Form 10-K Vintage Wine Estates, For: Jun 30

October 13, 2021 4:42 PM EDT

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10-K
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-40016

 

img7587657_0.jpg 

 

VINTAGE WINE ESTATES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

 

 

87-1005902

(State or other jurisdiction of incorporation or organization)

 

 

 

(I.R.S. Employer Identification No.)

______________________________

937 Tahoe Boulevard, Suite 210

Incline Village, Nevada 89451

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (877) 289-9463

______________________________

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, no par value per share

 

VWE

 

The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer.” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of December 31, 2020, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $364,680,000.

 

As of October 1, 2021, 60,461,611 shares of the registrant’s common stock were outstanding.

 

 


Table of Contents

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the registrant's next Annual Meeting of Stockholders (the "Proxy Statement"). The Proxy Statement, or an amendment to this Report, shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

Forward-Looking Statements

1

Part I.

 

1

Item 1.

Business

1

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

19

Item 3.

Legal Proceedings

20

Item 4.

Mine Safety Disclosures

21

 

 

 

Part II.

 

22

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issue Purchases of Equity Securities

22

Item 6.

Reserved

23

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 7A.

Quantitative and Qualitative Disclosures

38

Item 8.

Financial Statements and Supplementary Data

40

Item 9.

Changes in and Disagreements with Accountants

80

Item 9A.

Controls and Procedures

80

 

 

 

Part III.

 

82

Item 10.

Directors, Executive Officers and Corporate Governance

82

Item 11.

Executive Compensation

82

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

82

Item 13.

Certain Relationships and Related Transactions and Director Independence

82

Item 14.

Principal Accounting Fees and Services

82

 

 

 

Part IV.

 

83

Item 15.

Exhibits and Financial Statement Schedules

83

Item 16.

Form 10-K Summary

87

Signature

88

 

 


Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 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 heading “Item 1A. Risk Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K and in future Quarterly Reports on Form 10-Q or other reports filed with the Securities and Exchange Commission ("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.

References to a fiscal year refer to our fiscal year ended June 30 of the specified year.

Part I.

Item 1. Business

Our Company

Vintage Wine Estates, Inc. (“VWE”, “we”, “us”, "our" or “the Company”) 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 15th largest wine producer based on cases of wine shipped in California. We’ve exceeded 20% net revenue and adjusted EBITDA compound annual growth rates since 2010. We now sell nearly 2 million cases annually.

Our key differentiator is our diversification—what we call our three-legged stool business model.

We are diversified in our brand collection, producing over 50 brands ranging in retail price from $10 to $150, with a focus on the growing segment between $10 and $20. Eighty percent of our business is done in this critical segment.

We are diversified in our omni-channel sales strategy balanced between direct-to-consumer, 30% of sales, traditional wholesale, 33% of sales and business-to-business at 35% of sales. Our direct-to-consumer segment is particularly robust. Where most wine companies have two direct sales levers to pull: tasting rooms and wine clubs, we have six: tasting rooms, wine clubs, ecommerce, Cameron Hughes, Windsor/custom label design and engraving, and QVC/HSN.

We are diversified in our sourcing with a strong asset base of 2,800 owned and leased vineyard acres located in the premier winegrowing regions of the U.S. and 10 owned winery estates. These properties extend from the Central Coast of California to storied appellations in Napa Valley and Sonoma County, north to Oregon and Washington. We obtain fruit for our wines from owned and leased vineyards, as well as other sources, including independent growers and the spot wine market.

Vintage Wine Estates has completed over 20 acquisitions in the past 10 years and completed over 10 acquisitions in the past 5 years. We generally acquire the brands and inventories of a targeted business, eliminating redundant corporate overhead. We then integrate the acquired assets into our highly efficient production, distribution and omni channel selling networks, quickly increasing the sales and margins of the acquired business.

Our growth has allowed us to reinvest in our business and create the scale and infrastructure needed to successfully manage a variety of different wine brands and channels and reduce costs. Our owned winery facilities have the current capacity to produce up to 7 million cases of wine per year. We are in the process of completing a $45 million investment into our Ray’s Station production facility, which includes a high-speed bottling facility with the capacity to bottle over 13.5 million cases annually and a 364,000 square foot warehouse and distribution center. This project will be complete at the end of Q1 FY 22.

 

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Additional bottling capacity will not only be used for our products, but also will allow us to further expand our bottling and fulfillment services offered to third parties on a contract basis. The additional capacity of the bottling facility may not initially be fully utilized but provides us with capacity consistent with our growth plans. Our scale and consolidated operations are expected to enable us to increase margins of the businesses that we acquire, providing accretive value promptly after the acquisition. We intend to continue to grow our business organically and through acquisitions, with a view towards making two to three acquisitions per year over the next five years.

Our acquisition strategy is to acquire brands and inventories while eliminating redundant corporate overhead, increasing gross margins of the acquired businesses by leveraging scale economies, and driving revenue growth through our distribution network. Gross margins improve by incorporating brands into a more efficient operating system. In addition, operating margins improve from synergies of acquisitions.

There are more than 11,000 wineries in the U.S., with the largest 50 wineries controlling approximately 90% of the market share by volume, but less than 60% of consumer spending. We plan to use our financial capacity to: (i) continue to acquire family-owned brands from small wineries, (ii) acquire non-core brands from medium sized and large competitors, and (iii) potentially acquire one or more large businesses in our industry.

Our primary unique selling proposition for a seller is that we have a strong track record of closing once the price and structure are agreed upon. We also believe our managers are perceived as excellent brand stewards, having increased the market share and profitability of virtually all of our acquired brands. We intend to be a disciplined acquirer, exercising cost discipline, with a focus on the industry’s growth in premium and super-premium wines. We expect that the fragmented nature of the wine industry, coupled with our infrastructure and experience, will enable us to continue to gain market share.

Our innovation strategy is focused on creating and building new wine brands for today’s wine consumer. In the past five years, we have launched over 15 new wine brands, which are primarily sold to major national retail accounts and through direct-to-consumer channels. We also develop private labels and produce wine for major retail clients, including Costco and Target, to sell as proprietary brands. The ability to create new wine brands and quickly bring them to market allows us to respond swiftly to trends and changing consumer tastes and needs.

Our mission is to maintain an entrepreneurial spirit, stay humble and focus on the customer. We respect the ways people buy wine—at the estate wineries, at retail, in restaurants, on the telephone, on the internet, on television and by mail.

Our Business Combination

We were formed in 2019 as Bespoke Capital Acquisition Corp. (“BCAC”), a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia. BCAC was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or any other similar business combination involving BCAC.

On June 7, 2021, BCAC consummated its business combination (the “Business Combination”) with Vintage Wine Estates, Inc., a California corporation ("Legacy VWE"), pursuant to a transaction agreement dated February 3, 2021. As a result of the Business Combination and the related transactions, BCAC changed its jurisdiction of incorporation from the Province of British Columbia to the State of Nevada, BCAC changed its name to “Vintage Wine Estates, Inc.” and Legacy VWE became our wholly-owned subsidiary.

For accounting purposes, and in accordance with generally accepted accounting principles, BCAC was treated as the acquired company and Legacy VWE was treated as the acquirer.

Core Business Segments

We report our results of operations through the following segments: Wholesale, Business-to-Business ("B2B"), Direct-to-Consumer ("DTC") and Other.

Fundamentally, we are an omni-channel consumer goods business that happens to operate in the wine industry. Unlike wine companies that solely or mainly sell to wholesale distributors, we sell our products through a number of different channels.

A description of our segments follows:

Wholesale

Our wholesale operations generate revenue from products sold to distributors, who then sell them to off-premise retail locations such as grocery stores, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars.

We have longstanding relationships with our distribution network and marketing companies, including with industry leaders such as Deutsch Family Wine and Spirits, Republic National Distributing Company and Southern Glazer’s Wine & Spirits. Through these relationships, our products are sold in all 50 states and in 37 countries outside the U.S. In addition to our geographical reach, our products are available for purchase at 34,500 off-premise locations as of June 30, 2021 including leading national chains such as Costco, Kroger, Target, Albertsons and Total Wine & More. Our products were also sold at 17,657 restaurants and bars as of June 30, 2021.

 

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Our wholesale segment generated $72.9 million and $75.4 million of revenue for the fiscal years ended June 30, 2021 and June 30, 2020, respectively.

Business-to-Business

Our B2B sales segment generates revenue from the sale of private label wines and custom winemaking services.

We work with national retailers, including Costco, Albertsons, Target and other major retailers, to provide private label wines incremental to their existing beverage alcohol business. Retailers generally earn higher margins on sales of their private label wines than on sales of third-party wines. Consequently, retailers are increasingly offering more private label products in their stores. We expect retailers’ demand for private labels to continue to increase and believe that our private label business will continue to grow. Retailers frequently request brand, label and product line extensions.

Our custom winemaking services are governed by long-term contracts with other wine industry participants and include services such as fermentation, barrel aging, procurement of dry goods, bottling and cased goods storage. Additionally, we believe that our custom winemaking services business allows us to maximize our production assets’ throughput and efficiency and thus improves profit margins for our proprietary brands.

Our B2B segment generated $77.4 million and $54.1 million of revenue for the fiscal years ended June 30, 2021 and June 30, 2020, respectively.

Direct-to-Consumer

Our DTC segment generates revenue from sales made directly to the consumer. DTC sales have higher gross profit margins than wholesale sales because DTC sales allow us to capture the profit margin that otherwise would go to our distribution partners on sales in the wholesale segment. As a result, our profit margins in the DTC segment are significantly higher than in our other segments while operating margins are consistent with other segments. We believe that our DTC business is one of the largest in the U.S. wine industry.

Our DTC sales are made primarily through our tasting rooms, wine clubs and e-commerce.

Tasting Rooms — We currently operate 14 tasting rooms that served over 135,000 visitors during the fiscal year ended June 30, 2021, down from over 188,000 for the fiscal year ended June 30, 2020 due to the effects of the COVID-19 pandemic. We expect that, after there has been availability and public acceptance of effective COVID-19 vaccines and travel restrictions have been lifted, tasting room volumes will, over time, increase from the current lows. Our tasting rooms are designed to provide a welcoming atmosphere where we can introduce the consumer to our brands with a view towards developing an authentic relationship over time. These tasting rooms feature our exclusive, low-production wines, at higher-than-average price points, as well as our more accessible, higher-production, wines. Visitors are encouraged to taste, and then purchase, our wines.

Wine ClubsWe currently offer 26 branded wine clubs and had more than 35,000 wine club members as of June 30, 2021. Our wine club members sign up to purchase regular shipments of our wines and receive additional benefits such as volume discounts, exclusive visits to our tasting rooms, invitations to member-only events, access to winemakers and the ability to try each of our wines before they are widely sold in stores. We leverage digital technology through virtual tastings and mixers, giving members new ways to network with one another.

E-Commerce Sales through our various brand websites are a growing part of DTC sales. We have an active email list with over 859,000 subscribers. Our digital marketing team drafted and sent over 5,200 unique emails that generated over 64 million impressions for the fiscal year ended June 30, 2021. We have used digital marketing since the early 2000s, recently increasing our e-commerce customer conversion rate to 9.3%, which is substantially above the food and drink industry’s e-commerce conversion rate of 1.7%, as of August 2021.

Custom Label Design and Engraving — We also offer custom label design and engraving services whereby customers can design and engrave wine bottles to their specifications. We believe that we are the only wine producer with the ability to do custom engraving on wine bottles. As a result, we are able to offer our services profitably at a lower price than competitors that need to outsource bottle engraving. In addition to our core private label customers, we have created custom bottles for weddings, major corporate events and other promotional opportunities.

Our DTC segment generated $66.6 million and $55.6 million of revenue for the fiscal years ended June 30, 2021 and June 30, 2020, respectively.

Other

Our Other segment generates revenue from grape and bulk sales, storage services and for the year ended June 30, 2020, revenue under the Sales Pro and Master Class business line sold in 2019. We record corporate level expenses, non-direct selling expenses and other expenses not specifically allocated to the results of operations in our Other segment.

Our Other segment generated $3.8 million and $4.8 million of revenue for the years ended June 30, 2021 and 2020, respectively.

