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THE DUCKHORN PORTFOLIO, INC.

(NAPA)
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DUCKHORN PORTFOLIO, INC. Management's discussion and analysis of financial condition and results of operations (form 10-Q)

06/02/2022 | 04:32pm EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to those statements included elsewhere in this Quarterly Report on
Form 10-Q. In addition to historical financial information, the following
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. See "Cautionary note regarding forward-looking
statements" included in this Quarterly Report on Form 10-Q. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including those discussed in Part I "Item 1A. Risk
factors" included in our Annual Report on Form 10-K for Fiscal 2021.

Overview


The Duckhorn Portfolio is the premier scaled producer of luxury wines in North
America. We have delighted millions of consumers with authentic, high-quality,
approachable wines for over four decades. We champion a curated and
comprehensive portfolio of highly acclaimed luxury wines across multiple
varietals, appellations, brands and price points. Our portfolio is focused
exclusively on the desirable luxury segment, which we define as wines sold for
$15 or higher per 750ml bottle.

We sell our wines in all 50 states and over 50 countries at prices ranging from
$20 to $200 per bottle under a world-class luxury portfolio of winery brands,
including Duckhorn Vineyards, Decoy, Kosta Browne, Goldeneye, Paraduxx, Calera,
Migration, Canvasback, Greenwing and Postmark. Our wines have a strong record of
achieving critical acclaim, vintage after vintage. Each winery brand boasts its
own winemaking team to create distinct experiences for consumers, to ensure
product quality and continuity and to galvanize sustainable farming practices.
Beyond our winemaking teams is an organization comprised of passionate, talented
employees, including a highly tenured executive team that has approximately 100
years of cumulative experience with Duckhorn.

We sell our wines to distributors outside California and directly to retail
accounts in California, which together comprise our wholesale channel. We also
sell directly to consumers through our DTC channel, which made up approximately
16% of our net sales for the first nine months of Fiscal 2022. Our powerful
omni-channel sales model drives strong margins by leveraging long-standing
relationships developed over the past forty years. We believe our iconic winery
brands together with our scaled, quality-focused production, omni-channel
distribution and dedicated employees, set the standard for North American luxury
wine.

Key financial metrics

We use net sales, gross profit and adjusted EBITDA to evaluate the performance
of our business, identify trends in our business, prepare financial forecasts
and make capital allocation decisions. We believe the following metrics are
useful in evaluating our performance, but adjusted EBITDA should not be
considered in isolation or as a substitute for any other financial information
depicting our results prepared in accordance with U.S. GAAP. Certain judgments
and estimates are inherent in our processes to calculate these metrics.

                                               Three months ended April 30,                Nine months ended April 30,
(in thousands)                                    2022                  2021                 2022                  2021
Net sales                                  $        91,584          $  90,425          $      294,501          $ 265,720
Gross profit                               $        43,962          $  46,929          $      145,849          $ 132,961
Net income attributable to The Duckhorn
Portfolio, Inc.                            $        15,565          $   9,022          $       54,770          $  48,548
Adjusted EBITDA                            $        32,873          $  32,946          $      105,272          $  98,845


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The following table represents the reconciliation of adjusted EBITDA to net income attributable to The Duckhorn Portfolio, Inc.:

                                                  Three months ended April 30,                 Nine months ended April 30,
(in thousands)                                       2022                  2021                  2022                  2021
Net income attributable to The Duckhorn
Portfolio, Inc.                               $        15,565          $   9,022          $        54,770          $  48,548
Interest expense                                        1,618              3,755                    4,860             10,947
Income tax expense                                      4,699              5,623                   18,483             19,694
Depreciation and amortization expense                   6,237              5,554                   17,345             16,434
EBITDA                                                 28,119             23,954                   95,458             95,623
Purchase accounting adjustments(a)                         54                126                      347              1,449
Transaction expenses(b)                                   347              2,304                    3,116              2,304

Inventory write-down(c)                                 3,935                  -                    3,935                  -
Change in fair value of derivatives(d)                   (990)            (1,991)                  (1,947)            (4,818)
Equity-based compensation(e)                            1,365              8,962                    4,240              9,538
Casualty gain, net(f)                                       -                  -                        -             (7,832)

Loss on debt extinguishment(g)                              -                  -                        -                272
IPO preparation costs(h)                                    -                  -                        -                405
Wildfire costs(i)                                          43               (421)                     123              1,196
COVID-19 costs(j)                                           -                 12                        -                708
Adjusted EBITDA                               $        32,873          $  32,946          $       105,272          $  98,845


________________________________________________

(a) Purchase accounting adjustments relate to the impacts of prior business
combination accounting for our acquisition by TSG in Fiscal 2017, our subsequent
acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019,
respectively, and certain other transactions consummated prior to our
acquisition by TSG, which resulted in fair value adjustments to inventory and
long-lived assets.
(b) Transaction expenses include legal and professional fees and change of
control payments incurred in connection with our IPO in March 2021. Also
included are expenses incurred for abandoned transactions and the secondary
offering completed in October 2021. These expenses were directly related to such
transactions and were incremental to our normal operating expenses.
(c) Inventory write-down pertains to the Company's increase in inventory
obsolescence reserves for excess inventory levels of certain seltzer products.
See Note 4 (Inventories) to our Condensed Consolidated Financial Statements for
additional information.
(d) See Note 9 (Derivative instruments) to our Condensed Consolidated Financial
Statements for additional information.
(e) See Note 12 (Equity-based compensation) to our Condensed Consolidated
Financial Statements for additional information.
(f) Casualty gain, net in adjusted EBITDA pertains to the flood event at one of
our wineries in Fiscal 2019, and was primarily comprised of insurance proceeds
received pursuant to our claim, offset by flood damage and remediation costs.
The proceeds received, offset by costs incurred, are reported on the casualty
loss (gain), net line in the Condensed Consolidated Statements of Operations.
See Note 13 (Casualty loss) to our Condensed Consolidated Financial Statements
for additional information.
(g) Loss on debt extinguishment includes charges for unamortized deferred
financing fees we recognized in connection with amendments to our Credit
Facility.
(h) IPO preparation costs include professional fees incurred for outside
consultants to advise us on legal, accounting and tax matters related to our
preparation for becoming a public company which were not directly attributable
to an offering.
(i) Wildfire costs include the cost of unharvested fruit that was damaged and
rendered useless, charges we incurred to respond to imminent wildfire threat
with fire-fighting crews to protect our assets, clean-up and smoke remediation
expenses to restore operations at our tasting rooms after the fires, testing
fees to evaluate our fruit for possible smoke damage, and washing or other grape
processing costs prior to vinification to reduce the risk of smoke in finished
wine. These costs are reported on the casualty loss (gain), net line in the
Condensed Consolidated Statements of Operations along with related crop
insurance proceeds received. See Note 13 (Casualty loss) to our Condensed
Consolidated Financial Statements for additional information. While we expect
the potential for wildfires to be an ongoing risk to running an agricultural
business in California, we believe the wildfires and related costs we
experienced are not indicative of our core operating performance.
(j) COVID-19 costs include certain incremental expenses incurred during the
outbreak of the COVID-19 pandemic and the short-term closure mandates imposed by
government officials in the jurisdictions in which we operate. These costs
include tasting room expenses incurred during a period of mandatory closure and
reduced capacity, salaries and severance expenses for certain employees and
other immaterial costs to transfer inventory.

