You should read the following discussion and analysis of financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this Annual Report on Form 10-K. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we", "us", "our" and "the Company" are intended to mean the business and operations ofVintage Wine Estates, Inc. ("VWE") and its consolidated subsidiaries.
Overview
Vintage Wine Estates 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've exceeded 20% net revenue and adjusted EBITDA compound annual growth rates since 2010. We now sell nearly 2 million cases annually.
Our key differentiator is our diversification-what we call our three-legged stool business model.
We are diversified in our brand collection, producing over 50 brands ranging in retail price from$10 to$150 , with a focus on the fastest growing$10 and$20 segment. Approximately eighty percent of our business is done in this critical segment. We are diversified in our omni-channel sales strategy balanced between direct-to-consumer, 30% of sales, traditional wholesale, 33% of sales and business-to-business at 35% of sales. Our direct-to-consumer segment is particularly robust. Where most wine companies have two direct sales levers to pull: tasting rooms and wine clubs, we have seven: tasting rooms, wine clubs, ecommerce,Cameron Hughes ,Windsor /custom label design and engraving,QVC/HSN and The Sommelier Company . We are diversified in our sourcing with a strong asset base of 2,800 owned and leased vineyard acres in located in the premier winegrowing regions of theU.S. and 10 owned winery estates. These properties extend from theCentral Coast ofCalifornia to storied appellations inNapa Valley andSonoma County , north toOregon andWashington . We obtain fruit for our wines from owned and leased vineyards, as well as other sources, including independent growers and the spot wine market. We have completed over 20 acquisitions in the past 10 years and completed over 10 acquisitions in the past 5 years. We generally acquire the brands and inventories of a targeted business, eliminating redundant corporate overhead. We then integrate the acquired assets into our highly efficient production, distribution and omni channel selling networks, quickly increasing the sales and margins of the acquired business. Our growth has allowed us to reinvest in our business and create the scale and infrastructure needed to successfully manage a variety of different wine brands and channels and reduce costs. Our owned winery facilities have the current capacity to produce up to 7 million cases of wine per year. As of the date of this report, we are near completion of a$45 million investment into ourRay's Station production facility, which includes a high-speed bottling facility with the capacity to bottle over 13.5 million cases annually and a 364,000 square foot warehouse and distribution center. Additional bottling capacity will not only be used for our products, but also will allow us to further expand our bottling and fulfillment services offered to third parties on a contract basis. The additional capacity of the bottling facility may not initially be fully utilized but provides us with capacity consistent with our growth plans. Our scale and consolidated operations are expected to enable us to increase margins of the businesses that we acquire, providing accretive value promptly after the acquisition.
Strategy
Our strategy is to continue to grow organically and through acquisitions with a view towards making two to three acquisitions per year over the next five years. We believe we have completed more brand mergers and acquisitions in theU.S. wine industry over the last 10 years than any other company in the industry. These acquisitions have allowed us to diversify our wine sourcing into regions outside ofCalifornia , expand our portfolio of brands, increase our vineyard assets and provide our DTC and retail customers with a range of wines to choose from. We have historically targeted a significant increase in the target company's EBITDA within three years of the acquisition. To achieve these results, our acquisitions are subject to a rigorous, data-driven, due diligence and underwriting process, to assure that minimum financial thresholds with meaningful upside can be satisfied in each transaction. In accordance with GAAP, the results of the acquisitions we have completed are reflected in our consolidated financial statements. We typically incur minimal transaction costs in connection with identifying and completing acquisitions and ongoing integration costs as we integrate acquired companies and seek to achieve synergies. 24
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Table of Contents Recent Developments Our Business Combination We were formed in 2019 asBespoke Capital Acquisition Corp. ("BCAC"), a special purpose acquisition corporation incorporated under the laws of the Province ofBritish Columbia . BCAC was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or any other similar business combination involving BCAC. OnJune 7, 2021 , BCAC consummated its business combination (the "Business Combination") withVintage Wine Estates, Inc. , aCalifornia corporation ("Legacy VWE"), pursuant to a transaction agreement datedFebruary 3, 2021 . As a result of the Business Combination and the related transactions, BCAC changed its jurisdiction of incorporation from the Province ofBritish Columbia to theState of Nevada , BCAC changed its name to "Vintage Wine Estates, Inc. " and Legacy VWE became our wholly-owned subsidiary. For accounting purposes, and in accordance with generally accepted accounting principles, BCAC was treated as the acquired company and Legacy VWE was treated as the acquirer.U.S. Wildfires Significant wildfires inCalifornia ,Oregon andWashington states, have recently 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 the wildfires has impacted our revenues, costs of revenues and winery overhead for the periods presented.
Acquisitions and Divestitures
OnJune 22, 2021 , we acquired the net assets ofThe Sommelier Company consisting of customer relationships, independent Sommelier relationships and brand trademarks, for total consideration of$12.0 million . Consideration transferred consisted of a cash payment of$8.0 million and contingent consideration up to$4.0 million , whereby the Company will pay the seller three annual earn-out payments over three years, determined as a percentage of EBITDA.
