UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to______
Commission file number
(Exact name of registrant as specified in its charter)
|
|
|
||
(State or other jurisdiction of incorporation or organization) |
|
|
|
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
|
|
Trading |
|
|
|
|
|||
|
|
Securities registered pursuant to Section 12(g) of the Act: None
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.
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).
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:
Large accelerated filer |
|
☐ |
|
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 is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
As of March 8, 2024,
1 |
|
1 |
|
1 |
|
Condensed Consolidated Statements of Operations and Comprehensive Income |
2 |
3 |
|
4 |
|
6 |
|
Note 1: Basis of Presentation and Significant Accounting Policies |
6 |
9 |
|
10 |
|
11 |
|
12 |
|
13 |
|
14 |
|
15 |
|
17 |
|
17 |
|
19 |
|
20 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
22 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
30 |
30 |
|
32 |
|
32 |
|
32 |
|
35 |
|
36 |
|
37 |
Part I—Financial Information
Item 1. Financial Statements
VINTAGE WINE ESTATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
December 31, 2023 |
|
|
June 30, 2023 |
|
||
Assets |
|
(Unaudited) |
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Other receivables |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Assets held for sale, net |
|
|
|
|
|
|
||
Current interest rate swap asset |
|
|
|
|
|
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property, plant, and equipment, net |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
Finance lease right-of-use-assets |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Interest rate swap asset |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Liabilities, redeemable noncontrolling interest, and stockholders' equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Line of credit |
|
$ |
|
|
$ |
|
||
Accounts payable |
|
|
|
|
|
|
||
Accrued liabilities and other payables |
|
|
|
|
|
|
||
Accrued employee compensation |
|
|
|
|
|
|
||
Current operating lease liabilities |
|
|
|
|
|
|
||
Current finance lease liabilities |
|
|
|
|
|
|
||
Current maturities of long-term debt |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
|
||
Long-term debt, less current maturities |
|
|
|
|
|
|
||
Long-term operating lease liabilities |
|
|
|
|
|
|
||
Long-term finance lease liabilities |
|
|
|
|
|
|
||
Deferred tax liability |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Redeemable noncontrolling interest |
|
|
|
|
|
|
||
Stockholders' equity: |
|
|
|
|
|
|
||
Preferred stock, |
|
|
|
|
|
|
||
Common stock, |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Treasury stock, at cost: |
|
|
( |
) |
|
|
( |
) |
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total Vintage Wine Estates, Inc. stockholders' equity |
|
|
|
|
|
|
||
Noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
Total stockholders' equity |
|
|
|
|
|
|
||
Total liabilities, redeemable noncontrolling interest, and stockholders' equity |
|
$ |
|
|
$ |
|
||
See notes to unaudited condensed consolidated financial statements.
1
VINTAGE WINE ESTATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share amounts)
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
2022 |
|
||||
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
||||
Wine, spirits and cider |
|
$ |
|
|
$ |
|
|
$ |
|
$ |
|
||||
Nonwine |
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
||||
Wine, spirits and cider |
|
|
|
|
|
|
|
|
|
|
|
||||
Nonwine |
|
|
|
|
|
|
|
|
|
|
|
||||
Total cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
||||
Gross (loss) profit |
|
|
( |
) |
|
|
|
|
|
|
|
|
|||
Selling, general, and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization expense |
|
|
|
|
|
|
|
|
|
|
|
||||
Goodwill impairment losses |
|
|
|
|
|
|
|
|
|
|
|
||||
Intangible impairment losses |
|
|
|
|
|
|
|
|
|
|
|
||||
Gain on remeasurement of contingent liability |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Restructuring (benefit) expense |
|
|
( |
) |
|
|
|
|
|
|
|
|
|||
Loss (gain) on insurance and litigation |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
(Gain) loss on sale of assets |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
||
Loss from operations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Net (loss) gain on interest rate swap agreements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
( |
) |
|
|
|
|
( |
) |
||
Other, net |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
||
Total other (expense) income, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Loss before provision for income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Income tax (benefit) provision |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Net loss attributable to the noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Net loss attributable to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings per share allocable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
$ |
( |
) |
Weighted average shares used in the calculation of earnings per share allocable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
||||
See notes to unaudited condensed consolidated financial statements.