Net sales

Our net sales represent revenues less discounts, promotions and excise taxes.

Gross profit


Gross profit is equal to our net sales less cost of sales. Cost of sales
includes all wine production costs, winemaking, bottling, packaging, warehousing
and shipping and handling costs. Our gross profit and gross profit margins on
net sales are impacted by the mix of winery brands we sell in our portfolio. See
"-Components of results of operation and key factors affecting our performance"
for additional information.
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Adjusted EBITDA


Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income
before interest, taxes, depreciation and amortization, non-cash equity-based
compensation expense, purchase accounting adjustments, casualty losses or gains,
impairment losses (including certain inventory charges), changes in the fair
value of derivatives and certain other items which are not related to our core
operating performance. Adjusted EBITDA is a key metric we use to evaluate
business performance in comparison to budgets, forecasts and prior period
financial results, providing a measure that Management believes reflects the
Company's core operating performance.

For comparative periods presented, our primary operational drivers of adjusted
EBITDA have been sustained sales growth in our wholesale channel and steady
growth in our DTC channel, management of our cost of sales through our
diversified supply planning strategy, and discipline over selling, general and
administrative expenses relative to our sales growth.

Key operating metrics


We monitor the following key metrics to help us evaluate our business, identify
trends affecting our business, measure our performance, formulate business plans
and make strategic decisions. We believe the following metrics are useful in
evaluating our business but should not be considered in isolation or, solely
with respect to price / mix contribution, as a substitute for financial
information prepared and presented in accordance with U.S. GAAP. Certain
judgments and estimates are inherent in our processes to calculate these
metrics.

Net sales percentage by channel


We calculate net sales percentage by channel as net sales made through our
wholesale channel to distributors, through our wholesale channel directly to
retail accounts in California and through our DTC channel, respectively, as a
percentage of our total net sales. We monitor net sales percentage across these
three routes to market to understand the effectiveness of our omni-channel
distribution model and to ensure we are deploying resources effectively to
optimize engagement with our customers across our complementary distribution
channels.

                                                Three months ended April 30,                   Nine months ended April 30,
                                                 2022                   2021                   2022                   2021
Wholesale - distributors                            62.0  %                59.5  %                66.0  %                64.4  %
Wholesale - California direct to retail             16.6  %                15.7  %                17.6  %                16.5  %
DTC                                                 21.4  %                24.8  %                16.4  %                19.1  %


The composition of our net sales, expressed in percentages by channel for the
three months and nine months ended April 30, 2022 and 2021, performed generally
in line with historical trends, and continued to demonstrate signs of recovery
from COVID-19 disruption across major markets. In our wholesale business, the
expansion of on-premise activity was a bright spot for the broader industry, and
yet we outperformed by climbing beyond pre-pandemic levels and strengthening our
share even when compared to the notably rapid expansion in the comparative prior
year period. Off-premise activity remained a key strength in our results as we
strengthened share gains across our broader wholesale channel. We believe sales
channel mix in the future may be more consistent with performance prior to the
COVID-19 pandemic than those periods most prominently impacted by COVID-19
disruption, depending on changing consumer purchasing patterns and future market
conditions.

Net sales growth contribution


Net sales growth is defined as the percentage increase of net sales in the
period compared to the prior period. Contribution to net sales growth is
calculated based on the portion of changes in net sales for a given period that
is driven by two factors: changes in sales volume and changes in sales price and
mix. Volume contribution presents the percentage increase in cases sold in the
current period compared to the prior period.
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Price / mix contribution presents net sales growth less volume contribution and
reflects that, in addition to changes in sales volume, changes in net sales are
primarily attributable to changes in sales price and mix.

                                                         Three months ended April 30,                   Nine months ended April 30,
                                                          2022                   2021                   2022                   2021
Net sales growth                                              1.3  %                31.6  %                10.8  %                21.7  %
Volume contribution                                          (0.6) %                41.0  %                10.0  %                30.2  %
Price / mix contribution                                      1.9  %                (9.4) %                 0.8  %                (8.5) %


For the three months ended April 30, 2022, our net sales growth reflected
positive price mix. The positive price / mix contribution was primarily a result
of strength in Duckhorn Vineyards and Decoy driving our top line expansion, with
a substantial portion of the growth concentrated in wholesale. Volume growth was
down 0.6%, nearly keeping pace with the outsized volume growth seen for the
three months ended April 30, 2021. Despite achieving high growth rates in the
prior year period, we increased our market share gains and saw strong
off-premise performance for the three months ended April 30, 2022. Our
consistent use of distributor and retail sales discounts and promotions in our
wholesale channel to gain market share has historically placed modest downward
pressure on price / mix contribution. To the extent we deploy a similar strategy
in the future, we would expect to see similar downward pressure on price / mix.

For the nine months ended April 30, 2022, growth in net sales was mainly
attributable to strong sales volume growth and a positive price / mix
contribution demonstrating the shift back toward pre-COVID-19 trends as shown by
the sustained growth in our on-premise sales. Generally, on-premise growth also
drives increased sales in our ultra-luxury brands that sell at higher average
sales prices and positively impact price / mix contribution. In the prior year
period, we saw immense growth primarily driven by off-premise sales of our
luxury winery brands that drove a negative price / mix contribution.

We expect price / mix contribution will continue to move toward historical
levels as consumer purchasing and consumption habits normalize following the
COVID-19 pandemic. We expect that volume contribution will continue to be the
primary driver of changes in our net sales in future periods. To the extent our
growth is fueled by sales of lower-priced luxury winery brands, we may see lower
or negative price / mix contribution in the future, with potential for favorable
impacts to price / mix due to brand velocity at varying price points.

