Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 of Vintage Wine Estates, Inc. ("VWE") and its consolidated subsidiaries.
In this Annual Report on Form 10-K, we have revised our previously issued consolidated financial statements as of and for the year ended June 30, 2022 and certain previously reported financial information as of and for the year ended June 30, 2022 in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," including but not limited to information within Results of Operations and Liquidity and Capital Resources sections to conform the discussion with the appropriate revised amounts. See Note 1, "Reclassifications and Revisions", in Item 8, "Financial Statements and Supplementary Data", for additional information related to the revision including description of the errors and the impacts on our consolidated financial statements.
Overview
Vintage Wine Estates, Inc. is a leading vintner in the United States ("U.S."), offering a collection of wines including luxury wines produced by award-winning, heritage wineries, as well as popular lifestyle wines. Our name brand wines include Bar Dog, B.R.Cohn, Cherry Pie, Firesteed, Kunde, Cameron Hughes and many others. We also produce cider, under the ACE Cider brand. Since our founding over 20 years ago, we have grown organically through brand creation and acquisitions to become the 14th largest wine producer based on cases of wine shipped. We sell over 2.5 million cases annually, primarily in the U.S.
Our mission is to produce consistent quality in our luxury and lifestyle wines that are expressive and complex and provide a breadth of portfolio to impress a large base of consumers. Our team of experienced winemakers are driven to perfection and employ winemaking practices that reflect both our heritage and cutting-edge technology. Of note, we respect the ways people buy wine whether at our estate wineries, at retail, in restaurants, on the telephone, through eCommerce, on television or by mail. Our portfolio range s in retail price from $10 to $150 per product. The majority of our wine portfolio is in the super premium to luxury segments which serve the largest numbers of wine consumers. We believe that sales of our wines are benefiting from the premiumization trend to upgrade into luxury, but still reasonably priced, wines.
Our strategy is focused on driving growth with our wine brands. In addition to marketing our own brands, w e provide production and bottling services, producing proprietary brands for major retail clients.
We have a large asset base of 2,400 owned and leased acres located in the premier wine growing regions of the U.S. These properties extend from the Central Coast of California to storied appellations in Napa Valley and Sonoma County, and north to Oregon and Washington. We obtain approximately half of the fruit for our wines from owned and leased vineyards, and use other sources, including independent growers and the spot wine market , for the remaining supply. Our facilities have the capacity to store over 10 million gallons of bulk product. In addition, we have a high-speed bottling facility which has the capacity to bottle over 13.5 million cases annually. Our excess bottling capacity is used primarily for bottling and fulfillment services offered to third parties on a contract basis. We operate 12 wineries that support 11 tasting rooms.
We have an omni-channel sales strategy, as of June 30, 2023, balanced between Direct-to-Consumer ("DTC"), 29.4% of sales, traditional Wholesale, 30.6% of sales and Business-to-Business ("B2B") at 40.0% of sales. Our DTC segment was an early stage-setter in the wine industry and includes tasting rooms, wine clubs and ecommerce, including our digitally-native brand Cameron Hughes.
Since inception, we have completed more than 30 acquisitions. 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, increasing the sales and margins of the acquired business.
Our priorities under our Five-Point Plan in 2024 are to deliver profitability, generate cash, and reduce debt. In order to meet these objectives our near-term goals are to simplify the business, reduce costs, improve production throughout our operations, focus on key brands, and pay down debt through the monetization of assets and reducing costs, among other things.
Key Measures to Assess the Performance of our Business
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; income from operations and cash flow from operations. The key non-GAAP measures we consider are Adjusted EBITDA and Adjusted EBITDA Margin. We also monitor our case volume sold to help us forecast and identify trends affecting our growth.
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Net Revenues
We generate revenue from our segments: Wholesale, B2B, and DTC. We recognize revenue from 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, inventory reserves, and physical inventory adjustments, as well as inbound and outbound freight and import duties.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenues.
Income from Operations
Income from operations is primarily gross profit less selling, general and administrative expenses, impairment losses, gain or loss on sale of assets and amortization of intangible assets. Income from operations excludes interest expense, income tax expense, gains and losses related to interest rate swap agreements, gains and losses related to extinguishment of debt and other expenses, net. We use income from operations as well as other indicators as a measure of the profitability of our business.
Case Volumes
In addition to acquisitions, the primary drivers of net revenue growth in any period are attributable to changes in case volumes and changes in product mix and sales price. Case volumes represents the number of 9-liter equivalent cases of wine that we sell during a particular period. Case volumes are an important indicator of what is driving gross margin. This metric also allows us to develop our supply and production targets for future periods.
The following table summarizes 9-liter equivalent cases sold by segment:
June 30,
(in thousands)
Wholesale
DTC
Total case volume
* B2B segment sales are not primarily related to case volumes, therefore the Company has elected to not report case volumes for this segment as it would not be indicative of the underlying performance of the business.
Case volumes were up 14.7% for the year driven by volume increases in the Wholesale segment, which was partially offset by a decrease in the DTC segment. Wholesale volumes grew 21.5% for the year due to increased volumes of core brands as well as volumes associated with the acquisition of ACE Cider. DTC volumes were down 11.5% primarily driven by a decrease in volume from television sales.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we use 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. For a reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin to net income (loss) and net income (loss) margin, see "Non-GAAP Financial Measures" below.
Trends and Other Factors Affecting Our Business
Events, including the military incursion by Russia into Ukraine, inflationary conditions, rising interest rates and COVID-19, have caused disruptions in the U.S. and global economy, and uncertainty regarding general economic conditions, including concerns about a potential U.S. or global recession may affect consumer spending on discretionary items, including wine. This uncertainty could affect our operating results.
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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 higher sales and net income during our second fiscal quarter (October through December) due to usual timing of holiday buying and lower sales and net income during our third quarter (January through March). We expect these trends to continue.
Our ability to fulfill the demand for wine is impacted by the availability of grapes. Climate change, agricultural and other factors, such as wildfires, disease, pests, extreme weather conditions, water scarcity, biodiversity loss and competing land use, impact the quality and quantity of grapes available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenues and costs from year to year.
In addition, extreme weather events, such as wildfires can result in potentially significant expenses to repair or replace a vineyard or facility as well as impact the ability of grape suppliers to fulfill their obligations to us. Significant wildfires in California, Oregon and Washington, have historically 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 the U.S. grape harvest. When vineyards and grapes are exposed to smoke, it can result in an ashy, burnt, or smoky aroma, described as "smoke taint.” Industry grape suppliers have also experienced smoke and fire damage from the wildfires. Damage to our grape harvest and vineyards caused by the wildfires has impacted our revenues, costs of revenues and winery overhead for the years presented.
In relation to various events related to weather and wildfires, the Company received insurance and litigation proceeds of $2.3 million and $3.0 million in 2023 and 2022, respectively.
Results of Operations
Comparison of the years ended June 30, 2023 and 2022
Year Ended June 30,
Dollar Change
Percent Change
Net revenue
Wine, spirits and cider
Nonwine
Cost of revenue
Wine, spirits and cider
Nonwine
Gross profit
Selling, general, and administrative expenses
Amortization expense
Goodwill impairment losses
Intangible impairment losses
Loss (gain) on remeasurement of contingent liability
Gain on insurance and litigation proceeds
Gain on sale leaseback
Loss on sale of assets
Loss from operations
Other income (expense)
Interest expense
Net gain on interest rate swap agreements
Loss on modification or extinguishment of debt
Other, net
Total other income (expense), net
Income (loss) before provision for income taxes
Income tax (benefit) provision
Net loss
Net loss attributable to the noncontrolling interests
Net loss allocable to common stockholders
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nm indicates a percentage change that is not meaningful.
* Indicates an absolute value percentage change greater than 100.
Net Revenues
Net revenues for the year ended June 30, 2023 decreased $9.6 million, or 3.3%, to $283.2 milli on from $292.8 mil lion for the year ended June 30, 2022. Wine, spirits and cider revenues for the year ended June 30, 2023 decreased $18.7 million, or 9.0%, to $189.4 million from $208.0 million for the year ended June 30, 2022. The decrease is primarily attributable to the discontinuation of a bottled spirits program that did not qualify as discontinued operations resulting in a $13.8 million decrease in sales, a decrease in bulk whiskey sales of $4.2 million, a decrease in wholesale revenues of $2.8 million and e-commerce revenues by $3.6 million primarily due to slower consumer discretionary spending. This was partially offset by an increase of $8.3 million related to the ACE Cider acquisition. Nonwine revenues for the year ended June 30, 2023 increased $9.1 million, or 10.7%, to $93.9 million from $84.8 million for the year ended June 30, 2022 as a result of custom production.
Gross Profit
Gross profit for the year ended June 30, 2023 decreased $3.7 million, or 4.2%, to $85.2 million, from $88.9 million for the year ended June 30, 2022. The decrease in gross profit was primarily attributable to an increase in cider costs and freight costs, which was partially offset by a decrease in wine and spirits costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year ended June 30, 2023 increased $21.5 million, or 22.1%, to $118.4 mi llion, from $97.0 m illion for the year ended June 30, 2022. The increase is primarily related to an increase in non-recurring expenses related to historic and unconsummated acquisitions o f $5.3 million, an increase in payroll-related costs of $3.8 million, a n increase in legal and audit fees of $3.6 million, and a $2.1 million increase from cost-cutting initiatives.
Goodwill and Intangible Impairment Losses
The Company recognized a non-cash impairment of goodwill of $146.0 million and intangible asset impairment of $16.2 million for the year ended June 30, 2023. See Note 6 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for further discussion.
Loss on Sale of Assets
Loss on sale of assets for the year ended June 30, 2023 increased $7.9 million to $8.3 million from $0.4 million for the year ended June 30, 2022. As part of our simplification efforts, on June 29, 2023, the Company completed its sale of the assets of The Sommelier Company for a negligible amount of proceeds and an estimated earnout of $0.3 million. As a result of the sale, the Company recognized a loss on sale of assets of $9.7 million, of which $9 million was goodwill. The Company also sold Laetitia assets and incurred a loss of $4.5 million. These were partially offset by the Tenma Vineyard sale, in the quarter ended March 31, 2023, where we recognized a gain on the sale of assets of $6.1 million.
Loss from Operations
Loss from operations for the year ended June 30, 2023 was $208.8 million, an increase in loss of $200.9 million from a loss of $7.9 million for the year ended June 30, 2022. Along with the changes in selling, general, and administrative expenses, the increase was primarily driven by $146.0 million goodwill impairment charge, $16.2 million intangible impairment charge and $8.3 million loss from the sale of assets.
Other Income (Expense), Net
Total other expense, net, for the year ended June 30, 2023 was $12.8 million, an increase of $20.7 million from income of $7.9 million for the year ended June 30, 2022. Interest expense for 2023 was $18.4 million, an increase of $4.5 million reflecting increased rates resulting from debt refinancing that occurred in December 2022 and from the sale of interest rate swaps in March 2022. The increase is primarily attributable to a decrease in the net gain on interest rate swap agreements of $16.2 million compared to the prior year. See Note 10 and Note 11 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for further discussion.
Income Tax Provision
Income tax benefit was $31.4 million for the year ended June 30, 2023 compared to income tax expense of $0.7 million for the year ended June 30, 2022. The income tax benefit in 2023 was primarily due to goodwill and intangibles impairment in pre-tax income. The income tax expense for the year ended June 30, 2022 was primarily due to changes in pre-tax income and non-deductible stock based compensation.
Segment Results
Our financial performance is classified into the following segments: Wholesale, B2B, and DTC. Our corporate operations, including centralized selling, general and administrative expenses are not allocated to the segments, as management does not believe such items directly reflect our core operations. However, we allocate re-measurements of contingent consideration and impairment of goodwill and intangible assets to our segments. Other than our long-term property, plant and equipment for wine tasting facilities, and customer lists, trademarks and trade names specific to acquired brands, our revenue-generating assets are utilized across segments. Accordingly, the foregoing items are not allocated to the segments
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and are not discussed separately as the results of any such measures that had a significant impact on operating results are already 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 June 30, 2023 and 2022
Wholesale
Year Ended June 30,
Dollar
Percent
(in thousands, except %)
Change
Change
Net revenue
(Loss) income from operations
Wholesale net revenues for the year ended June 30, 2023 increased by $2.8 million, or 3.3%, from the year ended June 30, 2022. The increase was attributable to $8.3 million in net revenues related to the ACE Cider acquisition which was mostly offset by slowing consumer discretionary spending trends at retail.
Wholesale income from operations for the year ended June 30, 2023 decreased by $133.5 million fr om the year ended June 30, 2022. The decrease was attributable primarily to goodwill and intangible assets impairments of $116.3 million and $12.6 million, respectively.
Year Ended June 30,
Dollar
Percent
(in thousands, except %)
Change
Change
Net revenue
Income from operations
B2B net revenues for the year ended June 30, 2023 decreased by $0.7 million, or 0.6% from the year ended June 30, 2022. Improved throughput in custom production and the contribution of Meier's for the full year helped to offset a $13.9 million decline related to a discontinued, less profitable bottled distilled spirits program and a $4.2 million reduction in bulk distilled spirits sales.
B2B income from operations for the year ended June 30, 2023 decreased by $5.5 million, or 30.8%, from the yea r ended June 30, 2022. The decrease was attributable primarily to goodwill and intangible assets impairments of $9.0 million and $0.3 million, respectively, which was partially offset by the benefit of a full year of Meiers revenue.
DTC
Year Ended June 30,
Dollar
Percent
(in thousands, except %)
Change
Change
Net revenue
(Loss) income from operations
DTC net revenues for the year ended June 30, 2023 decreased by $8.8 million, o r 9.6% , from the year ended June 30, 2022. The decrease was primarily attributable to a decrease in sales in e-commerce, including telesales, and home shopping of approximately $7.0 million as well as a decrease in sales from tasting rooms & wine clubs of approximately $2.3 million.
DTC income from operations for the year ended June 30, 2023 decreased by $34.3 million, or 214.3%, from the year ended June 30, 2022. The decrease in income was primarily due to goodwill and intangible asset impairments of $20.7 million and $3.2 million, respectively, and a loss on sale of assets of $9.7 million.
Liquidity and Capital Resources
Our ongoing operations have, to date, been funded by a combination of cash flow from operations, the Merger with BCAC, borrowings under our Credit Facility and other debt financing. As of June 30, 2023, we had cash and cash equivalents on hand of $18.2 million and borrowing capacity available under our Credit Facility. We had $303.3 million in total debt as of June 30, 2023, and the Company expects to repay $14.4 million in 2024. In addition, the Company has operating and finance lease liabilities of $38.8 million, including interest. Annual lease-related payments are estimated to be between $6 million and $7 million, including interest.
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Our principal uses of cash have been to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic p lans, including acquisitions. We continuously reinvest in our properties and production assets. Our capital expenditures are expected to be approximately $12.0 million in 2024.
During 2022, the Company monetized certain assets, including existing hedging agreements, to generate cash. Under the terms of the Credit Facility, it is restricted from entering into certain investment agreements, including hedges. During 2023, the Company monetized assets, including property, plant and equipment, to decrease debt, and we expect to continue this in 2024.
We are implementing our Five-Point Plan which we believe will enable us to drive stronger earnings power, provide a sustainable foundation for future growth and allow us to continue as a leading vintner with a strong portfolio of affordable luxury brands by focusing on the plan's five priorities: (1) margin expansion, (2) cost reduction, (3) cash management, (4) monetizing assets, and (5) revenue growth. In 2024, our priorities under our Five-Point Plan are to deliver profitability, generate cash, and reduce debt. In order to meet these objectives our near-term goals are to simplify the business, reduce costs, improve production throughout our operations, focus on key brands, and pay down debt through the monetization of assets and reducing costs, among other things.
Indebtedness
Credit Facility
On December 13, 2022, we entered into a Second Amended and Restated Loan and Security Agreement (the “Second A&R Loan and Security Agreement”), which provides credit facilities totaling up to $458.4 million. These credit facilities consist of: (i) a term loan facility of $156.5 million maturing on December 13, 2027,(the “Term Loan Facility”), (ii) an accounts receivable and inventory revolving facility of $229.7 million (with a letter of credit sub-facility in the aggregate availability amount of $20.0 million maturing on December 13, 2027,(the “Revolving Facility”), (iii) an equipment loan facility of $4.2 million maturing on December 31, 2026, (the “Equipment Loan”), (iv) a capital expenditure facility of $15.2 million maturing on June 30, 2027 (the “Capex Facility”) and (v) a delayed draw term loan facility of $52.9 million maturing on December 13, 2027, (the “DDTL Facility”, and, together with the Term Loan Facility, the Revolving Facility, the Equipment Loan and the Capex Facility, the “Credit Facilities”). Outstanding balances under the Credit Facilities will bear interest at the rates specified in the Second A&R Loan and Security Agreement, which vary based on the type of Credit Facility and certain other conditions. Interest payments on the outstanding balances under any of the Credit Facilities will be due monthly, quarterly or bi-annually depending on the interest period selected by the Company. Principal payments, as specified in the Second A&R Loan and Security Agreement, will be due quarterly on all the Credit Facilities except for the Revolving Facility which is due at maturity.
