Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “us”, “our” and “the Company” are intended to mean the business and operations of Vintage Wine Estates, Inc., a Nevada corporation and its consolidated subsidiaries.
Business Overview
Vintage Wine Estates, Inc., is a leading vintner in the United States ("U.S."), offering a collection of wines produced by award-winning, heritage wineries, popular lifestyle wines, innovative new wine brands, packaging concepts, as well as craft spirits. Our name brands include Layer Cake, Cameron Hughes, Clos Pegase, B.R. Cohn, Firesteed, Bar Dog, Kunde, Cherry Pie and many others. Since our founding over 20 years ago, we have grown organically through wine brand creation and through acquisitions to become the 14th largest wine producer based on cases of wine shipped in California.
Growth Strategy
Our strategy is to continue to grow organically by leveraging our omnichannel sales capabilities and through select acquisitions that enhance our wine portfolio and expand our offerings through all three business segments for our customers. Acquisitions have enabled us to diversify our wine sourcing into regions outside of California, expand our portfolio of brands, increase our vineyard assets and provide our direct-to-consumer and retail customers with a range of wines to choose from. We are also focused on improving profitability and driving cash generation by eliminating less profitable brands, exiting lower margin businesses, addressing wine making, warehousing and production efficiencies, simplifying our go-to-market strategy and monetizing select assets.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
Economic Uncertainties
Inflation and supply chain constraints, as well as the ongoing COVID-19 pandemic ("COVID-19"), continue to disrupt the U.S. and global economies and there remains uncertainty about their impact on the economy. We cannot estimate with any certainty the length or severity of the economic uncertainties or the related financial consequences on our business and operations, including whether and when historic economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flows.
Management expects economic uncertainties including inflation and supply chain constraints to continue to impact financial metrics for several areas of the business including sales, cost of goods, operating expenses and cash flow.
Invasion of Ukraine
Russia's invasion of Ukraine has not had a direct impact on the Company. The Company does not have assets, operations or human capital resources located in Russia or Ukraine, does not invest or hold securities that trade in those areas and does not rely on goods or services sourced in Russia or Ukraine. However, the Company receives its capsules for wine bottles from a supplier in Italy, who has plants located in Ukraine (which has now closed), Italy and Poland. While the Company has not been impacted directly by supply chain disruptions as a result of the invasion, risks remain to the Company’s business including potential cybersecurity risks and other indirect operational or supply chain challenges, and the competition to secure wine bottle capsules has increased from suppliers due to the closing of the plant of the Company’s Italian supplier in Ukraine.
Weather Conditions
Our ability to fulfill the demand for wine is restricted by the availability of grapes. Climate change, agricultural and other factors, such as wildfires, disease, pests, extreme weather conditions, water scarcity, biodiversity loss and competing land use, impact the quality and quantity of grapes available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenue 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.
29
Table of Contents
Seasonality
There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenue and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during our second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.
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 revenue; gross profit; selling, general and administrative expenses; and income from operations. The key non-GAAP measures we consider are Adjusted EBITDA and Adjusted EBITDA Margin. We also monitor our case volume sold from our distributors to retailers to help us forecast and identify trends affecting our growth.
Net Revenue
We generate revenue from our segments: Wholesale, Business-to-Business ("B2B"), Direct-to-Consumer ("DTC") and Corporate and Other. 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, at which point title passes to the customer and 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 revenue less cost of sales. Cost of sales includes the direct cost of manufacturing, including direct materials, labor and related overhead, and physical inventory adjustments, as well as inbound and outbound freight and import duties.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenue, but are expected to increase over time to support the needs of the Company.
Income from Operations
Income from operations is gross profit less selling, general and administrative expenses; impairment losses on goodwill and intangible assets; acquisition and restructuring related expense or income and amortization of intangible assets. Income from operations excludes interest expense, income tax expense, and other expenses, net. We use income from operations as well as other indicators as a measure of the profitability of our business.