Components of results of operation and key factors affecting our performance

Net sales


Our net sales consist primarily of wine sales to distributors and directly to
retail accounts in California, which together comprise our wholesale channel,
and directly to individual consumers through our DTC channel. Net sales
generally represent wine sales and shipping, when applicable. Sales are
generally recorded at the point of shipment and are recorded net of returns,
consideration provided to customers through various incentive programs, other
promotional discounts and excise taxes.

We refer to the volume of wine we sell in terms of cases, each of which
represents a standard 12 bottle case of wine (in which each bottle has a volume
of 750 milliliters). Cases sold represent wine sales through our wholesale and
DTC channels. Depletions, in turn, represent sell-through from our distributors,
including our California wholesale sales channel, to retail accounts nationally.

The following factors and trends in our business have driven net sales growth
over the past fiscal years and are expected to be key drivers of our net sales
growth for the foreseeable future:

•Further leverage brand strength. We believe our comprehensive growth plan will
continue to increase brand awareness and grow sales of our winery brands to our
existing consumer base and a new generation of consumers. This plan is made
possible by our omni-channel platform, which enables us to grow both through
increased volume with existing and new customers and accounts as well as through
periodic price increases, particularly on our higher end, smaller lot DTC wines.

•Insightful and targeted portfolio evolution. Our curated portfolio and historical growth result from long-term dedication to continuous evolution and alignment with the luxury wine consumer. We believe we can drive additional sales through our wholesale and DTC channels. As we continue to scale, we believe our

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growth mindset, coupled with our differentiated production and distribution platform, will enable us to adapt and remain at the forefront of our industry.


•Distribution expansion and acceleration. Purchasing by distributors and loyal
accounts that continue to feature our wines are key drivers of net sales. We
plan to continue broadening distribution of the wines in our portfolio as well
as to increase the volume of wine sold to existing accounts. We believe our
long-standing existing commercial relationships coupled with exceptional
portfolio strength position us to capture distribution growth opportunities and
accelerate sales to existing distributors and retail accounts in California.

•Continued investment in DTC channel. We expect to continue to invest in our DTC
channel, leveraging wine clubs and brand-specific tasting rooms to engage with
our consumers, create brand evangelists and drive adoption across our portfolio.

•Opportunistic evaluation of strategic acquisitions. Our strategic and
opportunistic approach to evaluating acquisitions has led to the successful
acquisition of two winery brands in the past five years: Kosta Browne and
Calera. While our growth and success are not contingent upon future
acquisitions, we believe our team has the capabilities and track record both to
execute and to integrate meaningful acquisitions when opportunities arise to
create stockholder value.

The primary market for our wines is the United States, which has historically represented approximately 95% of our net sales. Accordingly, our results of operations are primarily dependent on U.S. consumer discretionary spending.

Sales channels


Our sales and distribution platform is based on long-standing relationships with
a highly-developed network of distributor accounts in all U.S. states (except
California, where we sell directly to retail accounts) and in over 50 countries
globally. We also have developed strong relationships with consumers who buy our
wines directly from us in the DTC channel. Channel mix can affect our
performance and results of operations, particularly gross profit and gross
profit margin.

•Wholesale channel. Consistent with sales practices in the wine industry, sales
to retailers in California and to distributors in other states occur below
suggested retail price. We work closely with our distributors to increase the
volume of our wines and number of products that are sold by the retail accounts
in their respective territories. In California, where we make sales directly to
retail accounts, we benefit from greater control over our sales and higher
profit margins by selling directly to retailers in the state. Our wholesale
channel comprises a greater proportion of our net sales than our DTC channel.

•DTC channel. Wines sold through our DTC channels are generally sold at suggested retail prices. Our DTC channel continues to grow as a result of a number of factors, including a shift to more consumption and corporate engagement in the home.


Wholesale channel sales made on credit terms generally require payment within 90
days of delivery, and a substantial majority are collected within 60 days. In
periods where the net sales channel mix reflects a greater concentration of
wholesale sales (which typically occurs in our first and second fiscal
quarters), we typically experience an increase in accounts receivable for the
period to reflect the change in sales mix, with payment collections in the
subsequent period generally reducing accounts receivable and having a positive
impact on cash flows in such subsequent period.

While we seek to increase sales in both channels, we expect that our future
sales will continue to be substantially comprised of sales in the wholesale
channel. We intend to maintain and strengthen our long-standing relationships
within our network of distributors, which we believe will be critical to our
continued growth and success. In the wholesale channel, we are positioned as a
one-stop luxury and ultra-luxury wine shop, offering a diverse mix of
high-quality winery brands and varietals at varying luxury and ultra-luxury
price points. We believe this strategy will enable us to continue increasing our
share of the wholesale luxury and ultra-luxury wine market in the future, as
customers will have greater opportunity to engage with and experience wines
across our broad portfolio. We continue to innovate with new products at all
price points within the portfolio. We strive to enhance customer engagement and
increase sales as new customers encounter our wines and existing customers trade
up to higher-priced wines.
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Our sales mix within our wholesale channel has reflected disproportional
benefits to off-premise sales in certain periods, while on-premise sales have
experienced variability, directly related to the COVID-19 pandemic, which began
impacting our sales in March 2020. Our responses to periods of historical
disruption in the wholesale channel have focused on strengthening relationships
with our accounts and distributors, introducing new products and maintaining and
strengthening our winery brand engagement. We believe this approach has enabled
us to strengthen our portfolio and increase our market share relative to
competitors during periods of market disruption.

We routinely offer sales discounts and promotions through various programs to
distributors around the country and to retail accounts in California. These
programs, where permissible, include volume-based discounts on sales orders,
depletion-based incentives we pay distributors and certain other promotional
activities. The expense associated with these discounts and promotions is
estimated and recorded as a reduction of total sales in order to arrive at
reported net sales. While our promotional activities may result in some variance
in total net sales from quarter to quarter, historically, the total impact of
such activities on annual net sales has been generally stable, and we expect
this trend to continue in the future.

In the DTC channel, our holistic approach to consumer engagement both online and
offline is supported by an integrated e-commerce platform and portfolio wine
shop, seven distinctive tasting room experiences located throughout Northern
California and Washington, and several award-winning wine clubs, all of which
enable us to cross-sell wines within our portfolio. These strategies are
designed to maximize each winery brand and property while driving awareness for
the Company's other world-class wines and properties, resulting in more and
deeper customer connections. We strive to evolve our offerings, experiences and
communication to match the generational shifts in wine engagement preferences
and related purchasing decisions. In addition, we anticipate that our holistic
consumer engagement approach will help our DTC sales remain strong through the
near-term impact of the COVID-19 pandemic on consumer purchasing behaviors.