The Second A&R Loan and Security Agreement contains customary representations and warranties, affirmative and negative covenants, including, amongst others, (i) a financial covenant with respect to a maximum debt to capitalization ratio of 0.60:1.00 through December 31, 2023, and stepping down to 0.575:1.00 for each quarter until March 31, 2024 and 0.55:1.00 for each quarter until December 31, 2024 and thereafter and (ii) a minimum fixed charge coverage ratio (based on trailing twelve-month EBITDA adjusted for capital expenditures, taxes and certain other items) of 1.10:1.00 measured on a rolling four quarter basis, provided that the minimum capital expenditure amount for purposes of calculating the fixed charge coverage ratio will increase by $175,000 per quarter until it reaches $1.5 million.
On May 9, 2023, we entered into an amendment to its Second A&R Loan and Security Agreement (described further in Note 12 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K) that adjusted the definition of certain financial covenants for the third quarter ended March 31, 2023 and the year ended June 30, 2023. As a result, the definition of Adjusted EBITDA (as defined in the Second A&R Loan and Security Agreement) as utilized in the fixed charge coverage ratio was modified to allow certain addbacks to Adjusted EBITDA.
On October 12, 2023, the Company entered into a fourth amendment to the Second Amended and Restated Loan and Security Agreement (the “Fourth Amendment”) by and among the Company, the Borrowers, the Lenders party thereto, and Agent. The Fourth Amendment, among other things: (i) waives certain existing events of default relating to the Company’s failure to comply with the financial covenants and financial reporting requirements set forth in the Credit Agreement for prior fiscal periods; (ii) reduces the aggregate revolving commitment and the aggregate delayed draw term loan commitment to $200,000,000 and $38,100,000, respectively; (iii) replaces the maximum debt to capitalization financial covenant with a minimum adjusted EBITDA financial covenant of not less than (1) $4,000,000 for the fiscal quarter ending September 30, 2023, (2) $17,000,000 for the two fiscal quarter period ending December 31, 2023, (3) $27,000,000 for the three fiscal quarter period ending March 31, 2024, (4) $34,000,000 for the four fiscal quarter period ending June 30, 2024, and (5) $35,000,000 for each four fiscal quarter period ending thereafter; (iv) adds a minimum liquidity covenant of $25,000,000 (or, for fiscal quarters ending in December, $15,000,000), which applies only for the fiscal quarters ending September 30, 2023 through and including December 31, 2024 (the “Covenant Modification Period”); (v) suspends the minimum fixed charge coverage ratio covenant for the fiscal quarters ending September 30, 2023 through and including June 30, 2024 and provides for a step-down of the minimum fixed charge coverage ratio to 1.00:1.00 for the remainder of the Covenant Modification Period; (vi) adds an equity cure right for the Company in the event of future breaches of the financial covenants; (vii) reduces revolver availability by (1) $15,000,000 during the months of February through September of each year and (2) $10,000,000 during the months of October through January of each year; (viii) suspends the exercise of incremental facilities during the Covenant Modification Period; (ix) restricts all permitted acquisitions during the term of the credit facilities, unless previously approved by the required Lenders; (x) increases in the applicable margin for all credit facilities to 3.00% for SOFR Loans and 2.00% for ABR Loans, which margins will step-up further if certain prepayments of the Term Loans are not made by certain dates prescribed in the Amendment; (xi) adds additional mandatory prepayments of (1) $10,000,000 by no later than March 31, 2024, (2) an additional $10,000,000 by no later than June 30, 2024 and (3) an additional $25,000,000 by
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no later than December 31, 2024; (xii) adds additional mandatory prepayments in the event that the Borrowers maintain a cash balance in excess of $20,000,000; (xiii) permits additional sales of certain real property with an aggregate appraised value of approximately $60,000,000, in addition to related personal property assets; and (xiv) adds certain additional reporting requirements to Agent and the Lenders.
As a result, as of the date hereof, the Company has received a waiver for certain events of default and is in compliance with its covenants contained in the Second A&R Loan and Security Agreement. Refer to Note 11 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The Company anticipates using any of the proceeds of the credit facilities for working capital and general corporate purposes, purchases of real estate (including vineyards) and equipment and paying down outstanding balances on the credit facilities.
The Credit Facility is collateralized by our eligible inventory and accounts receivable and matures as follows:
(in thousands)
Maximum Funding
Maturity
Term loan
December 13, 2027
Revolving credit facility
December 13, 2027
Delay draw term loan
December 13, 2027
Capital expenditure facility
June 30, 2027
Equipment
December 31, 2026
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)
Change
Operating activities
Investing activities
Financing activities
Cash Flows Used in or Provided by Operating Activities
Net cash used in operating activities was $8.4 million for the year ended June 30, 2023 compared to net cash provided by operating activities of $15.8 million for the year ended June 30, 2022, representing a decrease of net cash provided of $24.3 million. The decrease in net cash provided was primarily attributable to the increase in net loss when compared to the prior year after a change in non-cash adjustments of $19.9 million, which was partially offset by a decrease in accounts receivable of $25.5 million compared to the prior year.
Cash Flows Provided by or Used in Investing Activities
Net cash provided by investing activities w as $5.9 million for the year ended June 30, 2023, compared to net cash used in investing activities of $98.4 million for the year ended June 30, 2022, representing a decrease in net cash used of $104.2 mill ion. Cash flows from investing activities are utilized primarily to fund acquisitions, capital expenditures for improvements to existing assets and other corporate assets. The decrease in net cash used was primarily attributable to a decrease in business acquisitions of $73.7 million, a decrease in capital expenditures of $10.6 million and proceeds from the sale of assets, which increased by $19.9 million.
Cash Flows Used in or Provided by Financing Activities
Net cash used in financing activities was $28.8 million for the year ended June 30, 2023 compared to net cash provided by financing activities of $8.4 million for the year ended June 30, 2022, representing a decrease of net cash provided of $37.2 million. The increase in cash used was primarily related to a $45.8 million increase in principal payments on debt and lines of credit and a decrease in proceeds from debt lines of credit of $14.1 million. This was partially offset by an increase in cash used to repurchase shares of the Company's common stock of $26.0 million.
Non-GAAP Financial Measures
Adjusted EBITDA is defined as earnings (loss) before interest, income taxes, depreciation and amortization, casualty losses or gains, stock-based compensation expense, impairment losses, changes in the fair value of derivatives, 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. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net revenues.
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The following is a reconciliation of net loss to Adjusted EBITDA for the years presented:
Year Ended June 30, 2023
Year Ended June 30, 2022
Net loss (GAAP Measure)
Interest expense
Income tax (benefit) provision
Depreciation expense
Amortization expense
Gain on insurance and litigation proceeds
Stock-based compensation expense
Goodwill and intangibles impairment
Net gain on interest rate swap agreements
Loss on sale of assets
Adjusted EBITDA (Non-GAAP Measure)
Net revenue
Net loss margin
Adjusted EBITDA margin (Non-GAAP Measure)
Adjusted EBITDA and Adjusted EBITDA margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance.
Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms Adjusted EBITDA and Adjusted EBITDA margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an indicator of our operating performance in isolation from, or as a substitute for, net income (loss) and net income (loss) margin, which is defined as net income (loss) divided by net revenues, which are 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 and Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by these items.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the 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. As a result of adopting Accounting Standards Codification ("ASC") 842 effective July 1, 2022, there have been material changes to our lease accounting policies during the year ended June 30, 2023, which are described in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
While our significant accounting policies are described in more detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K 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, spirits and cider, 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 our winery estates and storage services, as well as the sale of other merchandise and services.
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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 our 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 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.
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 and Intangible Assets
The aggregate carrying amount of goodwill is zero as of June 30, 2023. Our intangible assets had an aggregate carrying amount of $39.0 million as of June 30, 2023.
We test our goodwill and indefinite-life intangible assets for impairment annually, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or indefinite-life intangible asset is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections (for example due to regulatory or industry changes), disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, or significant adverse changes in the markets in which we operate. We test our reporting units for impairment by comparing the estimated fair value of each reporting unit to its carrying amount. We test indefinite-life intangible assets for impairment by comparing the estimated fair value of each indefinite-life intangible asset to its carrying amount. If the carrying amount of a reporting unit or indefinite-life intangible asset exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount.
The Company has three operating segments: Wholesale, Direct-to-Consumer and Business-to-Business. We determined these three operating segments do not have components for which discrete financial information is available. The lowest level at which discrete financial information is available is at the operating segment level. Additionally, the components within each of the operating segments have similar long-term average gross margins, similar products, similar (shared) production processes, similar types of customers and similar (shared) distribution methods. Therefore, we concluded that our reporting units used for purposes of the goodwill impairment analysis are the same as our reportable segments.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units and trademarks requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, then one or more of our reporting units or intangible assets might become impaired in the future.
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We generally utilize the discounted cash flow method under the income approach and the Guideline Public Company Method (“GPCM”) under the market approach to estimate the fair value of our reporting units. Some of the more significant assumptions used in estimating the fair values of the individual reporting units under both approaches include the estimated future annual net cash flows for each reporting unit (including net sales, cost of revenue, selling, general and administrative expenses, depreciation and amortization, working capital, and capital expenditures), income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, management’s plans, and guideline companies.
During the second quarter of 2023, we identified a number of goodwill impairment indicators that led us to conclude that an impairment test on goodwill was required to determine if the fair values of certain reporting units were below their carrying values. The indicators included: revenue and earnings before income tax, depreciation and amortization ("EBITDA") falling short of projections, increases in certain operating costs including wine, freight and other supply chain items and the continued decline of the Company's stock price. As a result of the impairment testing, the Company determined that the goodwill in two of our reporting units - Wholesale and Business-to-Business, was impaired. The goodwill impairment charge reduced the carrying value and fully impaired goodwill in the Company's Wholesale and Business-to-Business reporting units by $116.3 million and $9.0 million, respectively.
During the fourth quarter of 2023, the Company performed its annual impairment assessment. Due to the continued decline of the Company's stock price, we elected to perform a quantitative assessment of goodwill for the Direct-to-Consumer reporting unit. Based on the quantitative assessment, the estimated carrying value of the Direct-to-Consumer reporting unit exceeded its fair value. As a result, we recognized a goodwill impairment of $20.7 million and fully impaired the goodwill of the reporting unit.
During 2022, we performed our annual goodwill impairment testing for all three reporting units. The estimated fair value of each reporting unit tested exceeded its carrying value.
We generally utilize the relief from royalty method under the income approach to estimate the fair value of our indefinite-lived intangible assets associated with trade names and trademarks. Some of the more significant assumptions used in estimating the fair values of the individual reporting units under both approaches include the estimated future annual net sales for each trademark, royalty rates (as a percentage of net sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, and a discount rate that reflects the level of risk associated with the future cost savings attributable to the indefinite-life intangible asset. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.
As noted above, the Company identified impairment indicators in the second quarter of 2023. As such, we performed a quantitative impairment test of our indefinite-lived intangibles. The Company evaluated its' winery use permits and determined that there was no evidence of impairment. Trade names and trademarks were also tested for impairment. Based on the analysis performed, the Company recorded an intangible asset impairment charge of $12.6 million, which consisted of $10.3 million related to Wholesale, $2.2 million related to Direct-to-Consumer and $0.1 million related to Business-to Business reporting units. The impairment was primarily related to Layer Cake trademarks ($4.1 million) and ACE trademarks ($3.7 million). The impairment loss arose due to a continued decline in Layer Cake volume and a lower royalty rate for assessing the ACE trademark given management's expectations.
The Company performed its annual impairment assessment in the fourth quarter of 2023, which included a quantitative impairment test of the our indefinite-lived intangibles. There was no evidence of impairment of the Company's winery use permits. Based on the analysis performed, the Company recorded an intangible asset impairment charge related to trade names and trademarks of $3.6 million, which consisted of $2.3 million related to Wholesale, $1.0 million related to Direct-to-Consumer and $0.3 million related to Business-to Business reporting units.
Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation.
Definite-lived intangible assets, which consist primarily of customer relationships, are amortized on a straight-line basis over the estimated periods benefited. We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of definite-lived intangible assets held for use, we group assets at the asset group level which is lowest level for which cash flows are separately identifiable. Our asset groups are the same as our reporting units. If an impairment is determined to exist, the impairment loss is calculated as the amount by which the carrying amount of the asset group exceeds its fair value.
Refer to Note 6 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for further discussion.
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Business Combinations
We account for business combinations using the acquisition method, which requires that the total consideration for each of the acquired businesses be allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
In determining the fair value of assets acquired and liabilities assumed in a business combination, we use the income approach to value our most significant acquired assets. Significant assumptions relating to our estimates in the income approach include base revenue, revenue growth rate net of client attrition, projected gross margin, discount rates, projected operating expenses and the future effective income tax rates. The valuations of our acquired businesses have been performed by a third-party valuation specialist under our management’s supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in discounted cash flow assumptions could result in an impairment of goodwill or intangible assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results.
Acquisition-related costs are not considered part of the consideration and are expensed as operating expenses as incurred. Contingent consideration, if any, is measured at fair value initially on the acquisition date as well as subsequently at the end of each reporting period until settlement at the end of the assessment period.
Stock-Based Compensation
Stock-based compensation provided to employees is recognized in the consolidated statement of operations and comprehensive income (loss) based on the grant date fair value of the awards. The fair value of restricted stock units is determined by the grant date market price of our common shares. The fair value of stock options is determined as of the grant date using the Black Scholes Model or the Monte Carlo simulation model. The determination of the grant date fair value of stock option awards granted is affected by a number of variables, including the fair value of the Company's common stock, the expected common stock price volatility over the life of the awards, the expected term of the stock option, risk-free interest rates and the expected dividend yield of the Company's common stock. Due to the Company's limited trading history since becoming a public company on June 7, 2021, the Company derived its volatility from the average historical stock volatilities of several peer public companies over a period equivalent to the expected term of the awards.
The compensation expense recognized for stock-based awards is net of estimated forfeitures and is recognized ratably over the service period of the awards. All income tax effects of stock-based awards are recognized in the consolidated statements of operations as awards vest or are settled. We classify stock-based compensation expense in selling, general and administrative ("SG&A") expenses in the consolidated statement of operations and comprehensive income (loss).
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 no t 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 the Public 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 the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
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Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting standards and pronouncements.
Item 7A. Quantitative and Qu alitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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Item 8. Financial Sta tements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 00 677 )
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Vintage Wine Estates, Inc. and subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vintage Wine Estates, Inc. (the “Company”) as of June 30, 2023 and 2022, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two year period then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the years in the two year period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Notes 1 and 9 to the consolidated financial statements, the Company changed its method of accounting for leases and sale-lease back transactions on July 1, 2022, due to the adoption of Accounting Standards Codification, Leases (ASC 842) .
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Cherry Bekaert LLP
We have served as the Company’s auditor since 2021.
Raleigh , North Carolina
October 13, 2023
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VINTAGE WINE ESTATES, INC
CONSOLIDAT ED BALANCE SHEETS
(in thousands, except share amounts and par value)
June 30, 2023
June 30, 2022
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Other receivables
Inventories
Assets held for sale, net
Current interest rate swap asset
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Operating lease right-of-use assets
Finance lease right-of-use-assets
Goodwill
Intangible assets, net
Interest rate swap asset
Other assets
Total assets
Liabilities, redeemable noncontrolling interest, and stockholders' equity
Current liabilities:
Line of credit
Accounts payable
Accrued liabilities and other payables
Current operating lease liabilities
Current finance lease liabilities
Current maturities of long-term debt
Total current liabilities
Other long-term liabilities
Long-term debt, less current maturities
Long-term operating lease liabilities
Long-term finance lease liabilities
Deferred tax liability
Deferred gain
Total liabilities
Commitments and contingencies (Note 14)
Redeemable noncontrolling interest
Stockholders' equity:
Preferred stock, no par value, 2,000,000 shares authorized, and none issued and outstanding at June 30, 2023 and June 30, 2022.
Common stock, no par value, 200,000,000 shares authorized, 62,234,028 issued and 59,362,134 outstanding at June 30, 2023 and 61,691,054 issued and 58,819,160 outstanding at June 30, 2022.
Additional paid-in capital
Treasury stock, at cost: 2,871,894 shares held at June 30, 2023 and June 30, 2022, respectively.
Accumulated deficit
Total Vintage Wine Estates, Inc. stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities, redeemable noncontrolling interest, and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
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VINTAGE WINE ESTATES, INC.