Case 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 for our DTC and Wholesale segments are an important indicator for us to determine what is driving gross margin, although our B2B segment sales are not related to case volumes. This metric also allows us to develop our supply and production targets for future periods for our DTC and Wholesale segments.
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.
Adjusted EBITDA is defined as earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, casualty losses or gains, impairment losses, changes in the fair value of derivatives, restructuring related income or expenses, 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 revenue.
30
Table of Contents
Results of Operations
Our financial performance is classified into the following segments: Wholesale, B2B, DTC and Corporate and Other. Our corporate operations, including centralized selling, general and administrative expenses 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 companies, our revenue generating assets are utilized across segments. Accordingly, the foregoing items are not allocated to the segments 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.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Wholesale Segment Results
The following table presents summary financial data for our Wholesale segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
20,811 |
|
|
$ |
24,549 |
|
|
$ |
(3,738 |
) |
|
-15.2% |
Income from operations |
|
$ |
(1,637 |
) |
|
$ |
3,270 |
|
|
$ |
(4,907 |
) |
|
-150.1% |
Wholesale net revenue for the three months ended March 31, 2023 decreased $3.7 million, or 15.2%, from the three months ended March 31, 2022. The decrease was attributable to a decrease in sales related to timing of retail programming, discontinued brand, and slowing consumer discretionary spending trends at retail.
Wholesale income from operations for the three months ended March 31, 2023 decreased $4.9 million, or 150.1%, from the three months ended March 31, 2022. The decrease was attributable primarily to the reduced sales mentioned above that was partially offset by a decrease in cost of sales for Wholesale totaling $1.8 million as well as inventory writedowns of $2.7 million.
B2B Segment Results
The following table presents summary financial data for our B2B segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
31,490 |
|
|
$ |
33,657 |
|
|
$ |
(2,167 |
) |
|
-6.4% |
Income from operations |
|
$ |
5,562 |
|
|
$ |
10,457 |
|
|
$ |
(4,895 |
) |
|
-46.8% |
B2B net revenue for the three months ended March 31, 2023 decreased $2.2 million, or 6.4%, from the three months ended March 31, 2022. The decrease was primarily attributable to a decrease in private label customer sales of $3.7 million.
B2B income from operations for the three months ended March 31, 2023 decreased $4.9 million, or 46.8%, from the three months ended March 31, 2022. The decrease is primarily related to inventory writedowns of $4.1 million as well as an increase in cost of revenue year over year.
31
Table of Contents
DTC Segment Results
The following table presents summary financial data for our DTC segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
17,174 |
|
|
$ |
19,595 |
|
|
$ |
(2,421 |
) |
|
-12.4% |
Income from operations |
|
$ |
(2,929 |
) |
|
$ |
916 |
|
|
$ |
(3,845 |
) |
|
-419.8% |
DTC net revenue for the three months ended March 31, 2023 decreased $2.4 million, or 12.4%, from the three months ended March 31, 2022. The decrease was primarily attributable to $1.2 million decline related to a major customers reduction in televised programming and reduced activity in tasting rooms, mostly as a result of bad weather. This was partially offset by growth in wine clubs, telemarketing and e-commerce.
DTC income from operations for the three months ended March 31, 2023 decreased $3.9 million, or 419.8%, from the three months ended March 31, 2022. The decreased is primarily attributable to inventory writedowns of $3.4 million.
Corporate and Other Segment Results
The following table presents summary financial data for our Corporate and Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
3 |
|
|
$ |
1,132 |
|
|
$ |
(1,129 |
) |
|
-99.7% |
Income (loss) from operations |
|
$ |
(4,795 |
) |
|
$ |
(13,759 |
) |
|
$ |
8,964 |
|
|
65.2% |
Corporate and Other net revenue for the three months ended March 31, 2023 decreased $1.1 million, or 99.7%, from the three months ended March 31, 2022. The decrease was primarily due to reduced bulk wine sales.