Kunde Acquisition
OnApril 19, 2021 , we acquired 100% of the outstanding equity ofKunde Enterprise Inc. ("Kunde") for total consideration, including amounts to acquire the combined 33.3% ownership held by two of the Company stockholders, of which one is an executive officer of the Company, of approximately$53.0 million , net of$5.9 million in pre-existing net liabilities due to Kunde. Kunde produces and sells premiumSonoma Valley varietal wines via the wholesale channel as well as internationally and locally through its tasting room, wine club, and internet site. In addition, Kunde provides wine storage, processing, and bottling services for other wineries. The operations of Kunde align with those of us, providing for expanded synergies and growth through the acquisition. See Note 3 to the consolidated financial statements. The$53.0 million purchase consideration was comprised of approximately$21.5 million of cash, approximately$11.7 million of notes payable to the sellers, and the issuance of 906,345 shares (2,589,507 shares retroactively restated giving effect to the recapitalization transaction discussed in Note 1) of the Company's Series A stock, with a value of$25.8 million , totaling$58.9 million less the release of pre-existing net liabilities between the Company and Kunde of$5.9 million . Two of the three notes payable issued to the sellers have a interest rate of Prime plus 1.00%, compounded quarterly, and mature onJanuary 5, 2022 , while the third note has a stated interest rate of 1.61%, compounded quarterly, and matures onDecember 31, 2021 . To fund the cash portion of the purchase consideration, we utilized our line of credit and delay draw term loan. For a summary of the allocation of the purchase price to the fair value of the assets acquired, see Note 3 to the consolidated financial statements.
InSeptember 2019 , the Company acquired assets, including inventory, land, winery equipment and brand trademarks fromOwen Roe Winery for total consideration of approximately$16.1 million . Consideration consisted of cash of approximately$15.1 million and contingent consideration of$1.0 million whereby we will pay the seller a fixed fee based on sales of the wine brands acquired for four years.
Divestiture of Certain Assets
Grounded Wine Project Divestiture
OnOctober 31, 2020 , we entered into a purchase and sale agreement with a former employee pursuant to which we sold our 51% interest inGrounded Wine Project, LLC ("GWP"), certain bulk wine and cased goods inventory related to GWP's business, and certain other assets used in the 25
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operation of GWP's business, including trademarks, customer lists, website content, domain names, marketing materials and certain assignable contracts, but excluding cash on hand and accounts receivable relating to the GWP business, for a purchase price of$1.0 million . In connection with the sale, we entered into an interim services agreement with the purchaser for a period ending on the earlier of six months from the closing date and purchaser's receipt of necessary permits for the operation of GWP, whereby we would continue to operate GWP and store and maintain its wine assets and purchaser would provide certain services to us relating to the operation of GWP. The services agreement was extended toAugust 31, 2021 . Management routinely evaluates the profitability of our brands and determined that GWP branded products were underperforming our expectations for the two years prior toJune 30, 2020 . GWP accounted for approximately 0.09% and 0.62% of our consolidated net revenues for fiscal years endedJune 30, 2021 and 2020.
Sales Pro and Master Class Divestiture
OnDecember 30, 2019 , we entered into an asset purchase agreement with a current employee pursuant to which we agreed to sell the intellectual property and marketing materials of Sales Pro andMaster Class in exchange for a royalty payment per case sold by the purchaser betweenJanuary 1, 2020 andDecember 1, 2025 . The effective date of the transfer of Sales Pro andMaster Class wasJanuary 1, 2020 . We acquired Sales Pro andMaster Class as part of the acquisition of the assets ofCameron Hughes Wine . Sales Pro andMaster Class is engaged in in-store wine tasting and promotion, which is not core to our business. Sales Pro andMaster Class represented approximately 1.4% of our consolidated net revenues for fiscal 2020.
Potential Divestiture of Certain Real Estate Assets
In the first quarter of fiscal 2020, our board of directors authorized
management to explore the divestiture of certain non-core real estate assets
with a combined appraised value in excess of
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, B2B, DTC 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, as well as inbound and outbound freight and import duties.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenues, but are expected to increase over time to support the needs of the Company.
Income from Operations
Income from operations is gross profit less selling, general and administrative expenses; acquisition and restructuring related expense or income and amortization of intangible assets. Income from operations excludes interest expense, income tax expense, and other expenses, net. We use income from operations as well as other indicators as a measure of the profitability of our business. Case Volume In addition to acquisitions, the primary drivers of net revenue growth in any period are attributable to changes in case volume and changes in product mix and sales price. Case volume represents the number of 9-liter equivalent cases of wine that we sell during a particular period. Case volume is an important indicator of what is driving gross margin. This metric also allows us to develop our supply and production targets for future periods. 26
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Table of Contents VWE 9L Equivalent Case Sales by Segment Year ended June 30, (in thousands) 2021 2020 Wholesale 969 1,037 B2B 558 411 DTC 348 274 Total case volume 1,875 1,722 Case volume was up 9% for the fiscal year driven by volume increase in the B2B and DTC segments. B2B volumes grew 35.8% for the year due to expanded relationships in private label. DTC volume was up 27% driven by increased tasting room activity and special programming through a large e-commerce company. Wholesale volumes were down 6.6% due to the discontinuation of certain brands partially offset by the inclusion of Kunde in the fourth quarter.