CONSOLIDATED S TATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
Year Ended June 30,
Net revenue
Wine, spirits and cider
Nonwine
Cost of revenue
Wine, spirits and cider
Nonwine
Gross profit
Selling, general, and administrative expenses
Amortization expense
Goodwill impairment losses
Intangible impairment losses
Loss (gain) on remeasurement of contingent liability
Gain on insurance and litigation proceeds
Gain on sale leaseback
Loss on sale of assets
Loss from operations
Other income (expense)
Interest expense
Net gain on interest rate swap agreements
Loss on modification or extinguishment of debt
Other loss, net
Total other income (expense), net
(Loss) income before provision for income taxes
Income tax (benefit) provision
Net loss
Net loss attributable to the noncontrolling interests
Net loss attributable to common stockholders
Net earnings per share allocable to common stockholders
Basic
Diluted
Weighted average shares used in the calculation of earnings per share allocable to common stockholders
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
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VINTAGE WINE ESTATES, INC.
CONSOLIDATED STATEME NTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Redeemable Noncontrolling
Interest Amount
Common Stock
Treasury Stock
Additional
Paid-In Capital
Accumulated Deficit
Noncontrolling
Interests
Total Stockholders' Equity
Shares
Amount
Shares
Amount
Balance, June 30, 2021
Out-of-period adjustment
Issuance of Common Stock in business combination
Stock-based compensation expense
Repurchase of common stock
Repurchase of public warrants
Net loss
Balance, June 30, 2022
ASC 842 Implementation
Stock-based compensation expense
Repurchase of public warrants
Shareholder distribution
Vesting of restricted stock
Taxes paid related to net share settlement of equity awards
Net loss
Balance, June 30, 2023
The accompanying notes are an integral part of the consolidated financial statements.
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VINTAGE WINE ESTATES, INC.
CONSOLIDATED STATE MENTS OF CASH FLOWS
(in thousands)
Year Ended June 30,
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation expense
Amortization expense
Loss on goodwill and intangible assets impairment
Stock-based compensation expense
Provision for credit losses
Provision for inventory reserves
Inventory write-down
Remeasurement of contingent consideration liabilities
Net gain on interest rate swap agreements
Provision for deferred income tax
Loss on sale of assets
Deferred gain on sale leaseback
Loss on modification or extinguishment of debt
Deferred rent
Change in operating assets and liabilities (net of effect of business combinations):
Accounts receivable
Other receivables
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities and other payables
Net change in lease assets and liabilities
Other
Net cash (used in) provided by operating activities
Cash flows from investing activities
Proceeds from sale of assets
Purchases of property, plant and equipment
Acquisition of businesses
Net cash provided by (used in) investing activities
Cash flows from financing activities
Principal payments on line of credit
Proceeds from line of credit
Financing costs incurred
Change in outstanding checks in excess of cash
Principal payments on long-term debt
Proceeds from debt
Principal payments on finance leases
Payments of minimum tax withholdings on stock-based payment awards
Distributions to noncontrolling interest
Repurchase of common stock
Repurchase of public warrants
Payments on acquisition payable
Net cash (used in) provided by financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
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Year Ended June 30,
Supplemental cash flow information
Cash paid during the year for:
Interest
Income taxes
Noncash investing and financing activities:
Contingent consideration in a business combination
Issuance of Common Stock in a business combination
Operating lease assets obtained in exchange for operating lease liabilities
Finance lease assets obtained in exchange for finance lease obligations
Accrued interest on term loan and line-of credit refinanced to principal
Line of credit refinanced as term debt
Term debt refinanced from a line of credit
Financing costs deducted from long-term debt proceeds
Financing costs deducted from line of credit proceeds
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO THE CONSOLID A TED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of Business
Vintage Wine Estates, Inc., a Nevada corporation (the "Company”, "we", "us", "our"), owns and operates winery and hospitality facilities in California, Washington and Oregon. The Company produces a variety of wines under its own or custom labels, which are sold to consumers, retailers, and distributors located throughout the United States, Canada, and other export markets. The Company also provides bottling, fulfillment, and storage services to other companies on a contract basis.
Principles of Consolidation
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, including Sabotage Wine Company, LLC and Splinter Group Napa, LLC. All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Significant estimates include, but are not limited to, revenue recognized from the sale of wine, spirits and cider, accounting for income taxes, contingent consideration, the net realizable value of inventory, estimated fair values of intangible assets in acquisitions, intangible assets and goodwill for impairment, and stock-based compensation.
Reclassifications and Revisions
Subsequent to the issuance of the Company's financial statements for the year ended June 30, 2022, the Company discovered an error in its classification of purchase price for specific properties, which resulted in the Company overstating depreciable assets and the related depreciation expense for post-acquisition periods. Management has evaluated this misstatement, which understated property, plant and equipment, net and overstated inventories and related cost of revenue, and concluded it was not material to prior periods, individually or in the aggregate. However, correcting the cumulative effect of the error in the fiscal 2023 interim period would have had a material effect on the results of operations for such periods. Therefore, the Company is revising the relevant prior period consolidated financial statements and related footnotes for this error and other immaterial out-of-period items for comparative purposes. The Company will also correct previously reported financial information for such immaterial errors in future filings, as applicable, and certain prior year amounts have been reclassified for consistency with the current year presentation. Additionally, comparative prior period amounts in the applicable notes to the consolidated financial statements have been revised and our beginning accumulated deficit was increased by $ 0.7 million, net of a tax benefit of $ 0.3 million, as a consequence of the immaterial impact of the identified errors to periods prior to July 1, 2021.
Regarding our previously reported consolidated balance sheet as of June 30, 2022, the following table presents the impact of certain immaterial out-of-period items, reclassifications and other adjustments including but not limited to:
$ 1.8 million reclassification from restricted cash to cash and cash equivalents as well as $ 0.7 million reclassification for outstanding checks between cash and cash equivalents and accounts payable;
$ 1.9 million non-recurring adjustment to prepaid expenses and other current assets related to the formation of VWE Captive, LLC;
(iii)
$ 2.6 million adjustment to property, plant and equipment, net due to an overstatement of depreciation expense arising from the incorrect classification of assets as part of historical purchase price allocations;
$ 1.5 million reclassification between property, plant and equipment and inventories related to specific spirits barrels;
$ 1.3 million adjustment to intangible assets, net due to impairment;
$ 2.1 million non-recurring adjustment to accrued liabilities and other payables for historical acquisitions;
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(vii)
$ 1.8 million adjustment to additional paid-in capital and retained earnings due to overstatement of stock-based compensation expense arising from an incorrect service period used in expense recognition; and
(viii)
$ 0.7 million adjustment to accumulated deficit due to a prior year equity reduction of $ 0.7 million primarily due to a non-recurring adjustment for historical acquisitions of $ 1.6 million, offset by $ 0.9 million for adjustment to property, plant and equipment, net due to overstatement of depreciation expense.
CONSOLIDATED BALANCE SHEET
June 30, 2022
(in thousands)
As Previously Reported
Adjustments
As Revised
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Intangible assets, net
Total assets
Liabilities, redeemable noncontrolling interest, and stockholders' equity
Current liabilities:
Accounts payable
Accrued liabilities and other payables
Total current liabilities
Other long-term liabilities
Deferred tax liability
Total liabilities
Redeemable noncontrolling interest
Stockholders' equity:
Additional paid-in capital
Accumulated deficit
Total Vintage Wine Estates, Inc. stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities, redeemable noncontrolling interest, and stockholders' equity
Regarding the previously reported consolidated statement of operations for the year ended June 30, 2022, the following table presents the impact of certain immaterial out-of-period adjustments and reclassifications including but not limited to:
(i) $ 1.3 million adjustment to intangible assets, net and retained earnings due to impairment recognized in 2022;
(ii) $ 1.8 million adjustment to additional paid-in capital and selling, general, and administrative expenses due to overstatement of stock-based compensation expense arising from an incorrect service period used in expense recognition.
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CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
Year Ended June 30, 2022
(in thousands, except share and per share amounts)
As Previously Reported
Adjustments
As Revised
Net revenues
Wine, spirits and cider
Total net revenues
Cost of revenues
Wine, spirits and cider
Nonwine
Total cost of revenues
Gross profit
Selling, general, and administrative expenses
Amortization Expense
Impairment of intangible assets
Loss on sale of property, plant, and equipment
Gain on remeasurement of contingent consideration liabilities
Loss from operations
Other income
Net unrealized gain on interest rate swap agreements
Total other income, net
Income before provision for income taxes
Income tax provision
Net loss
Net loss attributable to the noncontrolling interests
Net loss attributable to Vintage Wine Estates, Inc.
Net loss allocable to common stockholders
Net loss per share allocable to common stockholders
Basic
Diluted
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The following table presents the impact of the adjustments and reclassifications discussed above on the consolidated cash flow statement for the year ended June 30, 2022:
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 2022
(in thousands)
As Previously Reported
Adjustments
As Revised
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization expense
Depreciation expense
Amortization expense
Goodwill and intangible assets impairment expense
Amortization of deferred loan fees and line of credit fees
Amortization of label design fees
Stock-based compensation expense
Provision for doubtful accounts
Remeasurement of contingent consideration liabilities
Net unrealized gain on interest rate swap agreements
Provision for deferred income tax
Loss on disposition of assets
Change in operating assets and liabilities (net of effect of business combinations):
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities and other payables
Other
Net cash provided by operating activities
Cash flows from investing activities
Label design expenditures
Net cash used in investing activities
Cash flows from financing activities
Outstanding checks in excess of cash
Net cash provided by financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, end of year
Supplemental cash flow information
Noncash investing and financing activities:
Acquisition of assets under capital leases
Cash and Cash Equivalents
Cash consists of deposits held at financial institutions. Cash equivalents consists of money market accounts.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheet that sums to the total of the same such amounts as shown in the consolidated statements of cash flows:
(in thousands)
June 30, 2023
June 30, 2022
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash as shown in the consolidated statements of cash flows
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In connection with the amended and restated loan and security agreement (see Note 11), the Company entered into a Deposit Control Agreement which required $ 4.8 million of the total cash received to be placed into a restricted cash collateral account, subject to release upon the completion of certain construction work and certificates of occupancy associated with the Hopland facility. In July 2022, the Deposit Control Agreement was terminated upon certification that the conditions related to the Hopland facility were satisfied and the underlying cash restrictions were lifted.
Accounts Receivable and Allowance for Credit Losses
The Company adopted Accounting Standards Update ("ASU") ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, and its related amendments as of July 1, 2022, see “Recently Adopted Accounting Pronouncements” below.
Accounts receivable are recorded at the invoiced amount. We consider an account past due on the first day following its due date. We monitor past due accounts periodically, establish appropriate reserves to cover expected losses and consider historical loss rates over customer groupings with similar risk characteristics to develop our allowance for expected credit losses. We review these factors quarterly to determine if any adjustments are needed to the allowance. Account balances are written-off against the established allowance when we feel it is probable the receivable will not be recovered.
The reserve for credit losses and the provision for the allowance for credit losses were insignificant for the year ended June 30, 2023 and $ 0.4 million for the year ended June 30, 2022, We do not accrue interest on past-due amounts. The accounts written off were immaterial for the years ended June 30, 2023 and 2022, respectively .
Other receivables include insurance-related receivables, income tax receivables and other miscellaneous receivables.
Inventories
Inventories of bulk and bottled wines, spirits, and ciders 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.
Assets Held for Sale
The Company classifies an asset group ("asset") as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in loss from operations in the period in which the held for sale criteria are met. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the asset’s estimated useful life or the life of the related lease. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Vineyard development costs, including certain cultural costs for continuing cultivation of vines not yet bearing fruit, are capitalized. Depreciation of vineyard development costs commences when commercial grape yields are achieved, generally in the third year after planting. Estimated useful lives are generally as follows:
Buildings and improvements
10 - 39 years
Cooperage
3 - 5 years
Furniture and equipment
3 - 10 years
Machinery and equipment
5 - 20 years
Vineyards
7 - 10 years
Loss on Sale of Assets
Loss on sale of assets for the years ended June 30, 2023 and June 30, 2022 was $ 8.3 million and $ 0.4 million, respectively. As part of our simplification efforts, on June 29, 2023, the Company completed its sale of the assets of The Sommelier Company for a negligible amount of proceeds and an estimated earnout of $ 0.3 million. As a result of the sale, the Company recognized a loss on sale of assets of $ 9.7 million, of which
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$ 9 million was goodwill. The Company also sold Laetitia assets and incurred a loss of $ 4.5 million. These were partially offset by the Tenma Vineyard sale, in the quarter ended March 31, 2023, where we recognized a gain on the sale of assets of $ 6.1 million.
Sale-leaseback Transaction
Prior to the adoption of ASC 842, Leases , we accounted for the sale and leaseback of vineyards under ASC 840, Sale-Leaseback Accounting of Real Estate . Given we were considered to retain more than a minor part, but less than substantially all of the use of the property, a gain was recognized to the extent it exceeded the present value of the leaseback payments. Any gain that was less than or equal to the present value of the leaseback payments was deferred and amortized on a straight-line basis over the leaseback term. We derecognized the asset from our consolidated balance sheet at the sale closing. The gain is essentially a reduction to offset the future lease payment. The deferred gain was $ 10.7 million as of June 30, 2022 . In accordance with the guidance, with the adoption of ASC 842 on July 1, 2022, the deferred gain of $ 10.7 million, net of tax effect of $ 2.9 million, was recognized as a cumulative-effect adjustment to equity.
Leases
The Company adopted ASU 2016-02, Leases ("Topic 842") and its related amendments as of July 1, 2022, see “Recently Adopted Accounting Pronouncements” below. The Company has both operating leases and finance leases. The Company’s non-cancelable leases for winery facilities, vineyards, corporate and administrative offices, tasting rooms, and some equipment are classified as operating leases. The Company’s non-cancelable leases for certain equipment that include a bargain purchase option at the end of the lease term are classified as finance leases.
The Company recognizes a right of use (“ROU”) asset representing its right to use the underlying asset for the lease term on the consolidated balance sheet and related lease liabilities representing its obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The ROU asset also includes adjustments for lease incentives receivable, deferred rent and prepaid rent when applicable. The Company’s lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company has made an accounting policy election not to recognize ROU assets and lease obligations for its short-term leases, which are defined as leases with an initial term of 12 months or less. However, the Company will recognize these lease payments in the consolidated statements of operations and comprehensive income/(loss) on a straight-line basis over the lease term and variable lease payments in the period in which the obligation is incurred.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. For finance leases, the right-of-use asset is amortized to amortization expense and interest expense is recorded in connection with the lease liability. Payments under lease arrangements are primarily fixed, however, most lease agreements also contain some variable payments. Variable lease payments other than those that depend on an index or a rate are expensed as incurred and not incl uded in the operating lease ROU assets and lease liabilities. These amounts primarily include payments for taxes, parking and common area expenses. See Note 9.
Business Combinations
Business combinations are accounted for under Accounting Standards Codification (“ASC”) 805—Business Combinations, using the acquisition method of accounting under which all acquired tangible and identifiable intangible assets and assumed liabilities and applicable noncontrolling interests are recognized at fair value as of the respective acquisition date, while the costs associated with the acquisition of a business are expensed as incurred.
The allocation of purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, a market participant’s expectation of future cash flows from acquired customers, acquired trade names, useful lives of acquired assets, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from such estimates. During the measurement period, which is no longer than one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recognized in operations.
Goodwill and Intangible Assets
Goodwill arises from business combinations and is determined as the excess of the fair value of consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized. It is tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of a reporting unit. The Company performs its annual impairment testing in its fourth quarter. There were impairment charges for goodwill during the fourth and second quarters of the year ended June 30, 2023. As a result, the goodwill balance as of June 30, 2023 is zero . See Note 6 for additional information.
Intangible assets represent purchased assets consisting of both indefinite and finite-lived intangible 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 trade names, trademarks and winery use permits, are initially recognized at fair value and subsequently stated at adjusted costs, net of
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any recognized impairments. The indefinite-lived assets are not subject to amortization. Finite-lived intangible assets, comprised of customer relationships, trade names and trademarks, 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 loss from operations. 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. There were impairment charges for trade names and trademarks during the second and fourth quarters of the year ended June 30, 2023. See Note 6 for additional information.
Label and Package Design Costs
Label and package design costs are capitalized and generally amortized over an estimated useful life of two years . Amortization of label and packaging design costs are included in selling, general and administrative expenses and were $ 0.4 million a nd $ 1.0 million for the years ended June 30, 2023 and 2022 , respectively.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of such assets or intangible assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asse t. No impairment loss was recognized for long-lived assets during the years ended June 30, 2023 and 2022 .
Contingent Consideration Liabilities
Contingent consideration liabilities are recorded at fair value when incurred in a business combination. The fair value of these estimates are based on available historical information and on future expectations of actions we may undertake in the future. These estimated liabilities are re-measured at each reporting date with the change in fair value recognized as an operating expense in the Company’s consolidated statements of operations. Subsequent changes in the fair value of the contingent consideration are classified as an adjustment to cash flows from operating activities in the consolidated statements of cash flows because the change in fair value is an input in determining net loss. Cash paid in settlement of contingent consideration liabilities are classified as cash flows from financing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities.