Our Diversified Portfolio

Our asset base and product portfolio have been strategically built to provide significant flexibility throughout the business cycle. Our wine portfolio has three tiers: lifestyle brands, luxury brands, and digitally native brands. We also produce and sell craft spirits.

 

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Lifestyle Brands

Our lifestyle wines primarily sell through off-premise channels at retail prices ranging from $10.00 to $25.00 per bottle. The lifestyle tier accounts for more of our branded case volume than the luxury tier due to the lifestyle tier’s wider distribution and lower pricing. Our lifestyle brands are designed to deliver a compelling price-to-quality ratio. We believe our infrastructure, sourcing network and bottling-on-demand capabilities allow us to adjust production in line with market demand.

Our lifestyle brands include the following, among others:

Layer CakeLayer Cake is a vintage-dated, premium wine brand featuring Cabernet Sauvignon, Pinot Noir and Chardonnay and other varietals sourced from various vineyards from around the world. The wines are designed to be approachable and food-friendly, with layers of flavor. Layer Cake is distributed nationally, at retail prices between $11.99 and $19.99 per bottle.

FiresteedFounded in 1982, Firesteed is one of Oregon’s most recognized wine marques, well-known as an award-winning, high scoring top Pinot Noir producer. Located in Oregon’s Willamette Valley and considered a foundation brand for Oregon Pinot Noir, Firesteed serves the growing interest in and demand for authentic, cool-climate Oregon Pinot Noir. The signature wine, Firesteed Pinot Noir, is notably 100% Pinot Noir, with no blending wines added to alter the pure varietal character. Recognizing the appeal and demand for Oregon Pinot Noir, Firesteed is one of our top retail sales priorities. Firesteed wines are also available for sale DTC through our e-commerce channel and wine club. Firesteed wines sell at retail prices between $16.00 and $40.00 per bottle.

Bar Dog Bar Dog is vintage-dated, premium California wine, including Chardonnay, Cabernet Sauvignon and Pinot Noir varietals, along with Red Blend. Bar Dog launched as a first-to-market brand in Target stores in 2019 and now is distributed nationally with significant room to be distributed further. Bar Dog’s Cabernet Sauvignon has earned 94 points from the Toronto International Wine Competitions, its Red Wine and Chardonnay have earned Gold Medals, and its Pinot Noir has earned a Silver Medal from the San Francisco International Wine Competition. These wines sell at retail prices between $12.00 and $20.00 per bottle.

Middle SisterMiddle Sister is a non-vintage, premium California wine. The star of the “sisters” is Middle Sister Sweet & Savvy, the top-selling California Moscato in the United States, featuring a sister of color on the label. Middle Sister is a longstanding lifestyle brand, launched over 15 years ago in Target stores. It enjoys strong brand equity with a devoted consumer base. Middle Sister was the first wine label to feature a cast of stick figure characters on the label, engaging consumers in a novel, cheeky and humorous way. Middle Sister also was one of the early wine industry adopters of social media, having launched at the same time that Facebook was becoming a widely-used consumer platform. Middle Sister wines sell at a retail price of $10.00 per bottle.

Cherry Pie Cherry Pie wines are a vintage, premium California wine. These wines are 100% Pinot Noir sourced from select, cooler climate vineyards in Northern California and the Central Coast that highlight the variety. These wines sell at a retail prices between $20.00 and $50.00 per bottle.

Cartlidge & BrowneCartlidge & Browne is a legacy, premium California wine brand founded in 1980. Cartlidge & Brown wines appeals to consumers looking for quality and value. The brand continues to grow on the strength of longstanding trust in the wine quality and its appealing price point, with national distribution in retail chains, independent retailers and on-premise. Cartlidge & Brown wines sell at a retail price of $12.00 per bottle.

GAZE Wine Cocktails GAZE Wine Cocktails are refreshing, light, low-alcohol blends of Green Tea Moscato, Blueberry Pomegranate Moscato and White Peach Moscato. GAZE Wine Cocktails blend quality California wine with natural ingredients popular with wellness-minded consumers. The GAZE package is a sleek, portable, recyclable aluminum bottle with a resealable twist-off closure and bright, fashion-forward silkscreened graphics. The Blueberry Pomegranate Moscato flavor was awarded 94 points and a Double Gold award at the 2019 San Francisco International Wine Competition. A case of six GAZE Wine Cocktails sells at a retail price of $36.00.

Luxury Brands

Our super-premium to ultra-premium wines are generally smaller-production, estate-based wines. We also have a tier of more widely sourced and available appellation wines. Our luxury wines consistently garner 90+ scores, awards and accolades from top wine industry publications. They appeal to the wine aficionado who is intensely interested in the winemaker’s craft, the influence that vineyards and sites have on the wine, and the details of the vintage from budbreak to bottle.

Our luxury brands sell primarily at wine retailers, on-premise and through wine clubs and tasting rooms at prices ranging from $16.00 to $150.00 per bottle.

Our luxury brands include the following:

GirardGirard is a super-premium brand founded more than forty years ago. Girard wines use small batch fermentation techniques and classic blending techniques, which have consistently produced award-winning wines. Girard's tasting room room and production facility are in Calistoga, located in the northern end of Napa Valley, attraction for both tourists and wine collectors. Girard wines are offered in high-end grocery stores and

 

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restaurants, as well as in the tasting rooms and other e-commerce channels. Girard wines sell through wholesale, e-commerce, wine clubs and at the winery, at retail prices between $18.00 and $100.00 per bottle.

Clos PegaseClos Pegase is one of the best known assets in our luxury portfolio. Renowned architect Michael Graves submitted a neo-classical design for this winery to an international competition and was awarded the commission. The winery was completed in 1987 and has been recognized as one of the world’s great winery buildings. The winery features extensive caves for the cellaring and aging of wines and a drought-tolerant heritage garden. A companion winery house was completely restored to the original vision in 2019. In keeping with the high aesthetics of the winery, Clos Pegase wines are a benchmark for Napa Valley luxury wines. Two estate vineyards in the Calistoga American Viticultural Area (“AVA”) for Bordeaux varietal red wines, Applebone and Tenma, and Mitsuko’s Vineyard in the Carneros AVA for Pinot Noir. Chardonnay and other varieties produce world-class, award-winning wines. Clos Pegase wines are distributed nationally at wholesale and at the winery, and through e-commerce and wine clubs, selling at retail prices between $22.00 and $125.00 per bottle.

Laetitia Vineyard and WineryThe Laetitia estate, located approximately three miles from the Pacific Ocean in Arroyo Grande on California’s south-central coast, is a well-known name in California’s sparkling wine market. The 1,800-acre estate was founded as a sparkling wine producer in the 1980s, as the cooler climate, site and soils resembled those in the Champagne region of France. Laetitia has earned a reputation as a top California sparkling wine producer and continues to make a range of luxury sparkling wines, as well as Pinot Noir and Chardonnay varietals and Rhône-style wines. All Laetitia wines currently in wholesale distribution have scores of 90 points or higher from leading wine publications. The winery is a popular wine tourism destination, where guests can enjoy views of the vineyards and the Pacific Ocean as they enjoy the wines. Laetitia also features a private winery guest house for trade and media hospitality. Laetitia wines are sold at wholesale, the tasting room, wine clubs and e-commerce at retail prices between $24.00 and $65.00 per bottle.

Swanson VineyardsIn Napa Valley, Swanson Vineyards is strongly associated with Merlot. Founded in 1995 in the Rutherford AVA (generally better recognized for Cabernet Sauvignon), it was determined that Swanson’s site and soils resembled those of Château Pétrus in Bordeaux, France. We believe Swanson offered Napa Valley its first luxury wine tasting experience when it opened the Salon in 2001. Swanson Vineyards wines are distributed through wholesale, e-commerce and wine clubs at retail prices between $21.00 and $140.00 per bottle.

Kunde Family WineryThe Kunde Family Winery was established in 1904 and celebrated its 117th harvest in 2020. Kunde sources grapes from the Kunde family’s 1,800-acre sustainable vineyard and winery, which is the largest contiguous private property in Sonoma Valley, California. The Kunde brand is known for Cabernet Sauvignon, Merlot, Chardonnay and Zinfandel and is consistently recognized as one of the top ten brands in Sonoma. Kunde wines have earned scores of 90 points or higher for many of its wines across the portfolio. Kunde wines sell at the winery, and through wholesale, e-commerce and wine clubs at retail prices between $18.00 and $100.00 per bottle.

ViansaViansa is known for its Italian varietals and its 270-degree views of the Sonoma Valley. Viansa was one of the first wineries to use the tasting room as a place to host and entertain guests. Viansa’s hilltop villa and estate, referred to as the “Summit of Sonoma,” has a panoramic view of Sonoma Valley. The site features olive tree-lined vineyards, a 97-acre wetland preserve, an event pavilion, and tasting patios that overlook the marketplace area. Viansa has been a notable Sonoma attraction for more than 30 years. Viansa wines are sold exclusively at the winery, through wine clubs and e-commerce at retail prices between $22.00 and $125.00 per bottle.

B.R. Cohn Winery The B.R. Cohn Winery is located between the Mayacamas and Sonoma Mountain ranges, in the heart of California’s Sonoma Valley. Sonoma is pictured by some as a free-spirited cousin of Napa Valley. The history and heritage of B.R. Cohn may support this impression. Founded by the legendary rock and roll manager of the Doobie Brothers and other rock acts in the 1980s, the B.R. Cohn estate is an ideal site for growing Cabernet Sauvignon and other red Bordeaux varietals. Numerous musical events are hosted on the estate, including the Sonoma Harvest Music Festival held annually in September (with the exception of September 2020 due to COVID-19 restrictions). Alongside a range of small-lot estate wines, the Silver Label tier markets the B.R. Cohn wines to consumers at a more affordable price point. B.R. Cohn Silver Label wines, including Cabernet Sauvignon, Merlot, Chardonnay and Pinot Noir varietals and Sauvignon Blanc, are in wide wholesale and e-commerce distribution. B.R. Cohn wines sell at the winery, and through wholesale, e-commerce and wine clubs, at retail prices between $17.00 and $100.00 per bottle.

Craft Spirits

In addition to wine production and distribution, which is our core business, we are in the spirits business. We own the brand No. 209 Gin and Splinter Group Spirits, whose brands consists of Straight Edge Bourbon Whiskey, Slaughterhouse American Whiskey, and Whip Saw Rye. We also team with leading spirits manufacturers and distributors to develop products for our customers. We have collaborated with another spirits manufacturer to create Partner Vermouth, which is a sweet vermouth from the gardens and vineyards of California wine country.

We believe that we can use the spirits business to further expand our private label business with existing B2B customers. We expect that interest in selling private label products (due to the increased margins that we earn relative to sales of third party products) will lead to more retailers selling private label spirits. We believe that we can use our significant distribution network and production capabilities to increase our spirits private label business with both existing and new B2B customers.

Our Competitive Strengths

 

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We believe that our strengths include a diversified brand portfolio and infrastructure, a customer-centric and innovation-driven culture, a demonstrated success in acquiring and integrating new assets into our platform, strong working relationships with distributor and retail networks, access to low-cost and flexible debt financing, and an experienced management team assembled and led by Patrick Roney.

Diversified Brand Portfolio and Infrastructure

Our diversified wine sourcing, brand positioning and omni-channel sales strategy result in a nimble, scalable business model, enabling us to bring our products to market rapidly and navigate ever-changing consumer demand flexibly. We believe the efficiencies of our infrastructure have been reflected in our historical results.

Strong Relationships with Distributors and Retailers

We have longstanding working relationships with many of the wine industry’s largest distributors and retailers, which facilitates the distribution of our products to customers in as many locations as possible.

We believe that our existing arrangements with distributors also provide a scalable platform for us to introduce new products into the market and further expand our revenue and market share. The distribution market has experienced and continues to undergo significant consolidation. As a result, it is harder for newer or smaller wine and alcohol businesses to gain traction with major distributors, which limits their ability to get their products into the major wholesale and retail markets. We believe that our longstanding working relationships with the largest distributors and retailers—forged over many years—give us an advantage over newer and smaller competitors.

We have powerful, long-standing relationships with national retailers, including Costco, Albertson’s, Target and others. In addition, we believe that we have a seven-figure annual case volume expansion opportunity with our national chain account clients by placing more brands with existing customers and adding new major customers.