2
VINTAGE WINE ESTATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share amounts)
|
|
Redeemable Non-Controlling |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Non-Controlling |
|
|
Total Stockholders' Equity |
|
|||||||||||||||
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, June 30, 2023 |
|
$ |
|
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Vesting of restricted stock |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Taxes paid related to net share settlement of equity awards |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Net loss |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance, September 30, 2023 |
|
$ |
|
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Vesting of restricted stock |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Taxes paid related to net share settlement of equity awards |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Net loss |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance, December 31, 2023 |
|
$ |
|
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Redeemable Non-Controlling |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional |
|
|
(Accumulated Deficit) Retained |
|
|
Non-Controlling |
|
|
Total Stockholders' Equity |
|
|||||||||||||||
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, June 30, 2022 |
|
$ |
|
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Adoption of ASC 842 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Repurchase of public warrants |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Shareholder distribution |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net income (loss) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
( |
) |
|
|
|
||
Balance, September 30, 2022 |
|
$ |
|
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Vesting of restricted stock |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Taxes paid related to net share settlement of equity awards |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Net income (loss) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance, December 31, 2022 |
|
$ |
|
|
|
|
|
$ |
- |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
See notes to unaudited condensed consolidated financial statements.
3
VINTAGE WINE ESTATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
Six Months Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
||
Depreciation expense |
|
|
|
|
|
|
||
Non-cash operating lease expense |
|
|
|
|
|
|
||
Amortization expense |
|
|
|
|
|
|
||
Amortization of deferred loan fees and line of credit fees |
|
|
|
|
|
|
||
Goodwill and intangible assets impairment losses |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
(Benefit) provision for credit losses |
|
|
( |
) |
|
|
|
|
Provision for inventory reserves |
|
|
|
|
|
|
||
Deferred income tax provision (benefit) |
|
|
( |
) |
|
|
( |
) |
(Gain) loss on disposition of assets |
|
|
( |
) |
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
||
Remeasurement of contingent consideration liabilities |
|
|
( |
) |
|
|
( |
) |
Net loss (gain) on interest rate swap agreements |
|
|
|
|
|
( |
) |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
||
Other receivables |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
|
|
|
( |
) |
|
Other assets |
|
|
( |
) |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
||
Accrued liabilities and other payables |
|
|
|
|
|
|
||
Net change in lease assets and liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
|
||
Proceeds from sale of assets |
|
|
|
|
|
|
||
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by investing activities |
|
|
( |
) |
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
||
Principal payments on line of credit |
|
|
( |
) |
|
|
( |
) |
Proceeds from line of credit |
|
|
|
|
|
|
||
Payment of deferred financing costs |
|
|
- |
|
|
|
( |
) |
Change in outstanding checks in excess of cash |
|
|
|
|
|
( |
) |
|
Loan fees |
|
|
( |
) |
|
|
( |
) |
Principal payments on long-term debt |
|
|
( |
) |
|
|
( |
) |
Proceeds from long-term debt |
|
|
|
|
|
|
||
Principal payments on finance leases |
|
|
( |
) |
|
|
( |
) |
Payments of minimum tax withholdings on stock-based payment awards |
|
|
( |
) |
|
|
( |
) |
Distributions to noncontrolling interest |
|
|
|
|
|
( |
) |
|
Repurchase of public warrants |
|
|
|
|
|
( |
) |
|
Payments on acquisition earnout |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
Net change in cash, cash equivalents and restricted cash |
|
|
|
|
|
( |
) |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
4
|
|
Six Months Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Supplemental cash flow information |
|
|
|
|
|
|
||
Noncash investing and financing activities: |
|
|
|
|
|
|
||
Increase in operating lease assets and liabilities upon adoption of ASC 842 |
|
$ |
|
|
$ |
|
||
Increase in finance lease assets and liabilities upon adoption of ASC 842 |
|
$ |
|
|
$ |
|
||
Operating lease assets obtained in exchange for operating lease liabilities |
|
$ |
|
|
$ |
|
||
Finance lease assets obtained in exchange for finance lease obligations |
|
$ |
|
|
$ |
|
||
Issuance of shares in lieu of payment to consultant |
|
$ |
|
|
$ |
|
||
Accrued interest on term loan and line-of credit refinanced to principal |
|
$ |
|
|
$ |
|
||
Line of credit refinanced as term debt |
|
$ |
|
|
$ |
|
||
Term debt refinanced with line of credit proceeds |
|
$ |
|
|
$ |
|
||
Financing costs deducted from long-term debt proceeds |
|
$ |
|
|
$ |
|
||
Financing costs deducted from line of credit proceeds |
|
$ |
|
|
$ |
|
||
See notes to unaudited condensed consolidated financial statements.
5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of all majority-owned or controlled subsidiaries, and all significant intercompany transactions and amounts have been eliminated. The results of businesses acquired or disposed of are included in the condensed consolidated financial statements from the date of the acquisition or up to the date of disposal, respectively.
