WINC, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled "Risk Factors" and "Special Note Regarding Forward-Looking Statements" contained elsewhere in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All references to years, unless otherwise noted, refer to our fiscal years, which end onDecember 31 . Unless the context otherwise requires, all references in this subsection to "we," "us," "our," "Winc" or the "Company" refer toWinc, Inc. and its consolidated subsidiaries.
Overview
We are a differentiated platform for growing Alcoholic Beverages brands, fueled by the joint capabilities of our data-driven brand development strategy paired with a true omni-channel distribution network. We believe our balanced platform is well-suited to gain market share and drive meaningful long-term growth in the Alcoholic Beverages market.Winc's mission is to become the leading brand builder within the Alcoholic Beverages industry through an omni-channel growth platform. As product innovators focused on building durable brands that consumers love, we have developed a proprietary process, called Ideate, Launch and Amplify, that has allowed us to consistently produce quality wine brands in a capital-efficient fashion. We believe this process is unique within the Alcoholic Beverages industry, incorporating the "Best of the New" and "Best of the Old" aspects of Alcoholic Beverages brand creation in a truly omni-channel fashion. The "Best of the New" is highlighted by our data-rich DTC relationships via theWinc digital platform. This data is a critical competitive advantage that we use to help shape the ideation and development of our brands. Our digitally native roots also provide us with a strong core competency in digital marketing and data analytics that allows us to interact in a more targeted and direct fashion with end-consumers and Amplify brands in ways the legacy Alcoholic Beverages companies have yet to consistently utilize. Our "Best of the Old" strategy is encompassed by our appreciation of the value creation potential and durable power of proprietary brand development, as well as the scale benefits that can be achieved by leveraging the legacy wholesale distribution channel, through which the vast majority of wine is still purchased. We view our omni-channel platform as highly complementary because it creates a positive feedback loop where incremental scale on either side of our platform begets scale and success on the other. We generate net revenues by building durable brands that consumers love. We offer high-quality products in all 50 states either through our DTC channel or the national distribution network in our wholesale channel. Our omni-channel approach allows us to create compelling order economics, differentiated product offerings, consumer-led brands, and a loyal consumer following. We seek to meet consumers however they want to shop, balancing deep consumer connection with broad convenience and accessibility. We believe this distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products. Our integrated omni-channel presence provides meaningful benefits to our consumer which we believe is not easily replicated by our competitors. As we continue to execute on our omni-channel strategy, we have demonstrated success by significantly growing net revenues, continuing to improve our online operational metrics, expanding our wholesale distribution, and increasing the efficiency of our brand development process. The following financial and operational results were achieved during the years endedDecember 31, 2021 and 2020:
• we grew net revenues by 11.4% to
• we expanded our retail accounts by 114.8% to 16,905 from 7,869 for the years
ended
• our net loss increased to
• our Adjusted EBITDA loss increased to
See the section titled "Non-GAAP Financial Measures" for information regarding Adjusted EBITDA, including a reconciliation to the most directly comparable financial measure prepared in accordance with GAAP.
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the spread of COVID-19 a pandemic. Shortly thereafter, we closed our headquarters, supported our employees and contractors to work remotely, and implemented travel restrictions. In addition, we were 59 -------------------------------------------------------------------------------- required to operate our fulfillment centers with reduced occupancy to maintain social distancing requirements, which together with increased DTC orders, led to minor delivery delays in some instances. We have returned to full capacity in our fulfillment centers. The COVID-19 pandemic also significantly accelerated consumer adoption of a wide variety of at-home delivery services, including in the Alcoholic Beverages sector. Beginning inMarch 2020 , we experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much ofthe United States in response to the COVID-19 pandemic. The growth in new consumer acquisition has resulted in corresponding increases in "new consumer discount," resulting in lower DTC gross margins. While we believe this represents a permanent shift in consumer behavior, future DTC demand remains uncertain and difficult to predict. Our wholesale net revenues declined in April and May of 2020 as a result of the pandemic and government measures to slow the spread of the COVID-19 pandemic. These restrictions included limited operating hours, reduced capacity at dining and other venues and decreased consumer interest in frequenting public gathering spaces. While it is difficult to quantify the full impact the COVID-19 pandemic had on the wholesale channel as a whole, we believe the rate of growth for our wholesale net revenues from 2020 to 2021 was slightly impaired due to the restrictions noted above, specifically with respect to on-premise sales at venues like restaurants and bars. We do not believe that the COVID-19 pandemic materially impacted our growth in wholesale net revenues for the year endedDecember 31, 2021 as compared toDecember 31, 2020 . Although the global economy has begun to recover and the widespread availability of vaccines has encouraged greater economic activity, we are continuing to monitor the situation and we cannot predict for how long, or the ultimate extent to which, the pandemic may impact our operations, the markets in which we operate and consumer behavior.