Customer-Centric and Innovation-Driven Culture

We have created more than 15 new brands over the last 5 years to address specific consumer needs and market opportunities. We take a holistic approach with new brands, evaluating key attributes such as price points, packaging format, demographic and psychographic trends. We create new brands organically through an efficient concept-to-launch process, which generally requires less than six months in total and can sometimes be completed in less than three months. We believe that our efficient new product development and rapid speed to market gives us and our private label retailers an advantage over competitors because it enables us to quickly address actual or perceived unmet consumer needs and can help us better align brand strategy with consumer demand.

 

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Demonstrated Success Acquiring and Integrating New Assets

We believe we have completed more brand mergers and acquisitions in the U.S. wine industry over the last 10 years than any other company in the industry. As illustrated in the following chart, we have completed more than 20 acquisitions since 2010.

 

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Historically, our acquisitions have generated a strong return on equity. Over the three years immediately preceding the COVID-19 pandemic, we reviewed, on average, over 20 acquisitions per year, submitted an average of four letters of intent and completed an average of two acquisitions per year. We have historically targeted a significant increase in the target company’s EBITDA within three years of the acquisition. To achieve these results, our acquisitions are subject to a rigorous, data-driven, due diligence and underwriting process, to assure that minimum financial thresholds with meaningful upside can be satisfied in each transaction.

Experienced Management Team

Our senior leaders have decades of experience in the wine and spirits industry and have gone through numerous economic and consumer cycles, providing them with unique insight and historical perspectives that less experienced leaders do not have. Vintage Wine Estates was founded by Patrick Roney and Leslie Rudd, who passed away in 2018. Mr. Roney has spent more than 30 years in the wine, spirits and food industries and has held senior leadership roles at leading brands such as Seagram’s, Chateau St. Jean, Dean & Deluca and the Kunde Family Winery. Throughout his career, Mr. Roney has demonstrated a keen understanding of and ability to anticipate market trends and consumer behaviors. Mr. Roney also has also been able to attract some of the top talent in the industry, including President, Terry Wheatley. Mrs. Wheatley has spent her entire career in the wine and spirits industry at leading firms, including at E.J. Gallo and the Sutter Home/Trinchero Family Estate. Mrs. Wheatley also started her own wine brand, creation, sales and marketing company, Canopy Management, leveraging her long-term relationships with the wine industry’s top buyers to bring a portfolio of innovative wine brands to market. We acquired Canopy Brands in 2014.

Our Strategy

We are currently the 15th largest wine producer by cases shipped in California. We have been able to grow our business despite economic recessions. We intend to continue to grow our business by prioritizing the following goals: (i) increasing sales of our existing brands, (ii) continuing to develop new and innovative products, (iii) executing on our acquisition pipeline, (iv) continuing to grow our private label business, and (v) continuing to invest in and expand production capacity to meet the needs of our brands and our customers.

Increasing Sales of Existing Brands

We seek to grow our existing brands by increasing penetration within existing on-premise and off-premise retailers, selling into new retailers and distributors and investing in and expanding our DTC segment. Given the strength of our brands and our strong reputation with consumers, we

 

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believe we can increase the number of varietals and blends that are offered in retail and on-premise locations. As consumer shopping behaviors continue to evolve and change, we are well positioned to continue to increase sales and conversions through our off-premise retailers’ digital channels with the investment in a dedicated eGrocery team to manage and support the digital shelf online as well as in popular delivery apps and services. We will continue to invest in our DTC business and intend to capitalize on the consumer’s willingness to purchase more products online. Additionally, as government implemented measures in response to COVID-19 subside, we expect tasting room sales to increase, which should generally lead to increased wine club participation. Additionally, regulatory authorities across the U.S. have relaxed regulations regarding delivery of alcohol directly to consumers. As consumers have grown more used to obtaining alcoholic beverages this way, we expect DTC sales to continue to increase. While it is too soon to know if these relaxed regulations will be permanently enacted in each state, we believe we are well-positioned to take advantage of a consumer shift to DTC sales.

Developing New Brands and Innovative Products

We believe that we can continue to develop new brands and products that address consumer demand and sell these new products into our omni-channel distribution system. These new products are expected to diversify our revenue further and expand our addressable market to additional categories beyond wine. We believe our integrated infrastructure allows us to capitalize on emerging trends faster than many of our competitors, giving us an advantage in new product development. Additionally, upon federal legalization of cannabis, we expect to seek to produce and sell cannabis infused beverages through our distribution channels. We are at the early stage of developing this strategy and no material assets have been created from this initiative as of the date hereof. We do not intend to enter this sector unless cannabis is federally legalized in the U.S. and there is no assurance if or when cannabis will be federally legalized.

Executing our Acquisition Pipeline

There continues to be consolidation of distributors and retailers in the wine industry, creating uncertainty for smaller wine companies and further limiting their ability to garner attention in the wholesale channel. As a result, we expect more brands to look for buyers of their businesses, which may create more attractive acquisition opportunities for us in the future. Given our scale and infrastructure, we are generally able to increase margins of acquired businesses relatively quickly, adding value to the enterprise from the outset. While other, larger wine companies have recently been preoccupied with other strategic initiatives, we remain committed and highly active with our merger and acquisition ("M&A") strategy.

Growing Private Label Sales

We intend to expand our private label business by increasing sales of existing products, creating product line extensions and developing new brands for new customers. We believe the largest retailers will continue to increase their private label offerings. We also believe that, in addition to private label wine sales, we are well-positioned to expand our private label options to include spirits and other products.

Expanding Production Capacity

We believe we have opportunities to make capital investments that satisfy our financial return requirements while expanding our capacity to meet additional demand for our private brands and private label customers over time. We are in the process of completing a $45 million investment in state-of-the-art technology upgrades to our Ray’s Station production facility. The upgraded facility, together with existing facilities, will allow us to produce and ship approximately 15 million cases of wine per year and store over 3 million cases of wine. The new facility will put our production and distribution capacity at levels comparable to the top 5 wine producers in the U.S. This facility also will allow us to automate a number of processes that were previously completed manually, leading to increased efficiencies and margins.

We are one of a few vertically integrated winery companies that has our own pick-and-pack capabilities, leading to substantial per case cost savings. Notably, we have recently added a second warehouse facility in Cincinnati, Ohio. This is significantly more efficient than outsourcing this work and is currently the fastest growing portion of the wine business versus wholesale or private label.

Our capital expenditures have been at elevated levels in recent years, and as projects are completed, the business is expected to significantly increase margins with modest platform investments required going forward.

Competition

The wine industry and alcohol markets generally are intensely competitive. Our wines compete domestically and internationally with premium or higher quality wines produced in Europe, South America, South Africa, Australia and New Zealand, as well as North America. We compete on the basis of quality, price, brand recognition and distribution capability. The ultimate consumer has many choices of products from both domestic and international producers. Our wines may be considered to compete with all alcoholic and nonalcoholic beverages.

At any given time, there are more than 400,000 wine choices available to U.S. consumers, differing with one another based on vintage, variety or blend, location and other factors. Accordingly, we experience competition from nearly every segment of the wine industry. Additionally, some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of products, and have greater name recognition, which may give them greater negotiating leverage with distributors and allow them to offer their products in more locations and/or on better terms than us. Nevertheless, we believe that our diverse brand offerings, scalable infrastructure and relationships with the largest wholesalers and retailers will allow us to continue growing our business.

 

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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 the usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.

Human Capital Management

We are committed to fostering a work environment that values diversity and inclusion. This commitment includes providing equal access to and participation in, equal employment opportunities, programs and services without regard to race, religion, color, origin, disability, sex, sexual orientation, gender identity, veteran status, age or stereotypes based thereon. We welcome team members' differences, experiences, and beliefs, and we are investing in a more productive, engaged, diverse and inclusive workforce.

We monitor human capital metrics to ensure we are executing on our core values and making progress towards our diversity and inclusion commitments. As of June 30, 2021, we had 563 full-time employees. Among our employees, 44% identify as female and 56% identify as male. None of our employees are represented by a labor union, and none of our employees have entered into a collective bargaining agreement with us. We offer a highly competitive compensation and benefits program to attract and retain top talent.

Our talented employees drive our mission and share core values that both stem from and define our culture, which plays an invaluable role in our execution at all levels in our organization. Our culture is based on these shared core values which we believe contribute to our success and the continued growth of the organization. Our core values are used in candidate screening and in employee evaluations to help reinforce their importance in our organization:

Entrepreneurial in Spirit
Humble in our Hearts
Results Driven in Practice
Customers Top of Mind

 

We continue to focus on workplace safety by providing training and bringing awareness to workplace best practices in our continuous efforts to reduce workplace injuries and accidents. We acted quickly to respond to safety protocols as a result of the COVID-19 pandemic to protect the health and safety of our team members. To support team members, we provided temporary pay increases to certain employees, offered remote work where possible, purchased additional sanitation supplies and increased personal protective materials provided to staff.

Trademarks

Trademarks are an essential part of our business. We sell our products under a number of trademarks, which we own or use under license. We also have multiple licenses and distribution agreements for the import, sale, production and distribution of our products. Depending on the jurisdiction, trademarks are valid as long as the trademarks are in use and their registrations are properly maintained. These licenses and distribution agreements have varying terms and durations.

Government Regulation

The alcoholic beverage industry is subject to extensive regulation by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) (and other federal agencies), each state’s liquor authority and potentially local authorities as well, depending on location. As a result, there is a complex multi-jurisdictional regime governing alcoholic beverage manufacturing, distribution, sales and marketing in the U.S. Regulatory agencies issue permits and licenses for manufacturing, distribution and retail sale (with requirements varying depending on location), govern “trade practice” activity at each tier and also regulate how each tier of the alcohol industry may interact with another tier. In addition, these laws, rules, regulations and interpretations are constantly changing as a result of litigation, legislation and agency priorities. We take regulatory compliance very seriously, and to facilitate compliance with applicable requirements, we have a team of seven compliance professionals. We also use leading compliance software providers (Avalara and SOVOS) to assist the compliance team with data management and reporting cycles. Additionally, we consult with outside regulatory counsel on compliance issues on a regular basis and utilize Compliance Connection, an outside compliance company, on an as needed basis.

We maintain licenses and permits to produce and wholesale wine in Oregon and Washington with state regulatory agencies and TTB. We maintain licenses and permits to import, produce, and wholesale wine, and to import, rectify and wholesale distilled spirits with California regulatory authorities and TTB. In addition to licenses for our primary production activity, we maintain hundreds of ancillary permits to support our wholesale and DTC segments. Most states require permitting and registrations with the state for shipments to wholesalers or consumers within the state, and these permits often also require local registration and tax reporting. We manage our permit compliance internally, with our team responsible for managing

 

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renewals, tax payments and reporting in a timely manner. Specifically, we complete the following to satisfy our regulatory obligations: (i) prepare TTB’s monthly Report of Wine Premises Operations, (ii) complete monthly TTB export division reports which coincide with the monthly Report of Wine Premises Operations, (iii) complete bi-weekly excise TTB tax returns, (iv) prepare and complete California Department of Tax and Fee Administration’s (CDTFA) winegrower, beer/wine importer, and distilled spirits reports and tax returns, (v) prepares and completes Washington state’s winegrower, beer/wine importer, and distilled spirits reports and tax returns, (vi) file annual grape crush and purchase reports with the U.S. Food and Drug Administration (“FDA”), (vii) regularly update corporate filings with the TTB, as well as state Alcohol Beverage regulatory agencies as required, and (viii) complete biennial registrations with the FDA.

In California, we maintain licenses with: (i) the California Department of Food and Agriculture to purchase grapes, (ii) a potable water system permit with the California Division of Drinking Water, (iii) a hazardous material business plan permit with the County of Mendocino California Division of Environmental Health, and (iv) a storm water pollution prevention plan permit with the State of California State Water Resources Control Board. Additionally, food processing facilities, which includes wineries, must register with the FDA, and we maintain such registrations for our winery facilities.

We believe that we possess all licenses and permits material to operating our business.

Sale of our wine is subject to federal alcohol tax, payable at the time wine is removed from the bonded area of the winery for sale. In December 2017, the federal government passed comprehensive tax legislation that included the Craft Beverage Modernization and Tax Reform Act. This legislation modified federal alcohol tax rates by expanding the lower $1.07 per gallon tax rate to wines up to 16.0% alcohol content with wines containing higher alcohol levels being taxed at $1.57 per gallon. We are also subject to certain taxes at the state and local levels.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge on our website, www.vintagewineestates.com, under "Investor Overview — Investor Relations — SEC Filings" as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website, www.sec.gov, where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.