Corporate and Other loss from operations for the three months ended March 31, 2023 decreased $9.0 million, or 65.2%, from the three months March 31, 2022. The decrease was primarily attributable to a $4.0 million reduction in stock compensation expense and $6.3 million gain from sale of assets. The decrease was offset by $1.9 million in business realignment costs and $1.2 million in additional compensation and benefits expenses.
Nine Months Ended March 31, 2023 Compared to Nine Months Ended March 31, 2022
Wholesale Segment Results
The following table presents summary financial data for our Wholesale segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
67,260 |
|
|
$ |
62,923 |
|
|
$ |
4,337 |
|
|
6.9% |
Income from operations |
|
$ |
(129,331 |
) |
|
$ |
12,654 |
|
|
$ |
(141,985 |
) |
|
-1122.1% |
Wholesale net revenue for the nine months ended March 31, 2023 increased $4.3 million, or 6.9%, from the nine months ended March 31, 2022. The increase was driven by contributions of $8.0 million from the ACE Cider acquisition which was partially offset by slowing consumer discretionary spending trends at retail.
Wholesale income from operations for the nine months ended March 31, 2023 decreased $142.0 million, or 1,122.1%, from the nine months ended March 31, 2022. The decrease was attributable primarily to goodwill and intangible assets impairments of $116.3 million and $11.5 million, respectively, inventory writedowns of $2.7 million, as well as higher costs due to inflation and supply chain challenges, $3.7 million in incremental overhead burden, $0.8 million increase in contingent liability, and incremental operating loss of $1.0 million related to acquisitions.
B2B Segment Results
The following table presents summary financial data for our B2B segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
94,385 |
|
|
$ |
83,349 |
|
|
$ |
11,036 |
|
|
13.2% |
Income from operations |
|
$ |
16,445 |
|
|
$ |
26,274 |
|
|
$ |
(9,829 |
) |
|
-37.4% |
B2B net revenue for the nine months ended March 31, 2023 increased $11.0 million, or 13.2%, from the nine months ended March 31, 2022. The increase was primarily attributable to an increase of $9.5 million in custom production activities and $2.6 million from sales of bulk distilled spirits.
32
Table of Contents
B2B income from operations for the nine months ended March 31, 2023 decreased $9.8 million, or 37.4%, from the nine months ended March 31, 2022. The decrease was attributable to goodwill and intangible assets impairments of $9.0 million and $0.1 million, respectively, as well as to inventory writedowns of $4.1 million, partially offset by a gain on remeasurement of contingent consideration of $4.9 million and increased margin on bulk distilled alcohol sales and $0.1 million related to acquisitions.
DTC Segment Results
The following table presents summary financial data for our DTC segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
63,101 |
|
|
$ |
69,316 |
|
|
$ |
(6,215 |
) |
|
-9.0% |
Income from operations |
|
$ |
43 |
|
|
$ |
14,834 |
|
|
$ |
(14,791 |
) |
|
-99.7% |
DTC net revenue for the nine months ended March 31, 2023 decreased $6.2 million, or 9.0%, from the nine months ended March 31, 2022. The decrease was primarily attributable to less televised programming by $2.2 million, reduced e-commerce sales of $2.4 million, reduced tasting room sales of $1.1 million and reduced event sales of $0.7 million.
DTC income from operations for the nine months ended March 31, 2023 decreased $14.8 million, or 99.7%, from the nine months ended March 31, 2022. The decrease was primarily attributable to increases in costs of revenue, as well as inventory writedowns of $3.4 million, intangible assets impairments of $2.2 million, and amortization of $2.4 million.
Corporate and Other Segment Results
The following table presents summary financial data for our Corporate and Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
Dollar |
|
|
Percent |
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
Net revenue |
|
$ |
(46 |
) |
|
$ |
2,643 |
|
|
$ |
(2,689 |
) |
|
-101.7% |
Income (loss) from operations |
|
$ |
(44,238 |
) |
|
$ |
(34,014 |
) |
|
$ |
(10,224 |
) |
|
-30.1% |
Corporate and Other net revenue for the nine months ended March 31, 2023 decreased $2.7 million, or 101.7%, from the nine months ended March 31, 2022. The decrease was primarily attributable to reduced bulk wine sales.