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. (in thousands) June 30, 2021 June 30, 2020 Net income (loss)$ 10,088 $ (9,700 ) Interest expense 11,581 15,422 Income tax provision (benefit) 766 (9,957 ) Depreciation and amortization 11,436
11,805
Amortization of label design fees 464 260 Gain on litigation proceeds, net of legal fees (3,845 ) - Taint provision -
4,859
Stock-based compensation expense 3,334 289 Inventory adjustment for wildfire impact - vineyard 3,302 - Inventory adjustment for wildfire impact - winery overhead 9,000 - PPP loan forgiveness (6,604 ) - Net unrealized (gain) loss on interest rate swap agreements (6,136 )
12,945
(Gain) loss on disposition of assets (2,336 ) (1,052 ) Deferred lease adjustment 352 501 Transaction expenses 4,339 - Impairment of intangible assets 1,081
1,281
Remeasurement of contingent consideration liabilities (329 ) (1,035 ) Post-acquisition accounts receivable write-down 109 434 COVID impact 1,563 200 Inventory acquisition basis adjustment 401 1,271 Adjusted EBITDA$ 38,566 $ 27,523 Revenue 220,742 189,919 Adjusted EBITDA Margin 17.5 % 14.5 % Adjusted EBITDA and Adjusted EBITDA Margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these 27
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parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance. Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms Adjusted EBITDA and Adjusted EBITDA Margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as indicators of our operating performance in isolation from, or as a substitute for, net income (loss), which is prepared in accordance with GAAP. We have presented Adjusted EBITDA and Adjusted EBITDA Margin solely as supplemental disclosure because we believe it allows for a more complete analysis of our results of operations. In the future, we may incur expenses such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
COVID-19 The outbreak of COVID-19, which theWorld Health Organization declared a pandemic inMarch 2020 , has spread across the globe and theU.S and has disrupted the global economy and most industries, including the wine industry. In an effort to contain and slow the spread of COVID-19, governments implemented various measures, such as ordering non-essential businesses to close, issuing travel advisories and restrictions, canceling large public events, ordering shelter-in-place and requiring the public to practice social distancing. While many of these measures have been lifted or eased, some are continuing and others are being reimplemented as COVID-19 continues to spread. Although we have not experienced significant business disruptions to date from the COVID-19 pandemic, we experienced a year over year decline in visitors to our 14 tasting rooms during fiscal year endedJune 30, 2021 primarily due to continued COVID-19 measures. However, the decrease in the business we derive from our tasting rooms was offset by an increased amount of e-commerce and DTC wine sales. We sold approximately 1,875 cases for the year endedJune 30, 2021 compared to 1,722 cases for the year endedJune 30, 2020 . We expect that, following acceptance of COVID-19 vaccines and lifting of travel restrictions, tasting room volumes will, over time, increase from the current lows. In response to governmental directives and recommended safety measures, we modified our workplace practices. While we have implemented personal safety measures at all of our facilities where our employees are working onsite, any actions that we take may not be sufficient to mitigate the risk of infection and could result in a significant number of COVID-19 related claims. Changes to state workers' compensation laws, as have recently occurred inCalifornia , could increase our potential liability for such claims. To support employees and protect the health and safety of employees and customers, we provided temporary pay increases to certain employees and purchased additional sanitation supplies and personal protective materials. These measures will increase operating costs and adversely affect liquidity. In the longer-term, the COVID-19 pandemic is likely to adversely affect the economies and financial markets, and could result in an economic downturn and a recession. It is uncertain how this would affect demand for our products. While we continue to see robust demand in our industry, and have seen little impact to our business from the COVID-19 pandemic, we are unable to predict the full impact the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across theU.S. , the impact to our customers, employees and suppliers, and other factors described in the section titled "Risk Factors" in this Annual Report on Form 10-K. These factors are beyond our knowledge and control and, as a result, at this time, we are unable to predict the ultimate impact, both in terms of severity and duration, that the COVID-19 pandemic will have on our business, operating results, cash flows and financial condition.
Seasonality
There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenues and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during or second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.
Weather Conditions
Our ability to fulfill the demand for wine is restricted by the availability of grapes. Climate change, agricultural and other factors, such as wildfires, disease, pests, extreme weather conditions, water scarcity, biodiversity loss and competing land use, impact the quality and quantity of grapes available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenues and costs from year to year. 28
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In addition, extreme weather events, such as wildfires can result in potentially significant expenses to repair or replace a vineyard or facility as well as impact the ability of grape suppliers to fulfill their obligations to us.
Industry 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. Over the past ten years, the premium segment ($10 to$20 retail sales price) has grown on average by 6.6% annually. 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.