Item 1A. Risk Factors

In addition to the other information in this report and our other filings with the Securities and Exchange Commission ("SEC"), you should carefully consider the risks and uncertainties described below, which could materially and adversely affect our business, financial condition and results of operations. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us.

Risks Related to Our Operations

The ongoing COVID-19 pandemic has had, and will likely continue to have, adverse effects on the economy and on our business.

The outbreak of COVID-19, which the World Health Organization declared a pandemic in March 2020, has spread across the world and has disrupted the global economy and most industries, including the wine industry. Efforts to control the pandemic have slowed economic activity and disrupted, and reduced the efficiency of, normal business activities across the United States. The pandemic has resulted in authorities implementing numerous unprecedented measures such as travel restrictions, quarantines, shelter-in-place orders and workplace shutdowns. These measures have impacted, and will likely continue to impact, our business, customers, supply chain and employees.

We have experienced declines in visitors to our tasting rooms primarily due to travel restrictions, shelter-in-place orders and workplace shutdowns resulting from the COVID-19 pandemic. In response to governmental directives and recommended safety measures, we modified our workplace practices. While we have implemented personal safety measures at all of our facilities where our employees are working onsite, any actions that we take may not be sufficient to mitigate the risk of infection and could result in a significant number of COVID-19 related claims. Changes to state workers’ compensation laws, as have recently occurred in California, could increase VWE’s potential liability for such claims.

In the longer term, the COVID-19 pandemic is likely to adversely affect the economies and financial markets and could result in an economic downturn and a recession. It is uncertain how this would affect demand for our products. While VWE continues to see robust demand in its industry, and has seen little impact to its results of operations from the COVID-19 pandemic, the environment remains uncertain and it may not be sustainable over the longer term. The degree to which the pandemic ultimately impacts our business and results of operations will depend on future developments beyond our control, including the severity of the pandemic, the extent of actions to contain the virus, the availability and efficacy of a vaccine or other treatment, how quickly and to what extent normal economic and operating conditions can resume, and the severity and duration of the economic downturn that results from the pandemic.

Consumer demand for wine and alcoholic beverages could decline, which could adversely affect our results of operations.

We rely on consumers’ demand for our wine and other products. Consumer demand may decline due to a variety of factors, including a general decline in economic conditions, changes in the spending habits of consumers generally, a generational or demographic shift in consumer

 

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preferences, increased activity of anti-alcohol groups, increased state or federal taxes on alcoholic beverage products and concerns about the health consequences of consuming alcoholic beverage products. Furthermore, our ability to effectively manage production and inventory is inherently linked to actual and expected consumer demand for our products, particularly given the long product lead time and agricultural nature of the wine business. Unanticipated changes in consumer demand or preferences could have adverse effects on our ability to manage supply and capture growth opportunities, and substantial declines in the demand for one or more of our product categories could harm our results of operations, financial condition and prospects.

We are subject to significant competition, which could adversely affect our profitability.

VWE’s wines compete for sales with thousands of other domestic and foreign wines. VWE’s wines also compete with other alcoholic beverages and, to a lesser degree, non-alcoholic beverages. As a result of this intense competition, we have been subject to, and may continue to be subject to, upward pressure on selling and promotional expenses. In addition, some of our competitors have greater financial, technical, marketing and public relations resources available to them than we do. These circumstances could adversely impact our revenues, margins, market share and profitability.

Our wholesale operations and wholesale revenues largely depend on independent distributors whose performance and continuity is not assured.

Our wholesale operations and wholesale revenues depend largely on independent distributors whose performance and continuity is not assured. Our wholesale operations generate revenue from products sold to distributors, who then sell them to off-premise retail locations such as grocery stores, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars. Sales to distributors are expected to continue to represent a substantial portion of our revenues in the future. A change in relationships with one or more significant distributors could harm our business and reduce sales. The laws and regulations of several states prohibit changes of distributors except under certain limited circumstances, which makes it difficult to terminate a distributor for poor performance without reasonable cause as defined by applicable statutes. Difficulty or inability with respect to replacing distributors, poor performance of major distributors or inability to collect accounts receivable from major distributors could harm our business. There can be no assurance that existing distributors and retailers will continue to purchase our products or provide ours products with adequate levels of promotional support. Consolidation at the retail tier, among club and chain grocery stores in particular, can be expected to heighten competitive pressure to increase marketing and sales spending or constrain or reduce prices.

The loss or significant decline of sales to one or more of our more important distributors, marketing companies or retailers could have adverse effects on our results of operations, financial condition and prospects.

We derive significant revenue from distributors and marketing companies such as Deutsch Family Wine and Spirits, Republic National Distributing Company and Southern Glazer’s Wine & Spirits, and from retail business customers such as Costco, Albertson’s and Target. The loss of one or more of these customers, or significant decline in the volume of sales made to them, could have adverse effects on our results of operations, financial condition and prospects.

The strength of VWE’s brands is critical to our success.

Our reputation as a premier producer of wine and spirits among our customers and the wine industry is critical to the success of our business and our growth strategy. The wine market is driven by a relatively small number of active and well-regarded wine critics within the industry who have disproportionate influence over the perceived quality and value of wines. If we are unable to maintain the actual or perceived quality of our wines and other alcoholic beverage products, or if our wines otherwise do not meet the subjective expectations or tastes of one or more of a relatively small number of wine critics, the actual or perceived quality and value of one or more of our wines could be harmed, which could negatively impact not only the value of that wine, but also the value of the vintage, the particular brand or our broader portfolio. The winemaking process is a long and labor-intensive process that is built around yearly vintages, which means that once a vintage has been released we are not able to make further adjustments to satisfy wine critics or consumers. As a result, we are dependent on our winemakers and tasting panels to ensure that our wine products meet our exacting quality standards.

Any contamination or other quality control issue could have an adverse effect on sales of the impacted wine or our broader portfolio of winery brands. If any of our wines become unsafe or unfit for consumption, cause injury or are otherwise improperly packaged or labeled, we may have to engage in a product recall and/or be subject to liability and incur additional costs. A widespread recall, multiple recalls, or a significant product liability judgment against us could cause our wines to be unavailable for a period of time, depressing demand and our brand reputation. Even if a product liability claim is unsuccessful or is not fully pursued, any resulting negative publicity could adversely affect our reputation with existing and potential customers and accounts, as well as our corporate and individual winery brands image in such a way that current and future sales could be diminished. In addition, should a competitor experience a recall or contamination event, we could face decreased consumer confidence by association as a producer of similar products.

Additionally, third parties may sell wines or inferior brands that imitate our winery brands or that are counterfeit versions of our labels, and customers could be duped into thinking that these imitation labels are our authentic wines. A negative consumer experience with such a wine could cause them to refrain from purchasing our brands in the future and damage our brand integrity. Any failure to maintain the actual or perceived quality of our wines could materially and adversely affect our business, results of operations and financial results.

 

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Damage to our reputation or loss of consumer confidence in our wines for any of these or other reasons could result in decreased demand for our wines and could have a material adverse effect on our business, operational results and financial results, as well as require additional resources to rebuild our reputation, competitive position and winery brand strength.

Our advertising and promotional investments may not be effective.

In the ordinary course of conducting its business, we regularly incur significant advertising and promotional expenditures to enhance our winery brands and raise consumer awareness in both existing and emerging categories. Variations in the levels of advertising and promotional expenditures in the past have caused, and are expected in the future to continue to cause, variability in our results of operations. While we strive to invest only in effective advertising and promotional activities, it is difficult to correlate such investments with sales results. There is no guarantee that advertising and promotional expenditures will be effective in building brand strength or in growing repeat sales.

Decreases in wine quality ratings by important rating organizations could adversely affect our business.

Many of VWE’s brands are issued ratings by local or national wine rating organizations. In the wine industry, higher product ratings usually translate into greater demand and higher pricing. Although some VWE brands have been rated highly in the past, and VWE believes its farming and winemaking activities are of a quality to generate good ratings in the future, VWE has no control over ratings issued by third parties, which may or may not be favorable in the future. Significant or persistent declines in the ratings issued to VWE wines could have adverse effects on its business.

We may not be fully insured against catastrophic events and losses, which may adversely affect our financial condition.

A significant portion of our activities are located in California and the Pacific Northwest, which regions are increasingly prone to seismic activity, landslides, wildfires and other natural disasters (collectively, “catastrophes”). Although VWE insures against catastrophes, including through our use of a wholly-owned captive insurance company and by carrying insurance to cover our own property damage, business interruption and certain production assets, we may not be fully insured against all catastrophes, the occurrence of which may (i) disrupt our operations, (ii) delay production, shipments and revenue and (iii) result in significant expenses to repair or replace damaged vineyards or facilities. Any disruption caused by a catastrophe could adversely affect our business, results of operations or financial condition.

Our inability to protect its trademarks and other intellectual property rights could adversely affect its business.

VWE’s business relies on intellectual property, mainly consisting of trademarks, customer lists and business practices. VWE does not register its business practices or customer lists, but they are kept highly confidential and considered trade secrets and, as such, are accessible to a very limited number of people within VWE. Although VWE believes that it does not rely significantly on any individual intellectual property right, a breach of confidentiality with respect to the customer lists or business practices, or loss of access to them, or the future expiration of intellectual property trademark rights, could have adverse impacts on VWE’s business.

VWE relies in part on confidentiality agreements, ownership of intellectual property, and non-competition agreements with employees, vendors and third parties in order to protect its intellectual property. It is possible that these agreements could be breached and that VWE might lack an adequate remedy for breach. Disputes may arise concerning the ownership of intellectual property or the extent to which the confidentiality agreements remain in force. Furthermore, VWE’s trade secrets may become revealed to its competitors or developed independently by them, in which case VWE will not be able to enjoy exclusive use of some of its formulas or maintain confidentiality concerning its products.

New lines of business or new products and services could subject us to additional risks.

VWE may invest in new lines of business, or may offer new products, such as within its spirits business or, upon federal legalization of cannabis, cannabis-infused beverages. There are risks and uncertainties associated with such efforts, particularly in instances where the markets are not fully developed or are evolving. In developing and marketing new lines of business and new products and services, VWE may invest significant time and resources. External factors, such as regulatory compliance obligations, competitive alternatives, lack of market acceptance and shifting consumer preferences, may also affect the successful implementation of a new line of business or a new product or service. With respect to cannabis-infused beverages, even if the federal government legalizes medical and/or adult-use cannabis, significant delays in the drafting and implementation of industry regulations and licensing and the costs associated with burdensome regulations and taxes could adversely impact VWE’s ability to operate profitably in the cannabis-infused beverage industry. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have adverse effects on VWE’s business, results of operations and financial condition.

Litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.

Increased public attention has been directed at the beverage alcohol industry, which we believe is due to concern over problems related to alcohol abuse, including drinking and driving, underage drinking and health consequences from the misuse of alcohol. Adverse developments in these or similar lawsuits or a significant decline in the social acceptability of beverage alcohol products that could result from such lawsuits could materially adversely affect our business.

 

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Risks Related to Our Production Activities

If we are unable to obtain adequate supplies of grapes or other raw materials, or if there is an increase in the cost of such materials, our profitability and production of wine could be negatively impacted, which could materially and adversely affect our business, results of operations and financial condition.

We source our grapes from the vineyards that we own and control and from independent growers. Our production activities also require adequate supplies of other quality agricultural, raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies. A shortage of grapes of the required variety and quality, or an inability to obtain or significant increase in the price of other requisite raw materials, could impair our ability to produce wines in the quantity and quality demanded by our customers and reduce our profitability.

Any such occurrences could adversely affect our business, results of operations and financial condition.

Drought or inclement weather could reduce the amount of water available for use in our growing and production activities, which could materially and adversely affect our business, results of operations and financial condition.