Changes in the fair value of contingent consideration liabilities associated with the acquisition of a business can result from updates to assumptions such as the expected timing or probability of achieving customer related performance targets, specified sales milestones, changes in unresolved claims, projected revenue or changes in discount rates. Significant judgment is used in determining those assumptions as of the acquisition date and for each subsequent reporting period. Therefore, any changes in the fair value will impact our results of operations in such reporting period, thereby resulting in potential variability in our operating results until such contingencies are resolved.
Deferred Financing Costs
Deferred financing costs incurred in connection with obtaining new term loans are amortized over the term of the arrangement and recognized as a direct reduction in the carrying amount of the related debt instruments. Amortization of deferred loan fees is included in interest expense on the consolidated statements of operations and are amortized to interest expense over the term of the related debt using the effective interest method. Debt issu ance costs capitalized were $ 0.9 million for the year ended June 30, 2023 . No debt issuance costs were capitalized for the year ended June 30, 2022 . Amortization expense related to debt issuance fees were $ 0.7 million and $ 0.3 million for the years ended June 30, 2023 and 2022 , respectively. If existing financing is settled or replaced with debt instruments from the same lender that do not have substantially different terms, the new debt agreement is accounted for as a modification for the prior debt agreement and the unamortized costs remain capitalized, the new original issuance discount costs are capitalized, and any new third-party costs are charged to expense.
Line of Credit Fees
Costs incurred in connection with obtaining new debt financing specific to the line of credit are deferred and amortized over the life of the related financing. If such financing is settled or replaced prior to maturity with debt instruments that have substantially different terms, the settlement is treated as an extinguishment and the unamortized costs are charged to gain or loss on extinguishment of debt. Similar to the treatment of deferred financing costs, if existing financing is settled or replaced with debt instruments from the same lender that do not have substantially different terms, the new debt agreement is accounted for as a modification for the prior debt agreement and the unamortized costs remain capitalized, the new original issuance discount costs are capitalized, and any new third-party costs are charged to expense. S ee Note 11. Deferred line of credit fees are recognized as a component of prepaid expenses and other current assets and are amortized to interest expense over the term of the related debt using the effective interest method. $ 2.5 million line of credit fees were capitalized in the year ended June 30, 2023 . No line of credit fees were capitalized in 2022. Amortization expense related to line of credit fees were $ 0.5 million and $ 0.1 million for the years ended June 30, 2023 and 2022 , respectively.
I nterest Rate Swap Agreements
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GAAP requires that an entity recognize derivatives that are recorded as either an asset or a liability are measured at fair value at each reporting period. The Company has entered into interest rate swap agreements as a means of managing its interest rate exposure on its debt obligations. These agreements mitigate our exposure to interest rate fluctuations on our variable rate obligations. We have not designated these agreements as cash-flow hedges.
Accordingly, changes in the fair value of the interest rate swaps are included in the consolidated statements of operations as a component of other income (expense). We do not enter into financial instruments for trading or speculative purposes.
Noncontrolling Interests and Redeemable Noncontrolling Interest
Noncontrolling interests represent the portion of profit or loss, net assets and comprehensive loss that is not allocable to the Company. The redeemable noncontrolling interest is contingently redeemable by the holders. The redeemable noncontrolling interests are not being accreted to their redemption amount as we do not deem redemption probable; notwithstanding, should the instruments redemption become probable, we will thereupon begin to accrete, to the earliest date the holders can demand redemption, the redemption amount.
Fair Value Measurements
We determine fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In arriving at fair value, we use a hierarchy of inputs that maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 : Quoted prices in active markets for identical assets or liabilities.
Level 2 : Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of June 30, 2023 and 2022, the carrying value of the current assets and liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of our long-term variable rate debt approximates carrying value, excluding the effect of unamortized debt discount, as they are based on borrowing rates currently available to the Company for debt with similar terms and maturities (Level 2 inputs). Our contingent consideration and interest rate swap agreement are remeasured at fair value on a recurring basis as of June 30, 2023 and 2022 .
Revenue Recognition
Point in Time — Revenue is recognized 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 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 the Company.
Over Time — Certain long-term contracts in our Business-to-Business ("B2B") segment are for custom wine making services and include services such as fermentation, barrel aging, procurement of dry goods, bottling and cased goods. Additionally, we provide storage services for wine inventory of various customers.
We recognize revenue over time as the contract specific performance obligations are met. The Company elected to apply the "as-invoiced" practical expedient to such revenues, and as a result, will bypass estimating the variable transaction price.
Principal vs. Agent Considerations
As part of our revenue recognition process, we evaluate whether we are the principal or agent for the performance obligations in our contracts with customers. When we determine that we are the principal for a performance obligation, we recognize revenue for that performance obligation on a gross basis. When we determine that we are an agent for a performance obligation, we recognize revenue for that performance obligation net of the
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related costs. In determining whether we are the principal or the agent, we evaluate whether we have control of the goods or services before we transfer the goods or services to the customer by considering whether we are primarily obligated for transferring the goods or services to the customer, whether we have inventory risk for the goods or services before the goods or services are transferred to the customer, and whether we have latitude in establishing prices.
Disaggregation of Revenue
The following tables summarize the revenue by region for the years ended June 30, 2023 and 2022:
June 30,
(in thousands)
United States
International
Total net revenue
The following table provides a disaggregation of revenue based on the pattern of revenue recognition for the years ended June 30, 2023 and 2022:
June 30,
(in thousands)
Point in time
Over time
Total net revenue
Concentrations of Risk
Financial instruments that potentially expose us to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. We maintain the majority of our cash balances at multiple financial institutions that management believes are of high-credit quality and financially stable. At times, we have cash deposited with major financial institutions in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance limits. At June 30, 2023 and 2022 , we had $ 19.3 million and $ 49.0 million respectively, in four major financial institutions in excess of FDIC insurance limits. We attempt to limit our credit risk by performing ongoing credit evaluations of our customers and maintaining adequate allowances for potential credit losses.
The following table summarizes customer concentration of net revenues:
June 30, 2023
June 30, 2022
Revenue as a percent of total revenue
Customer A
The following table summarizes customer concentration of receivables:
June 30, 2023
June 30, 2022
Receivables as a percent of total receivables
Customer A
Revenues fo r sales to Customer A are included within the Business-to-Business reportable segment. Note 18.
Shipping
Shipping and handling revenues are classified as wine, spirits and cider revenues. Shipping and handling costs are included in wine, spirits and cider cost of revenues.
Excise Taxes
Excise taxes are levied by government agencies on beverages containing alcohol, including wine and spirits. These taxes are not collected from customers but are instead the responsibility of the Company. Applicable excise taxes are included in net revenues and were $ 15.8 million an d $ 11.2 million for the years ended June 30, 2023 and 2022 , respectively.
Sales Taxes
Sales taxes are pass-through taxes that are collected from customers at the time of sale and remitted to governmental agencies by the Company. These amounts are not reflected as revenues.
Stock-Based Compensation
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Stock-based compensation provided to employees is recognized in the consolidated statement of operations and comprehensive income (loss) based on the grant date fair value of the awards. The fair value of restricted stock units is determined by the grant date market price of our common shares. The fair value of stock options is determined on the grant date using a Black-Scholes model or Monte Carlo simulation model, depending on the terms of the award. The determination of the grant date fair value of stock option awards granted is affected by a number of variables, including the fair value of the Company's common stock, the expected common stock price volatility over the life of the awards, the expected term of the stock option, risk-free interest rates and the expected dividend yield of the Company's common stock. Due to the Company's limited trading history since becoming a public company on June 7, 2021, the Company derived its volatility from the average historical stock volatilities of several peer public companies over a period equivalent to the expected term of the awards.
The compensation expense recognized for stock-based awards is net of estimated forfeitures and is recognized ratably over the service period of the awards. Al l income tax effects of stock-based awards are recognized in the consolidated statements of operations and comprehensive income (loss) as awards vest or are settled. We record stock-based compensation expense in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
Advertising
Advertising costs are expensed either as the costs are incurred or the first time the advertising takes place. Advertising expense was $ 4.6 million and $ 5.2 million for the years ended June 30, 2023 and 2022 , respectively.
Casualty Gains
In relation to various events related to weather and wildfires, the Company received insurance and litigation proceeds of $ 2.3 million and $ 3.0 million for the years ended June 30, 2023 and 2022, respectively.
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 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 .
Comprehensive Income or Loss
We had no items of comprehensive income or loss other than net income (loss) for the years ended June 30, 2023 and 2022. Therefore, a separate statement of comprehensive income (loss ) has not been included in the accompanying consolidated financial statements.
Earnings Per Share
Basic and diluted earnings per share allocable to common stockholders is presented in conformity with the two-class method required for participating securities. We considered our Series B stock to be participating securities as, in the event a dividend is paid on Series A stock, the holders of Series B stock would be entitled to receive dividends on a basis consistent with the Series A stockholders. The two-class method determines earnings per share for each class of common and participating securities according to dividends declared or accumulated as well as participation rights in undistributed earnings. The two-class method requires income available to stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Legacy VWE’s redeemable Series B stock was a participating security. Under the two-class method, any net loss attributable to common stockholders is not allocated to the Series B stock as the holders of the Series B stock did not have a contractual obligation to share in losses.
Basic earnings per share is calculated by dividing the net income (loss) allocable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. For purposes of the calculation of diluted earnings per share, stock options and warrants to purchase common stock are considered potentially dilutive securities but are excluded from the calculation of diluted earnings per share when their effect is antidilutive. As a result, in certain periods, diluted earnings per share is the same as basic earnings per share for the periods presented.
The computation of net income (loss) available to Series A stockholders is computed by deducting the dividends declared, if any, and cumulative dividends, whether or not declared, in the period on Series B stock (whether paid or not) from the reported net income (loss).
As the Merger has been accounted for as a reverse recapitalization, the consolidated financial statements of the merged entity reflect the continuation of Legacy VWE’s consolidated financial statements, with the Legacy VWE Equity, which has been retroactively adjusted to the earliest period presented to reflect the legal capital of the legal acquirer, BCAC. As a result, earnings per share was also restated for periods ended prior to the Merger.
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Self-Insurance
On September 9, 2021, the Company formed VWE Captive, LLC, a wholly-owned captive insurance company ("Captive"), which became operational on October 1, 2021. The Company formed Captive to self-insure the first $ 10.0 million of claims, above which limit, the Company has secured insurance. The insurance policy protects us against a portion of our risk of loss related to earthquakes, floods and named wildfires and windstorms. During 2023, we added Directors and Officers insurance to self-insure the firs t $ 5.0 million of cla ims, above which limit, the Company has secured insurance.
Segment Information
We operate in three reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker (“CODM”), our Chief Executive Officer, allocates resources and assesses performance based upon discrete financial information at the segment level. See Note 18.
Emerging Growth Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, 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 use 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.
Recently Adopted Accounting Pronouncements
In December 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-06: Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting from March 31, 2023 to December 31, 2024. ASU 2020-04 provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be discontinued, to alternative reference rates. After December 31, 2024, entities will no longer be permitted to apply the relief in Topic 848. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Codification 842 or "Topic 842", which supersedes the guidance in ASC 840, Leases. The new standard, as amended by subsequent ASUs on Topic 842 and recent extensions issued by the FASB in response to COVID-19, requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of its classification. Leases with a term of 12 months or less are accounted for in the Company's consolidated statements of operations.
The Company adopted Topic 842 effective July 1, 2022 using the modified retrospective approach, whereby we recognized a transition adjustment at the effective date of Topic 842, rather than at the beginning of the earliest comparative period presented. Prior period information was not restated. In addition, the Company applied the package of transition practical expedients, which allows the Company to carryforward its population of existing leases, the classification of each lease and the treatment of initial direct costs as of the period of adoption. The Company did not elect the practical expedient related to hindsight analysis which allows a lessee to use hindsight in determining the lease term and in assessing impairment of the entity’s ROU assets.
The Company identified the population of real estate and equipment leases to which the guidance applies and implemented changes in its systems, procedures and controls relating to how lease information is obtained, processed and analyzed. Upon adoption, the Company recognized $ 37.6 million in ROU assets that represent the Company's right to use the underlying assets for the lease term and $ 39.2 million in lease obligations that represent the Company's obligation to make lease payments arising from the lease. The ROU assets recognized upon adoption of Topic 842, included the reclassification of $ 2.1 million of deferred rent and $ 0.4 million of prepaid rent. In addition, a deferred gain related to a sale-leaseback transaction that occurred under ASC 840 of $ 7.7 million, net of taxes of $ 2.9 million, was reclassified to equity. See Note 9.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses.
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The Company adopted ASU No. 2016-13, as amended effective July 1, 2022. We consider historical loss rates over customer groupings with similar risk characteristics to develop our allowance for expected credit losses. We review these factors quarterly to determine if any adjustments are needed to the allowance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
The recently issued accounting pronouncements are not expected to have an impact on the Company.
2. Business Combinations
Vinesse
On October 4, 2021, the Company acquired 100 % of the members' interest in Vinesse, LLC, a California limited liability company ("Vinesse"). Vinesse is a direct-to-consumer platform company that specializes in wine clubs with over 60,000 members. Founded in 1993, Vinesse has developed a long-time following by offering boutique wines to a broader audience and making wine accessible and easy to love.
The purchase price totaling $ 17.0 million was comprised of cash of $ 14.0 million, consulting fees of $ 0.2 million per year for three years totaling $ 0.6 million and a three-year earnout payable of up to $ 2.4 million. To fund the cash portion of the purchase consideration, we utilized the line of credit under the amended and restated loan and security agreement. The Company paid $ 0.5 million in June 2023 to settle working capital under the terms of the purchase agreement.
The allocation of the consideration for the net assets acquired from the acquisition of Vinesse was as follows:
(in thousands)
Sources of financing
Cash
Accrued other
Contingent consideration
Fair value of consideration
Assets acquired:
Fixed assets
Inventory
Trade Names and Trademarks
Customer relationships
Total identifiable assets acquired
Goodwill
The Company used the carrying value as of the acquisition date to value fixed assets, as we determined that they represented the fair value at the acquisition date.
Inventory was comprised of finished goods, bulk and raw materials. The fair value of finished goods inventory and bulk inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.
The trade names and trademarks fair value was derived using the Relief-From-Royalty Method (“RFR”). Key assumptions in valuing trade names and trademarks included (i) a royalty rate of 1.8 % and (ii) discount rate of 17.5 %.
Customer relationships fair value was derived using the Multiple-Period Excess Earnings Method (“MPEEM”), utilizing a discount rate of 18.0 %, and Cost Approach. Customer relationships were weighted; 50.0% using the MPEEM model and 50.0% using the Cost Approach.
The results of operations of Vinesse are included in the accompanying consolidated statements of operations from the October 4, 2021 acquisition date.
Transaction costs incurred in the acquisition were insignificant.
ACE Cider
On November 16, 2021 , the Company acquired 100 % of the capital stock of ACE Cider, the California Cider Company, Inc., a California corporation ("ACE Cider"). ACE Cider is a wholesale platform and specializes in hard cider, an alcoholic wine beverage fermented from apples. The operations of ACE Cider allowed the Company to enter the beer distribution category.
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The purchase price totaling $ 47.4 million was comprised of cash of $ 46.9 million, consulting fees of $ 60 thousand and a two-year earnout payable of $ 0.5 million. The Company paid $ 0.3 million in May 2022 to settle working capital under the terms of the purchase agreement.
The allocation of the consideration for the net assets acquired from the acquisition of ACE Cider were as follows:
(in thousands)
Sources of financing
Cash
Accrued other
Contingent consideration
Fair value of consideration
Assets acquired:
Fixed assets
Inventory
Trademarks
Customer relationships
Deferred tax liability
Total identifiable assets acquired
Goodwill
The Company used the carrying value as of the acquisition date to value fixed assets, as we determined that they represented the fair value at the acquisition date.
Inventory was comprised of finished goods, bulk cider and raw materials. The fair value of finished goods inventory and bulk cider inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.
The trademarks' fair value was derived using the RFR. Key assumptions in valuing trademarks included (i) a royalty rate of 2.75 % and (ii) discount rate of 12.5 %.
Customer relationships' fair value was derived using the MPEEM, utilizing a discount rate of 13.0 %, and Cost Approach. Customer relationships were weighted: 90.0% using the MPEEM model and 10.0% using the Cost Approach.
The results of operations of ACE Cider are included in the accompanying consolidated statements of operations from the November 16, 2021 acquisition date.
Transaction costs incurred in the acquisition were insignificant.
Meier's
On January 18, 2022, the Company acquired 100 % of the capital stock in Meier's Wine Cellars, Inc., DBA Meier's Beverage Group, an Ohio company ("Meier's"). Meier's is a wholesale and business-to-business company that specializes in custom blending, contract storage, contract manufacturing, and private labeling for wine, beer, and spirits. Over the years, Meier's continued extending their winemaking skills by producing table wines, sparkling wines, dessert wines, vermouth and carbonated grape juice.