Key Factors Affecting Our Performance and Growth
The Alcoholic Beverages market represents one of the largest total addressable market opportunities in the CPG landscape, and, within the Alcoholic Beverages market, the wine industry is a sizable market. We believe we are one of the few wine companies that is connecting with the next generation of consumerswho prefer to shop online, and we expect that connection will lead to a significant and expanding market opportunity. With a strong portfolio of brands and driven sales and performance marketing teams, we believe we have the potential to seize a larger portion of theU.S. Alcoholic Beverages market. Our primary goal is to grow by building a portfolio of durable brands that consumers love. As we strengthen our portfolio of brands and increase our brand awareness, we believe that it will become easier to acquire DTC consumers and grow our wholesale business. Our DTC channel net revenues decreased by 1.7% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . DTC represented 74.8% of our total net revenues for the year endedDecember 31, 2021 . Our Wholesale channel net revenues grew by 106.9% for the year endedDecember 31, 2021 compared toDecember 31, 2020 . Wholesale represented 23.6% of our total net revenues for the year endedDecember 31, 2021 . Our DTC channel growth slowed in 2021 as COVID-19 restrictions were eased or lifted, though we believe the overall growth of our DTC channel will continue beyond the pandemic. Additionally, the significant growth within the Wholesale channel was fueled primarily by an increase in retail accounts, more of the Company's products being sold at each retailer and an acceleration in the rate at which products sell at retail accounts. These factors were further amplified by the Company'sMay 2021 purchase of certain assets ofNatural Merchants, Inc. We believe wholesale net revenues will continue to grow but not at levels consistent with the growth for the year endedDecember 31, 2021 .
We believe the following factors and trends in our business have driven our recent growth and are expected to remain key drivers of our growth for the foreseeable future:
Brand Awareness and Loyalty
Our ability to promote and maintain brand awareness and loyalty is critical to our success. Consumer appreciation of our brands is reflected in the increase of online consumers in our DTC channel and the additional retail accounts in our wholesale channel. We believe we have a significant opportunity to continue to grow our brand awareness and loyalty through word of mouth, brand marketing and performance marketing. We have made significant investments to strengthen our brand and generate awareness of our products through our marketing strategy, which includes brand marketing campaigns across various platforms, including email, digital, display, site, direct-mail, commercials, and social media, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our mobile application. We plan to continue to invest in our brand and performance marketing to help drive our future growth.
Innovation
Ideation, development and innovation are core elements underpinning our growth
strategy. The improvement of existing products and the introduction of new
products have been, and continue to be, integral to our growth. While we
launched an aggregate of 7 innovation brands in the last two years, we have made
significant investments in our product development capabilities, which should
allow us to iterate faster and more efficiently in the future. Our continued
focus on brand innovation will be central to attracting and retaining
60
--------------------------------------------------------------------------------consumers in the future. Our ability to successfully Ideate, Launch and Amplify new products will depend on a variety of factors, including our continued investment in innovation, integrated business planning processes and capabilities.
Execution of Omni-channel Strategy
The continued execution of our omni-channel strategy impacts our financial performance. We intend to continue leveraging our marketing strategy to grow our DTC channel by driving increased consumer traffic to our digital platform. We believe our digital platform is a valuable tool for creating direct connections with our consumers, influencing brand experience and understanding consumer preference and behavior. Our wholesale channel is focused on relationships with leading national distributors and retailers that have broadened our consumer reach, raised our brand awareness and allowed us to achieve additional scale. We aim to strengthen these relationships to further increase their benefit. Our ability to execute this strategy will depend on a number of factors, such as distributors' and retailers' satisfaction with the sales our products, our ability to develop high-quality and culturally relevant brands and our introduction of innovative products.