Increasing customer engagement is a key driver of our business and results of
operations. We continue to invest in our DTC channel and in performance
marketing to drive customer engagement. In addition to developing new offerings
and cross-selling wines in our portfolio of winery brands, we focus on
increasing customer conversion and customer retention. As we continue to invest
in enhancing our DTC channel, we expect to continue to increase customer
engagement, which we believe will result in greater customer satisfaction and
retention.

Seasonality

Our net sales are typically highest in the first half of our fiscal year, mostly
due to increased consumer demand around major holidays. Net sales seasonality
differs for wholesale and DTC channels, resulting in quarterly seasonality in
our net sales that depends on the channel mix for that period. We typically
experience a higher concentration of sales through our wholesale channel during
our first and second fiscal quarters due to increased purchasing by distributors
in anticipation of higher consumer demand during the holiday season, which has
the effect of lowering average selling prices as a result of the use of
distributor and retail sales discounts and promotions in our wholesale channel.
See "-Key operating metrics." In Fiscal 2021, our net sales in the first,
second, third and fourth fiscal quarters represented approximately 27%, 25%, 27%
and 21%, respectively, of our total net sales for the year.

Gross profit


Gross profit is equal to our net sales, minus our cost of sales. Cost of sales
includes grape and bulk wine purchase costs. For grapes we grow, cost of sales
includes amounts incurred to develop and farm the vineyards we own and lease.
Cost of sales also includes all winemaking and processing charges, bottling,
packaging, warehousing and shipping and handling. Costs associated with storing
and maintaining wines that age longer than one year prior to sale continue to be
capitalized until the wine is bottled and available for sale.

As we continue to grow our business in the future, we expect gross profit to
increase as our sales grow and as we effectively manage our cost of sales,
subject to any future unexpected volatility in the grape and bulk wine markets,
increased seasonal labor costs and, to a lesser extent inflationary impact from
commodity costs, including dry goods and packaging materials. Additionally, we
expect gross profit as a percentage of net sales to remain consistent with
historical levels or to improve to the extent we return toward normalized
consumer spending behavior across the industry and within our business,
particularly with respect to on-premise sales in the wholesale channel, which
would favorably influence our gross profit margins on net sales.
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Agribusiness


We have developed a diversified sourcing and production model, supported by our
eight wineries and world-class, strategically located Estate vineyards and
strong relationships with quality-oriented growers. In addition, our sourcing
model includes the purchase of high-quality bulk wine from established suppliers
to add a highly flexible element of diversity to our supply model. Generally,
over 85% of our total production is sourced from third-party growers and, to a
significantly lesser extent, the bulk wine market. Our ability to adjust the
composition of a particular vintage among our grape and bulk wine sourcing
supply channels allows us to tailor inputs based on varying market or seasonal
factors, which we believe enables us to produce the highest possible quality
wine while optimizing gross profit.

Consistent with other agriculture enterprises, the cost of our wine fluctuates
due to annual harvest yields, which vary due to weather and other events. In
addition to agricultural factors, price volatility in the grape and bulk wine
markets, competition for supply and seasonal labor costs also impact our cost of
sales. We may continue to experience fluctuations in the costs of producing
wine, which could impact our gross profit.

Selling, general and administrative expenses


Selling, general and administrative expenses consist of selling expenses,
marketing expenses and general and administrative expenses. Selling expenses
consist primarily of direct selling expenses in our wholesale and DTC channels,
including payroll and related costs, product samples and tasting room operating
costs, including processing fees and outside services. Marketing expenses
consist primarily of advertising costs to promote winery brand awareness,
customer retention costs, payroll and related costs. General and administrative
expenses consist primarily of payroll and related costs, administrative expenses
to support corporate functions, legal and professional fees, depreciation,
accounting and information technology, tenancy expenses and other costs related
to management. Although we expect selling, general and administrative expenses
to increase as sales and related support needs expand, we expect our sales
growth rate to outpace the rate of increased selling, general and administrative
expenses as we achieve further efficiencies of scale. We also expect to incur
greater selling, general and administrative expenses as a result of operating as
a publicly traded company.

Other expenses

Other expenses consist primarily of interest expense we incur on balances outstanding under the terms of our Credit Facility and unrealized gains or losses on our derivative instruments.

Income tax expense

Income tax expense consists of federal and state taxes payable to various federal, state and local tax authorities.

Inventory lifecycle

Grape growing on our estate vineyards


Although generally over 85% of our wine is typically derived from grapes grown
by third party growers and, to a significantly lesser extent, bulk wine we
purchase, the remainder is sourced from our Estate vineyards that we own or
lease. Once a vineyard reaches consistent yield levels, approximately three to
five years after planting, it will generally produce a relatively consistent
amount of fruit for approximately 15 to 25 years, at which time blocks of the
vineyard will gradually be replanted in stages after a period of lying fallow.
The length of time between initial investment and ultimate sale of our Estate
wines, coupled with the ongoing investment required to produce quality wine, is
not typical of most agricultural industries. Over the long-term as our business
grows, we expect Estate vineyards to represent a smaller relative share of our
overall sourcing model.

Harvest-to-release

Of the total case volume we produce and sell, the majority is comprised of red
wines from grape varietals such as Cabernet Sauvignon, Pinot Noir and Merlot,
which can have production lifecycles spanning months and years from harvest
until the time the wine is released, depending on the aging requirements
prescribed by the winemakers responsible for each of our winery brands. Our red
wines generally have a harvest-to-release inventory lifecycle that can range
from 15 to 48 months. Our white, rosé and sparkling wines generally have a
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harvest-to-release inventory lifecycle that can range from five to 35 months. During aging and storage, we continue to capitalize overhead costs into the carrying value of the wine.


Given the long-term nature of our investment, grape purchasing and bulk wine
purchasing decisions, our production planning processes are designed to mitigate
the risk of over-supply by sourcing a portion of our production needs in the
spot markets to the degree appropriate based on winery brand and vintage. This
opportunistic approach to grape purchases also helps reduce our exposure to
future grape price volatility.

Other factors impacting the comparability of our results of operations

Impacts of COVID-19


In March 2020, the World Health Organization declared a global pandemic due to
the spread of COVID-19, the disease caused by a novel strain of coronavirus. As
governmental authorities implemented various measures limiting the activities of
businesses and individuals to reduce the spread of COVID-19, wine producers in
the United States were generally classified as essential businesses, which
enabled us to continue producing and selling our wine. For the safety of our
employees and the individuals with whom we work, we adapted our policies and
protocols to meet applicable federal, state and local requirements, and we
continue to monitor and revise our policies as appropriate.

