VINTAGE WINE ESTATES, INC. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we", "us", "our" and "the Company" are intended to mean the business and operations ofVintage Wine Estates, Inc. , aNevada corporation and its consolidated subsidiaries.
Business Overview
Vintage Wine Estates, Inc. , is a leading vintner inthe United States ("U.S."), offering a collection of wines produced by award-winning, heritage wineries, popular lifestyle wines, innovative new wine brands, packaging concepts, as well as craft spirits. Our name brands include Layer Cake,Cameron Hughes , ClosPegase ,B.R. Cohn , Firesteed, Bar Dog, Kunde, Cherry Pie and many others. Since our founding over 20 years ago, we have grown organically through wine brand creation and through acquisitions to become the 15th largest wine producer based on cases of wine shipped inCalifornia . We sell nearly two million cases annually.
Growth Strategy
Our strategy is to continue to grow organically and through acquisitions with a view towards making two to three acquisitions per year over the next five years. These acquisitions have allowed us to diversify our wine sourcing into regions outside ofCalifornia , expand our portfolio of brands, increase our vineyard assets and provide our direct-to-consumer and retail customers with a range of wines to choose from.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
COVID-19 Pandemic
The COVID-19 pandemic ("COVID-19") continues to disrupt the U.S. and global
economies. While many measures implemented by governments in an effort to slow
the spread of COVID-19 have been lifted or eased, some are continuing. We cannot
estimate with any certainty the length or severity of the COVID-19 pandemic or
the related financial consequences on our business and operations, including
whether and when historic economic and operating conditions will resume or the
extent to which the disruption may impact our business, financial position,
results of operations or cash flows.
Invasion of
Russia's invasion ofUkraine has not had a direct impact on the Company. The Company does not have assets, operations or human capital resources located inRussia orUkraine , does not invest or hold securities that trade in those areas and does not rely on goods or services sourced inRussia orUkraine . However, the Company receives its capsules for wine bottles from a supplier inItaly , who has plants located inUkraine ,Italy andPoland . While the Company has not been impacted directly by supply chain disruptions as a result of the invasion, including potential cybersecurity risks and other indirect operational or supply chain challenges, the competition has increased from suppliers due to the closing of the plant inUkraine .
Industry and Economic Conditions
The wine industry is recession resistant, with sustained growth over the past 25 years despite downturns in economic conditions from time to time. Consumers are increasingly purchasing higher priced wines and other alcoholic beverages, which has accelerated throughout the COVID-19 pandemic. Consumption increases are largely in the$10.00 or more retail price per bottle premium and luxury wine categories. We benefit from this trend by focusing on the premium wine segment. Approximately 80% of our wine sales are in the$10.00 to$20.00 per bottle range. 27
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Significant wildfires inCalifornia ,Oregon andWashington state , have engulfed the affected regions in smoke and flames. The long-term trend is that wildfires are increasing resulting from drought conditions. Drought conditions due to global climate change have increased the severity of destructive wildfires which have affected theU.S. grape harvest. When vineyards and grapes are exposed to smoke, it can result in an ashy, burnt, or smoky aroma, described as "smoke tainted". Industry grape suppliers have also experienced smoke and fire damage from the wildfires. Damage to our grape harvest and vineyards caused from wildfires have impacted our revenues, costs of revenues and winery overhead for the periods presented. Seasonality There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenues and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during our second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.
Weather Conditions
Our ability to fulfill the demand for wine is restricted by the availability of grapes. Climate change, agricultural and other factors, such as wildfires, disease, pests, extreme weather conditions, water scarcity, biodiversity loss and competing land use, impact the quality and quantity of grapes available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenues and costs from year to year.
In addition, extreme weather events, such as wildfires can result in potentially significant expenses to repair or replace a vineyard or facility as well as impact the ability of grape suppliers to fulfill their obligations to us.
We consider a variety of financial and operating measures in assessing the performance of our business, formulating goals and objectives and making strategic decisions. The key GAAP measures we consider are net revenues; gross profit; selling, general and administrative expenses; and income from operations. The key non-GAAP measure we consider is Adjusted EBITDA. We also monitor our case volume sold and depletions from our distributors to retailers to help us forecast and identify trends affecting our growth.