Casualty Gains
We suffered smoke-tainted inventory damage resulting from theOctober 2017 Napa andSonoma County wildfires. We filed an insurance claim for this damage, which was settled inDecember 2020 for approximately$3.8 million , net of legal costs. The gain of litigation proceeds consists of payments we received from our insurer . 29
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Table of Contents Results of Operations
Comparison of the years ended
The following table summarizes our operating results for the periods presented: Year Ended June 30, Dollar Percent (in thousands, except shares and per share data) 2021 2020 Change Change Net revenues Wine and spirits$ 177,331 $ 155,741 $ 21,590 14 % Nonwine 43,411 34,178 9,233 27 % 220,742 189,919 30,823 16 % Cost of revenues Wine and spirits 119,350 98,236 21,114 21 % Nonwine 26,041 20,051 5,990 30 % 145,391 118,287 27,104 23 % Gross profit 75,351 71,632 3,719 5 % Selling, general, and administrative expenses 72,505 64,699 7,806 12 % Impairment of intangible assets 1,081 1,282 (201 ) -16 % Gain on sale of property, plant, and equipment (2,336 ) (1,052 ) (1,284 ) 122 % Gain on litigation proceeds (4,750 ) - (4,750 ) * Gain on remeasurement of contingent consideration liabilities (329 ) (1,035 ) 706 68 % Income from operations 9,180 7,738 1,442 19 % Other income (expense) Interest expense (11,581 ) (15,422 ) (3,841 ) -25 % Net unrealized gain (loss) on interest rate swap agreements 6,136 (12,945 ) 19,081 147 % Gain on Paycheck Protection Program loan forgiveness 6,604 - 6,604 * Other, net 515 972 (457 ) -47 % Total other income (expense), net 1,674 (27,395 ) 29,069 106 % Income (loss) before provision for income taxes 10,854 (19,657 ) 30,511 155 % Income tax provision (766 ) 9,957 (10,723 ) -108 % Net income (loss) 10,088 (9,700 ) 19,788 204 % Net income attributable to the noncontrolling interests (218 ) (41 ) (177 ) 432 % Net income (loss) attributable to Vintage Wine Estates, Inc. 9,870 (9,741 ) 19,611 201 % Accretion on redeemable Series B stock 5,785 4,978 807 16 % Net income allocable to common stockholders$ 4,085 $ (14,719 ) $ 18,804 128 % Net earnings (loss) per share allocable to common stockholders Basic$ 0.14 $ (0.67 ) Diluted$ 0.14 $ (0.67 ) Weighted average shares used in the calculation of earnings (loss) per share allocable to common stockholders Basic 24,696,828 21,920,583 Diluted 25,179,502 21,920,583 *Not meaningful Net Revenues Net revenues for the year endedJune 30, 2021 increased$30.8 million , or 16.2%, to$220.7 million , from$189.9 million for the year endedJune 30, 2020 . The increase was driven by an increase in B2B net revenues of approximately$23.4 million , coupled with an increase in DTC net revenues of approximately$11.0 million , partially offset by a decrease in Wholesale net revenues of approximately$2.5 million and a decrease in Other net revenues of approximately$1.0 million . Nearly all of the increase in B2B net revenues for fiscal 2021 as compared to fiscal 2020 resulted from organic growth with less than 1% coming from acquisitions. Gross Profit Gross profit for the year endedJune 30, 2021 increased$3.7 million , or 5.2%, to$75.4 million , from$71.6 million for the year endedJune 30, 2020 . The increase in gross profit was driven by the increased volume in the B2B and DTC segments partially offset by wholesale volume and mix and by an atypical year end inventory adjustments of approximately$9.0 million (11.9% impact on margin), primarily related to the impact of wildfires on the 30
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2020 harvest. In addition, the shift in mix to greater B2B volume, which is the lowest gross margin business, combined with a shift of channels within the DTC segment had an approximate 5.5% reduction of margin.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year endedJune 30, 2021 increased$7.8 million , or 12.1%, to$72.5 million , from$64.7 million for the year endedJune 30, 2020 . The increase in selling, general and administrative expenses was driven primarily by costs related to going public, increased costs of insurance, freight, shipping and labor.
Income from Operations
Income from operations for the year endedJune 30, 2021 increased$1.4 million , or 18.6%, to$9.2 million from$7.7 million for the year endedJune 30, 2020 . The increase was driven by growth in B2B and DTC segments, gain on litigation proceeds related to the smoke taint lawsuit, and gain on sale of assets partially offset by lower wholesale revenue, inventory adjustments and impairment of intangible assets.
Other Income (Expense)
Total other income (expense) was$1.7 million income for the year endedJune 30, 2021 compared to$(27.4) million expense for the year endedJune 30, 2020 , a net increase year over year of$29.1 million or 106.1%. The change was due primarily to a change from an unrealized loss on interest rate swap agreements to an unrealized gain accounting for$19.1 million of the change. In addition,$6.6 million related to the forgiveness of the Paycheck Protection Program ("PPP") loan of$6.6M , and a$3.8 million decrease in interest expense due to amendments to the debt and lower interest rates.
Income Tax Provision
Income tax expense was$(766) thousand for the year endedJune 30, 2021 compared to income tax benefit of$10.0 million for the year endedJune 30, 2020 . The income tax expense in fiscal 2021 was primarily due to an increase in annual net income and costs related to the transaction, partially offset by the PPP Loan forgiveness, stock based compensation and research and development tax credits. The income tax benefit for the year endedJune 30, 2020 was primarily due to a net loss in fiscal 2020, the release of valuation allowance, a research and development tax credit and other adjustments.
Segment Results
Our financial performance is classified into the following segments: Wholesale, B2B, DTC 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 acquisition, our revenue generating assets are utilized across segments. Accordingly, the foregoing items are not allocated to the segments and are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above. We evaluate the performance of our segments on income from operations, which management believes is indicative of operational performance and ongoing profitability. Management monitors income from operations to evaluate past performance and identify actions required to improve profitability. Income from operations assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define income from operations as gross margin less operating expenses that are directly attributable to the segment. Selling expenses that can be directly attributable to the segment are allocated accordingly.
Segment Results for the Years Ended
Wholesale Segment Results
(in thousands, except %) Year Ended
2020 Change Change Net revenues$ 72,908 $ 75,435 $ (2,527 ) -3.3% Income from operations$ 15,044 $ 14,777 $ 267 1.8% Wholesale net revenues for the year endedJune 30, 2021 decreased by approximately$2.5 million , or 3.3%, from the year endedJune 30, 2020 . The decrease was attributable to a decrease in case volumes due to the normalized case volumes in the 2021 period as compared to the 2020 period when retailers increased case volume related to COVID as well as the impact of the discontinuation of two brands and partially offset by favorable mix. Wholesale income from operations for the year endedJune 30, 2021 increased by approximately$267 thousand , or 1.8%, from the year endedJune 30, 2020 . The increase was attributable to improved mix, partially offset by a decreased case volumes. 31
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Table of Contents B2B Segment Results (in thousands, except %) Year Ended June 30, Dollar Percent B2B Segment Results 2021 2020 Change Change Net revenues$ 77,440 $ 54,056 $ 23,384 43.3% Income from operations$ 17,944 $ 14,783 $ 3,161 21.4% B2B net revenues for the year endedJune 30, 2021 increased by approximately$23.4 million , or 43.3% from the year endedJune 30, 2020 . The increase was attributable to increased custom production as well as increased case volumes, reflecting the Company's continued strong relationships with private label and custom production customers. B2B income from operations for the year endedJune 30, 2021 increased by$3.2 million , or 21.4%, from the year endedJune 30, 2020 . The increase was attributable to the increased custom production activity coupled with increased case volumes delivering a low mix.