References to the "Company," "we," "our," "us," and similar pronouns in this Quarterly Report on Form 10-Q for the three and six months ended December 31, 2023 (this "Form 10-Q") refer to Vintage Wine Estates, Inc., a Nevada corporation, and its majority owned subsidiaries or controlled subsidiaries unless the context requires otherwise.
Our fiscal year ends on June 30. References to fiscal 2024 in these condensed consolidated financial statements are to the fiscal year ending June 30, 2024.
Our unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission ("SEC") instructions to Quarterly Reports on Form 10-Q and include the information and disclosures required by accounting principles generally accepted in the United States ("GAAP") for interim financial reporting.
In the opinion of management, all adjustments necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included in this Form 10-Q. Except as disclosed elsewhere in this Form 10-Q, all such adjustments are of a normal and recurring nature. In addition, financial results presented for this fiscal 2024 interim period are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2024 or any other future interim or annual period. These condensed consolidated financial statements are unaudited and accordingly, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on October 13, 2023. The June 30, 2023 condensed consolidated balance sheet was derived from the audited consolidated financial statements as of that date.
Going Concern
The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company did not meet certain financial debt covenants as required per our Second Amended and Restated Loan and Security Agreement (the "Second A&R Loan and Security Agreement") beginning with the quarter ended December 31, 2023, which constitutes an event of default. If the event of default is not cured or waived, the payment of the Company’s outstanding debt under the Second A&R Loan and Security Agreement may be accelerated. However, on February 28, 2024, the Company entered into a forbearance agreement (the "Forbearance Agreement") with respect to the Second A&R Loan and Security Agreement under which the Agent and Lenders (each as defined in Note 7) have agreed to forbear from enforcing their respective rights and remedies in respect to certain events of default under the agreement, subject to the terms and conditions set forth in the agreement, through March 31, 2024. See Note 7 for additional information. If the Company does not meet the terms of the Forbearance Agreement or if the events of default continue past the term of the Forbearance Agreement, and if the Agent and Lenders accelerate the maturity of the debt thereunder, the Company does not have sufficient cash to repay the outstanding debt.
In response to these conditions, management is actively engaged in conversations with the lender under the Second A&R Loan and Security Agreement regarding potential amendments and waivers to the related financial covenants, however, whether an amendment or waiver is obtained is not within the Company's control, and therefore cannot be deemed probable.
As a result of these uncertainties, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year as of the date these financial statements are issued. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.
Restatement of Previously Issued Condensed Consolidated Financial Statements
The Company restated its unaudited quarterly financial data, on October 13, 2023, for the periods ended September 30, 2022, December 31, 2022 and March 31, 2023. All amounts in this quarterly report on Form 10-Q affected by the restatement, including but not limited to the three and six months ended December 31, 2022, reflect such restated amounts.
6
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the fiscal year ended June 30, 2023. There have been no material changes in the Company’s significant accounting policies during the six months ended December 31, 2023.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Significant estimates include, but are not limited to, the net realizable value of inventory, intangible assets for impairment, amortization methods and periods, contingent consideration, stock-based compensation, accounting for income taxes, loss contingencies and net assets held for sale, as applicable. Actual results could differ materially from those estimates.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. Specifically, we reclassified $
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sums to the total of the same such amounts as shown in the condensed consolidated statements of cash flows:
(in thousands) |
|
December 31, 2023 |
|
|
June 30, 2023 |
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Total cash, cash equivalents and restricted cash as shown in the consolidated statement of cash flows |
|
$ |
|
|
$ |
|
||
Allowance for Credit Losses
The provision for credit losses for the periods ended December 31, 2023 and June 30, 2023, was immaterial. We do not accrue interest on past-due amounts. Bad debt expense was immaterial for all reporting periods presented.
Disaggregation of Revenue
The following table summarizes revenue by geographic region:
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
||||||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
International |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table provides a disaggregation of revenue based on the pattern of revenue recognition:
|
|
December 31, |
|
|
December 31, |
|
||||||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Over time |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assets Held for Sale
The Company classifies an asset group (‘asset’) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within
7
one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in selling, general and administrative expenses in the period in which the held for sale criteria are met. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale.
As of December 31, 2023, the Company has engaged a full-service brokerage and investment bank to monetize assets and has two asset groups classified as held for sale. The assets held for sale include certain real and intangible property related to Clos Pegase and certain real property related to Viansa. These assets are being marketed for sale. The Company intends to complete the sales of the assets within twelve months, but the assets do not qualify for discontinued operations because the sales would not represent a strategic shift that would have a major effect on the Company's operations.