Net Revenues
We generate revenue from our segments: Wholesale, Business-to-Business ("B2B"),
Direct-to-Consumer ("DTC") and Corporate and Other. We recognize revenue from
wine sales when obligations under the terms of a contract with our customer are
satisfied. Generally, this occurs when the product is shipped, and title passes
to the customer, and when control of the promised product or service is
transferred to the customer. Our standard terms are free on board, or FOB,
shipping point, with no customer acceptance provisions. Revenue is measured as
the amount of consideration expected to be received in exchange for transferring
products. We recognize revenue net of any taxes collected from customers, which
are subsequently remitted to governmental authorities. We account for shipping
and handling as activities to fulfill our promise to transfer the associated
products. Accordingly, we record amounts billed for shipping and handling costs
as a component of net sales and classify such costs as a component of costs of
sales. Our products are generally not sold with a right of return unless the
product is spoiled or damaged. Historically, returns have not been significant
to us.
Gross Profit
Gross profit is equal to net revenues less cost of sales. Cost of sales includes
the direct cost of manufacturing, including direct materials, labor and related
overhead, and physical inventory adjustments, as well as inbound and outbound
freight and import duties.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenues, but are expected to increase over time to support the needs of the Company.
Income from Operations
Income from operations is gross profit less selling, general and administrative
expenses; acquisition and restructuring related expenses or income and
amortization of intangible assets. Income from operations excludes interest
expense, income tax expense, and other expenses, net. We use income from
operations as well as other indicators as a measure of the profitability of our
business.
Case Volumes
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In addition to acquisitions, the primary drivers of net revenue growth in any period are attributable to changes in case volumes and changes in product mix and sales price. Case volumes represent the number of 9-liter equivalent cases of wine that we sell during a particular period. Case volumes are an important indicator of what is driving gross margin. This metric also allows us to develop our supply and production targets for future periods.
The following tables summarize 9-liter equivalent cases by segment:
Three Months Ended March 31,
(in thousands) 2022 2021 Unit Change % Change
Wholesale 357 318 39 12.3 %
B2B 113 85 28 32.9 %
DTC 87 52 35 67.3 %
Total case volume 557 455 102 22.4 %
Case volumes were up 22.4% for the three months ended March 31, 2022 , driven by
increased shipments in all segments, from the three months ended March 31, 2021 .
Wholesale increased 12.3% due to increased volumes associated with the
acquisition of ACE Cider, partially offset by reduced off premise shipments from
our core brands. B2B volumes increased 32.9% related primarily to increased
customer projects. DTC volumes increased 67.3% due to increased wine club and
tasting room transactions coupled with shipments related to the acquisition of
Vinesse.
Case Volume Nine Months Ended March 31,
(in thousands) 2022 2021 Unit Change % Change
Wholesale 1,072 782 290 37.1 %
B2B 452 437 15 3.4 %
DTC 307 240 67 27.9 %
Total case volume 1,831 1,459 372 25.5 %
Case volumes were up 25.5% for the nine months ended March 31, 2022 , driven by
increased volumes in the Wholesale and DTC segments from the nine months ended
March 31, 2021 . Wholesale volumes increased 37.1% due to shipments of high
volume core brands as well as the acquisition of ACE Cider partially offset by
the discontinuation of certain brands. B2B volumes remained stable with an
increase of 3.4% for the nine months ended March 31, 2022 . DTC volumes increased
27.9% for the nine months ended March 31, 2022 driven by increased tasting room
and wine club activity, special programming through a large e-commerce company
and the acquisition of Vinesse.
Depletions
Within our three tier distribution structure, depletion measures the sale of our inventory from the distributor to the retailer. Depletions are an important indicator of customer satisfaction, which management uses for evaluating performance of our brands and for forecasting.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we use EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies. These metrics are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. Adjusted EBITDA is defined as earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, casualty losses or gains, impairment losses, changes in the fair value of derivatives, restructuring related income or expenses, acquisition and integration costs, and certain non-cash, non-recurring, or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance, including COVID related adjustments. COVID related adjustments relate to the delayed GAZE brand launch and nonrecurring costs of implementing safety protocols for production facilities, warehouse, tasting rooms and offices. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net revenues.