Key Financial and Operating Metrics
In addition to the measures presented in our financial statements, we use the
following key financial and operational metrics to evaluate our business,
measure our performance, develop financial forecasts and make strategic
decisions:
Years Ended December 31,
2021 2020
DTC
DTC net revenues $ 53,931 $ 54,854
DTC gross profit 23,045 23,055
Average order value $ 71.91 $ 63.04
Wholesale
Wholesale net revenues $ 17,042 $ 8,237
Wholesale gross profit 6,473 2,393
Retail accounts 16,905 7,869
Consolidated
Net loss margin -20.3 % -10.8 %
Adjusted EBITDA¹ $ (10,199 ) $ (5,104 )
Adjusted EBITDA margin¹ -14.2 % -7.9 %
___________________
(1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are
presented for supplemental informational purposes only and should not be
considered as alternatives or substitutes to financial information presented in
accordance with GAAP. See the section titled "Non-GAAP Financial Measures" for
additional information and a reconciliation of net loss to Adjusted EBITDA and
net loss margin to Adjusted EBITDA margin.
Average Order Value
We believe the continued growth of our average order value demonstrates both our increasing value proposition for our consumer base and their increasing affinity for our premium brands. We define average order value as the sum of DTC net revenues, divided by the total orders placed in that period. Total orders are the summation of all completed individual purchase transactions in a given period. Average order value may fluctuate as we expand into and increase our presence in additional product categories.
We increased AOV by 14.1%, to
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--------------------------------------------------------------------------------Retail Accounts
Retail account growth is a key metric for our continued growth in wholesale as it is a measure of how widely our products are distributed. The metric represents the number of retail accounts in which we sold our products in a given period.
Components of Results of Operations
We evaluate our business and allocate resources among our reportable business segments: (i) DTC and (ii) Wholesale.
Net Revenues
We generate net revenues from the following revenue streams:
DTC - We define DTC net revenues as net revenues generated from consumers through our monthly membership or individual orders on our digital platform. Members are charged a monthly membership and are awarded credits in the same monetary value. Members can then utilize their credits to purchase our brand wines at their discretion. Members have the option to skip monthly charges, accumulate credits or use credits when purchased so that the membership is tailored to everyone's preference and lifestyle. Additionally, we have dedicated brand websites that generate orders and net revenues for our core brands. Breakage revenue related to prepaid credits and gift cards is reported in DTC net revenues. Breakage revenue is recognized based on historical redemption rates of payments received in advance of performance. We determined that a percentage of prepaid credits goes unredeemed. We recognize breakage proportionally with credit redemptions in net revenues, or when redemption is remote. Wholesale - We define wholesale net revenues as net revenues generated from wholesale distributors, state-operated licensees and directly to retail accounts. Our wholesale channel success is based on long-standing relationships with a highly developed network of distributors in allU.S. states. We work closely with wholesale distributors to increase the volume of our wines and number of products that are sold by the retail accounts in their respective territories. During the year endedDecember 31, 2021 , one wholesale distributor accounted for approximately 12% of wholesale net revenues. During the year endedDecember 31, 2020 , another wholesale distributor accounted for approximately 14% of wholesale net revenues. Other Non-Reportable - We also generate an immaterial amount of net revenues from a non- reportable segment that is comprised of a small business line focused on testing new products to determine if they have long-term viability prior to integration into the DTC and/or wholesale distribution channels.
Cost of Revenues
Cost of revenues consists of:
•
wine-related inputs, such as grapes and semi-finished bulk wine;
•
bottling materials (bottles, corks, and labeling materials);
•
boxes/packaging;
•
fulfillment costs (costs attributable to receiving, inspecting and warehousing inventories, picking, packaging, and preparing orders for shipment, including the variable costs of employing hourly employees and temporary staff provided by agencies at our fulfillment centers);
•
credit card fees related to DTC transactions;
•
inbound and outbound freight;
• storage; and • barrel depreciation.
Gross Profit and Gross Margin
We define gross profit as net revenues less cost of revenues as discussed above.
Gross margin is gross profit expressed as a percentage of net revenues. Our
gross margin has fluctuated historically and may continue to fluctuate from
period to period based on a number of factors, including the timing and mix of
the product offerings we sell, the timing and mix of sales through our DTC and
wholesale channels, and our ability to reduce costs, including with respect to
inflation and supply chain factors, in any given period. Additionally, as our
portfolio includes more subscale, high-growth brands, gross margin may be
negatively impacted until economies of scale can be achieved.
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--------------------------------------------------------------------------------DTC Gross Profit
We define DTC gross profit as DTC net revenues less DTC cost of revenues. DTC gross margin is DTC gross profit expressed as a percentage of DTC net revenues. DTC gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our DTC channels, and our ability to reduce costs, in any given period.
Wholesale Gross Profit
We define wholesale gross profit as wholesale net revenues less wholesale cost of revenues. Wholesale gross margin is gross profit expressed as a percentage of wholesale net revenues. Wholesale gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our wholesale network, and our ability to reduce costs, in any given period. Operating Expenses
Operating expenses primarily consist of marketing, personnel, and general and administrative expenses.