Water supply and adequate rainfall are critical to the supply of grapes, other agricultural raw materials and generally our ability to operate our business. If climate patterns change or droughts occur, there may be a scarcity of water or poor water quality, which could affect production costs, consistency of yields or impose capacity constraints. VWE depends on sufficient amounts of quality water for operation of its wineries, as well as to irrigate its vineyards and conduct other operations. The suppliers of the grapes and other agricultural raw materials purchased by VWE also depend upon sufficient supplies of quality water for their vineyards and fields. Prolonged or severe drought conditions or restrictions imposed on irrigation options by governmental authorities could have an adverse effect on our business, results of operations and financial condition.

Increases in the cost, disruption of supply or shortage of energy could adversely affect our business.

Our production facilities use a significant amount of energy in their operations, including electricity, propane and natural gas. Increases in the price, disruption of supply or shortage of energy sources, which may result from increased demand, natural disasters, power outages or other causes could increase our operating costs and negatively impact our profitability. VWE has experienced increases in energy costs in the past, and energy costs could rise in the future. In addition, we incur costs in connection with the transportation and distribution of our materials and products. Higher fuel costs will result in higher transportation, freight, and other operating costs, which could significantly increase our production costs and, correlatively, decrease our operating margins and profit.

We could be negatively impacted by the occurrence of wine contamination.

We are subject to certain hazards and product liability risks, such as potential contamination, through tampering or otherwise, of ingredients or products. Contamination of our wine could result in destruction of our wine held in inventory and could cause the need for a product recall, which could significantly damage VWE’s reputation for product quality. We maintains insurance against certain of these kinds of risks, and others, under various insurance policies. However, our insurance may not be sufficient to fully cover any resulting liability or may not continue to be available at a price or on terms that are satisfactory to us.

Risks Related to Information Technology and Cybersecurity

A failure of one or more of our key IT systems, networks, processes, associated sites or service providers could have a material adverse impact on business operations, and if the failure is prolonged, our financial condition.

We rely on IT systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided and used by third-parties or their vendors, to assist us in the operation of our business. The various uses of these IT systems, networks and services include, but are not limited to: hosting our internal network and communication systems; tracking bulk wine; supply and demand; planning; production; shipping wines to customers; hosting our winery websites and marketing products to consumers; collecting and storing customer, consumer, employee, stockholder, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing and sharing confidential and proprietary research, business plans and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes necessary to manage our business.

Increased IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking and other types of attacks pose a potential risk to the security of our IT systems, networks and services, as well as the confidentiality, availability, and integrity of our data, and we have in the past, and may in the future, experience cyberattacks and other unauthorized access attempts to our IT systems. Because the techniques used to obtain unauthorized access are constantly changing and often are not recognized until launched against a target, we or our vendors may be unable to anticipate these techniques or implement sufficient preventative or remedial measures.

If we are unable to efficiently and effectively maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access. In the event of a ransomware or other cyber-attack, the integrity and safety of our data could be at risk or we may incur unforeseen costs impacting our financial position. If the IT systems, networks or service providers we rely upon

 

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fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information due to any number of causes ranging from catastrophic events, power outages, security breaches, unauthorized use or usage errors by employees, vendors or other third parties and other security issues, we may be subject to legal claims and proceedings, liability under laws that protect the privacy and security of personal information (also known as personal data), litigation, governmental investigations and proceedings and regulatory penalties, and we may suffer interruptions in our ability to manage our operations and reputational, competitive or business harm, which may adversely affect our business, results of operations and financial results. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our employees, stockholders, customers, suppliers, consumers or others. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or technological failure and the reputational damage resulting therefrom, to pay for investigations, forensic analyses, legal advice, public relations advice or other services, or to repair or replace networks and IT systems.

As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase the stress on our technology infrastructure and systems. Although we maintain cyber risk insurance, this insurance may not be sufficient to cover all of our losses from any future breaches or failures of our IT systems, networks and services.

Our failure to adequately maintain and protect personal information of our customers or our employees in compliance with evolving legal requirements could have a material adverse effect on our business.

We collect, use, store, disclose or transfer (collectively, “process”) personal information, including from employees and customers, in connection with the operation of our business. A wide variety of local and international laws as well as regulations and industry guidelines apply to the privacy and collecting, storing, use, processing, disclosure and protection of personal information and may be inconsistent among countries or conflict with other rules. Data protection and privacy laws and regulations are changing, subject to differing interpretations and being tested in courts and may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.

Compliance with applicable privacy and data protection laws and regulations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms ensuring compliance. Our actual or alleged failure to comply with any applicable privacy and data protection laws and regulations, industry standards or contractual obligations, or to protect such information and data that we process, could result in litigation, regulatory investigations, and enforcement actions against us, including fines, orders, public censure, claims for damages by employees, customers and other affected individuals, public statements against us by consumer advocacy groups, damage to our reputation and competitive position and loss of goodwill (both in relation to existing customers and prospective customers) any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Additionally, if third parties that we work with, such as vendors or developers, violate applicable laws or our policies, such violations may also place personal information at risk and have an adverse effect on our business. Even the perception of privacy concerns, whether or not valid, may harm our reputation, subject us to regulatory scrutiny and investigations, and inhibit adoption of our wines by existing and potential customers.

Risks Related to Regulation of Our Business

VWE’s failure to obtain or maintain necessary licenses or otherwise fail to comply with applicable laws and regulations could have adverse effects on its results of operations, financial condition and business.

A complex multi-jurisdictional regime governs alcoholic beverage manufacturing, distribution, sales, and marketing in the United States. The alcoholic beverages industry in which VWE operates is subject to extensive regulation by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) (and other federal agencies), each state’s liquor authority, and potentially local authorities depending on location. These regulations and laws dictate such matters as licensing requirements, production, importation, ownership restrictions, trade, and pricing practices, permitted distribution channels, delivery, and prohibitions on sales to minors, permitted, and required labeling, and advertising and relations with wholesalers and retailers. These laws, regulations and licensing requirements may, and sometimes are, interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other legal mandates or with VWE’s business practices. Further, these laws, rules, regulations, and interpretations are constantly changing as a result of litigation, legislation, and agency priorities, and could result in increased regulation. VWE’s actual or asserted non-compliance with any such law, regulation or requirement could expose VWE to investigations, claims, litigation, injunctive proceedings and other criminal or civil proceedings by private parties and regulatory authorities, as well as license suspension, license revocation, substantial fines, and negative publicity, any of which could adversely affect VWE’s results of operations, financial condition, and business.

Failure to comply with environmental, health and safety laws and regulations would expose us to civil and criminal liability.

The laws and regulations concerning the environment, health and safety may subject us to civil liability for non-compliance or environmental pollution. Such laws may include criminal sanctions (including substantial penalties) for violations. Some environmental laws also include provisions imposing strict liability for the release of hazardous substances into the environment, which could result in VWE becoming liable for clean-up efforts without any negligence or fault on our part. Other environmental laws impose liability jointly and severally, which could expose us to responsibility for cleaning up environmental pollution caused by others.

 

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In addition, some environmental, health and safety laws are applied retroactively such that they could impose liability for acts done in the past even if such acts were carried out in accordance with the law in force at the time. Civil or criminal liability under such laws could have adverse effects on our business, results of operations and financial condition.

We may also become subject to claims for personal injury or property damage arising from exposure to hazardous substances if personal injury or environmental contamination was ostensibly caused by activity at one of its production sites. Such legal proceedings could be instituted by private individuals or non-governmental organizations.

In addition, any expansion of our existing facilities or development of new vineyards or wineries, or any expansion of our business into new product lines or new geographic markets, may be limited by present and future environmental restrictions, zoning ordinances and other legal requirements.

Risks Related to Our Financial Condition

We have identified a material weakness in our internal control over financial reporting, and if our remediation of such material weakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.

In the course of our financial close process for the fiscal year ended June 30, 2021, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to our process and controls regarding the tracking of costs through the various stages of inventory accounting, particularly as they pertain to bulk wine and spirits. Management concluded that this material weakness arose because we did not have effective business processes and controls to perform reconciliations of certain inventory-related account balances.

 

To address and remediate this material weakness, we are securing additional inventory cost accounting resources to help ensure that we effectively document and track bulk wine and spirits inventory costs from raw materials to cost of goods sold. We will not be able to fully remediate this material weakness until these steps have been completed and we have been operating effectively for a sufficient period of time. See Part II, Item 9A “Controls and Procedures” for additional information about this material weakness and our remediation efforts.

 

If we are unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. If we are unable to assert that our internal control over financial reporting is effective, or, if and when required, our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected, our common stock could become subject to delisting and we could become subject to litigation or investigations by the stock exchange or exchanges on which our securities are listed, the SEC or other regulatory authorities, any of which could require additional financial and management resources.

 

Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of financial statements for prior periods.

We may be unable to obtain additional financing to fund the operations and growth of our business on terms favorable to us, or at all.

We may require additional financing to fund our operations or growth. The failure to secure additional financing could have a material adverse effect on our continued development or growth. Such financings may result in dilution to stockholders, issuance of securities with priority as to liquidation and dividend and other rights more favorable than our common stock, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe that we have sufficient funds for current or future operating plans. There can be no assurance that financing will be available to us on favorable terms, or at all. The inability to obtain financing when needed may make it more difficult for us to operate its business or implement its growth plans.

The terms of the VWE credit facility may restrict our flexibility, and failure to comply with such terms would have a variety of adverse effects.

The VWE credit facility contains various covenants and restrictions that may, in certain circumstances and subject to carve-outs and exceptions, limit VWE’s ability to, among other things:

 

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create liens;
make loans to third parties;
incur additional indebtedness;
make capital expenditures in excess of agreed upon amounts;
merge or consolidate with another entity;
dispose of its assets;
make dividends or distributions to its shareholders;
change the nature of its business;
amend its organizational documents;
make accounting changes; and
conduct transactions with affiliates.

Under the VWE credit facility, VWE also is required to maintain compliance with a minimum fixed charge coverage ratio covenant (not less than 1.10:1.00).

As a result of the covenants and other restrictions contained in its credit facility, VWE is limited in how it may choose to conduct its business. VWE cannot guarantee that it will be able to remain in compliance with these covenants and other restrictions or be able to obtain waivers for noncompliance in the future. Failure to comply with the covenants and other restrictions contained in its debt instruments would likely have adverse effects on its financial condition and business by impairing its ability to continue financing its business.

Of particular significance, VWE could be forced to repay immediately and in full any outstanding borrowings under its credit facility if it were to breach its covenants and not cure the breach, even if it could otherwise satisfy its debt service obligations. Also, if VWE were to experience a change of control, as defined in its credit facilities, it could be required to repay in full all loans outstanding thereunder, plus accrued interest and fees.

VWE may be adversely affected by the phase-out of, or changes in the method of determining, the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with different reference rates.

LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on U.S. dollar-denominated loans globally. The VWE credit facility uses LIBOR as a reference rate such that the interest due to VWE’s creditors under this facility is calculated using LIBOR.

On July 27, 2017, the U.K.’s Financial Conduct Authority (the authority that administers LIBOR) announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. VWE cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks. VWE may need to renegotiate its credit facility or incur other indebtedness. Changes in the method of calculating LIBOR, or the use of an alternative rate or benchmark, could negatively impact the terms of such renegotiated credit facility or such other indebtedness. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, VWE might need to amend certain contracts and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to VWE interest expense.

If VWE’s intangible assets or goodwill become impaired, then VWE may be required to record charges to earnings, which could be significant.

VWE has substantial intangible assets and goodwill on its balance sheet resulting from acquisitions that VWE has completed. VWE reviews intangible assets and goodwill for impairment annually or more frequently if events or circumstances indicate that these assets might be impaired. Application of impairment tests requires judgment. A significant deterioration in a key estimate or assumption or a less significant deterioration to a combination of assumptions or the sale of a part of a reporting unit could result in an impairment charge in the future, which could have an impact, possibly significant, on VWE’s reported earnings.

We may not realize the benefits anticipated from our recent business combination, which could adversely affect our common stock price.

The anticipated benefits from the recently completed business combination are, necessarily, based on projections and assumptions that may not materialize as expected or which may prove to be inaccurate. Our ability to achieve the anticipated benefits will depend on our ability to successfully implement our growth strategies, as well as the availability of cash. We may encounter significant challenges with recognizing the anticipated benefits of the business combination, including the following:

 

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potential disruption of, or reduced growth in, our historical core businesses;
challenges arising from the expansion of VWE’s product offerings into adjacencies with which VWE has limited experience;
coordinating sales and marketing efforts to effectively position VWE’s capabilities and the direction of product development;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from combining VWE’s business with the capital resources resulting from the transactions;
the increased scale and complexity of VWE’s operations resulting from the business combination;
retaining key employees, suppliers and other stakeholders of VWE;
retaining and efficiently managing VWE’s expanded distributor and supplier base; and
difficulties in anticipating and responding to actions that may be taken by competitors in response to VWE’s business combination.