The following is a reconciliation of net income to Adjusted EBITDA for the periods presented:
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Three Months Ended Nine Months Ended
(in thousands) March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021
Net income $ 2,707 $ 626 $ 14,038 $ 15,263
Interest expense 3,729 3,842 10,825 9,173
Income tax provision 958 1,633 5,412 4,517
Depreciation and amortization 8,122 2,439 18,033 7,982
Stock-based compensation 1,943 143 1,943 601
expense
Net unrealized/(gain) loss on (4,553 ) (5,589 ) (8,582 ) (8,212 ) interest rate swap agreements (Gain)/loss on disposition of 1,099 678 508 (999 )
assets
Gain on litigation proceeds (3,000 ) 905 (3,000 ) (3,845 ) Deferred rent adjustment 47 126 285 376 Incremental public company 912 - 3,060 - costs Acquisition integration costs 243 - 643 - Deferred gain on sale (1,000 ) (1,000 ) (1,000 ) (1,000 )
leaseback
Inventory adjustment for - 3,302 - 3,302 casualty losses Transaction expenses - 3,015 - 3,015 COVID related adjustments - - - 100 Inventory acquisition basis 2,789 8 3,848 97 adjustment Adjusted EBITDA $ 13,996$ 10,128 $ 46,013 $ 30,370 Revenue $ 78,933$ 46,897 $ 218,231 $ 163,709 Adjusted EBITDA margin 17.7 % 21.6 % 21.1 % 18.6 % Adjusted EBITDA and Adjusted EBITDA Margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance. Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms Adjusted EBITDA and Adjusted EBITDA Margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of our operating performance in isolation from, or as a substitute for, net income (loss), which is prepared in accordance with GAAP. We have presented Adjusted EBITDA and Adjusted EBITDA Margin solely as supplemental disclosure because we believe it allows for a more complete analysis of our results of operations. In the future, we may incur expenses such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Results of Operations
Our financial performance is classified into the following segments: Wholesale, B2B, DTC and Corporate and Other. Our corporate operations, including centralized selling, general and administrative expenses and other factors, such as the remeasurements of contingent consideration and impairment of intangible assets and goodwill are not allocated to the segments, as management does not believe such items directly reflect our core operations. Other than our long-term property, plant and equipment for wine tasting facilities, and the customer list and trademark intangible assets specific to the Sommelier, Vinesse, ACE Cider and Meier's acquisitions, our revenue generating assets are utilized across segments. Accordingly, the foregoing items are not allocated to the segments and are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above. We evaluate the performance of our segments on income from operations, which management believes is indicative of operational performance and ongoing profitability. Management monitors income from operations to evaluate past performance and identify actions required to improve profitability. Income from operations assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define income from operations as gross margin less operating expenses that are directly attributable to the segment. Selling expenses that can be directly attributable to the segment are allocated accordingly.
Three Months Ended
Wholesale Segment Results
The following table presents summary financial data for our Wholesale segment:
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Three Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 24,549 $ 21,092 $ 3,457 16.4%
Income from operations $ 3,270 $ 6,138 $ (2,868 ) -46.7%
For the three months ended March 31, 2022 , Wholesale net revenues increased $3.5
million , or 16.4%, from the three months ended March 31, 2021 . The increase was
attributable to an increase in sales of $5.0 million related to acquisition case
volumes partially offset by reduced off premise sales from our core brands.
For the three months ended March 31, 2022 , Wholesale income from operations
decreased $2.9 million , or 46.7%, from the three months ended March 31, 2021 .
The decrease was attributable amortization of acquired customer relationships,
higher costs due to inflation and supply chain challenges not yet offset from
pricing actions going into effect in coming quarters.