The comparability of our results of operations have been significantly impacted
by the effects of the COVID-19 pandemic on our business, industry, customer
behavior, key markets where we operate and as a result of macroeconomic factors.
Accordingly, certain period-over-period comparisons have been and may continue
to be influenced by disruption due to the COVID-19 pandemic.

At the outset of the COVID-19 pandemic in the third quarter of Fiscal 2020, we
experienced a significant decrease in sales of ultra-luxury wines sold through
our on-premise wholesale sales channel and a significant increase of sales of
ultra-luxury and luxury wines sold at off-premise retailers. Historically, our
ultra-luxury winery brands have delivered higher gross profit margins, and
generally sell in larger volumes on-premise than our luxury winery brands, which
typically see higher sales volumes off-premise. This shift in sales channel mix
continued through the majority of Fiscal 2021.

During Fiscal 2022, we observed continued signs of reopening across the domestic
consumer product markets and reversion toward consumer purchasing habits which
we believe to be more in line with trends observable before the COVID-19
pandemic. On-premise sales have continued to increase from their pandemic lows,
resulting in higher sales of our ultra-luxury winery brands and fortifying
on-premise sales for the nine months ended April 30, 2022. Off-premise activity
remained a key strength in our results as we strengthened share gains across our
broader wholesale channel. We expect sales channel mix to continue to move
toward historical levels and to reflect consumer purchasing patterns more
consistent with performance prior to the COVID-19 pandemic. At the same time,
the significant off-premise sales growth that we experienced during the pandemic
may be tempered compared to the outsized growth rates in pandemic-impacted
comparative periods. Although we have observed strong customer demand during
periods impacted by pervasive stay-at-home restrictions, and cannot predict the
future impact on consumer spending as these restrictions continue to vary by
market, we believe that the diverse offerings of The Duckhorn Portfolio, which
include a broad spectrum of price points, mitigates some of the risk to our
future operations in periods in which the on- and off-premise relative mix
fluctuates.

During the pandemic, our tasting rooms have also experienced lower tasting fee
revenue due to reduced capacities or mandatory closure in order to comply with
applicable regulations despite sustained operating levels of expenses, primarily
comprised of tasting room operating expenses during periods of capacity
restrictions or mandatory closure. Conversely, e-commerce sales increased
substantially in response to lockdowns as customers sought to purchase our wines
in a manner that reduced human contact. We believe that our tasting rooms will
continue to see strong visitation and sales results as the pandemic wanes,
tourism increases and regulations limiting occupancy are eased. At the same
time, we believe that customers who used e-commerce platforms to purchase our
wines will continue to enjoy the convenience of those platforms to purchase
wines from The Duckhorn Portfolio, Inc.
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Impact of wildfires


During the first quarter of Fiscal 2021, several wildfires occurred in Northern
California. These fires adversely affected certain industry grape supplies.
Other than smoke exposure to grapes that had not been harvested, our vineyards
did not sustain damage during the fires. However, smoke and fire damage to
vineyards in the primary regions and markets where we source fruit rendered some
of the available grapes unacceptable for the Company's production needs. In
response, we took steps to obtain alternative sources of supply that we believe
substantially mitigates the impact of the fires on our supply. Based on our
internal analysis of the impacts of the wildfires, we believe the potential
future impact on our operational results to be immaterial. We continue to
monitor the ongoing effects on our business for any material changes to that
conclusion. Wildfires and smoke damage to grape yields have resulted in
disruption and could continue to disrupt the overall grape supply market,
introduce changes to our production plan, impact the quantity or release timing
of expected case sales in our sales forecast, or result in changes to future
gross profit margins as compared to prior periods.

We continue to enhance our wildfire response plan and to mitigate the supply risk associated with wildfires in the following ways:


•our diversified sourcing strategy, with a mix of our owned or leased Estate
properties and high-quality grower contracts, covers a wide geographic footprint
across California and Washington; and
•we have assembled a team of winemakers and operational leadership with deep
industry experience, enabling us to respond effectively to supply disruption in
our active grape sourcing markets or to expand into new sourcing markets if
needed.

Impacts of purchase accounting due to prior acquisitions


We were acquired by TSG in Fiscal 2017, and subsequently completed acquisitions
of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019, respectively. In
applying business combination accounting pursuant to U.S. GAAP authoritative
literature in connection with each of these transactions, we recorded acquired
assets and liabilities at their fair values. The impacts of these purchase
accounting adjustments primarily resulted in reductions to deferred revenue,
increases to inventory, increases to long-lived assets and recognition of
indefinite-lived intangible assets and definite-lived intangible assets, which
amortize over their assigned useful lives ranging from 9 to 14 years. See Note 6
(Other intangible assets) to our Condensed Consolidated Financial Statements for
additional information.

The effects of purchase accounting adjustments on our operational performance
caused our pre-tax income from operations to be lower in certain periods than we
would otherwise have recognized due to increased cost of sales from step-up to
fair value of inventory and increased operating expenses due to step-up
depreciation on property and equipment and amortization of definite-lived
intangible assets. The table below reflects the line items of our Condensed
Consolidated Statements of Operations impacted by these purchase accounting
adjustments:

                                                  Three months ended April 30,                Nine months ended April 30,
(in thousands)                                       2022                  2021                 2022                  2021

Purchase accounting adjustments to cost of
sales                                         $            54          $     126          $          347          $   1,449
Impact of purchase accounting on gross profit             (54)              (126)                   (347)            (1,449)
Amortization of customer relationships and
other intangible assets                                 1,921              1,921                   5,762              5,762
Impact of purchase accounting on selling,
general and administrative expenses                     1,921              1,921                   5,762              5,762
Impacts of purchase accounting on income
before income taxes                           $        (1,975)         $  (2,047)         $       (6,109)         $  (7,211)


Results of operations

The following table sets forth our results of operations for the periods presented and expresses the relationship of each line item shown as a percentage of net sales for the periods indicated. The table below should be read in conjunction with the corresponding discussion and our audited annual consolidated financial

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statements, our unaudited Condensed Consolidated Financial Statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q:

                                                       Three months ended April 30,                                                Nine months ended April 30,
(in thousands, except percentages)               2022                                  2021                                 2022                                  2021
Net sales                          $      91,584            100.0  %       $ 90,425            100.0  %       $     294,501            100.0  %       $ 265,720            100.0  %
Cost of sales                             47,622             52.0            43,496             48.1                148,652             50.5            132,759             50.0
Gross profit                              43,962             48.0            46,929             51.9                145,849             49.5            132,961             50.0
Selling, general, and
administrative expenses                   23,083             25.2            31,142             34.4                 70,055             23.8             65,418             24.6