•
Our marketing expenses consist primarily of costs incurred to acquire new consumers, retain existing consumers, build our brand awareness through various offline and online paid advertising channels, including television, digital and social media, direct mail, radio and podcasts, email, brand activations, and strategic brand partnerships.
•
Our personnel expenses consist primarily of payroll and related expenses, including stock- based compensation.
•
Our general and administrative expenses consist of: (i) costs associated with general corporate functions, such as depreciation expense and rent relating to facilities and equipment and insurance expense; (ii) professional fees and other general corporate costs; (iii) travel-related expenses; and (iv) customer services costs, such as third-party staffing to respond to inquiries from consumers. We expect our operating expenses to increase substantially for the foreseeable future as we continue to increase our headcount to support our existing business, increase our online consumer base, and grow our business. We will also incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC , additional director and officer insurance expenses, investor relations activities, and other administrative and professional services.
Contract Liability
Contract liabilities, also referred to as deferred revenues, arise as a result of the Winc.com subscription model. Deferred revenues represent payments received from consumers in advance of ordering goods and are referred to as "credits". Winc.com members are charged a monthly fee and are awarded credits equivalent to the monetary value. Members are then able to utilize member credits at their leisure to place an order on our website. Revenue is recognized when the member takes control of the ordered goods, at delivery. Credits do not expire or lose value over periods of inactivity. We are not required by law to escheat the value of unredeemed credits.
Other Income and Expense
Other income and expense consist primarily of income from a forgiven Paycheck Protection Program loan, interest expense associated with our credit facilities, rental income from sublease agreements, and changes in fair value of warrants that were issued in connection with past financing transactions. See "Liquidity and Capital Resources - Credit Facilities."
Results of Operations
Comparison of the Years Ended
The following table summarize the results of operations for our DTC reportable
segment for the years ended
Years Ended December 31,
2021 2020 Change $ Change %
DTC Net revenues $ 53,931 $ 54,854 $ (923 ) -1.7 %
DTC Cost of revenues 30,886 31,799 (913 ) -2.9 %
DTC Gross profit $ 23,045 $ 23,055 $ (10 ) 0.0 %
DTC Net Revenues
DTC net revenues for the year ended December 31, 2021 was $53.9 million ,
compared to $54.9 million for the year ended December 31, 2020 , a decrease of
$0.9 million . This decrease was primarily driven by a 18.2% decrease in order
volume year over year, partially offset by a 14.1% increase in AOV. During the
years ended December 31, 2021 , we had a 43.2% decrease in first time orders,
which contributed to the increased AOV because first orders offer significant
discounts.
63
--------------------------------------------------------------------------------DTC Cost of Revenues
DTC cost of revenues for the year endedDecember 31, 2021 was$30.9 million , compared to$31.8 million for the year endedDecember 31, 2020 , a decrease of$0.9 million or 2.9%. The decrease in DTC cost of revenues is primarily due to a$0.8 million decrease in product costs due to strategic sourcing. DTC cost of revenues as a percentage of DTC net revenues decreased approximately 0.7%, resulting in increased margin. This change is primarily related to a$3.8 million decrease period over period in discounts related to first orders.
DTC Gross Profit
Changes in DTC gross profit are a function of the changes in DTC net revenues and DTC cost of revenues discussed above. DTC gross profit remained consistent for the years endedDecember 31, 2021 and 2020. The following table summarize the results of operations for our wholesale reportable segment for the year endedDecember 31, 2021 and 2020 (in thousands): Years Ended December 31, 2021 2020 Change $ Change % Wholesale Net revenues$ 17,042 $ 8,237 $ 8,805 106.9 % Wholesale Cost of revenues 10,569 5,844 4,725 80.9 % Wholesale Gross profit$ 6,473 $ 2,393 $ 4,080 170.5 % Wholesale Net Revenues Wholesale net revenues for the year endedDecember 31, 2021 was$17.0 million , compared to$8.2 million for the year endedDecember 31, 2020 , an increase of$8.8 million or 106.9%. Growth in wholesale net revenues was primarily attributable to an increase in the number of retail accounts through wholesale distribution as a result of organic growth of our brands, as well as the purchase of certain assets fromNatural Merchants, Inc. , which combined resulted in a$8.3 million increase. Wholesale Cost of Revenues Wholesale cost of revenues for the endedDecember 31, 2021 was$10.6 million , compared to$5.8 million for the year endedDecember 31, 2020 , an increase of$4.7 million or 80.9%. The increase in wholesale cost of revenues was primarily attributable to the increase in wholesale net revenues for the year. This increase was partially offset by approximately$0.9 million in lower product costs due to strategic sourcing.