B2B Segment Results
The following table presents summary financial data for our B2B segment:
Three Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 33,657 $ 11,026 $ 22,631 205.3%
Income from operations $ 10,457 $ 3,391 $ 7,066 208.4%
For the three months ended March 31, 2022 , B2B net revenues increased $22.6
million , or 205.3%, from the three months ended March 31, 2021 . The increase was
primarily attributable to increased custom production as well as an increase of
$3.1 million related to acquisitions.
For the three months ended March 31, 2022 , B2B income from operations increased
$7.1 million , or 208.4%, from the three months ended March 31, 2021 . The
increase was attributable to increased custom production as well as an increase
of $ 0.5 million related to acquisitions.
DTC Segment Results
The following table presents summary financial data for our DTC segment:
Three Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 19,595 $ 14,675 $ 4,920 33.5%
Income from operations $ 916 $ 1,986 $ (1,070 ) -53.9%
For the three months ended March 31, 2022 , DTC net revenues increased $4.9
million , or 33.5%, from the three months ended March 31, 2021 . The increase was
primarily attributable to increased tasting rooms traffic as restrictions
related to COVID-19 have been lifted and an increase of $3.3 million related to
acquisitions.
For the three months ended March 31, 2022 , DTC income from operations decreased
$1.1 million , or 53.9%, from the three months ended March 31, 2021 . The decrease
was primarily due to increased amortization of acquired intangible assets of
$0.7 million as well as incremental SG&A costs which do not yet represent
expected synergies.
Corporate and Other Segment Results
The following table presents summary financial data for our Corporate and Other
segment:
Three Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 1,132 $ 104 $ 1,028 *
Income (loss) from operations
*Not meaningful For the three months endedMarch 31, 2022 , Corporate and other net revenues increased$1.0 million from the three months endedMarch 31, 2021 . The increase was primarily attributable to an increase in bulk wine sales when compared to the prior year three month period. Loss from operations increased$2.4 million , or 21.4%, from the three monthsMarch 31, 2022 . The increase in losses was due to the increased infrastructure costs required to be a public company, and the continued increased costs of labor, warehousing, freight and insurance. 31
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Nine Months Ended
Wholesale Segment Results
The following table presents summary financial data for our Wholesale segment:
Nine Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 62,923 $ 55,399 $ 7,524 13.6%
Income from operations $ 12,654 $ 14,760 $ (2,106 ) -14.3%
For the nine months ended March 31, 2022 , Wholesale net revenues increased $7.5
million , or 13.6%, from the nine months ended March 31, 2021 . The increase was
attributable to an increase in sales of $7.6 million related to an acquisition,
partially offset by discontinued brands.
For the nine months ended March 31, 2022 , Wholesale income from operations
decreased $2.1 million , or 14.3%, from the nine months ended March 31, 2021 . The
decrease was attributable amortization of acquired customer relationships,
higher costs due to inflation and supply chain challenges not yet offset from
pricing actions going into effect in coming quarters.
B2B Segment Results
The following table presents summary financial data for our B2B segment:
Nine Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 83,349 $ 57,704 $ 25,645 44.4%
Income from operations $ 26,274 $ 18,052 $ 8,222 45.5%
For the nine months ended March 31, 2022 , B2B net revenues increased $25.6
million , or 44.4%, from the nine months ended March 31, 2021 . The increase was
primarily attributable to increased custom projects and timing of private label
sales as well as an increase of $3.1 million related to acquisitions.
For the nine months ended March 31, 2022 , B2B income from operations increased
$8.2 million , or 45.5%, from the nine months ended March 31, 2021 . The increase
was attributable to increases in custom production as well as an increase of
$0.5 million related to acquisitions.
DTC Segment Results
The following table presents summary financial data for our DTC segment:
Nine Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 69,316 $ 48,650 $ 20,666 42.5%
Income from operations $ 14,834 $ 9,997 $ 4,837 48.4%
For the nine months ended March 31, 2022 , DTC net revenues increased $20.7
million , or 42.5%, from the nine months ended March 31, 2021 . The increase was
primarily attributable to increased case volumes from tasting rooms and wine
clubs, and revenues earned from events as restrictions related to COVID-19 have
been lifted and an increase in sales of $7.6 million related to an acquisition.