The following table summarizes the carrying amounts of assets and liabilities classified as held for sale on the Company’s consolidated balance sheet:
(in thousands) |
December 31, 2023 |
|
||
Assets |
|
|
|
|
Accounts Receivable |
$ |
|
|
|
Inventory |
|
|
|
|
Assets held for sale - current |
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
Finance lease right-of-use assets |
|
|
|
|
Intangible assets, net |
|
|
|
|
Assets held for sale - long-term |
|
|
|
|
Total assets held for sale |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts Payable |
|
|
|
|
Current finance lease liabilities |
|
|
|
|
Liabilities held for sale - current |
|
|
|
|
Long-term finance lease liabilities |
|
|
|
|
Liabilities held for sale - long-term |
|
|
|
|
Total liabilities held for sale |
|
|
|
|
Assets held for sale, net |
$ |
|
|
|
On February 26, 2024, the Company entered into a non-binding letter of intent with respect to a proposed disposition of the stock of a subsidiary of VWE to a third-party purchaser. The sale would allow for the Company to pay down debt. The securities that would be sold under the agreement did not meet all criteria to be classified as assets held for sale as of the balance sheet date, and as such are not presented and disclosed as assets held for sale in the consolidated financial statements.
During February 2024, the Company determined that certain standalone DTC operations are classified as assets held for sale. The assets held for sale include certain real and intangible property related to these DTC operations. The Company has received indications of interest, which lead the Company to believe that these assets will be sold within twelve months. These assets did not meet all criteria to be classified as assets held for sale as of the balance sheet date, and as such, are not presented and disclosed as assets held for sale in the consolidated financial statements.
Casualty Gains
In relation to various weather and wildfire events, the Company received insurance and litigation proceeds of $
Segment Information
We operate in
8
Company’s chief operating decision maker (“CODM”), our Chief Executive Officer, allocates resources and assesses performance based upon discrete financial information at the segment level.
Earnings Per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) allocable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. For purposes of the calculation of diluted net income (loss) per share, stock options, warrants to purchase common stock and restricted stock units are considered potentially dilutive securities but are excluded from the calculation of diluted net income (loss) per share when their effect is antidilutive. As a result, in certain periods, diluted net income (loss) per share is the same as the basic net income (loss) per share.
The Company does not pay dividends or have participating shares outstanding.
Emerging Growth Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.
Recently Issued Accounting Pronouncements
In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-06: Disclosure Improvements. The new guidance clarifies disclosure and presentation requirements on a variety of topics in the codification. The amendments will align the requirements in the FASB Accounting Standard codification with the SEC's regulations. The amendments are effective prospectively on the date each individual amendment is effectively removed from Regulation S-X or Regulation S-K. The Company is in the process of evaluating the impact the adoption of this ASU will have on the financial statements and related disclosures, which is not expected to be material.
In November 2023, the FASB issued ASU 2023-07: Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. This update will improve reportable segment disclosure requirements by enhancing disclosures around significant segment expenses and disclosures around the CODM, pertaining to what measures are used to evaluate profit or loss and such measures are used in assessing segment performance. These amendments will improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities. ASU 2023-07 is effective for public entities' fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is in the process of evaluating the impact the adoption of this ASU will have on the financial statements and related disclosures, which is not expected to be material.
In December 2023, the FASB issued ASU 2023-09: Income Taxes (Topic 740), Improvements to Income Tax Disclosures. On an annual basis, companies will be required to disclose a rate reconciliation with additional information for reconciling items that meet a quantitative threshold. Companies will need to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state and foreign taxes along with the amount of taxes paid (net of refunds received) disaggregated by individual jurisdictions in which the payments are equal to or greater than 5 percent of total income taxes paid (net of refunds received). Public companies will also need to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign along with income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. ASU 2023-09 is effective for public business entities' fiscal years beginning after December 15, 2024. The Company is in the process of evaluating the impact the adoption of this ASU will have on the financial statements and related disclosures, which is not expected to be material.