Wholesale Gross Profit
Changes in wholesale gross profit are a function of the changes in wholesale net revenues and wholesale cost of revenues discussed above. Wholesale gross profit for the year endedDecember 31, 2021 was$6.5 million compared to$2.4 million for the year endedDecember 31, 2020 , an increase of$4.1 million or 170.5%. The following table summarize the results of operations for our other non-reportable segments for the year endedDecember 31, 2021 and 2020 (in thousands): Years Ended December 31, 2021 2020 Change $ Change % Other Net revenues$ 1,096 $ 1,616 $ (520 ) -32.2 % Other Cost of revenues 489 709 (220 ) -31.0 % Other Gross profit$ 607 $ 907 $ (300 ) -33.1 % Other Net Revenues Other non-reportable net revenues for the year endedDecember 31, 2021 was$1.1 million , compared to$1.6 million for the year endedDecember 31, 2020 , a decrease of$0.5 million or 32.2%. The decrease in other net revenues was primarily attributable to$0.3 million lower new revenues ofWonderful Wine, Co. due to decreased marketing spend as advertising priorities shifted during the period and$0.2 million lower net revenues generated from the Summer Water Société program due to limited volume sold to satisfy demand in wholesale.
Other Cost of Revenues
Other non-reportable cost of revenues for the year endedDecember 31, 2021 was$0.5 million , compared to$0.7 million for the year endedDecember 31, 2020 , a decrease of$0.2 million or 31.0%. Decline in other non-reportable cost of revenues was entirely driven by the decrease in other non-reportable net revenues discussed above. 64 --------------------------------------------------------------------------------
Other Gross Profit
Changes in other non-reportable gross profit are a function of the changes in other non-reportable net revenues and other non-reportable cost of revenues discussed above. Other non-reportable gross profit for the year endedDecember 31, 2021 was$0.6 million compared to$0.9 million for the year endedDecember 31, 2020 , a decrease of 33.1%.
Operating Expenses
Comparison of the Years Ended
The following table identifies our operating expenses and other income and expense items for the years endedDecember 31, 2021 and 2020 (in thousands). Years Ended December 31, 2021 2020 Change $ Change % Marketing$ 17,516 $ 17,388 $ 128 0.7 % Personnel 15,500 7,582 7,918 104.4 % General and administrative 13,214 7,545 5,669 75.1 % Production and operation 318 169 149 88.2 % Creative development 374 83 291 350.6 % Total operating expenses$ 46,922 $ 32,767 Interest expense (654 ) (834 ) 180 -21.6 % Income (expense) from change in fair 388 (208 ) 596 -286.5 % value of warrant liabilities Other income, net 1,101 523 578 -110.5 % Gain on debt forgiveness from Paycheck 1,364 - 1,364 100.0 % Protection Program note payable Total other income (expense), net$ 2,199 $ (519 ) Income tax expense 50 27 23 85.2 % Personnel Expenses Personnel expenses increased$7.9 million or 104.4%, to$15.5 million in during the year endedDecember 31, 2021 , from$7.6 million during the year endedDecember 31, 2020 . This increase was primarily attributable to a$1.1 million increase in stock-based compensation expense as a result of grants made to new employees hired in anticipation of being a public company and$3.5 million of additional compensation expense related to the forgiveness of promissory notes originally issued to executives in connection with the exercise of stock options. Additionally,$2.4 million of the increase was due to increased headcount to support functions as we grow our business and develop public company processes.
General and Administrative Expenses
General and administrative expenses increased$5.6 million or 75.1%, to$13.2 million during the year endedDecember 31, 2021 , from$7.5 million during the year endedDecember 31, 2020 . This increase was primarily attributable to$2.5 million of increased professional services fees, specifically accounting, legal, investor relations, recruiting and consulting, as well as$0.6 million related to increased rental expense and$1.9 million related to other various internal expenses, specifically software and licenses and travel-related expenses.