DTC Segment Results
(in thousands, except %) Year Ended June 30, Dollar Percent DTC Segment Results 2021 2020 Change Change Net revenues$ 66,605 $ 55,639 $ 10,966 19.7% Income from operations$ 11,437 $ 7,149 $ 4,288 60.0% DTC net revenues of$66.6 million for the year endedJune 30, 2021 increased by approximately$11.0 million , or 19.7%, from the year endedJune 30, 2020 . The increase was primarily attributable to the an increase in case volume from tasting rooms and e-commerce. The overall mix affected by a shift to special programming through a large e-commerce company. DTC income from operations for the year endedJune 30, 2021 increased by approximately$4.3 million , or 60.0%, from the year endedJune 30, 2020 . The increase was due to improved traffic in tasting rooms compared to the prior year and wine clubs resulting in positive mix and continued strong growth in e-commerce. Other Segment Results
(in thousands, except %) Year Ended
$ 3,789 $ 4,789 $ (1,000 ) -20.9%
Income from operations
Other net revenues for the year endedJune 30, 2021 decreased by approximately$1.0 million , or 20.9%, from the year endedJune 30, 2020 . The decrease was primarily attributable to fewer bulk wine sales in the year compared to the year prior. Other losses from operations for the year endedJune 30, 2021 increased by$6.3 million , or 21.7%, from the year endedJune 30, 2020 . The increase in losses were due to the go public transaction costs, increased costs of warehousing freight, insurance and labor partially offset by the proceeds from the smoke taint litigation and the gain on sale of assets.
Liquidity and Capital Resources
Our ongoing operations have, to date, been funded by a combination of cash flow from operations, the Business Combination with BCAC, borrowings under our credit facility and other debt financing. As ofJune 30, 2021 , we had cash and cash equivalents on hand of approximately$118.9 million and approximately$125.0 million in borrowing capacity available under our credit facility. We had approximately$293.9 million in total debt as ofJune 30, 2021 . Our principal uses of cash have been to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including acquisitions. We continuously reinvest in our properties and production assets and are currently working on several capital projects. Our capital expenditures are expected to be approximately$5 million to$9 million over the next twelve months,$5.6 million of which will be used to complete the construction of additional warehouse and storage space at ourRay's Station facility located inHopland, California . We believe our existing cash and cash equivalents, cash flow from operations, and availability under our credit facility will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements. We may also seek to finance capital expenditures under capital leases or other debt arrangements that provide liquidity or favorable borrowing terms. COVID-19 has negatively impacted the global economy and financial markets which could interfere with our ability to access sources of liquidity at favorable rates and generate operating cash flows. We took advantage of the Paycheck Protection Program (the "PPP") established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). 32
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We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. While we have in the past financed certain acquisitions with internally generated cash, term loans and our credit facility, in the event that suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings. Our future capital requirements will depend on many factors, including funding needs to support our business growth and to respond to business opportunities, challenges or unforeseen circumstances. If our forecasts prove inaccurate, we may be required to seek additional equity or debt financing from outside sources, which we may not be able to raise on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected.
Indebtedness
Credit Facility
During our fiscal year endedJune 30, 2020 , we entered into a$350 million credit facility consisting of (i) a$100.0 million term loan; (ii) a$50.0 million capital expenditure facility; and (iii) a$200.0 million revolving credit facility. OnApril 13, 2021 , we entered into an amended and restated loan and security agreement to increase the credit facility from an aggregate of$350.0 million to$480.0 million , consisting of an accounts receivable and inventory revolving facility up to$230.0 million , a term loan in a principal amount of up to$100.0 million , a capital expenditures facility in an aggregate principal of up to$50.0 million , and a new delay draw term loan facility in an aggregate principal amount of up to$100.0 million . All other terms of the original agreement generally remain the same. Concurrent with the amendment, we executed approximately a$29.3 million delayed draw term loan. Proceeds from the new loan were used to pay down$10.8 million and$12.0 million of the existing term loan and outstanding line of credit, respectively, deposit cash of$4.8 million into a restricted cash collateral account, and pay bank fees and third party expenses associated with the amendment. The credit facility can be used to fund acquisitions, real estate purchases, capital equipment purchases and for other general corporate purposes. The credit facility is collateralized by our eligible inventory and accounts receivable and matures as follows: (in thousands) Description Maximum funding Maturity Term loan $ 100,000 July 18, 2026
Revolving credit facility $ 230,000
$ 100,000July 18, 2024
Capital expenditure facility $ 50,000
Repayments of the term loan and the capital expenditure facility are calculated based on whether the purpose of the original loan or draw was for real estate or capital equipment purchases or draw and are subject to periodic third-party valuations. For real estate purchases, quarterly repayments are equal to 1% of the original principal balance at closing. For capital equipment purchases, quarterly repayments are equal to 1/28th of the original balance. Any unpaid principal is due upon the termination of these loans at maturity. Repayment of the revolving credit facility is required if the borrowing base (as defined in the credit facility) does not support the amount of borrowing on the facility. Borrowings under the credit facility bear interest at a rate per annum equal to, at our option, either (a) a LIBOR rate determined by reference to the LIBOR rate for dollar deposits with a term equivalent to the interest period relevant to such borrowing as administered by theICE Benchmark Administration , plus an applicable margin or (b) an adjusted base rate, or ABR, determined by reference to the highest of (i) 0.50% above the federal funds effective rate, (ii) the rate of interest established by the administrative agent as its "prime rate" and (iii) 1.0% above the LIBOR rate for dollar deposits with a one-month term commencing that day, plus an applicable margin. See Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our interest rate swap transactions. In addition, we pay certain recurring fees with respect to the credit facility, including (i) a fee for the unused commitments of the lenders under the revolving credit facility and the capital expenditure facility as of the end of each month, accruing at a rate equal to 0.125% per annum, which may be reduced to 0.0% if the average availability under the revolving credit facility is less than 50%, (ii) letter of credit fees, including a fronting fee and processing fees to each issuing bank, which vary depending on the applicable margin rate based on the average availability under the revolving credit facility and (iii) administration fees. Amortization expense related to debt issuance fees was approximately$0.1 million and$0.2 million for the years endedJune 30, 2021 and 2020, respectively.