The purchase price totaling $ 25.0 million was comprised of cash of $ 12.5 million and 1,229,443 shares of common stock with a value of $ 12.5 million. The shares may not be transferred during the lock-up period, as outlined in the lock-up agreement entered into on the acquisition date.
The terms of the acquisition also provide for the possibility of additional contingent consideration of up to $ 10.0 million based on Meier's exceeding current EBITDA levels over each of the next three years. The earn out consideration will be paid in a combination of 50 % cash and 50 % stock. The common stock shares issued are also subject to the terms of the lock-up agreement.
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The allocation of the consideration for the net assets acquired from the acquisition of Meier's were as follows:
(in thousands)
Sources of financing
Cash
Shares of common stock
Contingent consideration
Settlement of pre-existing relationship
Fair value of consideration
Assets acquired:
Accounts receivable
Fixed assets
Inventory
Other assets
Trademarks
Customer relationships
Accounts payable and accrued expenses
Deferred tax liability
Total identifiable assets acquired
Goodwill
The number of shares of common stock was determined in part based on the closing stock price on the acquisition date, resulting in a fair value of $ 12.0 million, less a discount of $ 1.5 million due to lack of marketability for shares of common stock, resulting in the shares of common stock valued at $ 10.5 million.
The fair value of the contingent consideration was calculated using the Monte Carlo simulation model, resulting in estimated earnout payments of $ 4.9 million.
The Company estimated the fair value of accounts receivable, other assets, accounts payable and accrued expenses and fixed assets at the acquisition date.
Inventory was comprised of finished goods, work in process and raw materials. The fair value of finished goods inventory and work in process inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was recorded at its book value.
The trade names' and trademarks' fair values were derived using the RFR. Key assumptions in valuing trade names and trademarks included (i) a royalty rate of 1.1 % and (ii) discount rate of 27.0 %.
Customer relationships' fair value was derived using the MPEEM, utilizing a discount rate of 28.0 %.
The results of operations of Meier's are included in the accompanying consolidated statements of operations from the January 18, 2022 acquisition date.
Transaction costs incurred in the acquisition were insignificant.
3. Inventory
Inventory consists of the following:
(in thousands)
June 30, 2023
June 30, 2022
Bulk wine, spirits and cider
Bottled wine, spirits and cider
Bottling and packaging supplies
Nonwine inventory
Total inventories
For the years ended June 30, 2023 and 2022 , the Company recognized an expense related to reducing inventory to its net realizable value of $ 10.8 million and $ 3.7 million, respectively. In addition, for the year ended June 30, 2022, the Company wrote down $ 12.4 million of inventory related to fiscal inventory count adjustments and $ 3.0 million related to additional remediation efforts.
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For the years ended June 30, 2023 and 2022 , the Company's inventory balances are presented net of inventory reserves of $ 0.6 million and $ 2.2 million, respectively, for bulk wine, spirits and cider inventory, $ 3.2 million and $ 1.8 million, respectively, for bottled wine, spirits and cider inventory and $ 0.6 million and $ 0.4 million, respectively, for bottling and packaging supplies inventory. The gross value of bulk wine inventory reflects the writedown of $ 6.2 million that was recognized in the quarter ended March 31, 2023.
In relation to various events related to weather and wildfires that damaged inventory, the Company received insurance and litigation proceeds of $ 2.3 million and $ 3.0 million for the years ended June 30, 2023 and 2022, respectively.
4. Assets Held for Sale
As of June 30, 2023, the Company had one asset group held for sale. The asset group relates to land, a building and assumption of a land lease related to the Tamarack Cellars production facility. The Company completed the sale of the assets in July 2023.
The carrying amounts of assets held for sale consists of the following:
(in thousands)
June 30, 2023
Tamarack Cellars property, plant and equipment held for sale
Less accumulated depreciation and amortization
Total assets held for sale
The cash flows related to held for sale assets have not been segregated and remain included in the major classes of assets.
There were no assets classified as held for sale as of June 30, 2022.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
(in thousands)
June 30, 2023
June 30, 2022
Buildings and improvements
Land
Machinery and equipment
Cooperage
Vineyards
Furniture and fixtures
Less accumulated depreciation
Construction in progress
Depreciation expense, a portion of which is recognized as an inventoriable cost, related to property, plant and equipment was $ 15.9 million an d $ 15.2 million for the years ended June 30, 2023 and 2022 , respectively.
6. Goodwill and Intangible Assets
Goodwill
The following is a rollforward of the Company’s goodwill by reportable segment:
(in thousands)
Wholesale
Direct-to-Consumer
Business-to-Business
Total
Balance at June 30, 2021
Additions from current year acquisitions
Measurement period adjustments
Balance at June 30, 2022
Goodwill impairment
Disposition of business
Balance at June 30, 2023
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Our reporting units are the same as our reportable segments.
During the quarter ended June 30, 2023, the Company performed its annual impairment test. There was a sustained stock price decline resulting in a lower market capitalization that led us to perform a quantitative analysis.
During the quarter ended December 31, 2022, we identified a number of goodwill impairment indicators that led us to conclude that a quantitative impairment test on goodwill was required to determine if the fair values of certain reporting units were below their carrying values. Most notably, revenue and earnings before income tax depreciation and amortization (EBITDA) for the second quarter (a historically strong quarter given the seasonal impact of holiday sales) fell short of projections. Additionally, we experienced increases in operational costs associated with higher costs of wine, freight and other supply chain items consistent with trends in the current economic environment. Both of these factors had a negative impact on our overall financial performance and led us to experience declining cash flows when compared to earlier quarter projections. Along with the continued market fluctuations, the Company's stock price continued to consistently decline during our second quarter of 2023.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, then one or more of our reporting units might become impaired in the future.
We utilized the discounted cash flow method under the income approach and the Guideline Public Company Method (GPCM) under the market approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values under the income approach include the estimated future annual net cash flows for each reporting unit (including net sales, cost of revenue, selling, general and administrative expense updated as of the end of the second quarter, depreciation and amortization, working capital, and capital expenditures), estimated growth rates, income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. Under the GPCM approach, the significant assumptions include the consideration of stock price and financial metrics from guideline companies.
As a result of our interim impairment test, we determined that the fair values of the Wholesale and Business-to-Business reporting units were less than their respective carrying amounts. We recognized a total impairment charge of $ 125.3 m illion, which consists of $ 116.3 million for Wholesale and $ 9.0 million for Business-to-Business and is included in goodwill impairment losses in the consolidated statements of operations and comprehensive income (loss).
As a result of our year-end impairment test, we determined that the fair value of the Direct-to-Consumer reporting unit was less than its respective carrying amount. We recognized a total impairment charge of $ 20.7 m illion and it is included in goodwill impairment losses in the consolidated statements of operations and comprehensive income (loss).
As part of our simplification efforts, on J une 29, 2023, the Company completed its sale of the assets of The Sommelier Company for negligible proceeds and an estimated potential earnout of $ 0.3 million. As a result of the sale, the Company recognized a loss on sale of assets of $ 9.7 million, of which approximately $ 9.0 million was goodwill.
For the year ended June 30, 2022, the Company did no t recognize any impairment.
Intangible Assets
The components of finite-lived intangible assets, accumulated amortization, and indefinite-lived assets are as follows:
June 30, 2023
(in thousands)
Gross
Intangible
Accumulated
Amortization
Accumulated Impairment Losses
Net Intangible
Indefinite-life intangibles
Trade names and trademarks
Winery use permits
Total Indefinite-life intangibles
Definite-life intangibles
Customer relationships
Trade names and trademarks
Total definite-life intangibles
Total other intangible assets
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June 30, 2022
(in thousands)
Gross
Intangible
Accumulated
Amortization
Accumulated Impairment Losses
Net Intangible
Indefinite-life intangibles
Trade names and trademarks
Winery use permits
Total Indefinite-life intangibles
Definite-life intangibles
Customer and Sommelier relationships
Trade names and trademarks
Total definite-life intangibles
Total other intangible assets
The customer relationships weighted average remaining amortization is 3.7 and 4.4 years as of June 30, 2023 and June 30, 2022, respectively. The trade names and trademarks weighted average remaining amortization is 3.0 and 3.5 years as of June 30, 2023 and June 30, 2022, respectively.
Our indefinite-lived intangible asset balance consists of trade names, trademarks and winery use permits, which had an aggregate carrying amount o f $ 19.4 million as of June 30, 2023. We te st our trade names, trademarks, and winery use permits for impairment annually, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a trade name, trademark or winery use permit is less than its carrying amount. As noted above in the goodwill section, there were events and circumstances which occurred during the fourth quarter ending June 30, 2023 and second quarter ending December 31, 2022 that indicated that it was more likely than not that the fair values of certain of our trade names and trademarks may be below their carrying amounts. As such, we performed a quantitative impairment test on our indefinite-lived intangibles. In addition, the Company recognized a tradename impairment charge of $ 1.3 million in the year ended June 30, 2022.
We evaluated the Company's winery use permits and determined that there was no evidence as of June 30, 2023 and December 31, 2022 to suggest that any of the permits associated with the land and facilities of a given property had been compromised or no longer held the value assigned on the date of the acquisition. The value of the winery use permits is based off of the various ways the winery property can be used in the Company’s operations and is therefore not solely dependent on the value of the trade name and forecasted sales of the wine currently produced on that particular property.
We utilized the relief from royalty method under the income approach to estimate the fair value of our trade names and trademarks. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual gross sales for each trademark and trade name, royalty rates (as a percentage of gross sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, and a discount rate that reflects the level of risk associated with the future cost savings attributable to the trade name or trademark. Based on the analysis performed for the quarter ended December 31, 2022, it was determined that the Company had a trade names and trademark impairment charge totaling $ 12.6 million, which consisted of $ 10.3 million related to Wholesale, $ 2.2 million related to Direct-to-Consumer and $ 0.1 million related to Business-to-Business segments. The total impairment loss of $ 12.6 million consists primarily of the $ 4.1 million and $ 3.7 million related to certain trademarks, respectively. The impairment loss arose due to a continued decline in certain tradename volume and a lower royalty rate use for assessing certain trademark given management's expectations. The impairment loss is included in intangible asset impairment losses in the consolidated statements of operations.
Based on the analysis performed for the quarter ended June 30, 2023, it was determined that the Company had a trade names and trademark impairment charge totaling $ 3.6 million, which consisted of $ 2.3 million related to Wholesale, $ 1.0 million related to Direct-to-Consumer and $ 0.3 million related to Business-to-Business.. The impairment loss arose due to a continued decline in certain trademark volume compared to management's expectations and the write-off of various small trade names related to the Company's simplification efforts pertaining to brand and SKU rationalization. The impairment loss is included in intangible asset impairment losses in the consolidated statements of operations. if current expectations of future growth rates and royalty rates are not met, if market factors outside of our control, such as discount rates, change, or if management's expectations or plans otherwise change, then one or more of our intangible assets may become impaired in the future.
The range of discount rates, long-term growth rates, EBITDA multiples and royalty rates we used to estimate the fair values of our reporting units (in relation to our goodwill impairment testing) and trademarks as of the December 31, 2022 impairment testing date for each reporting unit or trademark, were as follows:
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Discount Rate
Long-Term Growth Rate
EBITDA Multiple
Royalty Rate
Min
Max
Min
Max
Min
Max
Min
Max
Reporting units
Trademarks
The range of discount rates, long-term growth rates, EBITDA multiples and royalty rates we used to estimate the fair values of our reporting units (in relation to our goodwill impairment testing) and trademarks as of the June 30, 2023 impairment testing date for each reporting unit or trademark, were as follows:
Discount Rate
Long-Term Growth Rate
EBITDA Multiple
Royalty Rate
Min
Max
Min
Max
Min
Max
Min
Max
Reporting unit
Trademarks
Amortization expense of definite-lived intangible assets was $ 6.8 million and $ 5.0 mill ion for the years ended June 30, 2023 and 2022, respectively.
As noted above, as part of our simplification efforts, on J une 29, 2023, the Company completed its sale of the assets of The Sommelier Company. The sale included customer and Sommelier relationships with a gross intangible value of $ 2.5 million.
As of June 30, 2023, the estimated future amortization expense for finite-lived intangible assets is as follows:
(in thousands)
Total estimated amortization expense
7 . Accrued Liabilities
The major classes of accrued liabilities are summarized as follows:
(in thousands)
June 30, 2023
June 30, 2022
Accrued purchases
Accrued employee compensation
Other accrued expenses
Non related party accrued interest expense
Contingent consideration
Unearned Income
Captive insurance liabilities
Total Accrued liabilities and other payables
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8. Fair Value Measurements
The following tables present assets and liabilities measured at fair value on a recurring basis:
June 30, 2023
(in thousands)
Level 1
Level 2
Level 3
Total
Assets:
Money market funds
Interest rate swaps (1)
Total
Liabilities:
Contingent consideration liabilities (2)
Total
June 30, 2022
(in thousands)
Level 1
Level 2
Level 3
Total
Assets:
Money market funds
Interest rate swaps (1)
Total
Liabilities:
Contingent consideration liabilities (2)
Total
(1) The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated Level 2 inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by discounting future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the non-performance risk of the Company and the respective counterparty.
(2) We assess the fair value of contingent consideration to be settled in cash related to acquisitions using probability weighted models for the various contractual earn-outs. These are Level 3 measurements. Significant unobservable inputs used in the estimated fair values of these contingent consideration liabilities include probabilities of achieving customer related performance targets, specified sales milestones, consulting milestones, changes in unresolved claims, projected revenue or changes in discount rates.
On March 13, 2023, the Company entered into a termination agreement to terminate two interest rate swap agreements with notional amounts of $ 50,000,000 and $ 75,000,000 . As part of the termination, the Company realized a gain of $ 6.3 million that is included in net (loss) gain on interest rate swap agreements in the consolidated statement of operations and comprehensive income (loss). The remaining balance included in this account represents the net unrealized gain (loss) on interest rate swaps.
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The following table provides a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
(in thousands)
Contingent
Consideration
Balance at June 30, 2021
Acquisitions
Payments
Change in fair value
Balance at June 30, 2022
Acquisitions
Dispositions
Payments
Change in fair value
Balance at June 30, 2023
Less: current portion
Long term portion
The current and long-term portion of contingent consideration is included within the accrued liabilities and other payables and other long-term liabilities, respectively, in the consolidated balance sheets.
Our non-financial assets, such as goodwill, indefinite-lived intangible assets and long-lived assets are adjusted to fair value when an impairment charge is recognized. Such fair value measurements are based predominately on Level 3 inputs.
9. Leases
Leases Under ASC 842
We have lease agreements for certain winery facilities, vineyards, corporate and administrative offices, tasting rooms, and equipment under long-term non-cancelable leases. We determine if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
Beginning July 1, 2022, operating leases are included in operating lease right-of-use assets, current operating lease liabilities and long-term operating lease liabilities in our consolidated balance sheet. Operating lease right-of-use assets and corresponding operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease expense for operating lease assets is recognized on a straight-line basis over the lease term. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable.
Finance leases are included in finance lease right-of-use assets, current finance lease liabilities and long-term finance lease liabilities in our consolidated balance sheet. One capital lease of $ 0.7 million was converted to a finance lease with the adoption of ASC 842.
Our lease agreements include leases that contain lease components and non-lease components. For all asset classes, we have elected to account for both of these provisions as a single lease component.
We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of 12 months or less. In addition, we elected the package of transition practical expedients permitted under the transition guidance, which allows the Company to carry forward our leases without reassessing, whether any contracts are leases or contain leases, lease classification and initial direct costs.
Our leases have remaining lease terms from less than one year to 10 years . Our lease terms may include options to extend or terminate the lease when it is reasonably certain and there is a significant economic incentive to exercise that option.
Beginning in 2022, we no longer had related party lease agreements.
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The following table summarizes the components of lease expense:
(in thousands)
June 30, 2023
Operating lease expense
Finance lease expense
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease expense
Variable lease expense
Short-term lease expense
Total lease expense
The following table summarizes supplemental balance sheet items related to leases:
(in thousands)
June 30, 2023
Operating Leases
Operating lease right-of-use assets
Current portion of operating lease liabilities
Long-term operating lease liabilities
Total operating lease liabilities
Finance Leases
Finance lease right-of-use assets
Current portion of finance lease liabilities
Long-term finance lease liabilities
Total finance lease liabilities
The following table summarizes the weighted-average remaining lease term and discount rate:
Weighted-average remaining lease term (in years)
Operating leases
Finance leases
Weighted-average discount rate
Operating leases
Finance leases
The cash paid for amounts included in the measurement of lease liabilities for operating leases was $ 6.2 million for the year ended June 30, 2023.
The minimum annual payments under our lease agreements as of June 30, 2023 are as follows:
(in thousands)
Operating Leases
Finance Leases
Thereafter
Total lease payments
Less imputed interest
Present value of lease liabilities
Current portion of lease liabilities
Total long term lease liabilities
Note - Table excludes obligations for leases with original terms of 12 months or less which have not been recognized as ROU assets or liabilities in our consolidated balance sheets.