Corporate and Other loss from operations for the nine months ended March 31, 2023 decreased $10.2 million, or 30.1%, from the nine months March 31, 2022. The decrease was due to $6.3 million of acquisition related expenses and $5 million of share-based compensation expense.
Case Volumes
The following tables summarize 9-liter equivalent cases by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Unit Change |
|
|
% Change |
|
Wholesale |
|
|
433 |
|
|
|
357 |
|
|
|
76 |
|
|
|
21.3 |
% |
B2B |
|
* |
|
|
* |
|
|
* |
|
|
* |
|
DTC |
|
|
67 |
|
|
|
87 |
|
|
-20 |
|
|
|
-23.0 |
% |
Total case volume |
|
|
500 |
|
|
|
444 |
|
|
|
56 |
|
|
|
12.6 |
% |
The decrease in DTC volumes was primarily driven by reduced volumes for televised programming.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Unit Change |
|
|
% Change |
|
Wholesale |
|
|
1425 |
|
|
|
1,072 |
|
|
|
353 |
|
|
|
32.9 |
% |
B2B |
|
* |
|
|
* |
|
|
* |
|
|
* |
|
DTC |
|
|
291 |
|
|
|
307 |
|
|
-16 |
|
|
|
-5.2 |
% |
Total case volume |
|
|
1,716 |
|
|
|
1,379 |
|
|
|
337 |
|
|
|
24.4 |
% |
The increase in case volumes was primarily due to our wholesale segment, driven by the ACE Cider acquisition that ships higher case volumes of lower priced product.
*B2B segment sales are primarily not 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.
33
Table of Contents
Non-GAAP Financial Measures
The following is a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
Nine Months Ended March 31 |
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Net (loss) income (GAAP Measure) |
|
$ |
(10,174 |
) |
|
$ |
2,707 |
|
|
$ |
(141,433 |
) |
|
$ |
14,038 |
|
Interest expense |
|
|
4,291 |
|
|
|
3,729 |
|
|
|
13,322 |
|
|
|
10,825 |
|
Income tax provision |
|
|
(1,673 |
) |
|
|
958 |
|
|
|
(24,231 |
) |
|
|
5,412 |
|
Depreciation |
|
|
4,101 |
|
|
|
6,040 |
|
|
|
11,409 |
|
|
|
14,095 |
|
Amortization |
|
|
1,813 |
|
|
|
2,083 |
|
|
|
5,429 |
|
|
|
3,938 |
|
Stock-based compensation expense |
|
|
(2,008 |
) |
|
|
- |
|
|
|
6,971 |
|
|
|
- |
|
Net loss (gain) on interest rate swap agreements |
|
|
3,596 |
|
|
|
(4,553 |
) |
|
|
(4,892 |
) |
|
|
(8,582 |
) |
Goodwill and intangible asset impairment losses |
|
|
- |
|
|
|
- |
|
|
|
139,108 |
|
|
|
- |
|
Loss (gain) on disposition of assets |
|
|
(5,977 |
) |
|
|
1,099 |
|
|
|
(5,625 |
) |
|
|
508 |
|
Deferred rent adjustment |
|
|
- |
|
|
|
47 |
|
|
|
- |
|
|
|
285 |
|
Gain on litigation proceeds |
|
|
(884 |
) |
|
|
- |
|
|
|
(1,414 |
) |
|
|
- |
|
Adjusted EBITDA (Non-GAAP Measure) |
|
$ |
(6,915 |
) |
|
$ |
12,110 |
|
|
$ |
(1,356 |
) |
|
$ |
40,519 |
|
Revenue |
|
$ |
69,478 |
|
|
$ |
78,933 |
|
|
$ |
224,700 |
|
|
$ |
218,231 |
|
Adjusted EBITDA margin (Non-GAAP Measure) |
|
|
-10.0 |
% |
|
|
15.3 |
% |
|
|
-0.6 |
% |
|
|
18.6 |
% |
Adjusted EBITDA and Adjusted EBITDA Margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance. See Note 6, Goodwill and Intangible Assets, in Item 1, Financial Statements, for details related to our impairment testing reported in the quarter ended December 31, 2022.
