE was 76.2%. The total net assets of the VIE included on the Consolidated Statements of Financial Position were $2.4 million and $2.2 million at July 31, 2022 and 2021, respectively. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurement . The assets and liabilities, which may only be used to settle its own obligations, are primarily related to property, equipment and working capital accounts, which generally represent the amounts owed by or to the Company for the goods under current contracts. Significant customers and concentrations of credit risk The Company’s five largest customers, which are each wholesale customers, represented in total approximately 46%, 48% and 43% of net sales for the years ended July 31, 2022, 2021 and 2020, respectively. There were no significant concentrations of revenue or credit risk related to DTC sales. Of the largest five customers, two wholesale customers each represented 10% or more of the Company's net sales. The percentages for each of these significant customers for the periods presented are as follows: Net sales Fiscal years ended July 31, 2022 2021 2020 Customer A 16 % 15 % 13 % Customer B 14 % 16 % 15 % Customer C 9 % 10 % 8 % Financial instruments potentially subjecting the Company to concentrations of credit risk, consist primarily of bank demand deposits in excess of Federal Deposit Insurance Corporation limits, as well as trade receivables. The majority of the Company’s wine sales are made through distributors. Receivables associated with such sales are not collateralized. The Company monitors credit risk associated with its customers on a regular basis and management is of the opinion that any risk of significant loss is reduced due to the diversity of our customers and geographic sales area. The same two wholesale customers, shown in the net sales table above, represent 10% or more of the Company's trade accounts receivable balance for the periods presented. The percentages for each of these significant customers as of the periods presented are as follows: Accounts receivable trade July 31, 2022 2021 Customer A 22 % 23 % Customer B 14 % 11 % Customer C 8 % 14 % Equity-based compensation Equity awards issued in exchange for services rendered by the Company's employees, officers or directors are accounted for pursuant to ASC 718, Compensation-Stock Compensation. The Company measures equity awards at fair value at their grant date. Compensation cost is recognized in selling, general and administrative expenses or is capitalized into inventory over the requisite service period (generally the vesting period), net of actual forfeitures as incurred. For awards with performance-based conditions impacting the timing or number of awards vesting, compensation cost is recognized when a performance condition is probable of being met. If a performance condition is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company estimates the fair value of certain awards using a Black-Scholes option pricing model. The Company values shares purchased under the ESPP using a Black-Scholes option valuation model. See Note 15 (Equity-based compensation) for further discussion. Accounting pronouncements As an “emerging growth company” as established by the JOBS Act, the Company was permitted to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Prior to fiscal year ended July 31, 2022, the Company had elected to use the adoption dates available to private companies. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. Recently adopted accounting pronouncements: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , and several amendments, codified as ASC 842, which supersedes prior guidance on accounting for leases under ASC 840, Leases . ASU No. 2016-02, among other provisions, (i) requires lessees to classify leases as either finance or operating leases, (ii) generally requires all leases to be recorded on the Consolidated Statements of Financial Position through the recognition of right-of-use ("ROU") assets and corresponding lease liabilities and (iii) expands mandatory qualitative and quantitative disclosures regarding leasing activities. The Company adopted the standard effective August 1, 2021, the first day of fiscal year 2022, using the modified retrospective transition method. The guidance provides a number of optional practical expedients in adoption. The Company elected the package of practical expedients available for expired or existing contracts, which allowed it to carryforward historical assessments of (1) whether contracts are, or contain, leases, (2) lease classification and (3) initial direct costs. The Company did not elect the use-of-hindsight practical expedient. In addition, the Company elected an accounting policy to include both lease and non-lease components as a single component for all asset classes where it is the lessee. The most significant impact of adoption was the recognition as of August 1, 2021 of operating lease ROU assets of $27.2 million and corresponding operating lease liabilities of $26.9 million on the Consolidated Statement of Financial Position, along with certain incremental disclosures. The difference between the operating lease ROU assets and operating lease liabilities represents the existing deferred rent and tenant improvement allowance liabilities balance, resulting from historical straight-lining of operating leases, which were effectively reclassified upon adoption to reduce the measurement of leased assets. In addition, the difference represents favorable lease assets effectively reclassified upon adoption from intangible assets to increase the measurement of leased assets. Adoption of the new standard did not have a material impact on the Company's results of operations or liquidity. See Note 6 (Leases) for further discussion. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , and several amendments, collectively, ASC 326, to replace the incurred loss impairment method with a method that requires the reflection of expected credit losses on financial instruments. The Company adopted this standard as of July 31, 2022. As a result of adopting this ASU, the Company changed its method of estimating its allowance for doubtful accounts for accounts receivable to be based upon the Company's |