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On December 15, 2022, we closed on a purchase and sale agreement to sell a portion of Laetitia Vineyard and Winery’s land and related vineyards to a third-party buyer for $ 8.7 million. Concurrent with the finalization of the sale, we entered into a lease agreement to lease back from the third-party buyer certain of the vineyards' blocks sold. The rent, payable annually, on this two-year operating lease was deemed to be below market. Therefore, we recorded an off-market adjustment of $ 0.3 million which increased the initial measurement of the ROU asset for this lease and reduced the loss recognized on this sale.
On March 31, 2023, the Company entered into a lease agreement related to the Tamarack Cellars production facility with a third-party to lease a building beginning on April 1, 2023 for an initial term of 4 years at a monthly rate of $ 7,500 for the first year to be increased by 3 % each year. Concurrently with the lease, the Company sold certain equipment held at the leased premises for a total consideration of $ 0.1 million. Subsequent to year end, the Company terminated the lease and sold the building.
10. Interest Rate Swaps
On March 13, 2023, the Company entered into a termination agreement to terminate two interest rate swap agreements with notional amounts of $ 50,000,000 and $ 75,000,000 . As part of the termination, the Company realized a gain of $ 6.3 million that is included in net gain on interest rate swap agreements in the consolidated statement of operations and comprehensive income (loss). The remaining balance included in this account represents the net unrealized gain (loss) on interest rate swaps.
In March 2020, we entered into two interest rate swap agreements with fixed notional amounts of $ 28.8 million and $ 46.8 million at a fixed rate of 0.77 % and 0.71 %, respectively. The agreement calls for monthly interest payments until termination in July 2026 and March 2025 , respectively. The fair value of the $ 28.8 million swap agreement was an asset of $ 2.9 million and $ 2.3 million at June 30, 2023 and 2022 , respectively. The fair value of the $ 46.8 million swap agreement was an asset of $ 3.2 million and $ 2.7 million at June 30, 2023 and 2022, respectively.
In July 2019, in connection with the 2019 Loan and Security Agreement (see Note 11) , we transferred an interest rate swap agreement with a fixed notional amount of $ 20.0 million at a fixed rate of 2.99 % dated June 2018, to our new lender. Shortly thereafter, the interest rate swap of $ 20.0 million was amended and restated in its entirety to increase the notional amount to $ 50.0 million at a fixed rate of 2.34 %. The agreement calls for monthly interest payments until termination in July 2026 . The fair value of the 2019 swap agreement was an asset o f $ 2.8 m illion and $ 1.0 million at June 30, 2023 and 2022, respectively.
Interest rate swaps consisted of the following:
(in thousands)
Fixed Notional Amount
Fixed Interest
Fair Value Asset (Liability)
Date of Agreement
June 30, 2023
June 30, 2022
Rate
Termination Date
March 2020
July 2026
March 2020
March 2025
July 2019
July 2026
April 2021
March 2023
May 2019
March 2023
The Company records the changes in fair value in a separate line item in the consolidated statements of operations.
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11. Long-Term and Other Short-Term Borrowings
The following table summarizes long-term and other short-term obligations:
June 30,
(in thousands)
Note to a bank with interest at LIBOR plus 1.75 %; payable in quarterly installments of $ 1,180 principal with applicable interest; secured by specific assets of the Company. Extinguished and refinanced in December 2022.
Note to a bank with interest at SOFR ( 5.16 %) at June 30, 2023 plus 2.35 %; payable in quarterly installments of $ 1,454 principal with applicable interest; matures in December 2027 ; secured by specific assets of the Company.
Capital expenditures borrowings payable at LIBOR plus 1.75 %, payable in quarterly installments of $ 1,077 . Extinguished and refinanced in December 2022.
Capital expenditures borrowings payable at SOFR ( 5.16 %) at June 30, 2023 plus 2.35 %, payable in quarterly installments of $ 801 with draw expiring June 2027.
Equipment Term Loan payable at SOFR ( 5.16 %) at June 30, 2023 plus 2.35 %, payable in quarterly installments of $ 250 with draw expiring December 2026.
Note to a bank with interest fixed at 3.6 %, payable in monthly installments of $ 60 principal with applicable interest; matured in April 2023 .
Note to a bank with interest fixed at 2.75 %, payable in monthly installments of $ 61 principal with
applicable interest; matures in March 2024 .
Note to a bank with interest fixed at 7.50 %, payable in monthly installments of $ 61 principal with
applicable interest; matures in April 2026 .
Delayed Draw Term Loan ("DDTL") with interest at LIBOR plus 1.75 %, payable in quarterly installments of $ 1,260 starting March 2022. Extinguished and refinanced in December 2022.
Delayed Draw Term Loan ("DDTL") with interest at SOFR ( 5.16 %) at June 30, 2023 plus 2.35 %, payable in quarterly installments of $ 818 . Matures in December 2027 .
Less current maturities
Less unamortized deferred financing costs
Line of Credit
In April 2021, we entered into an amended and restated loan and security agreement (the “Amended and Restated Loan and Security Agreement”) to increase the Credit Facility 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 delay draw term loan facility up to an aggregate of $ 100.0 million which was limited to an aggregate of $ 55.0 million.
On November 8, 2022, we amended the amended and restated loan and security agreement to revise a definition used in a financial covenant under the agreement for the debt covenant calculation as of September 30, 2022 and subsequent periods.
On December 13, 2022, we entered into a second amended and restated loan and security agreement (the “Second A&R Loan and Security Agreement”), which further amended and restated the Amended and Restated Loan and Security Agreement and provides credit facilities totaling up to $ 458.4 million. The credit facilities under the Second A&R Loan and Security Agreement consist of: (i) a term loan facility in the principal amount of $ 156.5 million (the “Term Loan Facility”), (ii) an accounts receivable and inventory revolving facility in the principal amount of $ 229.7 million with a letter of credit sub-facility in the aggregate availability amount of $ 20.0 million (the “Revolving Facility”), (iii) an equipment loan facility in the principal
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amount of $ 4.2 million (the “Equipment Loan”), (iv) a capital expenditure facility in the principal amount of $ 15.2 million (the “Capex Facility”) and (v) a delayed draw term loan facility in the principal amount of $ 52.9 million (amounts are available to be drawn through December 13, 2023) (the “DDTL Facility”, and, together with the Term Loan Facility, the Revolving Facility, the Equipment Loan and the Capex Facility, the “Credit Facilities”).
Concurrent with the closing of the Second A&R Loan and Security Agreement, we executed a draw of $ 154.6 million on the Term Loan Facility, $ 125.0 million on the Revolving Facility, $ 4.2 million on the Equipment Loan, $ 15.2 million on the Capex Facility and $ 30.6 million on the DDTL Facility. The proceeds from the loan were used to, among other things, pay down outstanding amounts of under the Company’s existing credit facilities including the Amended and Restated Loan and Security Agreement.
The Term Loan Facility matures on December 13, 2027 , and the Second A&R Loan and Security Agreement extends the maturities of the other credit facilities as follows: (i) the Revolving Facility matures on December 13, 2027 , (ii) the Equipment Loan matures on December 31, 2026 , (iii) the Capex Facility matures on June 30, 2027 and (iv) the DDTL Facility matures on December 13, 2027 . The refinancing of the Second A&R Loan and Security Agreement was evaluated in accordance with ASC 470-50, Modifications and Extinguishments on a lender-by-lender basis. Certain lenders did not participate in the refinancing and the repayment of their related outstanding debt balances has been accounted for as an extinguishment of debt. Proceeds of borrowings from new lenders were accounted for as a new debt financing. The Company recorded a loss on extinguishment of debt of $ 0.5 million in the accompanying consolidated statement of operations and comprehensive income (loss). For the remainder of the lenders, this transaction was accounted for as a modification because the difference between present value of the cash flows under the terms of the modified agreement (the Second A&R Loan and Security Agreement) and the present value of the cash flows under terms of the original agreement was less than 10% on a lender-by-lender basis.
As part of the refinancing of the Term Loan Facility, the Company incurred various costs of $ 2.3 million, including a $ 0.5 million original issue discount and $ 1.9 million in third-party debt issuance costs.
As part of the refinancing of the Revolving Facility , t he Company incurred various costs of $ 2.6 million, including a $ 0.5 million original issue discount and $ 2.1 million in third-party debt issuance costs.
Regularly scheduled principal repayments of the Credit Facilities (other than the Revolving Facility) are payable on a quarterly basis as follows: (i) with respect to the Term Loan Facility, an amount equal to the original principal amount of the Term Loan Facility multiplied by 1/100 th , (ii) with respect to the Equipment Loan, an amount equal to $ 0.2 million, (iii) with respect to the Capex Facility, an amount equal to $ 0.8 million, and (iv) with respect to the DDTL Facility, an amount equal to the original principal amount of the DDTL Facility multiplied by 1/28 th with respect to delayed draw term loans used to purchase equipment and 1/100 th with respect to delayed draw term loans used to purchase real estate. Repayment of the Revolving Facility is required if the borrowing base (as defined in the Second A&R Loan and Security Agreement) does not support the amount of borrowing under the Revolving Facility. Any unpaid principal, interest and other amounts owing with respect to any Credit Facility is due at maturity of such Credit Facility.
Borrowings under the Credit Facilities bear interest at a rate per annum equal to, at the Company’s option, either (a) a Term Secured Overnight Financing rate “SOFR” for the applicable interest period relevant to such borrowing, plus a market-determined credit spread adjustment depending on such interest period ( 0.10 % for one-month; 0.15 % for three-months; and 0.25 % for six-months), plus an applicable margin ( 2.25 % for the Credit Facilities other than the Revolving Facility; for the Revolving Facility the applicable margin is based on a range of 1.50 %- 2.00 % depending on average borrowing availability under the Credit Facilities) or (b) an Adjusted Base Rate, or ABR, determined by reference to the highest of (i) Federal Funds Rate plus 0.50 %, (ii) the rate of interest established by the lender acting as the administrative agent as its “prime rate” and (iii) the Term SOFR for a one-month term in effect on that day plus 1.0 % plus a market-determined credit spread adjustment of 0.10 %, plus, in each case, an applicable margin ( 1.25 % for the Credit Facilities other than the Revolving Facility; depending on average availability for the Revolving Facility, with the initial applicable margin for the Revolving Facility being 1.00 %). The Company is currently in the process of amending our interest rate swap agreements to conform with the Credit Facilities. We do not expect the impact of these amendments to have a material impact on the Credit Facilities' interest rates.
In addition, the Second A&R Loan and Security Agreement and related loan documents provide for recurring fees with respect to the Credit Facilities, including (i) a fee for the unused commitments of the lenders under the Term Loan Facility, the Revolving Facility and the DDTL Facility, payable quarterly, accruing at a rate equal to 0.25 % per annum with respect to the Term Loan Facility and the DDTL Facility and a rate within the range of 0.15 %- 0.20 % per annum with respect to the Revolving Facility depending on average availability under the Revolving Facility (ii) letter of credit fees (which vary depending on the applicable margin rate based on the average availability under the Revolving Facility), fronting fees and processing fees to each issuing bank and (iii) administration fees.
The Credit Facilities are secured by substantially all of the assets of the Company.
Additionally, the Second A&R Loan and Security Agreement includes customary representations and warranties, affirmative and negative covenants, financial covenants and certain other amendments, including, without limitation, (i) a minimum fixed charge coverage ratio (based on trailing twelve-month EBITDA adjusted for capital expenditures, taxes and certain other items) of 1.10:1.00l measured on a rolling four quarter basis provided that the minimum capital expenditure amount for purposes of calculating the fixed charge coverage ratio will increase by $ 175.0 thousand per quarter until it reaches $ 1.5 million, (ii) the addition of a maximum debt to capitalization ratio covenant, initially set at 0.60:1.00 for each quarter until
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December 31, 2023 and stepping down to 0.575:1.00 for each quarter until March 31, 2024 and 0.55:1.00 for each quarter until December 31, 2024 and thereafter, (iii) certain new EBITDA addbacks (and one historical EBITDA deduction in the amount of $ 1.4 million for the quarter ended September 30, 2022) and (iv) certain amendments to the conditions for permitted acquisitions and accordion increases.
The effective interest rate under the revolving facility w as 4.8 % and 3.3 % as of June 30, 2023 and 2022, respectively. The Company has availability under the line of credit as of June 30, 2023 and 2022.
On February 13, 2023, we amended the Second A&R Loan and Security Agreement to revise the deadline for submitting our December 31, 2022 consolidated financial statements to 90 days after the period end.
On March 31, 2023, we amended the Second A&R Loan and Security Agreement to revise the deadline for submitting our December 31, 2022 consolidated financial statements to 120 days after the period end.
On May 9, 2023, we amended the Second A&R Loan and Security Agreement to revise the definition and calculation of certain financial covenants as of March 31, 2023. The amendment revised the definition of Adjusted EBITDA (as defined in the Second A&R Loan and Security Agreement) as utilized in the fixed charge coverage ratio calculation to allow certain addbacks to Adjusted EBITDA.
Debt modification costs of $ 2.0 million and debt extinguishment costs of $ 0.5 million related to the various amendments were expensed during 2023 and are reported in loss on modification and extinguishment of debt in the Company's statements of operations.
On October 12, 2023, the Company entered into a fourth amendment to the Second Amended and Restated Loan and Security Agreement (the “Fourth Amendment”) by and among the Company, the Borrowers, the Lenders party thereto, and Agent. The Fourth Amendment, among other things: (i) waives certain existing events of default relating to the Company’s failure to comply with the financial covenants and financial reporting requirements set forth in the Credit Agreement for prior fiscal periods; (ii) reduces the aggregate revolving commitment and the aggregate delayed draw term loan commitment to $ 200,000,000 and $ 38,100,000 , respectively; (iii) replaces the maximum debt to capitalization financial covenant with a minimum adjusted EBITDA financial covenant of not less than (1) $ 4,000,000 for the fiscal quarter ending September 30, 2023, (2) $ 17,000,000 for the two fiscal quarter period ending December 31, 2023, (3) $ 27,000,000 for the three fiscal quarter period ending March 31, 2024, (4) $ 34,000,000 for the four fiscal quarter period ending June 30, 2024, and (5) $ 35,000,000 for each four fiscal quarter period ending thereafter; (iv) adds a minimum liquidity covenant of $ 25,000,000 (or, for fiscal quarters ending in December, $ 15,000,000 ), which applies only for the fiscal quarters ending September 30, 2023 through and including December 31, 2024 (the “Covenant Modification Period”); (v) suspends the minimum fixed charge coverage ratio covenant for the fiscal quarters ending September 30, 2023 through and including June 30, 2024 and provides for a step-down of the minimum fixed charge coverage ratio to 1.00:1.00 for the remainder of the Covenant Modification Period; (vi) adds an equity cure right for the Company in the event of future breaches of the financial covenants; (vii) reduces revolver availability by (1) $ 15,000,000 during the months of February through September of each year and (2) $ 10,000,000 during the months of October through January of each year; (viii) suspends the exercise of incremental facilities during the Covenant Modification Period; (ix) restricts all permitted acquisitions during the term of the credit facilities, unless previously approved by the required Lenders; (x) increases in the applicable margin for all credit facilities to 3.00 % for SOFR Loans and 2.00 % for ABR Loans, which margins will step-up further if certain prepayments of the Term Loans are not made by certain dates prescribed in the Amendment; (xi) adds additional mandatory prepayments of (1) $ 10,000,000 by no later than March 31, 2024, (2) an additional $ 10,000,000 by no later than June 30, 2024 and (3) an additional $ 25,000,000 by no later than December 31, 2024; (xii) adds additional mandatory prepayments in the event that the Borrowers maintain a cash balance in excess of $ 20,000,000 ; (xiii) permits additional sales of certain real property with an aggregate appraised value of approximately $ 60,000,000 , in addition to related personal property assets; and (xiv) adds certain additional reporting requirements to Agent and the Lenders.
As a result, as of the date hereof, the Company has received a waiver for certain events of default and is in compliance with its covenants contained in the Second A&R Loan and Security Agreement.
Maturities of Long-Term and Other Short-Term Borrowings
Maturities of long-term and other short-term borrowings for succeeding years are as follows:
Year ending June 30,
Thereafter
12. Noncontrolling Interest
Noncontrolling Redeemable Interest
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July 2016 Noncontrolling Redeemable Interest
One of our consolidated subsidiaries, Splinter Group Napa, LLC (“Splinter Group”), has a member who owns a noncontrolling interest in Splinter Group. The membership interest of this member has a put option allowing the member to put its membership interest back to us for cash upon the occurrence of a contingent event. Specifically, we currently have the right, pursuant to the operating agreement with Splinter Group, to acquire all of the membership interest held by Splinter Group if we (a) sell capital stock comprising at least 25 % of our then outstanding capital stock to an unaffiliated third party, (b) sell assets comprising at least 25 % of the aggregate value of our then existing assets to an unaffiliated third party buyer or (c) merge with and into, an unaffiliated third party buyer. If we choose not to exercise this right following any of these events, the holder of the noncontrolling interest had the right to require us to purchase all of the noncontrolling interest holder’s membership interest at fair value, as determined via appraisal. The redemption amount is the fair value of the noncontrolling interest at the redemption date.