Change in Fair Value of Warrant Liabilities
The decrease in the loss from the change in fair value of warrants is primarily due to changes in the underlying assumptions to the fair value calculations. Refer to Note 11 in our consolidated financial statements as of and for the year endedDecember 31, 2021 included elsewhere in this annual report for further information. Other income, net
The increase in other income, net is primarily due to an increase in rental
income from sublessees as we began subleasing our previous primarily office
space during the year ended
Gain on debt forgiveness from Paycheck Protection Program note payable
The increase in gain on debt forgiveness from Paycheck Protection Program note payable is due to the forgiveness of the Paycheck Protection Program Loan. Refer to Note 9 in our consolidated financial statements as of and for the year endedDecember 31, 2021 included elsewhere in this annual report for further information. 65 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our operations have been financed to date by a combination of issuances and sales of capital stock, borrowings under our credit facilities and cash generated from operations. Our primary cash needs have been to fund working capital requirements, debt service payments, and operating expenses (primarily marketing to increase growth and inventory to support that growth). As ofDecember 31, 2021 , we had cash on hand of$4.9 million , inventory of$23.9 million , total current assets of$38.2 million , and total current liabilities of$23.9 million . As ofDecember 31, 2021 , all of our$7.0 million line of credit also remains undrawn and we have no outstanding debt. Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, debt service, acquisitions and other transactions as opportunities present themselves. Based on our current level of operations, we expect that our liquidity needs for the next twelve months will be met by our cash on hand, cash flow from operations and working capital items, and future debt or equity raises, as necessary. However, our ability to fund future operating expenses, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which may be affected by general economic, financial and other factors beyond our control.
Issuances of Stock
During the year endedDecember 31, 2021 , we raised total net proceeds of$13.3 million from the issuance of Series E and Series F redeemable convertible preferred stock private placements. InMay 2021 , the proceeds, along with additional consideration in the form of Series F redeemable convertible preferred stock, were used to finance the purchase of certain assets fromNatural Wine Merchants, Inc. During the year endedDecember 31, 2020 , we raised total net proceeds of$6.8 million from the issuance of Series D and Series E redeemable convertible preferred stock.
On
Concurrent with the IPO, all then-outstanding shares of our redeemable convertible preferred stock outstanding were automatically converted into an aggregate of 8,395,808 shares of common stock and were reclassified into permanent equity. Following the IPO, there were no shares of redeemable convertible preferred stock outstanding.
Credit Facilities
InOctober 2015 , we entered into a loan and security agreement withWestern Alliance Bank , which provided us with a revolving line of credit for up to$12 million , or the WAB Line of Credit. The maturity was subsequently extended toMay 2020 and the WAB Line of Credit was reduced to$7.0 million . The amount outstanding was fully repaid during the year endedDecember 31, 2020 , at which time the agreement was terminated. Accordingly, there was no outstanding balance as of or subsequent toDecember 31, 2020 .
InDecember 2020 , we entered into a credit agreement, or the BoC Credit Agreement, withPacific Mercantile Bank (subsequently acquired by Banc of California inOctober 2021 ) for a new$7.0 million line of credit, or the BoC Line of Credit. The BoC Line of Credit bears interest at a variable annual rate equal to 1.25% plus the Prime Rate. We had an outstanding balance of zero under the BoC Line of Credit as of bothDecember 31, 2021 andDecember 31, 2020 . The BoC Line of Credit matures onJune 30, 2022 .
InDecember 2017 , we entered into a loan and security agreement, or the Multiplier LSA, withMultiplier Capital II, LP , or Multiplier, for a term loan of$5.0 million , all of which was disbursed to us at the time of execution. While outstanding, the loan bore interest at a variable annual rate equal to the greater of 6.25% above the Prime Rate (as defined in the loan and security agreement), with a minimum interest rate of 11.5% per annum and a maximum interest rate of 14.0% per annum. The loan was secured by all of our assets. InNovember 2021 , we repaid the remaining outstanding principal and interest of$1.2 million , and the Multiplier LSA was terminated. In connection with this transaction, we recognized a loss on early extinguishment of debt of$0.1 million .
Paycheck Protection Program Loan
We applied for a loan being administered by theSmall Business Administration under the Coronavirus Aid, Relief, and Economic Recovery Act of 2020, or the CARES Act, to assist in maintaining payroll and operations through the period impacted by the COVID-19 pandemic. OnApril 20, 2020 , we received a$1.4 million loan fromWestern Alliance Bank under the Paycheck Protection Program, or PPP. We applied for and were granted loan forgiveness inMarch 2021 by utilizing the funds in accordance with defined loan forgiveness guidance issued by the government. 66 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Years Ended December 31,
2021 2020
Net cash (used in) provided by operating activities
(9,479 ) (375 )
Net cash provided by financing activities 28,565 546
Net (decrease) increase in cash$ (2,125 )
Cash Flows from Operating Activities
Operating cash flow is derived by adjusting our net loss for non-cash operating items, such as depreciation and amortization, provision for doubtful accounts, deferred income tax benefits or expenses, and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. Cash flows (used in) provided by operating activities resulted in net outflows of$21.2 million and net inflows of$0.4 million for the year endedDecember 31, 2021 and 2020, respectively. Changes in operating assets and liabilities resulted in outflows of$11.0 million for the year endedDecember 31, 2021 compared to inflows of$6.1 million for the year endedDecember 31, 2020 . This decrease was primarily driven by an increase in cash spent on inventory to meet demand, partially offset by timing of settling accounts payable, accrued liabilities, and contract liabilities.