The credit facility contains various covenants and restrictions that may, in certain circumstances and subject to carve-outs and exceptions, limit our ability to, among other things:
• create liens; • make loans to third parties; • incur additional indebtedness; 33
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Table of Contents • make capital expenditures in excess of agreed upon amounts; • merge or consolidate with another entity; • dispose of our assets; • make dividends or distributions to our shareholders; • change the nature of our business; • amend our organizational documents; • make accounting changes; and • conduct transactions with affiliates.
We are required to maintain compliance with a minimum fixed charge coverage ratio covenant of not less than 1.10:1.00.
We may prepay, in full or in part, borrowings under the credit facility without premium or penalty, subject to notice requirements, minimum prepayment amounts and increment limitations, provided that prepayments on all LIBOR loans will be subject to customary "breakage" costs.
Convertible Notes
Woodbridge Notes
OnJanuary 2, 2018 , we issued a secured convertible promissory note in favor ofJayson Woodbridge in the original principal amount of$19.0 million . Interest on the outstanding principal amount accrues at the prime rate, as published in theWall Street Journal on the issuance date, subject to adjustment every six months. The principal amount of the convertible promissory note was due and payable in four equal annual installments commencing onJanuary 2, 2019 . The outstanding principal amount of the note could be repaid at any time without premium or penalty. The holder of the note could, at its option, convert all or part of any regularly scheduled principal payment into shares of Series A stock. In addition, the holder had conversion rights upon a liquidity event. As ofJune 30, 2021 ,Jayson Woodbridge converted the remaining outstanding principal of the secured convertible promissory note of$4.8 million resulting in us having no further liability or obligations under this convertible promissory note.
Rudd Trust Notes
OnJanuary 2, 2018 , we entered into a convertible promissory note, which was subsequently amended, in favor of theRudd Trust in the original principal amount of$9.0 million , which was issued pursuant to a credit agreement of the same date. Interest on the outstanding principal amount accrued at the prime rate in effect on the issuance date plus 4%, subject to adjustment on the first day of each calendar quarter. The note matured onMay 31, 2021 . InMay 2021 , we repaid$9.0 million aggregate principal, at which time we had no further liability or obligations under this convertible promissory note.
OnJanuary 2, 2018 , we entered into a convertible promissory note, which was subsequently amended, in favor ofPatrick Roney in the original principal amount of$1.0 million issued pursuant to a credit agreement of the same date. Interest on the outstanding principal amount accrued at the prime rate in effect on the issuance date plus 4%, subject to adjustment on the first day of each calendar quarter. The note matured onMay 31, 2021 . We repaid$1.0 million aggregate principal, at which time we had no further liability or obligations under this convertible promissory note. Paycheck Protection Program Our Paycheck Protection Program loan (the "PPP Loan"), under Division A, Title I of the Coronavirus Aid, Relief and Economic Security ("CARES") Act onApril 14, 2020 , of approximately$6.5 million required monthly amortized principal and interest payments to begin six months after the date of disbursement. InOctober 2020 , the deferral period associated with the monthly payments was extended from six to ten months. While the PPP Loan currently had a two-year maturity, the amended law permitted the borrower to request a five-year maturity from its lender. Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, we were eligible to apply for and receive forgiveness for all or a portion of the PPP Loan. Such forgiveness is determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, "Qualifying Expenses"), and on the maintenance of employee and compensation levels during the twenty-four week period following the funding of the PPP Loan. OnJune 25, 2021 , the Company received notification from theSmall Business Association that the Company's Forgiveness Application of the PPP Loan and accrued interest, totaling approximately$6.6 million , was approved in full, and the Company had no further obligations related to the PPP Loan. Accordingly, the Company recorded a gain on the forgiveness of the PPP Loan. 34
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Table of Contents Cash Flows
Information about our cash flows, by category, is presented in our consolidated statements of cash flows and is summarized below:
Year Ended June 30, (in thousands) 2021 2020 Operating activities$ 8,991 $ (23,045 ) Investing activities$ (60,288 ) $ 1,289 Financing activities$ 173,225 $ 20,730
Cash Flows provided by (used in) Operating Activities
Net cash provided by operating activities was$9.0 million for the year endedJune 30, 2021 compared to net cash used in operating activities of$23.0 million for the year endedJune 30, 2020 , representing an increase of net cash of$32.0 million . The increase in net cash provided was primarily attributable to the increase in net income of$19.8 million , net changes in certain non-cash adjustments of$0.9 million to reconcile net income to operating cash flow and net changes in other operating assets and liabilities as detailed on the consolidated statement of cashflows.