Because this redemption event is not solely within our control, the Splinter Group noncontrolling interest has been classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.
Upon purchase of our controlling interest in Splinter Group in July 2016, we classified the noncontrolling interest as temporary equity at its initial carrying amount of $ 1.4 million. Because of the low probability of this redemption event occurring, we will not subsequently adjust the initial carrying amount of the noncontrolling interest to fair value at each reporting period. Should it become probable that the redemption event will occur, we will thereupon accrete the initial carrying value to its redemption amount equal to its fair value.
13 . Stockholders’ Equity
Warrants
At June 30, 2023 , there were 25,646,453 warrants outstanding to purchase shares of the Company's common stock at a price of $ 11.50 per whole share. The 25,646,453 warrants are made up of 18,000,000 Public Warrants (the "Public Warrants") and 8,000,000 Private Warrants (the "Private Warrants") less 353,547 warrants that have been repurchased as part of our share repurchase plan.
The Public Warrants are exercisable commencing on August 11, 2021 and expire five years after the commencement date. The Company may accelerate the expiry date by providing 30 days ’ prior written notice, if and only if, the closing price of the Company’s common stock equals or exceeds $ 18.00 per share for any 20 trading days within a 30 -trading day period. The public warrant holder’s right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of acceleration of the expiry date.
The Private Warrants are exercisable commencing on August 11, 2021 for one common share at an exercise price of $ 11.50 , subject to anti-dilution adjustments. The Private Warrants expire five years after the commencement date.
Earnout Shares
In connection with the closing of the business combination between Bespoke Capital Acquisition Corp. and Vintage Wine Estates, Inc., a California corporation (“VWE Legacy”) pursuant to a transaction agreement dated February 3, 2021, as amended, certain shareholders of VWE Legacy we re entitled to receive up to an additional 5,726,864 shares of the Company’s common stock (the “Earnout Shares”) if at any point during the Earnout Period, from June 7, 2021 to June 7, 2023, the Company's closing share price on the Nasdaq on 20 trading days out of 30 consecutive trading days;
was at or above $15 (but below $20), 50% of the Earnout Shares will be issued; and
was at or above $20 (i) to the extent no Earnout Shares have previously been issued, 100% of the Earnout Shares or (ii) to the extent the event Earnout Shares were previously issued, 50% of the Earnout Shares will be issued.
The Earnout Shares would have been adjusted to reflect any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible common shares), reorganization, recapitalization, reclassification, combination and, exchange of shares or other like change. The Earnout Shares were indexed to the Company’s equity and met the criteria for equity classification. The fair value of the Earnout Shares, $ 32.4 million, was recorded as a dividend to additional paid in capital due to the absence of retained earnings.
No Earnout Shares were issued through June 7, 2023, at which time the Earnout Period ended.
Meier's Earnout Shares
In connection with the closing of the Meier's business combination with Paul T. Lux Irrevocable Trust pursuant to a merger agreement dated January 18, 2022, Mr. Lux is entitled to receive up to an additional $ 5 million of the Company’s common stock, subject to the terms of the earnout agreement. The Company will make earnout payments based on the product of the amount of adjusted EBITDA in calendar 2022, 2023 and 2024 over EBITDA threshold, as defined in the merger agreement, and the earnout multiple of seven. The earnout payment shall be paid 50 % in cash and 50 % in the Company's common stock. No shares were issued through June 30, 2023.
2021 Stock Incentive Plan
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Effective June 7, 2021, the Company adopted the 2021 Omnibus Incentive Plan (as amended, the "2021 Plan”). The 2021 Plan reserves 11,200,000 common shares for the issuance of stock options, stock appreciation rights, performance shares, performance units, stock, restricted stock, restricted stock units and cash incentive awards. The 2021 Plan was approved by shareholders at the Annual Meeting of Shareholders on February 2, 2022.
The following table provides total stock-based compensation expense by award type:
June 30,
(in thousands)
Stock option awards
Restricted stock units
Total share-based compensation
Stock-based compensation expense is included as a component of selling, general and administrative expenses in the consolidated statement of operations and comprehensive income (loss).
On February 7, 2023, the Company and Patrick Roney, founder of VWE, entered into a letter agreement whereby Mr. Roney voluntarily elected to transition from Chief Executive Officer of the Company to Executive Chairman of the Board, effective February 7, 2023. In connection with his appointment as Executive Chairman, all outstanding stock options and unvested restricted stock units previously granted to Mr. Roney under the Company’s 2021 Plan ceased to vest and any unvested awards were forfeited; however, Mr. Roney maintained the vested stock option awards which are exercisable pending attainment of market condition.
Stock Options
Certain stock options granted under the 2021 Plan prior to May 17, 2023 are subject to market conditions. The stock options are exercisable for ten years and only become exercisable if the volume-weighted average price per share of our common stock meets a $ 12.50 threshold over a 30-day consecutive trading period following the grant date. The fair value of the stock options was estimated using a Monte Carlo simulation valuation model. These stock option awards vest, except as set forth in the award agreement, in four equal installments of 25 %, with the first installment vesting 18 months after the grant date with respect to an additional 25 % of the total stock-based award on each of the 2nd, 3rd and 4th anniversaries of the grant date, providing in each case the employee remains in continuous employment or service with the Company or an Affiliate. Stock options granted under the 2021 Plan subsequent to May 17, 2023 are not subject to market conditions and vest, except as set forth in the award agreement, in four equal installments of 25 %, with the first installment vesting 12 months after the grant date with an additional 25 % of the total stock-based award on each of the 2nd, 3rd and 4th anniversaries of the grant date, providing in each case the employee remains in continuous employment or service with the Company or an Affiliate. Compensation expense is recognized ratably over the requisite service period.
The following table presents a summary of stock option activity under the 2021 Plan:
Stock Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Life (Years)
Aggregate Intrinsic Value
Outstanding at June 30, 2021
Granted
Exercised
Forfeited or cancelled
Outstanding at June 30, 2022
Granted
Exercised
Forfeited or cancelled
Outstanding at June 30, 2023
Total unrecognized compensation expense related to the stock options was $ 4.4 million, which is expected to be recognized over a weighted-average period of 4.5 years. As of June 30, 2023, 705,342 options were exercisable pending attainment of market condition.
For the year ended June 30, 2023, the weighted-average grant date fair value was $ 1.27 . The fair value of the options was estimated at the grant date using the Monte Carlo Simulation model, for options with a market condition, or the Black-Scholes model, for options without a market condition, with the following assumptions: risk-free rate ranging from 1.8 % to 3.9 %; expected term ranging from 5.5 years to 7.4 years; expected volatility ranging from 29.7 % to 50 %; and no expected dividend yield.
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For the year ended June 30, 2022, the weighted-average grant date fair value was $ 3.27 . The fair value of the options was estimated at the grant date using the Monte Carlo Simulation model with the following assumptions: weighted average risk-free rate 1.8 %; weighted average expected term 5.5 years; weighted average expected volatility 40 %; and no expected dividend yield.
Restricted Stock Units
Restricted stock units are subject only to service conditions and those issued prior to May 17, 2023 vest, except as set forth in the award agreement, in four equal installments of 25 %, with the first installment vesting 18 months after the vesting commencement date and the other installments vesting on each of the 2nd, 3rd and 4th anniversaries of the vesting commencement date. Restricted stock units issued subsequent to May 17, 2023 vest, except as set forth in the award agreement, in four equal installments of 25 %, with the first installment vesting 12 months after the vesting commencement date and the other installments vesting on each of the 2nd, 3rd and 4th anniversaries of the vesting commencement date. One restricted stock unit vested in full on the nine month anniversary of the vesting commencement date.
The following table presents a summary of restricted stock units activity for the years presented:
Restricted Stock Units
Weighted-Average Grant Date Fair Value
Outstanding at June 30, 2021
Granted
Vested
Forfeited or cancelled
Outstanding at June 30, 2022
Granted
Vested
Forfeited or cancelled
Outstanding at June 30, 2023
Total unrecognized compensation expense related to the restricted stock units was $ 3.0 million, which is expected to be recognized over a weighted-average period of 2.60 years.
During the year ending June 30, 2023 , 840,186 restricted stock units vested and as a result the Company withheld 297,212 restricted stock units to cover the taxes related to the net share settlement of equity awards.
During the year ended June 30, 2023, 569,489 restricted stock units were forfeited or cancelled. This was partially as a result of the staffing changes described above.
Stock and Warrant Repurchase Plan
On March 8, 2022, the Company's board of directors approved a repurchase plan authorizing the Company to purchase up to $ 30.0 million in aggregate value of our common stock and/or warrants through September 8, 2022. The repurchase program did not require the Company to acquire a specific number of shares or warrants. The cost of the shares and warrants that were repurchased were funded from available working capital.
For accounting purposes, common stock and/or warrants repurchased under our repurchase plan were recorded based upon the settlement date of the applicable trade. Such repurchased shares are presented using the cost method. During the year ended June 30, 2022 , the Company repurchased 2,871,894 common stock shares at an average price of $ 9.04 per share that are held in treasury. During the years ended June 30, 2023 and 2022, the Company repurchased 171,994 and 181,553 warrants, respectively, at an average price of $ 1.00 and $ 1.46 per warrant, respectively. The total cost of the shares and warrants repurchased was $ 0.2 million and $ 26.3 million for the years ended June 30, 2023 and 2022, respectively.
The table below summarizes the changes in repurchases of common stock and warrants:
Common Stock and Warrants
Balance at June 30, 2021
Repurchases of common stock
Repurchases of warrants
Balance at June 30, 2022
Repurchases of common stock
Repurchases of warrants
Balance at June 30, 2023
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14. Commitments, Contingent Liabilities and Litigation
We are subject to a variety of claims and lawsuits that arise from time to time in the ordinary course of business. Although management believes that any pending claims and lawsuits will not have a material impact on the Company’s consolidated financial position or results of operations, the adjudication of such matters are subject to inherent uncertainties and management’s assessment may change depending on future events.
Litigation
On November 14, 2022, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Nevada against the Company and certain current and former members of its management team. The lawsuit is captioned Ezzes v. Vintage Wine Estates, Inc., et al. (“Ezzes“), and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of the Company's periodic reports filed with the SEC relating to, among other things, the Company’s business, operations, and prospects, including with respect to the Company’s inventory metrics and overhead burden. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On November 28, 2022, a second purported securities class action lawsuit, captioned Salbenblatt v. Vintage Wine Estates, Inc., et al. (“Salbenblatt”), was filed in the same court, containing similar claims and allegations, and seeking similar relief, as the Ezzes lawsuit. On February 14, 2023, the Court consolidated both actions and appointed the lead plaintiffs. The Salbenblatt action was transferred to and consolidated with the Ezzes action. On May 1, 2023, the lead plaintiffs filed a consolidated amended class action complaint (“amended complaint”). On June 30, 2023 defendants filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed on September 25, 2023, and is pending. The Company believes this litigation is without merit and intends to defend against it vigorously. However, litigation is inherently uncertain, and the Company is unable to predict the outcome of this litigation and is unable to estimate the range of loss, if any, that could result from an unfavorable outcome. The Company also cannot provide any assurance that the ultimate resolution of this litigation will not have a material adverse effect on our reputation, business, prospects, results of operations or financial condition.
The Company is involved in two disputes relating to an Asset Purchase Agreement (“APA”) and a related Non-Compete Agreement/Non-Solicitation Agreement (the “Non-Compete Agreement”) from a 2018 acquisition. Claimant has alleged that the Company did not make certain earnout payments allegedly due under the APA and has alleged that the Company misused alleged rights of publicity with respect to the brands in violation of the Non-Compete Agreement. On or about August 30, 2023, Claimants served a demand for arbitration on the Company. At present, Claimants collectively have not quantified the total amount of their alleged damages for all claims; however based on information provided by Claimants, the Company would anticipate that any claim of damages would likely be at least approximately $ 3.0 million. The Company disputes both that any amounts in excess of the accrued earn-out liability of approximately $ 0.4 million for the dispute period are owed and that the Company misused the alleged rights of publicity. The Company intends to vigorously defend itself against the claims. At this time, in view of the complexity and ongoing nature of the matters, we are unable to reasonably estimate a possible loss or range of loss that the Company may incur to resolve these matters or defend against these claims.
From time to time, the Company may become subject to other legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any other material legal proceedings, nor is it aware of any pending or threatened litigation that, in the Company’s opinion, would have a material adverse effect on the business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Indemnification Agreements
In the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. These indemnities include indemnities to our directors and officers to the maximum extent permitted under applicable state laws. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. Historically, we have not incurred any significant costs as a result of such indemnifications.
Other Commitments
Contracts exist with various growers and certain wineries to supply a significant portion of our future grape and wine requirements. Contract amounts are subject to change based upon actual vineyard yields, grape quality and changes in grape prices. Estimated future minimum grape and bulk wine purchase commitments are as follows:
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(in thousands)
Total
Grape, bulk wine and cider purchases under contracts totaled $ 49.4 million and $ 41.7 million for the years ended June 30, 2023 and 2022 , respectively. The Company expects to fulfill all of these purchase commitments.
15. Related Party Transactions
On February 7, 2023, the Company and Patrick Roney, founder of VWE, entered into a letter agreement (the “Letter Agreement”) whereby Mr. Roney voluntarily elected to transition from Chief Executive Officer of the Company to Executive Chairman of the Board, effective February 7, 2023. Pursuant to the terms of the Letter Agreement, the Employment Agreement between the Company and Mr. Roney effective June 7, 2021 (the “Prior Employment Agreement”) was terminated and upon such termination the Company agreed to provide Mr. Roney his accrued but unpaid Base Salary and PTO (as defined in the Prior Employment Agreement) through February 7, 2023, and any vested amounts or benefits that he is entitled to receive under any plan, program, or policy, as described in Section 5.1 of the Prior Employment Agreement. Mr. Roney expressly waived any claim to the severance benefits described in Section 5.2(b) of the Prior Employment Agreement. Pursuant to the terms of the Letter Agreement, Mr. Roney will receive an annual base salary of $ 250,000 for his service as Executive Chairman and will be eligible to participate in the Company’s employee benefit plans and programs in accordance with their terms and eligibility requirements. In connection with his appointment as Executive Chairman, all outstanding stock options and unvested restricted stock units previously granted to Mr. Roney under the Company’s 2021 Plan ceased to vest and any unvested awards were forfeited. See Note 13.
The Company has a contract with Bin-to-bottle, a storage and bottling company owned by Mr. Roney, for storage purposes. The expenses incurred for storage were immaterial for the years ended June 30, 2023 and 2022.
Also on February 7, 2023, the Board appointed Jon Moramarco, a member of the Board, as the Company’s Interim Chief Executive Officer. In connection with such appointment, the Company entered into a consulting agreement (the “Consulting Agreement”) with bw166 LLC (“bw166”) and Mr. Moramarco, pursuant to which the Company will pay bw166 a monthly fee of $ 17,500 and will reimburse bw166 and Mr. Moramarco for reasonable business-related expenses in connection with the Interim Chief Executive Officer services provided thereunder. Additionally, the Company agreed to award Mr. Moramarco a one-time grant of 100,000 restricted stock units pursuant to the 2021 Plan, which will vest in full on the one-year anniversary of the grant date. Mr. Moramarco is the Managing Partner of bw166 and has a controlling interest therein.
Immediate Family Member and Other Business Arrangements
We provide at will employment to several family members of officers or directors who provide various sales, marketing and administrative services to us. Salaries paid totaled $ 0.5 million and $ 0.4 million for the years ended June 30, 2023 and 2022, respectively.
We make sponsorship payments to Tough Enough to Wear Pink and use Connect the Dots for marketing services and point of sale marketing materials to unincorporated businesses. Both of these are managed by immediate family members of a former Company executive officer. For the years ended June 30, 2023 and 2022 , payments related to sponsorship and marketing services totaled $ 0.4 million and $ 0.3 million, respectively. We made an additional payment related to sponsorship and marketing services to an immediate family member of a former Company executive officer in the year ended June 30, 2023 totaling $ 10 thousand.
The Company has a revenue sharing agreement with Sonoma Brands Partners II, LLC where a portion of B.R. Cohn and Clos Pegase sales during various events throughout the year go to Sonoma Brands Partners II, LLC. Sonoma Brands Partners II, LLC is managed by a member of the Company's board of directors. For the years ended June 30, 2023 and 2022 , payments to Sonoma Brands Partners II, LLC totaled $ 0.2 million per year.
Financial Advisory Agreement
In April 2022, the Company entered into an arrangement with Global Leisure Partners LLC ("GLP") to act as a financial advisor to the Company in connection with its exploration of acquisitions, mergers, investments and other strategic matters. A director of the Company having the authority to establish policies and make decisions is an executive of GLP. Although members of the board of directors are typically independent from management, members of the board of directors would be considered management based on the definition of management in ASC 850, Related
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Party Disclosures . P ayments to GLP in respect of capital markets and mergers and acquisitions matters totaled $ 0.2 million and $ 0.1 million for the years ended June 30, 2023 and 2022, respectively.