For the nine months ended March 31, 2022 , DTC income from operations increased
$4.8 million , or 48.4%, from the nine months ended March 31, 2021 . The increase
was due to increased margin contribution from improved traffic in tasting rooms,
wine club shipments and events, partially offset by a loss of $0.3 million from
an acquisition, net of amortization of acquired customer lists.
Corporate and Other Segment Results
The following table presents summary financial data for our Corporate and Other
segment:
Nine Months Ended March 31, Dollar Percent
(in thousands, except %) 2022 2021 Change Change
Net revenues $ 2,643 $
1,956
Income (loss) from operations$ (34,014 ) $
(22,751 )
For the nine months ended
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Loss from operations decreased$11.3 million , or 49.5%, from the nine months endedMarch 31, 2021 . The increase was due to the costs related to increased infrastructure cost required to be a public company and the continued increased costs of labor, warehousing, freight and insurance.
Liquidity and Capital Resources
We currently believe that, based on available capital resources and projected operating cash flows, we have adequate capital resources to fund our currently anticipated working capital needs; capital expenditures, business acquisitions, debt obligations, and tax payments over the next 12 months and beyond.
Cash and Cash Equivalents
Our cash and equivalents balance was
Cash Flows
The table below presents a summary of our sources and uses of cash:
For the Nine Months Ended
March 31,
(in thousands) 2022 2021 Change
Operating activities $ (3,903 ) $ 19,661 $ (23,564 )
Investing activities $ (90,111 ) $ (29,243 ) $ (60,868 )
Financing activities $ 46,044 $ 8,287 $ 37,757 Cash Flows provided by (used in) Operating Activities
Net cash used in operating activities was$3.9 million for the nine months endedMarch 31, 2022 compared to net cash provided by operating activities of$19.7 million for the nine months endedMarch 31, 2021 , representing an increase in net cash used of$23.6 million . The increase in net cash used was primarily attributable to the decrease in net income of$1.2 million , net changes in certain non-cash adjustments of$14.7 million to reconcile net income to operating cash flow and net changes in other operating assets and liabilities of$37.0 million as detailed on the condensed consolidated statement of cash flows.
Cash Flows provided by (used in) Investing Activities
Net cash used in investing activities was$90.1 million for the nine months endedMarch 31, 2022 , compared to net cash used in investing activities of$29.2 million for the nine months endedMarch 31, 2021 , representing an increase in net cash used of$60.8 million . Cash flows from investing activities are utilized primarily to fund acquisitions, capital expenditures for improvements to existing assets and other corporate assets. The increase in net cash used was primarily attributable to acquisitions of businesses of$74.3 million , partially offset by reduced purchases of property, plant and equipment of$11.3 million .
Cash Flows provided by (used in) Financing Activities
Net cash provided by financing activities was$46.0 million for the nine months endedMarch 31, 2022 compared to net cash used of$8.3 million for the nine months endedMarch 31, 2021 , representing an increase in net cash provided of$37.8 million . The increase in net cash provided consisted primarily of$46.2 million of proceeds from our line of credit, net of payments on our line of credit and long-term debt.
Contractual Obligations
There have been no material changes to our contractual obligations from what was
previously disclosed in our Annual Report on Form 10-K filed with the
Off-Balance Sheet Arrangements
As of
Significant Accounting Policies
There have been no material changes to the significant accounting policies from what was previously disclosed in our Annual Report on Form 10-K filed with theSEC .
Recent Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 1, Basis of
Presentation and Significant Accounting Policies in the notes to our unaudited
condensed consolidated financial statements.
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Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the safe harbor provisions of theU.S. Private Securities Litigation Reform Act of 1995. Investors are cautioned that statements that are not strictly historical statements of fact constitute forward-looking statements, including, without limitation, statements under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and are often identified by words like "believe," "expect," "may," "will," "should," "seek," "anticipate," or "could" and similar expressions. Forward-looking statements are not assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed or implied by forward-looking statements include those discussed under the "Risk Factors" section of our Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q or other reports filed with theSEC .
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly revise or update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
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