Cash Flows provided by (used in) Investing Activities
Net cash used in investing activities was$60.3 million for the year endedJune 30, 2021 , compared to net cash provided by investing activities of$1.3 million for the year endedJune 30, 2020 , representing an increase of net cash used of$61.6 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 the purchase of plant, property and equipment of$38.0 million and$23.6 to acquire businesses.
Cash Flows provided by (used in) Financing Activities
Net cash provided by financing activities was$173.2 million for the year endedJune 30, 2021 compared to net cash provided of$20.7 million for the year endedJune 30, 2020 , representing an increase of net cash provided of$152.5 million . The increase in net cash provided consisted primarily of$250.1 million of cash provided by the merger and PIPE financing, net of transactions costs, offset by cashed used of$27.5 million for payments, net of proceeds on our line of credit and long-term debt and cash used of$32.0 million to purchase Series B redeemable stock (See Note 2).
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. While our significant accounting policies are described in more detail in Note 1 to our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue from the sale of wine, including private label wines, to wholesale distributors and to consumers. We also recognize revenue from custom winemaking and production services, grape and bulk sales, private events held at its winery estates and storage services, as well as the sale of other merchandise and services. We recognize revenue when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when the product is shipped, and title passes to the customer, and when control of the promised product or service is transferred to the customer. Our standard terms are free on board ("FOB") shipping point, with no customer acceptance provisions. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We account for shipping and handling as activities to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and classify such costs as a 35
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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.
Revenue is generated from one of our three reporting segments as described below:
Wholesale: Wholesale operations generate revenue from product sold to distributors, which then sell the product to off-premise retail locations such as grocery stores, wine clubs, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars. We transfer control and recognize revenue for these orders upon shipment of the wine out of our own or third-party warehouse facilities. We pay depletion and marketing allowances to certain distributors, based on sales to our customers, or the allowance is netted against the purchase price. Direct to Consumer: We sell our wine and other merchandise directly to consumers through wine club memberships, at wineries' tasting rooms and through the internet. Wine club membership sales are made under contracts with customers, which specify the quantity and timing of future wine shipments. Customer credit cards are charged in advance of wine shipments in accordance with each contract. We recognize revenue for these contracts at the time that control of the wine passes to the customer, which is generally at the time of shipment. Tasting room and internet wine sales are paid for at the time of sale. We transfer control and recognize revenue for this wine when the product is either received by the customer (on-site tasting room sales) or upon the shipment to the customer (internet sales). Sales taxes are calculated based upon the customer's location and are collected at the time of the sale and recorded in a sales tax liability account. Sales reporting requirements to the states are performed as required by the state and sales taxes are remitted to the government agencies when due. Our winery estates hold various public and private events for customers and our wine club members. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. We recognize event revenue on the date the event is held. Business-to-Business: This segment generates revenue primarily from the sale of private label wines and custom winemaking services. Annually, we work with our national retail partners to develop private label wines incremental to our wholesale channel businesses. Additionally, we provide custom winemaking and production services. These services are made under contracts with customers, which include specific protocols, pricing, and payment terms. The customer retains title and control of the wine during the production process. We recognize revenue over time as the contract specific performance obligations are met. Additionally, we provide storage services for wine inventory of various customers. The customer retains title and control of the inventory during the storage agreement. We recognize revenue over time for storage services, and when the contract specific performance obligations are met. Other: Our Other segment includes revenue from grape and bulk sales, storage services, and for the year endedJune 30, 2020 revenue under theSales Pro LLC ("SalesPro") andMaster Class Marketing, LLC ("Master Class") business line sold in 2019. We transfer control and recognize revenue for grape sales when product specification has been met and title to the grapes has transferred, which is generally on the date the grapes are harvested, weighed and shipped. We transfer control and recognizes revenue for wine and spirits bulk contracts upon shipment. SalesPro and Master Class revenue represents fees earned from off-premise tastings for third-party customers. These customers include other wine and beer brand owners and producers.
Income Taxes
Deferred income taxes are determined using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the expected recognition of a deferred income tax asset is considered to be unlikely. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to income tax matters as a component of income tax expense.
Inventories
Inventories of bulk and bottled wines and spirits and inventories of non-wine products and bottling and packaging supplies are valued at the lower of cost using the FIFO method or net realizable value. Costs associated with winemaking, and other costs associated with the manufacturing of products for resale, are recorded as inventory. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. Inventories are classified as current assets in accordance with recognized industry practice, although most wines and spirits are aged for periods longer than one year.
Goodwill represents the excess of consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. We have three reporting units under which goodwill has been allocated. We conduct a goodwill impairment analysis annually for impairment, as of the end of the respective fiscal year, or sooner if events or circumstances indicate the carrying amount of the asset may not be recoverable. 36
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Our intangible assets represent purchased intangible assets consisting of both indefinite and finite lived assets. Certain criteria are used in determining whether intangible assets acquired in a business combination must be recognized and reported separately. Our indefinite lived intangible assets, representing trademarks and winery use permits, are initially recognized at fair value and subsequently stated at adjusted costs, net of any recognized impairments. The indefinite lived assets are not subject to amortization. Our finite-lived intangible assets, comprised of customer relationships and Sommelier relationships, are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. If that pattern cannot be reliably determined, the intangible assets are amortized using the straight-line method over their estimated useful lives and are tested for impairment along with other long-lived assets. Amortization related to the finite-lived assets is included in selling, general and administrative expenses. Intangible assets are reviewed annually for impairment, as of the end of the reporting period, or sooner if events or circumstances indicate the carrying amount of the asset may not be recoverable.