16. Income Taxes
The components of (loss) income from continuing operations before provision for income taxes are as follows:
June 30,
(in thousands)
United States
Total
The components of the (benefit) provision for income taxes are as follows:
June 30,
(in thousands)
Federal
State
Deferred tax expense (benefit)
Federal
State
Total (benefit) provision for income taxes
The Company's effective tax rate for the year ended June 30, 2023 , differs from the 21 % U.S. federal statutory rate primarily due to stock based compensation, state taxes, goodwill impairment and changes in valuation allowance.
A reconciliation of income tax (benefit) expense to the federal rate of 21% is as follows:
June 30,
June 30,
(in thousands)
Income taxes at statutory rate
State taxes
Goodwill impairment
Valuation allowance
Stock-based compensation
Other, net
Total (benefit) provision for income taxes
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Deferred tax assets and liabilities are summarized as follows:
June 30,
(in thousands)
Deferred tax assets:
Accruals
Captive
Operating loss carryforwards
Lease liability
Inventories
Investments
Intangibles
Interest
Stock compensation
Research and development tax credit carry forwards, net of uncertain tax position
Other
Deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Prepaid expenses
Intangible assets
Right of use
Investments
Inventories
Change in accounting method
Deferred tax liabilities
Valuation allowance
Deferred tax liability, net
The valuation allowance increased by $ 15.4 million for the tax year ended June 30, 2023 .
As of June 30, 2023 , the Company has a federal R&D tax credit carryforward of $ 3.5 million, which will begin to expire in July 2043 . In addition, the Company has a California R&D tax credit carryforward of $ 2.4 million, which does not expire.
As of June 30, 2023 , the Company had Federal net operating losses of $ 63.4 million which do not expire but are limited to 80% of taxable income. In addition, the Company has California net operating losses of $ 64.8 million which will begin to expire in the tax year of 2040 and an immaterial amount for the other states which will begin to expire in 2033 .
The Company is subject to taxation in the United States and various states and local jurisdictions. As of June 30, 2023, the Company is no longer subject to U.S. federal examinations for years before fiscal 2018. As of June 30, 2023, the Company is no longer subject to U.S. state tax examinations for years before fiscal 2017.
A reconciliation of the beginning and ending balances of unrecognized tax benefit is as follows:
June 30,
(in thousands)
Balance, beginning of period
Tax position taken in prior period:
Gross increases
Gross decreases
Tax position taken in current period:
Gross increases
Gross decreases
Lapse of statute of limitations
Settlements
Balance, end of period
As of June 30, 2023 , the Company had $ 2 million in unrecognized income tax benefits and there were immaterial increases to the Company’s unrecognized tax benefits during the year. The Company does not anticipate any material decreases to unrecognized tax benefit during the next 12
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months. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no accrued interest or penalty associated with uncertain tax benefit.
17. Employee Benefit Plan
A 401(k) plan is provided that covers substantially all employees meeting certain age and service requirements. We make discretionary contributions to the 401(k) plan.
We recorded matching contributions of $ 1.5 million and $ 1.4 million, respectively for the years ended June 30, 2023 and 2022 .
18. Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Segment results are presented in the same manner as we present our operations internally to make operating decisions and assess performance. Financial performance is reported in three segments: Wholesale, Direct-to-Consumer, and Business-to-Business.
Wholesale —We sell our wine, spirits and cider to wholesale distributors under purchase orders. Wholesale operations generate revenue from product sold to distributors, who then sell them off 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 pay depletion and marketing allowances to certain distributors, based on sale s to their custo mers, or the allowance is netted directly against the purchase price. When recording a sale to the distributor, a depletion and marketing allowance liability is recorded to accrued liabilities and sales are reported net of those expenses. Depletion and marketing allowance payments are made when completed incentive program payment requests are received from the customers or are net of initial pricing. Depletion and marketing allowance payments reduce the accrued liability. For the years ended June 30, 2023 and 2022 we recorded $ 0.9 million and $ 1.9 million respectively, as a reduction in sales on the consolidated statements of operations and comprehensive income (loss) related to depletions. As of June 30, 2023 and 2022 , we recorded a depletion allowance and marketing liability in the amount of $ 0.6 million and $ 0.3 million, respectively, which is included as a component of other accrued expenses in accrued liabilities and other payables on the consolidated balance sheets. Estimates are based on historical and projected experience for each type of program or customer.
Direct-to-Consumer — We sell our wine and other merchandise directly to consumers through wine club memberships, at wineries’ tasting rooms, at wine tasting events, and through eCommerce. 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. The Company recognizes event revenue on the date the event is held.
Business-to-Business — Our Business-to-Business sales channel generates revenue primarily from the sale of private label wines and spirits, and custom services, such as fermentation, barrel aging, winemaking, procurement of dry goods, bottling and cased goods storage. Annually, we work with our national retail partners to develop private label wines incremental to their wholesale channel businesses. These services are made under contracts with customers, which includes specific protocols, pricing, and payment terms. The customer retains title and control of the product during the process.
Other — Other is included in the tables below for purposes of reconciliation of revenues and profit but is not considered a reportable segment. In 2022, included revenue from grape and bulk wine sales and storage services. In 2023 and going forward, these immaterial revenues are recorded in the B2B segment. We record corporate level expenses, non-direct selling expenses and other expenses not specifically allocated to the results of operations in Other.
We have determined that operating income is the profit or loss measure that the CODM uses to make resource allocation decisions and evaluate segment performance. Operating income 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 operating profit 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, as well as other factors including the re-measurements of contingent consideration and impairment of intangible assets and goodwill. However, centralized selling expenses and general and administrative expenses are not allocated to a segment as management does not believe such items directly reflect the core operations and therefore are not included in measuring segment performance. Excluding the property, plant, and equipment specific to assets located at our tasting facilities, and the customer relationships and intangible assets specific to the Sommelier acquisition, given the nature of our business, revenue-generating assets are utilized across segments, therefore, discrete financial information related to segment assets and other balance sheet data is not available and the information continues to be aggregated.
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Following is financial information related to operating segments:
Year Ended June 30, 2023
(in thousands)
Wholesale
Direct-to-Consumer
Business-to-Business
Other
Total
Segment Results
Net revenue
Income (loss) from operations
Year Ended June 30, 2022
(in thousands)
Wholesale
Direct-to-Consumer
Business-to-Business
Other
Total
Segment Results
Net revenue
Income (loss) from operations
There was no inter-segment activity for any of the years presented.
Depreciation expense recognized by operating segment is summarized below:
(in thousands)
Wholesale
Direct-to-Consumer
Business-to-Business
Other
Total
For the years ended:
Amortization expense recognized by operating segment is summarized below:
(in thousands)
Wholesale
Direct-to-Consumer
Business-to-Business
Other
Total
For the years ended:
All of our long-lived assets are located within the United States.
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19. Net Loss Per Share
The following table presents the calculation of basic and diluted loss per share:
June 30,
(in thousands, except for per share amounts)
Net loss
Less: loss allocable to noncontrolling interest
Net loss allocable to common shareholders
Numerator – Basic EPS
Net loss allocable to common shareholders
Net loss allocated to common shareholders
Numerator – Diluted EPS
Net loss allocated to common shareholders
Net loss allocated to common shareholders
Denominator – Basic Common Shares
Weighted average common shares outstanding - Basic
Denominator – Diluted Common Shares
Weighted average common shares - Diluted
Net loss per share – basic:
Common Shares
Net loss per share – diluted:
Common Shares
The following securities have been excluded from the calculations of diluted earnings (loss) per share allocable to common shareholders because including them would have been antidilutive are, as follows:
June 30,
Shares subject to warrants to purchase common stock
Shares subject to options to purchase common stock
Shares subject to restricted stock units
Total
20. Subsequent Events
Debt Amendment
On October 12, 2023, the Compa ny entered into a fourth amendment to the Second Amended and Restated Loan and Security Agreement (the “Fourth Amendment”) by and among the Company, the Borrowers, the Lenders party thereto, and Agent. The Fourth Amendment, among other things: (i) waives certain existing events of default relating to the Company’s failure to comply with the financial covenants and financial reporting requirements set forth in the Credit Agreement for prior fiscal periods; (ii) reduces the aggregate revolving commitment and the aggregate delayed draw term loan commitment to $ 200,000,000 and $ 38,100,000 , respectively; (iii) replaces the maximum debt to capitalization financial covenant with a minimum adjusted EBITDA financial covenant of not less than (1) $ 4,000,000 for the fiscal quarter ending September 30, 2023, (2) $ 17,000,000 for the two fiscal quarter period ending December 31, 2023, (3) $ 27,000,000 for the three fiscal quarter period ending March 31, 2024, (4) $ 34,000,000 for the four fiscal quarter period ending June 30, 2024, and (5) $ 35,000,000 for each four fiscal quarter period ending thereafter; (iv) adds a minimum liquidity covenant of $ 25,000,000 (or, for fiscal quarters ending in December, $ 15,000,000 ), which applies only for the fiscal quarters ending September 30, 2023 through and including December 31, 2024 (the “Covenant Modification Period”); (v) suspends the minimum fixed charge coverage ratio covenant for the fiscal quarters ending September 30, 2023 through and including June 30, 2024 and provides for a step-down of the minimum fixed charge coverage ratio to 1.00:1.00 for the remainder of the Covenant Modification Period; (vi) adds an equity cure right for the Company in the event of future breaches of the financial covenants; (vii) reduces revolver availability by (1) $ 15,000,000 during the months of February through September of each year and (2) $ 10,000,000 during the months of October through January of each year; (viii) suspends the exercise of incremental facilities during the Covenant Modification Period; (ix) restricts all permitted acquisitions during the term of the credit facilities, unless previously approved by the required Lenders; (x) increases in the applicable margin for all credit facilities to 3.00 % for SOFR Loans and 2.00 % for ABR Loans, which margins will step-up further if
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certain prepayments of the Term Loans are not made by certain dates prescribed in the Amendment; (xi) adds additional mandatory prepayments of (1) $ 10,000,000 by no later than March 31, 2024, (2) an additional $ 10,000,000 by no later than June 30, 2024 and (3) an additional $ 25,000,000 by no later than December 31, 2024; (xii) adds additional mandatory prepayments in the event that the Borrowers maintain a cash balance in excess of $ 20,000,000 ; (xiii) permits additional sales of certain real property with an aggregate appraised value of approximately $ 60,000,000 , in addition to related personal property assets; and (xiv) adds certain additional reporting requirements to Agent and the Lenders.
Nasdaq Deficiency Notice
On September 13, 2023, the Company received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer meets Nasdaq Listing Rule 5450(a)(1), which requires listed companies to maintain a minimum bid price of at least $ 1 per share.
Nasdaq Listing Rule 5810(c)(3)(A) provides a compliance period of 180 calendar days, or until March 11, 2024, in which to regain compliance with the minimum bid price requirement. If the Company evidences a closing bid price of at least $ 1 per share for a minimum of 10 consecutive business days during the 180-day compliance period, the Company will automatically regain compliance. In the event the Company does not regain compliance with the $ 1 bid price requirement by March 11, 2024, the Company may be eligible for consideration of a second 180-day compliance period. To qualify for this additional compliance period, the Company would be required to transfer the listing of the common stock to the Nasdaq Capital Market. To qualify, the Company must meet the continued listing requirement for the applicable market value of publicly held shares requirement and all other applicable initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement. In addition, the Company would also be required to notify Nasdaq of its intent to cure the minimum bid price deficiency.
If the Company fails to regain compliance with the Nasdaq continued listing standards, Nasdaq will provide notice that the Company’s common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.
The notification has no immediate effect on the listing of the Company’s common stock on Nasdaq. The Company intends to monitor the closing bid price of its common stock and consider its available options in the event the closing bid price of its common stock remains below $ 1 per share.
Restructuring
On July 20, 2023, the Company's executive officers, authorized by the Board of Directors (the "Board") to take such action, approved an organizational restructuring plan (the "Plan") to expand margin through simplification and improved execution, measurably reduce costs, improve cash management, monetize assets, reduce debt and grow revenue of its key brands. As part of the Plan, there was a reduction in force affecting approximately 25 roles, or 4 % of the workforce, which is expected to increase the Company's annualized cost savings to approximately $ 6 million, including the impact of the actions taken in March 2023, which was a reduction in force of approximately 20 roles. Cash expenditures for the reduction in force are estimated to be $ 6 million to $ 7 million, substantially all of which are related to employee severance and benefits costs. The majority of the expense is expected to be accrued in the first quarter of 2024.
Executive Leadership Changes
On July 20, 2023, the Company announced that the Board appointed Seth Kaufman, age 49, as the Company’s President and Chief Executive Officer, effective on or prior to October 30, 2023. In connection with such appointment, the Company entered into an Employment Agreement with Mr. Kaufman , pursuant to which the Company will pay an annualized base salary of $ 900 thousand, a target bonus of 80 % of base salary, which is guaranteed for fiscal 2024, and a signing bonus of $ 326 thousand payable in two equal lump sums on the 6-month and 12-month anniversary dates of his employment, respectively. Additionally, the Company awarded Mr. Kaufman a one-time grant of 4 million stock options, pursuant to the Company's 2021 Omnibus Incentive Plan (the "2021 Plan"), with each one-fourth of the granted options vesting over four years and being exercisable at $ 1.50 , $ 3.00 , $ 4.50 , and $ 6.00 per share respectively; 1 million time-vesting restricted stock units pursuant to the 2021 Plan, which vest over four years; and 2 million performance-vesting restricted stock units (the "PSUs") pursuant to the 2021 Plan, which vest over four years, provided that for each one-third of the granted PSUs, the Volume Weighted Average Price per share of the Company's common stock over a 30 day consecutive trading day period preceding an applicable vesting date is at least $ 2.00 , $ 4.00 , and $ 6.00 per share, respectively.
On July 19, 2023, the Company and Terry Wheatley, President of VWE, entered into a Separation Agreement and Release of all Claims (the "Separation Agreement") whereby Ms. Wheatley voluntarily elected to resign from the Company. Pursuant to the terms of the Separation Agreement, the employment agreement between the Company and Ms. Wheatley effective June 7, 2021 (the "Prior Employment Agreement") was terminated and upon such termination the Company agreed to provide Ms. Wheatley her accrued but unpaid Base Salary and PTO (as defined in the Prior Employment Agreement) through July 19, 2023, and any vested amounts or benefits that she is entitled to receive under any plan, program, or policy, as described in Section 5.1 of the Prior Employment Agreement. Pursuant to the terms of the Separation Agreement, the Company agreed to pay Ms. Wheatley an amount equal to three years of her annual base salary, to be paid in monthly installments over twenty-four consecutive months, a one-time payment of $ 125 thousand and reimbursement for the cost of health insurance continuation coverage through December 31, 2023, if continuation coverage is elected by Ms. Wheatley. In addition, the Company agreed to use good faith reasonable efforts to enter into an asset purchase agreement for the sale to Ms. Wheatley of the Company’s intellectual property rights related to its "Purple Cowboy," "Wine Sisterhood" and "Gem & Jane" trademarks for a nominal price.
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The Company and Ms. Wheatley entered into an asset purchase agreement (the "Wheatley APA") effective as of September 17, 2023, whereby the Company sold Ms. Wheatley all of its intellectual property rights related to its "Purple Cowboy," "Wine Sisterhood" and "Gem+Jane" trademarks for a nominal sum. Pursuant to the Wheatley APA, the Company holds a worldwide, non-exclusive license to use the Purple Cowboy intellectual property ("IP") until June 30, 2024 for the purpose of liquidating its existing Purple Cowboy inventory. Pursuant to the Wheatley APA, Ms. Wheatley is required to purchase, by December 31, 2024, all Purple Cowboy inventory held by the Company that was not sold by June 30, 2024, at cost plus shipping charges. From September 17, 2023 to June 30, 2024, the Company has agreed to make sponsorship payments to “Tough Enough to Wear Pink” of all gross profits received from sales of inventory associated with the Purple Cowboy IP. The sponsorship payments are to be made at a rate of $ 20,000 per month with any adjustment needed to account for remaining gross profits not previously covered by the sponsorship payments to be made in the final payment in July 2024. In the event the sponsorship payments exceed the gross profits received by the Company from sales of Purple Cowboy inventory, Ms. Wheatley is required to refund such excess amount to the Company by July 30, 2024. Pursuant to the Wheatley APA, the Company holds a worldwide, partially non-exclusive and partially exclusive license to use the Wine Sisterhood IP for the purpose of liquidating, and until it has liquidated, its existing inventory associated with the Wine Sisterhood IP. Ms. Wheatley has also agreed to pay the Company a royalty of $1.00 per 9-liter case of “Gem+Jane” branded products sold for a period of three years from September 17, 2023.
Item 9. Changes in and Disag reements with Accountants on Accounting and Financial Disclosure
None.