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, which are not prepared in accordance with GAAP, should not be construed as an indicator of our operating performance in isolation from, or as a substitute for, respectively, net income (loss) or net income (loss) divided by revenue, which are indicators prepared in accordance with GAAP. We have presented Adjusted EBITDA and Adjusted EBITDA Margin solely as supplemental disclosure because we believe it allows for a more complete analysis of our results of operations. In the future, we may incur expenses such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Liquidity and Capital Resources
On May 9, 2023, the Company entered into an amendment to its Second A&R Loan and Security Agreement (defined in Note 10) that adjusted the definition of certain financial covenants for the quarter ended March 31, 2023. Due to the amendment, the Company was in compliance with its debt covenants as of March 31, 2023. The Company currently forecasts that it will not meet certain financial debt covenants as required per our Second A&R Loan and Security Agreement (defined in Note 10) beginning with the quarter ended June 30, 2023, which would constitute an event of default, which if not waived, can result in the potential acceleration of the Company’s outstanding debt under the Second A&R Loan and Security Agreement. If an event of default occurs under the Second A&R Loan and Security Agreement and the lender accelerates the maturity of the debt thereunder, the Company may not have sufficient cash to repay the outstanding debt.
In response to these conditions, management has begun to actively engage in conversations with the lender of the Second A&R Loan and Security Agreement regarding amendments and waivers to the related financial covenants, however, whether an amendment or waiver is obtained is not within the Company's control, and therefore cannot be deemed probable.
During the third fiscal quarter of 2023 which ended March 31, 2023, the Company implemented several cost reduction and revenue enhancing initiatives to improve its financial results and cash flow from operations. This included reducing our workforce by approximately 4%. In addition, we have strategically raised prices across the Direct-to-Consumer segment, increased certain shipping fees and restructured customer contracts to reduce freight costs. These efforts are expected to have an annualized benefit of $10 million to operating income exclusive of the $2 million in costs we incurred during the three months ending March 31, 2023 to affect the changes.
34
Table of Contents
Furthermore, we are contemplating developing a comprehensive business development and restructuring plan including the evaluation of several options for further cost reductions. We expect we can improve operating results through customer contract renegotiations, simplification of the business, focusing resources on key brands and an elimination of less profitable SKUs (stock keeping unit). As part of the process, we are also evaluating further asset monetization opportunities to generate cash to reduce debt.
There can be no assurances that the Company will be able to successfully implement these strategies, or if successfully implemented, that we will see the expected benefits from such strategies. Additionally, there can be no assurances that any benefits from cost reduction strategies will enable the Company to remain in compliance with its financial covenants or provide the Company with sufficient cash to pay the outstanding debt on the Second A&R Loan and Security Agreement if accelerated by the lender.
As a result of these uncertainties, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.
Debt
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 (defined in Note 10) that adjusted the definition of certain financial covenants for the quarter ended March 31, 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. As a result, at March 31, 2023, we believe we will be in compliance with the covenants contained in the Second A&R Loan and Security Agreement. Refer to Note 10– Long-Term and Other Short-Term Obligations, of the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.
We currently forecast that we will not meet certain financial debt covenants as required per our Second A&R Loan and Security Agreement (defined in Note 10) beginning with the quarter ended June 30, 2023, which would constitute an event of default, which if not waived, can result in the potential acceleration of our outstanding debt under the Second A&R Loan and Security Agreement. If an event of default occurs under the Second A&R Loan and Security Agreement and the lender accelerates the maturity of the debt thereunder, we may not have sufficient cash to repay the outstanding debt. In response to these conditions, management has begun to actively engage in conversations with the lender of the Second A&R Loan and Security Agreement regarding amendments and waivers to the related financial covenants, however, whether an amendment or waiver is obtained is not within our control, and therefore cannot be deemed probable. As a result, we classified all amounts owed under the Second A&R Loan and Security Agreement as Current Maturities of Long-Term Debt on the balance sheet at March 31, 2023.