Casualty loss (gain), net                     43                -              (421)            (0.5)                   123                -             (6,636)            (2.5)
Income from operations                    20,836             22.8            16,208             17.9                 75,671             25.7             74,179             27.9
Interest expense                           1,618              1.8             3,755              4.2                  4,860              1.7             10,947              4.1
Other income, net                         (1,046)            (1.1)           (2,192)            (2.4)                (2,477)            (0.8)            (5,006)            (1.9)
Total other expenses                         572              0.6             1,563              1.7                  2,383              0.8              5,941              2.2
Income before income taxes                20,264             22.1            14,645             16.2                 73,288             24.9             68,238             25.7
Income tax expense                         4,699              5.1             5,623              6.2                 18,483              6.3             19,694              7.4
Net income                                15,565             17.0             9,022             10.0                 54,805             18.6             48,544             18.3
Less: Net loss (income)
attributable to non-controlling
interest                                       -                -                 -                -                    (35)               -                  4                -
Net income attributable to The
Duckhorn Portfolio, Inc.           $      15,565             17.0  %       $  9,022             10.0  %       $      54,770             18.6  %       $  48,548             18.3  %


Comparison of the three and nine months ended April 30, 2022 and 2021

Net sales
                             Three months ended April 30,                  Change                     Nine months ended April 30,                       Change
(in thousands, except
percentages)                    2022              2021               $                %                 2022                  2021                $                %
Net sales                   $  91,584          $ 90,425          $ 1,159             1.3  %       $      294,501          $ 265,720          $ 28,781             10.8  %


Net sales for the three months ended April 30, 2022 increased $1.2 million, or
1.3%, to $91.6 million compared to $90.4 million for the three months ended
April 30, 2021. The increase in net sales for the three months ended April 30,
2022 was driven by a favorable shift in price/mix contribution due to favorable
brand mix led by wholesale, partially offset by negative volume growth.

Net sales for the nine months ended April 30, 2022 increased $28.8 million, or
10.8%, to $294.5 million compared to $265.7 million for the nine months ended
April 30, 2021. The increase in net sales for the nine months ended April 30,
2022 was primarily driven by volume growth and favorable price / mix
contribution as a result of strong growth led by the wholesale sales channels.

Cost of sales
                             Three months ended April 30,                  Change                     Nine months ended April 30,                       Change
(in thousands, except
percentages)                    2022              2021               $                %                 2022                  2021                $                %
Cost of sales               $  47,622          $ 43,496          $ 4,126             9.5  %       $      148,652          $ 132,759          $ 15,893             12.0  %


Cost of sales increased by $4.1 million, or 9.5%, to $47.6 million for the three
months ended April 30, 2022 compared to $43.5 million for the three months ended
April 30, 2021. The increase in cost of sales for the three months ended April
30, 2022 is primarily driven by higher sales and an increase in our inventory
reserve for excess seltzer products (see Note 4 (Inventories) for additional
information). As the remaining seltzer inventory levels are immaterial, we do
not expect a material impact to any future period as a result of potential
further inventory reserves for this product.

Cost of sales increased by $15.9 million, or 12.0%, to $148.7 million for the
nine months ended April 30, 2022 compared to $132.8 million for the nine months
ended April 30, 2021.The increase in cost of sales for the nine months ended
April 30, 2022 is primarily driven by higher sales and an increase in the
seltzer inventory reserve, partially offset by the diminishing impacts of
step-up cost of wine due to purchase accounting adjustments from prior
acquisitions. For additional information see "-Other factors impacting the
comparability of our results of operations".
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Gross profit
                               Three months ended April 30,                      Change                      Nine months ended April 30,                      Change
(in thousands, except
percentages)                      2022                 2021                $                %                  2022                  2021                $                %
Gross profit                $      43,962           $ 46,929          $ (2,967)            (6.3) %       $     145,849           $ 132,961          $ 12,888             9.7  %
Gross margin                         48.0   %           51.9  %                                                   49.5   %            50.0  %


Gross profit decreased $3.0 million, or 6.3%, to $44.0 million for the three
months ended April 30, 2022 compared to $46.9 million for the three months ended
April 30, 2021. Gross profit margin was 48.0% for the three months ended April
30, 2022 compared to 51.9% for the three months ended April 30, 2021. The
decrease in gross profit for the three months ended April 30, 2022 is primarily
the result of an increase in our inventory reserve (see Note 4 (Inventories) for
additional information), which more than offset positive mix shifts that were
favorable to gross profit margin.

Gross profit increased $12.9 million, or 9.7%, to $145.8 million for the nine
months ended April 30, 2022 compared to $133.0 million for the nine months ended
April 30, 2021. Gross profit margin was 49.5% for the nine months ended April
30, 2022 compared to 50.0% for the nine months ended April 30, 2021. While gross
profit margins were generally consistent over the comparative periods, the
increase in gross profit for the nine months ended April 30, 2022 was primarily
the result of higher sales volume, brand and channel mix shifts that were net
favorable to gross profit margin, a reduction in step-up cost of wine sold due
to lower balances of remaining inventory with associated step-up from purchase
accounting in previous periods, offset by an increase in our inventory reserve
(see Note 4 (Inventories) for additional information related to the inventory
reserve).

Operating expenses
Selling, general and administrative expenses
                              Three months ended April 30,                   Change                      Nine months ended April 30,                     Change
(in thousands, except
percentages)                     2022              2021                $                %                  2022                 2021               $                %
Selling expenses             $  11,296          $  9,699          $  1,597             16.5  %       $       32,666          $ 26,425          $ 6,241             23.6  %
Marketing expenses               2,113             2,314              (201)            (8.7)                  7,172             6,239              933             15.0
General and administrative
expenses                         9,674            19,129            (9,455)           (49.4)                 30,217            32,754           (2,537)            (7.7)
Total selling, general and
administrative expenses      $  23,083          $ 31,142          $ (8,059)           (25.9) %       $       70,055          $ 65,418          $ 4,637              7.1  %


Selling, general and administrative expenses decreased $8.1 million, or 25.9%,
to $23.1 million for the three months ended April 30, 2022, compared to $31.1
million for the three months ended April 30, 2021. The decrease in selling,
general and administrative expenses for the three months ended April 30, 2022
was driven by IPO related expenses, specifically equity-based compensation and
other transaction costs incurred in the third quarter of Fiscal 2021 which were
not present in the third quarter of Fiscal 2022, partially offset by higher
compensation expense due to headcount increase.