If we do not successfully manage these issues and the other challenges inherent in operating a business of our scale, then we may not achieve the anticipated benefits of the business combination, could incur unanticipated expenses and charges and the results of operations and the market price of our common stock could be adversely affected.

A significant aspect of VWE’s expansion plan is to grow through strategic acquisitions. If the liabilities VWE assumes as part of making strategic acquisitions are greater than anticipated, VWE’s financial results could be adversely affected.

When VWE acquires the equity, i.e., the stock of a corporation or the membership interests in a limited liability company, rather than the assets, of a target company, it also generally assumes the liabilities of the target company, which often include known, unknown, and contingent liabilities. VWE’s ability to accurately identify and assess the magnitude of these assumed liabilities may be limited by, among other things, the information available to VWE and the limited operating experience VWE has with these acquired businesses. If VWE is unable to accurately assess the scope of these liabilities or if these liabilities are neither probable nor estimable at the time of the acquisition, VWE’s projected financial results for the acquired company could be adversely affected. To the extent that VWE’s overall results of operations are affected by any of these events, the price of VWE common stock could decrease.

General Risk Factors

Mergers and acquisitions in which VWE might engage involve risks that could adversely affect its business.

As part of its growth strategy, VWE will continue considering and entering into discussions, negotiations and agreements regarding possible transactions such as mergers, acquisitions and other business combinations. The purchase price for possible acquisitions of brands, other assets and businesses might be paid in cash, through the issuance of common stock or other securities, borrowings or a combination of these methods. Business combinations entail numerous risks, including:

difficulties in the integration of acquired operations, supply and distribution networks, and products, which can impact retention of customer goodwill;
failure to achieve expected synergies;
diversion of management’s attention from other business concerns;
assumption of unknown material liabilities of acquired companies, which could become material or subject us to litigation or regulatory risks;
amortization of acquired intangible assets, which could reduce future reported earnings; and
potential loss of customers or key employees.

There can be no assurance that VWE will continue to be able to identify, consummate and successfully integrate business combinations.

VWE is an emerging growth company and can offer no assurance that the reduced reporting requirements applicable to emerging growth companies will not make its shares less attractive to investors.

VWE is an emerging growth company as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as VWE continues to be an emerging growth company, it may take advantage of exemptions from various reporting requirements that apply to public companies other than emerging growth companies, including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. VWE will remain an emerging growth company until the earlier of (1) the date (a) December 31, 2026, (b) on which VWE has total annual gross revenue of at least $1.07 billion, or (c) on which VWE is deemed to be a large accelerated filer, which means the market value of shares of

 

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VWE’s common stock that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which VWE has issued more than $1.0 billion in non-convertible debt during the prior three-year period.

VWE can offer no assurance that investors will not find its common stock less attractive because VWE may rely on these exemptions. If some investors find such less attractive as a result, then there may be a less active trading market for such stock and its market price may be more volatile.

VWE will continue to incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on its business, financial condition and results of operations.

VWE, as a public company, faces increased legal, accounting, administrative and other costs and expense. VWE also is a reporting issuer in all of the provinces and territories of Canada, other than Quebec. The Sarbanes-Oxley Act, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the Public Company Accounting Oversight Board (United States), Nasdaq and the TSX impose additional reporting and other obligations on public companies. Compliance with public company requirements will increase costs and make certain activities more time-consuming. In addition, expenses associated with SEC and Canadian reporting requirements will be incurred. Furthermore, if any issues in complying with those requirements are identified (for example, if the auditors identify a material weakness or a significant deficiency in the internal control over financial reporting), then VWE could incur additional costs rectifying those issues, and the existence of those issues could adversely affect VWE’s reputation or investor perceptions of it. It may also be more expensive to obtain director and officer liability insurance in such a situation. Risks associated with VWE’s status as a public company may make it more difficult to attract and retain qualified persons to serve on the board of directors or as executive officers. The additional reporting and other obligations imposed by these rules and regulations will increase legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased costs will require VWE to divert a significant amount of money that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase costs.

VWE is subject to financial reporting and other requirements that places increased demands on its accounting and other management systems and resources and for which VWE may not be adequately prepared.

VWE is subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404(a) of the Sarbanes-Oxley Act and similar legislation imposed on reporting issuers under Canadian law, as applicable. Section 404 requires annual management assessments of the effectiveness of VWE’s internal controls over financial reporting and, after VWE is no longer an “emerging growth company,” its independent registered public accounting firm may be required to express an opinion on the effectiveness of VWE’s internal controls over financial reporting. To the extent applicable, these reporting and other obligations will place significant demands on VWE’s management, administrative, operational, and accounting resources and will cause VWE to incur significant expenses. VWE is in the process of creating systems, implementing financial and management controls, reporting systems and procedures, and hiring additional accounting and finance staff. If VWE is unable to accomplish these objectives in a timely and effective manner, then its ability to comply with the financial reporting requirements and other rules that apply to public reporting companies could be impaired. Any failure to maintain effective internal controls could have adverse effects on our business, results of operations and stock price.

We compete for skilled management and labor and our future success depends in large part on key personnel.

Our future success depends in large part on our ability to retain and motivate to a high degree our senior management team. Our ability to deliver high-quality products also depends on retaining and motivating proficient winemakers, grape growers and other skilled management and operations personnel. The loss of such personnel or a labor shortage could adversely affect our business and our ability to implement our strategy.

VWE’s management has limited experience operating a public company. This could lead to diversion of time otherwise spent on business operations and could necessitate the incurrence of additional costs to staff for regulatory expertise.

Although several of the directors of the Company have substantial public market experience, VWE’s executive officers have limited experience in the management of a publicly traded company subject to significant regulatory oversight and reporting obligations under federal securities laws. VWE’s management team may struggle to manage VWE successfully or effectively as a public company. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities, which will result in less time being devoted to the management and growth of VWE. It is possible that VWE will be required to expand its employee base and hire additional qualified personnel, or engage additional outside consultants and professionals, to support its operations as a public company, increasing its operating costs in future periods.

The terms of the investor rights agreement, VWE’s organizational documents and Nevada law could inhibit a takeover that VWE shareholders might consider favorable.

Features of the investor rights agreement, the VWE articles of incorporation and bylaws and Nevada law will make it difficult for any party to acquire control of VWE in a transaction not approved by the VWE board of directors. These features include:

until the 2028 annual meeting of shareholders of VWE, the Roney Representative (which will be Patrick Roney, so long as he is alive) may designate five individuals (the “Roney Nominees”), the former Bespoke shareholders may designate two individuals (the “Bespoke

 

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Nominees”) and the VWE nominating committee may designate two individuals ("the Nominating Committee Nominees") in the slate of nominees recommended to VWE shareholders for election as directors at any annual or special meeting of the shareholders at which directors are to be elected, subject to certain terms and conditions;
the affirmative vote of shareholders holding at least 66-2/3% of the voting power of the issued and outstanding shares of capital stock of VWE will be required to amend or repeal certain provisions of the articles of incorporation and bylaws of VWE, including those relating to election, removal and replacement of directors, for five years following the closing of the transactions;
the ability of the board of directors to issue and determine the terms of preferred stock;
advance notice for shareholder proposals and nominations of directors by shareholders to be considered at VWE’s annual meetings of shareholders;
certain limitations on convening shareholder special meetings;
limiting the ability of shareholders to act by written consent; and
anti-takeover provisions of Nevada law.

These features may have an anti-takeover effect and could delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a VWE shareholder might consider in its best interest, including those attempts that might result in a premium over the market price of their common stock.

The VWE articles of incorporation provide that the Second Judicial District Court in the State of Nevada, located in Washoe County, Nevada will be the sole and exclusive forum for substantially all disputes between VWE and its shareholders, which could limit VWE shareholders’ ability to obtain a favorable judicial forum for disputes with VWE or its directors, officers or employees.

The VWE articles of incorporation provide that, unless VWE consents in writing to the selection of an alternative forum, the Second Judicial District Court, in and for the State of Nevada, located in Washoe County, Nevada, will, to the fullest extent permitted by law, be the exclusive forum for (i) any derivative action, suit or proceeding brought on behalf of VWE, (ii) any action, suit or proceeding asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or stockholder of VWE to VWE or to its stockholders, or (iii) any action, suit or proceeding arising pursuant to any provision of the NRS or the VWE articles of incorporation or bylaws (as either may be amended and/or restated from time to time). Subject to the foregoing, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Such exclusive forum provision will not relieve VWE of its duties to comply with the federal securities laws and the rules and regulations thereunder, and its shareholders will not be deemed to have waived VWE’s compliance with such laws, rules and regulations.

The VWE articles of incorporation further provide that any person or entity purchasing or otherwise acquiring any interest in any VWE securities will be deemed to have notice of and consented to these provisions. Such articles provide that if any action whose subject matter is within the scope of clause (i), (ii) or (iii) above is filed in a court other than the courts in the State of Nevada (a “foreign action”) in the name of any stockholder, such stockholder will be deemed to have consented to (1) the personal jurisdiction of the state and federal courts in Nevada in connection with any action brought in any such court to enforce the provisions of such clause and (2) having service of process made upon any such stockholder’s counsel in the foreign action as agent for such stockholder. These exclusive forum provisions may limit a shareholder’s ability to bring an action, suit or proceeding in a judicial forum of its choosing for disputes with VWE or its directors, officers, employees or stockholders, which may discourage such actions, suits and proceedings. None of the aforementioned provisions of the VWE articles of incorporation will apply to suits to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.

If a court were to find the exclusive forum provision contained in the VWE articles of incorporation to be inapplicable or unenforceable in an action, suit or proceeding, then VWE may incur additional costs associated with resolving such action, suit or proceeding in other jurisdictions, which could harm its business, results of operations, and financial condition. Even if VWE is successful in defending against such actions, suits and proceedings, litigation could result in substantial costs and be a distraction to management and other employee.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters are located in Incline Village, Nevada. We own or control sizable vineyards, production facilities and tasting rooms and are making capital expenditures to increase capacity, improve efficiency and assure sustainability.

 

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Vineyards

We own or control approximately 900 acres of planted vineyards located in the premier winegrowing regions of the U.S. We currently own ten winery estates and lease two winery estates. We anticipate that our vineyards, at full production, will enable us to grow approximately 30-40% of the grapes needed to meet our current production capacity. We source the remainder of our grapes from bulk wine purchases and other growing and processing arrangements.

Wine Production Facilities

In 2021, we produced approximately 7.8 million cases (over 15,000,000 gallons) of wine in our winery and production facilities, a significant increase from the approximately 7 million cases (over 16,000,000 gallons) that we produced in 2020 from the 2019 and 2018 harvests.

Our revamped Ray’s Station facility has a footprint exceeding 700,000 square feet in size. Located in Hopland, California, the facility contains areas for receiving grapes and bulk wine, as well as processing, fermenting and aging. The property also has bottling, laboratory facilities and offices. Approximately 150,000 square feet of outside production area is used for crushing, pressing and fermenting wine grapes in addition to insulated storage capacity that can store approximately 7,600,000 gallons of wine.

In addition to the capacity at Ray’s Station, Clos Pegase, Girard, Laetitia, Delectus, Cosentino, Kunde, Tamarack, Swanson Vineyards and Owen Roe wineries have the combined capacity to bottle approximately 1.5 million cases of boutique wines per year.

We actively manage our real estate portfolio and endeavors to be asset-light rather than asset-heavy so as to increase returns on capital. Accordingly, real estate is not only bought but also sold. Two properties are currently available for purchase at targeted prices.

Capital Expenditures

New Bottling Line

We completed a state-of-the-art 400-bottle-per-minute bottling line at Ray’s Station that incorporates advanced automation. The revised process uses less expensive bulk glass from our glass supplier, which gives us significantly increased flexibility with regard to scheduling and reduces our costs of goods sold. The new bottling line began operations in June 2021.