Cash Flows from Investing Activities
Cash used in investing activities was
Investing cash flows for the year ended
Investing cash flows for the year ended
Cash Flows from Financing Activities
Cash flows provided by financing activities resulted in net inflows of$28.6 million for the year endedDecember 31, 2021 and net inflows of$0.5 million for the year endedDecember 31, 2020 . Financing cash flows for the year endedDecember 31, 2021 included$17.7 million of proceeds from the issuance of common stock through our IPO,$2.5 million for repayments of long-term debt,$13.3 million of proceeds from the issuance of redeemable convertible preferred stock and warrants, and$0.1 million in proceeds from employee stock option exercises. Financing cash flows for the year endedDecember 31, 2020 included$1.4 million in proceeds from the Paycheck Protection Program note payable,$6.0 million in payments on the previously outstanding line of credit,$1.7 million for repayments of long-term debt, and$6.8 million for proceeds from issuance of redeemable convertible preferred stock and warrants. 67 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
Our management believes Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts and other interested parties because these measures can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors and other interested parties to evaluate and assess performance. We define Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, stock based compensation expense and other items we believe are not indicative of our operating performances, such as gain or loss attributable to the change in fair value of warrants. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net revenues. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Some of these limitations include:
•
Adjusted EBITDA and Adjusted EBITDA margin do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
•
Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or cash requirements for our working capital needs;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;
•
and Adjusted EBITDA and Adjusted EBITDA margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures.
Other companies, including other companies in our industry, may not use such
measures or may calculate the measures differently than as presented in this
Annual Report, limiting their usefulness as comparative measures.
A reconciliation of net loss to Adjusted EBITDA and net loss margin to Adjusted
EBITDA margin is set forth below (dollars in thousands). Adjusted EBITDA margin
is defined as Adjusted EBITDA divided by net revenues.
Years Ended December 31,
2021 2020
Net loss $ (14,648 ) $ (6,958 )
Interest expense 654 834
Income tax expense 50 27
Depreciation and amortization expense 714 510
EBITDA $ (13,230 ) $ (5,587 )
Stock-based compensation 1,330 275
Gain on debt forgiveness from Paycheck Protection (1,364 ) -
Program note payable Forgiveness of employee promissory notes issued for 3,453
-
stock option exercises Change in fair value of warrant liabilities (388 ) 208 Adjusted EBITDA$ (10,199 ) $ (5,104 ) Net loss margin -20.3 % -10.8 % Adjusted EBITDA margin -14.2 % -7.9 %
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Significant Judgements and Estimates
Our consolidated financial statements are prepared in accordance withU.S GAAP, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 of our consolidated financial statements. The following section is a summary of certain aspects of those accounting policies involving estimates or assumptions that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. These estimates and judgments could materially impact the consolidated financial statements and disclosures based on varying assumptions.
Fair value of Financial Instruments
The Company's financial instruments include cash, accounts receivable, employee
advances, accounts payable, accrued liabilities, line of credit, and notes
payable. The Company believes that the fair value of these financial instruments
approximates their carrying amounts based on current market indicators, such as
prevailing market rates and the short-term maturities of certain financial
instruments.
68
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Prior to the completion of the IPO, we utilized Level 3 inputs to derive the
estimated fair value of warrant liabilities, which were measured on a recurring
basis prior to being classified into equity in conjunction with the IPO. The
valuation of the Company's warrants contained unobservable inputs that reflected
the Company's own assumptions for which there was little market data. These
assumptions included expected term, volatility, risk-free rates, dividends, and
the fair value of our common stock prior to our IPO. We determined these
assumptions utilizing expected hold periods based on issuance and expiration
dates, volatility and fair value determined through an independent appraisal of
fair market value prior to our IPO, and available comparable market data for
interest rates and expected dividend payout. Subsequent to the IPO on November
11, 2021 , we did not have any assets or liabilities that were measured using
Level 3 inputs on a recurring basis or nonrecurring basis.