Selling, general and administrative expenses increased $4.6 million, or 7.1%, to
$70.1 million for the nine months ended April 30, 2022, compared to $65.4
million for the nine months ended April 30, 2021. The increase in selling,
general, and administrative expenses for the nine months ended April 30, 2022 is
largely attributable to compensation costs due to our expanded workforce, higher
equity-based compensation as a public company as compared to the prior year
period, transaction expenses incurred for the secondary offering (see Note 1
(Description of business) for additional information related to the offering),
higher general and administrative costs related to being a public company and
higher selling expenses in support of revenue-generating activities as travel
restrictions lessened versus the comparative prior year period.

Casualty loss (gain), net

                             Three months ended April 30,                  Change                    Nine months ended April 30,                     Change
(in thousands, except
percentages)                     2022               2021             $               %                 2022                2021               $                 %
Casualty loss (gain), net   $         43          $ (421)         $ 464            110.2  %       $        123          $ (6,636)         $ 6,759             101.9  %


Casualty loss (gain), net increased by $0.5 million, or 110.2%, for the three
months ended April 30, 2022 compared to the three months ended April 30, 2021.
The increase in casualty loss (gain), net is primarily due to
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the receipt of crop insurance proceeds received in the third quarter of Fiscal
2021 related to wildfires resulting in fruit damage and other direct costs which
occurred in the first quarter of Fiscal 2021.

Casualty loss (gain), net increased by $6.8 million, or 101.9%, for the nine
months ended April 30, 2022 compared to the nine months ended April 30, 2021.
The increase in casualty loss (gain), net is primarily due to insurance proceeds
received in Fiscal 2021 related to a flood at one of our wineries in a previous
fiscal year that did not reoccur in the current fiscal year. See Note 13
(Casualty loss) to our Condensed Consolidated Financial Statements for further
information.

Other expenses
                             Three months ended April 30,                     Change                      Nine months ended April 30,                      Change
(in thousands, except
percentages)                     2022                2021               $                 %                  2022                2021                $                %
Interest expense                   1,618            3,755          $ (2,137)            (56.9) %       $       4,860          $ 10,947          $ (6,087)           (55.6) %
Other income, net                 (1,046)          (2,192)            1,146              52.3  %              (2,477)           (5,006)            2,529             50.5  %

Total other expenses $ 572 $ 1,563 $ (991)

            (63.4) %       $       2,383          $  5,941          $ (3,558)           (59.9) %


Other expenses decreased by $1.0 million, or 63.4%, to $0.6 million for the
three months ended April 30, 2022 compared to $1.6 million for the three months
ended April 30, 2021. The decrease in other expenses for the three months ended
April 30, 2022 is driven by a decrease in interest expense due to lower debt
balances outstanding for the period and a lower overall swap notional balance.

Other expenses decreased by $3.6 million, or 59.9%, to $2.4 million for the nine
months ended April 30, 2022 compared to $5.9 million for the nine months ended
April 30, 2021. The decrease in other expenses for the nine months ended April
30, 2022 is largely due to lower debt balances outstanding for the period, in
conjunction with lower average interest rates on our variable-rate debt. The
change in our other income, net was primarily driven by downward pressure on
LIBOR and a lower overall swap notional balance. Both of these factors
contributed to a change in overall swap position to an asset on our Condensed
Consolidated Statements of Financial Position. In addition, see "-Liquidity and
capital resources" for discussion of our Credit Facility.

Income tax expense
                           Three months ended April 30,                 Change                      Nine months ended April 30,                      Change
(in thousands, except
percentages)                  2022              2021              $                %                  2022                 2021                $                %
Income tax expense         $  4,699          $ 5,623          $ (924)            (16.4) %       $       18,483          $ 19,694          $ (1,211)            (6.1) %


Income tax expense decreased $0.9 million, or 16.4%, to $4.7 million for the
three months ended April 30, 2022 compared to $5.6 million for the three months
ended April 30, 2021. The decrease in income tax expenses for the three months
ended April 30, 2022 is primarily due to a reduction in unfavorable permanent
book/tax differences related to non-deductible equity-based compensation.

Income tax expense decreased $1.2 million, or 6.1%, to $18.5 million for the
nine months ended April 30, 2022 compared to $19.7 million for the nine months
ended April 30, 2021. The decrease in income tax expense for the nine months
ended April 30, 2022 is primarily due to a reduction in unfavorable permanent
book/tax differences related to non-deductible equity-based compensation.

Liquidity and capital resources

Sources of liquidity


Our primary cash needs are for working capital purposes, such as producing or
purchasing inventory and funding operating and capital expenditures. We fund our
operational cash requirements with cash flows from operating activities and
borrowings under our Credit Facility. As of April 30, 2022, we had $8.7 million
in cash and $310.0 million available in undrawn capacity on our revolving line
of credit, subject to the terms of our Credit Facility.

In response to the COVID-19 pandemic, we evaluated risks related to our inventory and liquidity management, which we determined to be sufficiently mitigated, subject to reassessment in the future in response to pandemic-related impacts as they occur. The full impact of COVID-19 on our future operations remains

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uncertain and will be determined by the length and severity of pandemic-related
disruption. Consequently, unforeseen future events could negatively impact our
operations, results of operations, cash flows and liquidity.

Due to the seasonal nature of our operations, our cash needs are generally
greatest during harvest, a period which can span from August to November based
on agricultural conditions and other factors outside our control. We believe
that our expected operating cash flows, cash on hand and borrowing capacity on
our revolving line of credit, will be adequate to meet our cash needs for the
next 12 months. However, changes in our business growth plan, planned capital
expenditures or responses to the impacts of the global pandemic or to an
ever-changing and highly competitive industry landscape may result in changes to
our cash requirements.

If our cash needs change in the future, we may seek alternative or incremental
funding sources to respond to changes in our business. To the extent required,
we may seek to fund additional liquidity through debt or equity financing,
although we can provide no assurance that such forms of capital will be
available when needed, if at all, or available on terms that are acceptable.

Cash flows

The following table presents the major components of net cash flows.


                                           Nine months ended April 30,
(in thousands)                                 2022                   2021
Cash flows provided by (used in):
Operating activities                $       47,855                 $ 41,536
Investing activities                       (24,798)                 (11,400)
Financing activities                       (18,647)                 (31,361)
Net increase in cash                $        4,410                 $ (1,225)


Operating activities

Our cash flows from operating activities consist primarily of net income
adjusted for certain non-cash transactions, including depreciation and
amortization, amortization of debt issuance costs, changes in the fair values of
derivatives, equity-based compensation and deferred income taxes. Operating cash
flows also reflect the periodic changes in working capital, primarily inventory,
accounts receivable, prepaid expenses, accounts payable and accrued expenses.