Increased Warehouse Capacity

As described above, in addition to the bottling line, we are constructing additional warehouse and storage space at Ray’s Station, where we will be able to store over 3 million cases of wine. The additional storage capacity will reduce our reliance on and expenses associated with third party storage, which will also improve our margins. Further, by locating this storage facility adjacent to the bottling line, we will be able to further streamline our supply chain. As of the date of this report, we expect the 264,000 square-foot warehouse and distribution center is fully operational as of the end of the first quarter of fiscal 2022. The warehouse project started in December 2019 and expenditures on this project were $20.3 million as of June 30, 2021.

Re-investing for the Future

We plan to add new riddling, disgorging and bottling equipment at the Laetitia vineyard to increase our expansion into the sparkling wine sector. We have also increased our generator capacity at Ray’s Station, Clos Pegase and Girard wineries to mitigate the impact of periodic power shutoffs in California.

Environmental Initiatives

We are focused on sustainability, the environment and reducing our environmental impact. Towards that end, we have increased our solar power generation capacity at Ray’s Station from 750 kilowatts to 2.23 megawatts and have started to use the Tesla battery for energy storage to further reduce our carbon footprint. We have also improved the efficiency of our water and waste water treatment facilities at Ray’s Station in anticipation of the increased output from the new high-speed bottling line. Similarly, we have reduced the amount of water used and improved our recycling capacity by purchasing new equipment at our Clos Pegase and Girard properties. In addition, we have installed a computerized tank control system at the Girard winery to control the timing and demand for electricity from our chilling equipment. We have also automated the riddling machines to increase both capacity and efficiency at our Laetitia vineyard.

 

From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business that could have a material adverse effect on our business, results of operations or financial condition. As of the date of this Annual Report on Form 10-K, the Company is not currently a party to any material pending legal proceedings, to our knowledge, in which we believe would have a material effect on our business, results of operations or financial condition.

 

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Item 4. Mine Safety Disclosures

None.

 

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Part II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock began trading on The Nasdaq Global Market under the symbol “VWE” on June 8, 2021. Prior to such date and before the completion of the Business Combination between BCAC and Legacy VWE, the Class A restricted voting shares of BCAC traded on the Nasdaq under the symbol "BSPE".

Stock Performance Graph

The following graph compares the performance of our common stock to the Nasdaq Composite Index (ticker symbol: IXIC) and Crimson Wine Group, Ltd. (ticker symbol CWGL), a peer issuer in the business of producing and selling luxury wines, assuming $100 was invested as of February 8, 2021, which was our first day of trading on the Nasdaq. Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of pre-tax amount of all dividends; however, no dividends have been declared on our common stock to date.

 

img7587657_2.jpg 

 

 

 

February 8, 2021

 

 

June 30, 2021

 

VWE ("BSPE" prior to June 8, 2021)

 

$

100

 

 

$

118

 

Crimson Wine Group, Ltd. (CWGL)

 

$

100

 

 

$

146

 

Nasdaq Composite Index (IXIC)

 

$

100

 

 

$

104

 

 

Holders of Common Stock

As of June 30, 2021, there were nineteen (19) holders of record of our common stock.

Dividend Policy

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board, and will depend on our results of operations, financial conditions, capital requirements and other factors that our Board deems relevant.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table presents information with respect to our repurchases of our equity securities during the fiscal quarter ended June 30, 2021:

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs

 

April 1, 2021 to April 30, 2021

 

 

-

 

 

$

-

 

 

 

-

 

 

 

-

 

May 1, 2021 to May 30, 2021

 

 

10,324,596

 

 

$

10.096

 

 

 

-

 

 

 

-

 

June 1, 2021 to June 30, 2021

 

 

8,042,049

 

 

$

10.096

 

 

 

-

 

 

 

-

 

Total

 

 

18,366,645

 

 

$

10.096

 

 

 

-

 

 

 

-

 

In connection with the vote of BCAC shareholders to extend the permitted timeline for BCAC to complete its qualifying acquisition, on May 17, 2021, BCAC redeemed 10,324,596 Class A restricted voting shares of BCAC at a price of approximately $10.09644396 per share, for an aggregate amount of $104,241,705.

In connection with the consummation of the Business Combination on June 7, 2021, BCAC redeemed 8,042,049 Class A restricted voting shares of BCAC at a price of approximately $10.09644396 per share, for an aggregate amount of $81,196,097.

Item 6.

Reserved.

 

 

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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.

Overview

Vintage Wine Estates 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 15th largest wine producer based on cases of wine shipped in California. We’ve exceeded 20% net revenue and adjusted EBITDA compound annual growth rates since 2010. We now sell nearly 2 million cases annually.

Our key differentiator is our diversification—what we call our three-legged stool business model.

We are diversified in our brand collection, producing over 50 brands ranging in retail price from $10 to $150, with a focus on the fastest growing $10 and $20 segment. Approximately eighty percent of our business is done in this critical segment.

We are diversified in our omni-channel sales strategy balanced between direct-to-consumer, 30% of sales, traditional wholesale, 33% of sales and business-to-business at 35% of sales. Our direct-to-consumer segment is particularly robust. Where most wine companies have two direct sales levers to pull: tasting rooms and wine clubs, we have seven: tasting rooms, wine clubs, ecommerce, Cameron Hughes, Windsor/custom label design and engraving, QVC/HSN and The Sommelier Company.

We are diversified in our sourcing with a strong asset base of 2,800 owned and leased vineyard acres in located in the premier winegrowing regions of the U.S. and 10 owned winery estates. These properties extend from the Central Coast of California to storied appellations in Napa Valley and Sonoma County, north to Oregon and Washington. We obtain fruit for our wines from owned and leased vineyards, as well as other sources, including independent growers and the spot wine market.

We have completed over 20 acquisitions in the past 10 years and completed over 10 acquisitions in the past 5 years. We generally acquire the brands and inventories of a targeted business, eliminating redundant corporate overhead. We then integrate the acquired assets into our highly efficient production, distribution and omni channel selling networks, quickly increasing the sales and margins of the acquired business.

Our growth has allowed us to reinvest in our business and create the scale and infrastructure needed to successfully manage a variety of different wine brands and channels and reduce costs. Our owned winery facilities have the current capacity to produce up to 7 million cases of wine per year. As of the date of this report, we are near completion of a $45 million investment into our Ray’s Station production facility, which includes a high-speed bottling facility with the capacity to bottle over 13.5 million cases annually and a 364,000 square foot warehouse and distribution center.

Additional bottling capacity will not only be used for our products, but also will allow us to further expand our bottling and fulfillment services offered to third parties on a contract basis. The additional capacity of the bottling facility may not initially be fully utilized but provides us with capacity consistent with our growth plans. Our scale and consolidated operations are expected to enable us to increase margins of the businesses that we acquire, providing accretive value promptly after the acquisition.

Strategy

Our strategy is to continue to grow organically and through acquisitions with a view towards making two to three acquisitions per year over the next five years. We believe we have completed more brand mergers and acquisitions in the U.S. wine industry over the last 10 years than any other company in the industry. These acquisitions have allowed us to diversify our wine sourcing into regions outside of California, expand our portfolio of brands, increase our vineyard assets and provide our DTC and retail customers with a range of wines to choose from.

We have historically targeted a significant increase in the target company’s EBITDA within three years of the acquisition. To achieve these results, our acquisitions are subject to a rigorous, data-driven, due diligence and underwriting process, to assure that minimum financial thresholds with meaningful upside can be satisfied in each transaction. In accordance with GAAP, the results of the acquisitions we have completed are reflected in our consolidated financial statements. We typically incur minimal transaction costs in connection with identifying and completing acquisitions and ongoing integration costs as we integrate acquired companies and seek to achieve synergies.

 

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Recent Developments

Our Business Combination

We were formed in 2019 as Bespoke Capital Acquisition Corp. (“BCAC”), a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia. BCAC was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or any other similar business combination involving BCAC.

On June 7, 2021, BCAC consummated its business combination (the “Business Combination”) with Vintage Wine Estates, Inc., a California corporation ("Legacy VWE"), pursuant to a transaction agreement dated February 3, 2021. As a result of the Business Combination and the related transactions, BCAC changed its jurisdiction of incorporation from the Province of British Columbia to the State of Nevada, BCAC changed its name to “Vintage Wine Estates, Inc.” and Legacy VWE became our wholly-owned subsidiary.

For accounting purposes, and in accordance with generally accepted accounting principles, BCAC was treated as the acquired company and Legacy VWE was treated as the acquirer.

U.S. Wildfires

Significant wildfires in California, Oregon and Washington states, have recently engulfed the affected regions in smoke and flames. The long-term trend is that wildfires are increasing resulting from drought conditions. Drought conditions due to global climate change have increased the severity of destructive wildfires which have affected 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 tainted”. Industry grape suppliers have also experienced smoke and fire damage from the wildfires. Damage to our grape harvest and vineyards caused from the wildfires has impacted our revenues, costs of revenues and winery overhead for the periods presented.

Acquisitions and Divestitures

The Sommelier Company

On June 22, 2021, we acquired the net assets of The Sommelier Company consisting of customer relationships, independent Sommelier relationships and brand trademarks, for total consideration of $12.0 million. Consideration transferred consisted of a cash payment of $8.0 million and contingent consideration up to $4.0 million, whereby the Company will pay the seller three annual earn-out payments over three years, determined as a percentage of EBITDA.

Kunde Acquisition

On April 19, 2021, we acquired 100% of the outstanding equity of Kunde Enterprise Inc. (“Kunde”) for total consideration, including amounts to acquire the combined 33.3% ownership held by two of the Company stockholders, of which one is an executive officer of the Company, of approximately $53.0 million, net of $5.9 million in pre-existing net liabilities due to Kunde. Kunde produces and sells premium Sonoma Valley varietal wines via the wholesale channel as well as internationally and locally through its tasting room, wine club, and internet site. In addition, Kunde provides wine storage, processing, and bottling services for other wineries. The operations of Kunde align with those of us, providing for expanded synergies and growth through the acquisition. See Note 3 to the consolidated financial statements.

The $53.0 million purchase consideration was comprised of approximately $21.5 million of cash, approximately $11.7 million of notes payable to the sellers, and the issuance of 906,345 shares (2,589,507 shares retroactively restated giving effect to the recapitalization transaction discussed in Note 1) of the Company’s Series A stock, with a value of $25.8 million, totaling $58.9 million less the release of pre-existing net liabilities between the Company and Kunde of $5.9 million. Two of the three notes payable issued to the sellers have a interest rate of Prime plus 1.00%, compounded quarterly, and mature on January 5, 2022, while the third note has a stated interest rate of 1.61%, compounded quarterly, and matures on December 31, 2021. To fund the cash portion of the purchase consideration, we utilized our line of credit and delay draw term loan. For a summary of the allocation of the purchase price to the fair value of the assets acquired, see Note 3 to the consolidated financial statements.

Owen Roe Winery

In September 2019, the Company acquired assets, including inventory, land, winery equipment and brand trademarks from Owen Roe Winery for total consideration of approximately $16.1 million. Consideration consisted of cash of approximately $15.1 million and contingent consideration of $1.0 million whereby we will pay the seller a fixed fee based on sales of the wine brands acquired for four years.

Divestiture of Certain Assets

Grounded Wine Project Divestiture

On October 31, 2020, we entered into a purchase and sale agreement with a former employee pursuant to which we sold our 51% interest in Grounded Wine Project, LLC (“GWP”), certain bulk wine and cased goods inventory related to GWP’s business, and certain other assets used in the

 

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operation of GWP’s business, including trademarks, customer lists, website content, domain names, marketing materials and certain assignable contracts, but excluding cash on hand and accounts receivable relating to the GWP business, for a purchase price of $1.0 million. In connection with the sale, we entered into an interim services agreement with the purchaser for a period ending on the earlier of six months from the closing date and purchaser’s receipt of necessary permits for the operation of GWP, whereby we would continue to operate GWP and store and maintain its wine assets and purchaser would provide certain services to us relating to the operation of GWP. The services agreement was extended to August 31, 2021. Management routinely evaluates the profitability of our brands and determined that GWP branded products were underperforming our expectations for the two years prior to June 30, 2020. GWP accounted for approximately 0.09% and 0.62% of our consolidated net revenues for fiscal years ended June 30, 2021 and 2020.