35
Table of Contents
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.
Cash and Cash Equivalents
Our cash and cash equivalents balance was $32.0 million at March 31, 2023 compared to $50.3 million at June 30, 2022, exclusive of restricted cash. At March 31, 2023, our cash and cash equivalents were held in cash depository accounts with major banks.
Cash Flows
The table below presents a summary of our sources and uses of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
|
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Change |
|
Operating activities |
|
$ |
(3,846 |
) |
|
$ |
(4,128 |
) |
|
$ |
282 |
|
Investing activities |
|
$ |
8,389 |
|
|
$ |
(89,886 |
) |
|
$ |
98,275 |
|
Financing activities |
|
$ |
(22,869 |
) |
|
$ |
46,044 |
|
|
$ |
(68,913 |
) |
The cash flows related to held for sale assets have not been segregated, and remain included in the major classes of assets.
Cash Flows provided by (used in) Operating Activities
Net cash used by operating activities was $3.9 million for the nine months ended March 31, 2023 compared to net cash used in operating activities $4.1 million for the nine months ended March 31, 2022, representing an increase in net cash provided of $0.2 million.
Cash Flows provided by (used in) Investing Activities
Net cash provided by investing activities was $8.4 million for the nine months ended March 31, 2023, compared to net cash used in investing activities of $89.9 million for the nine months ended March 31, 2022, representing an increase in net provided of $98.2 million. Cash flows from investing activities are utilized primarily to fund acquisitions, capital expenditures for improvements to existing assets and other corporate assets. The increase in net cash provided for the nine months ended March 31, 2023, was primarily attributable to purchases of property, plant and equipment totaling $15.7 million in the prior period, along with a business acquisition totaling $74.3 million in the prior period. This was also offset by proceeds from sales of assets totaling $11.1 million in the current quarter.
Cash Flows provided by (used in) Financing Activities
Net cash used in financing activities was $22.9 million for the nine months ended March 31, 2023 compared to net cash provided by of $46.0 million for the nine months ended March 31, 2022, representing an increase in net cash used of $68.9 million. The increase in net cash used consisted primarily of $136.4 million of payments on our line of credit and long-term debt, net of proceeds.
Contractual Obligations
There have been no material changes to our contractual obligations from what was previously disclosed in our Annual Report on Form 10-K filed with the SEC.
Off-Balance Sheet Arrangements
As of March 31, 2023, the Company had no off-balance sheet arrangements.
Significant Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed 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 condensed consolidated financial statements. For a description of our critical accounting policies, refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K. As a result of adopting ASC 842 effective July 1, 2022, there have been material changes to our lease accounting policies during the nine months ended March 31, 2023, that are described in Note 1 to our condensed consolidated financial statements included in Part I, Item I of this Form 10-Q.
Goodwill and Intangible Assets
The aggregate carrying amount of goodwill is $29.7 million as of March 31, 2023. Our intangible assets had an aggregate carrying amount of $45.4 million as of March 31, 2023.
36
Table of Contents
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 reporting 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.
We generally utilize the discounted cash flow method under the income approach and the 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.
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.
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 and Sommelier 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.
See Note 6, Goodwill and Intangible Assets, in Item 1, Financial Statements, for details related to our impairment testing reported as of December 31, 2022.
Recent Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 1, Basis of Presentation and Significant Accounting Policies in the notes to our unaudited condensed consolidated financial statements.
37
Table of Contents
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Investors are cautioned that statements that are not strictly historical statements of fact constitute forward-looking statements, including, without limitation, statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and are often identified by words like “believe,” “expect,” “may,” “will,” “should,” “seek,” “anticipate,” or “could” and similar expressions.
Forward-looking statements are not assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed or implied by forward-looking statements include those discussed under the “Risk Factors” section of our Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q or other reports filed with the SEC.
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly revise or update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
38
Table of Contents