Fair value of Acquired Assets
We recognize goodwill in accounting for business combinations based on the amount by which the total consideration transferred, plus the fair value of any non-controlling interest, exceeds the fair value of the identifiable assets acquired and liabilities assumed. In an asset acquisition, any excess consideration over the fair value of assets acquired and liabilities assumed is allocated to the assets acquired and liabilities assumed on a relative fair value basis. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs, and cash flows, discount rates, and selection of comparable companies. We engage a third party firm to assist in the calculation of fair value of assets acquired and liabilities assumed. During the measurement period of a business combination, new information obtained about facts and circumstances that existed as of the acquisition date could materially impact the net assets recorded and may change the amount of the purchase price allocable to the excess over the fair value of assets acquired. Revenue Recognition We recognize revenue from the sale of wine to customers when the performance obligation is fulfilled and control transfers to the customer. Principal terms of DTC sales are FOB destination and we record revenue for online wine sales upon receipt of the wine by the customer. Wholesale revenue is recognized when the wholesale customer picks up the wine from one of our distribution points. Shipping and handling fees charged to customers are reported within revenue and the Company elected to exclude sales tax assessed by a government authority from the transaction price. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. We estimate sales allowances based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current period sales activity. This includes a historical analysis of refunds as a percentage of gross sales in order to estimate a reasonable sales allowance. A hypothetical one percentage point change in the sales return percentage estimate would results in less than a$0.1 million impact to the allowance as ofDecember 31, 2021 . Gift cards and prepaid credits are recorded as a contract liability when sold and recorded as revenue when the customer redeems the gift card or prepaid credit. Based on historical redemption rates, a percentage of gift cards and prepaid credits will not be redeemed, which is referred to as "breakage." Breakage revenue requires us to estimate the redemption patterns of customer based on historical redemption rates and is recognized in proportion to the pattern of redemption by the customer. A hypothetical one percentage point increase in redemption rate estimates would result in an increase of breakage revenue of approximately$0.4 million for the year endedDecember 31, 2021 . A hypothetical one percentage point decrease in redemption rate estimates would result in a decrease of breakage revenue of approximately$0.4 million for the year endedDecember 31, 2021 . Stock-Based Compensation Certain employees and non-employees have received grants of equity awards. In accordance withU.S. GAAP, we account for all stock-based awards granted to employees and non-employees as stock-based compensation expense based on the grant date fair value. We record stock-based compensation expense for our stock options on a straight-line basis over the requisite service period, net of actual forfeitures. We use the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. The inputs to the option pricing model include expected term, volatility, risk-free rates, dividends, and the fair value of our common stock. These inputs are highly subjective and require inputs based on the following assumptions:
Expected Term: The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and end of the contractual term).
Volatility: The volatility is estimated based on average volatility for comparable publicly-traded companies, over a period equal to the expected term of the stock option grants.
Risk-free Rate: The risk-free rate assumption is based on theU.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. 69 -------------------------------------------------------------------------------- Dividends: We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. Fair value of common stock: Prior to our initial public offering, there had been no public market for our common stock, and as a result, the fair value of shares of common stock underlying our stock-based awards was estimated on each grant date by our Board of Directors. Our board of directors intended all stock options granted to have an exercise price per share not less than the per share fair value of our common stock on the date of grant. To determine the fair value of our common stock underlying option grants, our Board of Directors within put from management, considered, among other things, valuations of our common stock, which were prepared by an independent third-party valuation firm in accordance with the guidance provided byAmerican Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid. We have not granted any stock options subsequent to our IPO.
Changes in these inputs and assumptions may materially affect the estimated fair value of our stock-based compensation. See Note 13 of the notes to our consolidated financial statements for further information.
Recent Accounting Pronouncements
See "New Accounting Pronouncements" in Note 2 of the notes to our consolidated financial statements for recent accounting pronouncements.
Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" as defined in the JOBS Act. For as long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation, on the frequency of the advisory vote on executive compensation, and on any golden parachute payments not previously approved. In addition, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to utilize this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. As described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report, we have early adopted accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. We expect to use the extended transition period for any other new or revised accounting standards during the period in which we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i)December 31, 2026 , (ii) the last day of the fiscal year in which we have total annual gross revenue of at least$1.07 billion , (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer", which would occur if the market value of our common stock held by non-affiliates exceeded$700 million as of the last business day of the second fiscal quarter of such year or (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. We are also a "smaller reporting company" as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than$250 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than$100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than$700 million measured on the last business day of our second fiscal quarter.
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