Sales Pro and Master Class Divestiture

On December 30, 2019, we entered into an asset purchase agreement with a current employee pursuant to which we agreed to sell the intellectual property and marketing materials of Sales Pro and Master Class in exchange for a royalty payment per case sold by the purchaser between January 1, 2020 and December 1, 2025. The effective date of the transfer of Sales Pro and Master Class was January 1, 2020. We acquired Sales Pro and Master Class as part of the acquisition of the assets of Cameron Hughes Wine. Sales Pro and Master Class is engaged in in-store wine tasting and promotion, which is not core to our business. Sales Pro and Master Class represented approximately 1.4% of our consolidated net revenues for fiscal 2020.

Potential Divestiture of Certain Real Estate Assets

In the first quarter of fiscal 2020, our board of directors authorized management to explore the divestiture of certain non-core real estate assets with a combined appraised value in excess of $70.0 million. These efforts continue as of June 30, 2021.

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; and income from operations. The key non-GAAP measure we consider is Adjusted EBITDA. We also monitor our case volume sold and depletions from our distributors to retailers to help us forecast and identify trends affecting our growth.

Net Revenues

We generate revenue from our segments: Wholesale, B2B, DTC and Other. We recognize revenue from wine sales when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when the product is shipped, and title passes to the customer, and when control of the promised product or service is transferred to the customer. Our standard terms are free on board, or FOB, shipping point, with no customer acceptance provisions. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. We recognize revenue net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We account for shipping and handling as activities to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and classify such costs as a component of costs of sales. Our products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been significant to us.

Gross Profit

Gross profit is equal to net revenues less cost of sales. Cost of sales includes the direct cost of manufacturing, including direct materials, labor and related overhead, as well as inbound and outbound freight and import duties.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenues, but are expected to increase over time to support the needs of the Company.

Income from Operations

Income from operations is gross profit less selling, general and administrative expenses; acquisition and restructuring related expense or income and amortization of intangible assets. Income from operations excludes interest expense, income tax expense, and other expenses, net. We use income from operations as well as other indicators as a measure of the profitability of our business.

Case Volume

In addition to acquisitions, the primary drivers of net revenue growth in any period are attributable to changes in case volume and changes in product mix and sales price. Case volume represents the number of 9-liter equivalent cases of wine that we sell during a particular period. Case volume is an important indicator of what is driving gross margin. This metric also allows us to develop our supply and production targets for future periods.

 

 

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VWE 9L Equivalent Case Sales by Segment

 

 

 

 Year ended June 30,

 

(in thousands)

 

2021

 

 

2020

 

Wholesale

 

 

969

 

 

 

1,037

 

B2B

 

 

558

 

 

 

411

 

DTC

 

 

348

 

 

 

274

 

Total case volume

 

 

1,875

 

 

 

1,722

 

 

Case volume was up 9% for the fiscal year driven by volume increase in the B2B and DTC segments. B2B volumes grew 35.8% for the year due to expanded relationships in private label. DTC volume was up 27% driven by increased tasting room activity and special programming through a large e-commerce company. Wholesale volumes were down 6.6% due to the discontinuation of certain brands partially offset by the inclusion of Kunde in the fourth quarter.

Depletions

Within our three tier distribution structure, depletion measures the sale of our inventory from the distributor to the retailer. Depletions are an important indicator of customer satisfaction, which management uses for evaluating performance of our brands and for forecasting.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we use EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies. These metrics are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.

Adjusted EBITDA is defined as earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, casualty losses or gains, impairment losses, changes in the fair value of derivatives, restructuring related income or expenses, acquisition and integration costs, and certain non-cash, non-recurring, or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance, including COVID-related adjustments. COVID related adjustments relate to the delayed GAZE brand launch and nonrecurring costs of implementing safety protocols for production facilities, warehouse, tasting rooms and offices. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net revenues.

 

(in thousands)

 

June 30, 2021

 

 

June 30, 2020

 

Net income (loss)

 

$

10,088

 

 

$

(9,700

)

Interest expense

 

 

11,581

 

 

 

15,422

 

Income tax provision (benefit)

 

 

766

 

 

 

(9,957

)

Depreciation and amortization

 

 

11,436

 

 

 

11,805

 

Amortization of label design fees

 

 

464

 

 

 

260

 

Gain on litigation proceeds, net of legal fees

 

 

(3,845

)

 

-

 

Taint provision

 

 

-

 

 

 

4,859

 

Stock-based compensation expense

 

 

3,334

 

 

 

289

 

Inventory adjustment for wildfire impact - vineyard

 

 

3,302

 

 

 

-

 

Inventory adjustment for wildfire impact - winery overhead

 

 

9,000

 

 

 

-

 

PPP loan forgiveness

 

 

(6,604

)

 

 

-

 

Net unrealized (gain) loss on interest rate swap agreements

 

 

(6,136

)

 

 

12,945

 

(Gain) loss on disposition of assets

 

 

(2,336

)

 

 

(1,052

)

Deferred lease adjustment

 

 

352

 

 

 

501

 

Transaction expenses

 

 

4,339

 

 

-

 

Impairment of intangible assets

 

 

1,081

 

 

 

1,281

 

Remeasurement of contingent consideration liabilities

 

 

(329

)

 

 

(1,035

)

Post-acquisition accounts receivable write-down

 

 

109

 

 

 

434

 

COVID impact

 

 

1,563

 

 

 

200

 

Inventory acquisition basis adjustment

 

 

401

 

 

 

1,271

 

Adjusted EBITDA

 

$

38,566

 

 

$

27,523

 

Revenue

 

 

220,742

 

 

 

189,919

 

Adjusted EBITDA Margin

 

 

17.5

%

 

 

14.5

%

Adjusted EBITDA and Adjusted EBITDA Margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these

 

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parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance.

Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms Adjusted EBITDA and Adjusted EBITDA Margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as indicators of our operating performance in isolation from, or as a substitute for, net income (loss), which is prepared in accordance with GAAP. We have presented Adjusted EBITDA and Adjusted EBITDA Margin solely as supplemental disclosure because we believe it allows for a more complete analysis of our results of operations. In the future, we may incur expenses such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.

Trends and Other Factors Affecting Our Business

Various trends and other factors affect or have affected our operating results, including:

COVID-19

The outbreak of COVID-19, which the World Health Organization declared a pandemic in March 2020, has spread across the globe and the U.S and has disrupted the global economy and most industries, including the wine industry. In an effort to contain and slow the spread of COVID-19, governments implemented various measures, such as ordering non-essential businesses to close, issuing travel advisories and restrictions, canceling large public events, ordering shelter-in-place and requiring the public to practice social distancing. While many of these measures have been lifted or eased, some are continuing and others are being reimplemented as COVID-19 continues to spread.

Although we have not experienced significant business disruptions to date from the COVID-19 pandemic, we experienced a year over year decline in visitors to our 14 tasting rooms during fiscal year ended June 30, 2021 primarily due to continued COVID-19 measures. However, the decrease in the business we derive from our tasting rooms was offset by an increased amount of e-commerce and DTC wine sales. We sold approximately 1,875 cases for the year ended June 30, 2021 compared to 1,722 cases for the year ended June 30, 2020. We expect that, following acceptance of COVID-19 vaccines and lifting of travel restrictions, tasting room volumes will, over time, increase from the current lows.

In response to governmental directives and recommended safety measures, we modified our workplace practices. While we have implemented personal safety measures at all of our facilities where our employees are working onsite, any actions that we take may not be sufficient to mitigate the risk of infection and could result in a significant number of COVID-19 related claims. Changes to state workers’ compensation laws, as have recently occurred in California, could increase our potential liability for such claims. To support employees and protect the health and safety of employees and customers, we provided temporary pay increases to certain employees and purchased additional sanitation supplies and personal protective materials. These measures will increase operating costs and adversely affect liquidity.

In the longer-term, the COVID-19 pandemic is likely to adversely affect the economies and financial markets, and could result in an economic downturn and a recession. It is uncertain how this would affect demand for our products. While we continue to see robust demand in our industry, and have seen little impact to our business from the COVID-19 pandemic, we are unable to predict the full impact the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across the U.S., the impact to our customers, employees and suppliers, and other factors described in the section titled “Risk Factors” in this Annual Report on Form 10-K. These factors are beyond our knowledge and control and, as a result, at this time, we are unable to predict the ultimate impact, both in terms of severity and duration, that the COVID-19 pandemic will have on our business, operating results, cash flows and financial condition.

Seasonality

There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenues and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during or second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.

Weather Conditions

Our ability to fulfill the demand for wine is restricted by the availability of grapes. Climate change, agricultural and other factors, such as wildfires, disease, pests, extreme weather conditions, water scarcity, biodiversity loss and competing land use, impact the quality and quantity of grapes available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenues and costs from year to year.

 

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In addition, extreme weather events, such as wildfires can result in potentially significant expenses to repair or replace a vineyard or facility as well as impact the ability of grape suppliers to fulfill their obligations to us.

Industry and Economic Conditions

The wine industry is recession resistant, with sustained growth over the past 25 years despite downturns in economic conditions from time to time. Consumers are increasingly purchasing higher priced wines and other alcoholic beverages, which has accelerated throughout the COVID-19 pandemic. Consumption increases are largely in the $10.00 or more retail price per bottle premium and luxury wine categories. Over the past ten years, the premium segment ($10 to $20 retail sales price) has grown on average by 6.6% annually. We benefit from this trend by focusing on the premium wine segment. Approximately 80% of our wine sales are in the $10.00 to $20.00 per bottle range.

Casualty Gains

We suffered smoke-tainted inventory damage resulting from the October 2017 Napa and Sonoma County wildfires. We filed an insurance claim for this damage, which was settled in December 2020 for approximately $3.8 million, net of legal costs. The gain of litigation proceeds consists of payments we received from our insurer .

 

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Results of Operations

Comparison of the years ended June 30, 2021 and 2020

The following table summarizes our operating results for the periods presented:

 

 

 

Year Ended June 30,

 

 

Dollar

 

 

Percent

 

(in thousands, except shares and per share data)

 

2021

 

 

2020

 

 

Change

 

 

Change

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

 

Wine and spirits

 

$

177,331

 

 

$

155,741

 

 

$

21,590

 

 

 

14

%

Nonwine

 

 

43,411

 

 

 

34,178

 

 

 

9,233

 

 

 

27

%

 

 

 

220,742

 

 

 

189,919

 

 

 

30,823

 

 

 

16

%

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

Wine and spirits

 

 

119,350

 

 

 

98,236

 

 

 

21,114

 

 

 

21

%

Nonwine

 

 

26,041

 

 

 

20,051

 

 

 

5,990

 

 

 

30

%

 

 

 

145,391

 

 

 

118,287

 

 

 

27,104

 

 

 

23

%

Gross profit

 

 

75,351

 

 

 

71,632

 

 

 

3,719

 

 

 

5

%

Selling, general, and administrative expenses

 

 

72,505

 

 

 

64,699

 

 

 

7,806

 

 

 

12

%

Impairment of intangible assets

 

 

1,081

 

 

 

1,282

 

 

 

(201

)

 

 

-16

%

Gain on sale of property, plant, and equipment

 

 

(2,336

)

 

 

(1,052

)

 

 

(1,284

)

 

 

122

%

Gain on litigation proceeds

 

 

(4,750

)

 

 

-

 

 

 

(4,750

)

 

*

 

Gain on remeasurement of contingent consideration liabilities

 

 

(329

)

 

 

(1,035

)

 

 

706

 

 

 

68

%

Income from operations

 

 

9,180

 

 

 

7,738

 

 

 

1,442

 

 

 

19

%

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(11,581

)

 

 

(15,422

)

 

 

(3,841

)

 

 

-25

%

Net unrealized gain (loss) on interest rate swap agreements

 

 

6,136

 

 

 

(12,945

)

 

 

19,081

 

 

 

147

%

Gain on Paycheck Protection Program loan forgiveness

 

 

6,604

 

 

 

-

 

 

 

6,604

 

 

*

 

Other, net

 

 

515

 

 

 

972

 

 

 

(457

)

 

 

-47

%

Total other income (expense), net

 

 

1,674

 

 

 

(27,395

)

 

 

29,069

 

 

 

106

%

Income (loss) before provision for income taxes

 

 

10,854

 

 

 

(19,657

)

 

 

30,511