Stock-Based Compensation, Stock Option and Series A Stock Valuation
Stock-based compensation is reported at calculated fair value based on the grant date of the share-based payment. The Black-Scholes option-pricing model is used to estimate the calculated fair value of each option grant on the date of grant. We amortize the calculated value to stock-based compensation expense using the straight-line method over the vesting period of the option. As there has been no public market for the stock options we have granted, the grant date fair value of such awards has been determined by our board of directors with the assistance of management and an independent third-party valuation specialist. We believe our board of directors has the relevant experience and expertise to determine the fair value of our stock options. The grant date fair value of stock options was determined first by estimating our aggregate equity value using a weighting of discounted cash flows, comparable public companies, and comparable-transactions valuation methodologies. An option-pricing method, which utilizes certain assumptions including volatility, time to liquidation, a risk-free interest rate, and an assumption for a discount for lack of marketability, was then used to allocate the total equity value to our different classes of equity according to the rights and preferences. A discount for lack of marketability was applied to determine the stock option equity values. In determining the fair value of the stock options, the methodologies used to estimate its enterprise value were performed using methodologies, approaches, and assumptions consistent with theAmerican Institute of Certified Public Accountants Accounting and Valuation Guide , Valuation of Privately-Held-Company Equity Securities Issued as Compensation ("AICPA Accounting and Valuation Guide"). The assumptions we used in the valuation model were based on future expectations combined with management's judgment. In the absence of a public trading market, the board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the stock options as of the date of each award, including the following factors:
•
independent valuations performed at periodic intervals by an independent third-party valuation firm; • operating and financial performance, forecasts and capital resources; • current business conditions; • the hiring of key personnel; • the status of research and development efforts; • any adjustment necessary to recognize a lack of marketability for the stock options; • trends and developments in the industry; • the market performance of comparable publicly traded technology companies; and • theU.S. and global economic and capital market conditions. The dates of our valuation reports, which were prepared on a periodic basis, were not contemporaneous with the grant dates of our option awards. Therefore, we considered the amount of time between the valuation report date and the grant date to determine whether to use the latest valuation report for the purposes of determining the fair value of the options for financial reporting purposes. The additional factors considered when determining any changes in fair value between the most recent valuation report and the grant dates included, when available, the prices paid in recent transactions involving our Series A stock, as well as our operating and financial performance, current industry conditions and the market performance of comparable publicly traded companies. There were significant judgments and estimates inherent in these valuations, which included assumptions regarding our future operating performance and the determinations of the appropriate valuation methods to be applied. If we had made different estimates or assumptions, our stock-based compensation expense, net income (loss) per unit attributable to our series A stockholders could have been significantly different from those reported in this Annual Report on Form 10-K. In valuing the series A stock, we determined the equity value of our business by taking a weighted combination of the value indications using the income approach and the market comparable approach valuation methods.
Income Approach
The income approach estimates value based on the expectation of future cash flows a company will generate, such as cash earnings, cost savings, tax deductions and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in its industry or similar lines of business as of each valuation date. This
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weighted-average cost of capital discount rate, or WACC, is adjusted to reflect the risks inherent in the business. The WACC used for these valuations was determined to be reasonable and appropriate given our debt and equity capitalization structure at the time of each respective valuation. The income approach also assesses the residual value beyond the forecast period and is determined by taking the projected residual cash flow for the final year of the projection and applying a terminal exit multiple. This amount is then discounted by the WACC less the long-term growth rate.
Market Comparable Approach
The market comparable approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market multiple is determined which is applied to its financial metrics to estimate the value of its parent or its subsidiary. To determine our peer group of companies, we considered winery and consumer product public companies and selected those most similar to us based on various factors, including, but not limited to, financial risk, company size, geographic diversification, profitability, growth characteristics and stage of life cycle. In some cases, we considered the amount of time between the valuation date and the award grant date to determine whether to use the latest valuation determined pursuant to one of the methods described above or to use a valuation calculated by management between the two valuation dates. Once we determined an equity value, we utilized the Black-Scholes Option Pricing Model ("BSOPM") to allocate the equity value to our options. BSOPM values its options by creating call options on the respective equity value, with exercise prices based on the liquidation preferences, participation rights and strike prices. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent.
Emerging Growth Company Election
We are an "emerging growth company" as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. We expect to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and non-public companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used. In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act and compliance with applicable laws, if, as an emerging growth company, we rely on such exemptions, we are not required to, among other things: (a) provide an auditor's attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002; (b) provide all of the compensation disclosures that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (c) comply with any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis); and (d) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer's compensation to median employee compensation. We will remain an emerging growth company under the JOBS Act until the earliest of (a)December 31, 2026 , (b) the last date of our fiscal year in which we had total annual gross revenue of at least$1.07 billion , (c) the date on which we are deemed to be a "large accelerated filer" under the rules of theSEC or (d) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the previous three years.
Recent Accounting Pronouncements
See Note 1 of notes to the consolidated financial statements for a discussion of recent accounting standards and pronouncements.
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