For the nine months ended April 30, 2022, net cash provided by operating
activities was $47.9 million compared to $41.5 million for the nine months ended
April 30, 2021, a increase of $6.4 million. The increase in cash provided by
operating activities was driven by the following factors:

•The net income after adjusting for non-cash items increased operating cash flows by $4.4 million;


•Increases in cash provided by changes in prepaid expenses for the nine months
ended April 30, 2022 driven by timing of deposits and and increased insurance in
fiscal year 2021, partially offset by timing impacts in bulk and bottled wine
supply management to support increases in demand, in aggregate resulted in an
increase to operating cash flow of $6.8 million;

•Our wholesale sales channel, generally subject to credit terms, saw an increase
in net sales, which drove a corresponding increase in accounts receivable and
resulted in a $11.6 million increase in operating cash flow;

•Changes in accounts payable and accrued expenses decreased operating cash flows $9.8 million due primarily to timing of invoice accruals and payments;


•Decreases in accrued compensation of $10.9 million based on the timing of
certain compensation-related payments resulted in a corresponding decrease in
operating cash flow; and

•Deferred revenues increased operating cash flows by $3.8 million primarily due to shipment timing for DTC list member sales.

Investing activities


For the nine months ended April 30, 2022, net cash used in investing activities
was $24.8 million compared to $11.4 million for the nine months ended April 30,
2021, an increase of $13.4 million, primarily due to vineyard
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acquisitions completed during the previous fiscal quarter, see Note 5 (Property
and equipment). Capital expenditures were $24.9 million for the nine months
ended April 30, 2022 and $11.5 million for nine months ended April 30, 2021.
From time to time, we evaluate wineries, vineyards and production facilities for
potential opportunities to make strategic acquisitions to support our growth.
Any such transactions may require us to make additional investments and capital
expenditures in the future.

Financing activities

For the nine months ended April 30, 2022, net cash used by financing activities
was $18.6 million as compared to $31.4 million for the nine months ended April
30, 2021, an decrease of $12.8 million of net cash used by financing activities.
The decrease was primarily the result of a decrease in net payments under our
line of credit of $95.5 million and a $100 million dividend paid out in the
prior year, offset by $183.9 million of IPO proceeds.

Capital resources

Credit facility


On October 14, 2016, we entered into the Credit Facility with a syndicated group
of lenders. The Credit Facility provides a combination of term and revolving
line of credit features. The term and revolving line of credit borrowings have
variable interest rates, based primarily on LIBOR plus an applicable margin as
defined in the First Lien Loan Agreement. Interest is paid monthly or quarterly
based on loan type. Our debt is collateralized by substantially all of our cash,
trade accounts receivable, real and personal property. Pursuant to the terms and
conditions of the First Lien Loan Agreement, we have issued the instruments
discussed below.

As of April 30, 2022, outstanding principal balances on the debt instruments were $115.0 million for the revolving line of credit, $6.0 million for the capital expenditure loan, $98.4 million for the term loan (tranche one) and $13.6 million for term loan (tranche two).

The First Lien Loan Agreement contains customary affirmative covenants, including delivery of audited financial statements and customary negative covenants that, among other things, limit our ability to incur additional indebtedness or to grant certain liens. As of April 30, 2022, we were not in violation of any covenants.


Revolving line of credit

The revolving line of credit allows us to borrow up to a principal amount of
$425.0 million (including a letter of credit sub-facility of the revolving loan
facility in the aggregate of $15.0 million and a swingline sub-facility of the
revolving loan facility in the aggregate of $15.0 million), with an incremental
seasonal borrowing amount for harvest costs increasing the total amount to a
maximum of $455.0 million. The revolving line of credit matures on August 1,
2023. The interest rate ranges from LIBOR plus 125 basis points to LIBOR plus
175 basis points depending on the average availability of the revolving line of
credit.

Capital expenditure loan

The capital expenditure loan has a maximum, non-revolving draw-down limit of
$25.0 million with quarterly principal payments and the remaining unpaid
principal and interest due upon maturity on August 1, 2023. As of April 30,
2022, the $25.0 million limit was fully drawn. This instrument has an interest
rate of LIBOR plus 190 basis points.

Term loans


The first tranche of term loans was issued in 2016 for a principal balance of
$135.0 million with quarterly principal payments and the remaining unpaid
principal and interest due upon maturity on August 1, 2023. This tranche of the
term loans has an interest rate of LIBOR plus 190 basis points.

The second tranche of term loans, issued in August 2018, allowed for a principal
balance up to $25.0 million with quarterly principal payments and the remaining
unpaid principal and interest due upon maturity on August 1, 2023. We drew $16.4
million of the second tranche of the term loan in November 2018. This tranche of
the term loans has an interest rate of LIBOR plus 163 basis points.
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Off-balance sheet arrangements


As of April 30, 2022, we did not have any off-balance sheet arrangements that
had, or are reasonably likely to have in the future, a material effect on our
financial condition, results of operations, liquidity, capital expenditures or
capital resources.

Critical accounting policies and estimates


Our management's discussion and analysis of our financial condition and results
of operations are based on our Condensed Consolidated Financial Statements,
which are prepared in accordance with U.S. GAAP. The preparation of these
Condensed Consolidated Financial Statements requires the application of
appropriate technical accounting rules and guidance, as well as the use of
estimates. The application of these policies requires judgments regarding future
events. These estimates and judgments could materially impact the Condensed
Consolidated Financial Statements and disclosures based on varying assumptions,
as future events rarely develop exactly as forecasted, and even the best
estimates routinely require adjustment.

There have been no material changes in our critical accounting policies during
the nine months ended April 30, 2022, as compared to those disclosed in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for
Fiscal 2021.

Recent accounting pronouncements


See Note 2 (Basis of presentation and significant accounting policies) to our
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Report for additional information regarding recent accounting pronouncements.

Emerging growth company status


We are an emerging growth company, as defined in the JOBS Act. Section 107 of
the JOBS Act provides that an "emerging growth company" can take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. In other words, an
"emerging growth company" can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. Section 107 of
the JOBS Act provides that any decision to opt out of the extended transition
period for complying with new or revised accounting standards is irrevocable. 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. 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. Based on the Company's aggregate worldwide
market value of voting and non-voting common equity held by non-affiliates as of
January 31, 2022, the Company will become a "large accelerated filer" and lose
emerging growth company status beginning with its Annual Report on Form 10-K for
the year ending July 31, 2022.

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