2. Restructuring
On July 20, 2023, the Company's executive officers, authorized by the Board of Directors (the "Board") to take such action, approved an organizational restructuring plan (the "2023 Plan") intended to expand margin through simplification and improved execution, measurably reduce costs, improve cash management, monetize assets, reduce debt and grow revenue of its key brands. As part of the 2023 Plan, there was a reduction in force affecting approximately
9
The following table presents the changes in the Company's restructuring-related accrued employee compensation liabilities:
(in thousands) |
|
|
|
|
Balance at June 30, 2023 |
|
$ |
|
|
Additions |
|
|
|
|
Revisions to estimates |
|
|
( |
) |
Cash payments |
|
|
( |
) |
Balance at December 31, 2023 |
|
$ |
|
|
Subsequent to the three months ended December 31, 2023, on January 16, 2024, the Company's Board of Directors approved an organizational restructuring plan (the "2024 Plan") to monetize assets and reduce non-core lower margin product and service offerings. As part of the 2024 Plan, there is a reduction in force affecting approximately
Cash expenditures for the reduction in force are estimated to be $
3. Inventory
Inventory consists of the following:
(in thousands) |
|
December 31, 2023 |
|
|
June 30, 2023 |
|
||
Bulk wine, spirits and cider |
|
$ |
|
|
$ |
|
||
Bottled wine, spirits and cider |
|
|
|
|
|
|
||
Bottling and packaging supplies |
|
|
|
|
|
|
||
Nonwine inventory |
|
|
|
|
|
|
||
Total inventory, net of reserve |
|
$ |
|
|
$ |
|
||
Inventories of bulk and bottled wines, spirits, and ciders and inventories of non-wine products and bottling and packaging supplies are valued at the lower of cost using the FIFO method or net realizable value. Costs associated with winemaking, and other costs associated with the manufacturing of products for resale, are recorded as inventory. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. Inventories are classified as current assets in accordance with recognized industry practice, although most wines and spirits are aged for periods longer than one year.
As a result of continued simplification of the business, the Company performed a detailed review of its bottled wine, spirits and cider inventory and reduced the value of non-core lower margin products and aged inventory by $
Inventory valued at $
10
4. Intangible Assets
The following tables summarize other intangible assets by class:
|
|
December 31, 2023 |
|
|||||||||||||
(in thousands) |
|
Gross |
|
|
Accumulated |
|
|
Accumulated Impairment Losses |
|
|
Net Intangible |
|
||||
Indefinite-life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|||
Winery use permits |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Total Indefinite-life intangibles |
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Definite-life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Trade names and trademarks |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Total definite-life intangibles |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Total other intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
|
|
June 30, 2023 |
|
|||||||||||||
(in thousands) |
|
Gross |
|
|
Accumulated |
|
|
Accumulated Impairment Losses |
|
|
Net Intangible |
|
||||
Indefinite-life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|||
Winery use permits |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Total Indefinite-life intangibles |
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Definite-life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
|
||
Trade names and trademarks |
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
|
||
Total definite-life intangibles |
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
|
||
Total other intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Intangible assets, net of $
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, then one or more of our reporting units might become impaired in the future.
We utilized the discounted cash flow method under the income approach and the Guideline Public Company Method (GPCM) under the market approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values under the income approach include the estimated future annual net cash flows for each reporting unit (including net sales, cost of revenue, selling, general and administrative expense updated as of the end of the second quarter, depreciation and amortization, working capital, and capital expenditures), estimated growth rates, income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. Under the GPCM approach, the significant assumptions include the consideration of stock price and financial metrics from guideline companies.
We periodically assess whether any indicators of impairment exist related to our intangible assets. During the three months ended December 31, 2023, we identified a triggering event as a result of a decline in actual and projected revenue of certain trade names. As a result of the impairment analysis performed, the Company recorded a non-cash impairment charge of $
11
5. Fair Value Measurements
The following tables present assets and liabilities measured at fair value on a recurring basis:
|
|
December 31, 2023 |
|
|||||||||||||
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest rate swaps (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liabilities (2) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
June 30, 2023 |
|
|||||||||||||
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest rate swaps (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liabilities (2) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1) The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated Level 2 inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by discounting future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the non-performance risk of the Company and the respective counterparty.
(2) We assess the fair value of contingent consideration to be settled in cash related to acquisitions using probability weighted models for the various contractual earn-outs. These are Level 3 measurements. Significant unobservable inputs used in the estimated fair values of these contingent consideration liabilities include probabilities of achieving customer related performance targets, specified sales milestones, consulting milestones, changes in unresolved claims, projected revenue or changes in discount rates. The long-term portion of the contingent consideration liabilities was
The following table provides a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
(in thousands) |
|
Contingent |
|
|
Balance at June 30, 2023 |
|
|
|
|
Acquisitions |
|
|
|
|
Payments |
|
|
( |
) |
|
|
( |
) |
|
Balance at December 31, 2023 |
|
|
|
|
Less: current portion |
|
|
( |
) |
Long-term portion |
|
|
|
|
During the six months ended December 31, 2023, the Company recognized a decrease in the fair value of contingent consideration of $
12
6. Commitments, Contingent Liabilities and Litigation
We are subject to a variety of claims and lawsuits that arise from time to time in the ordinary course of business. Although management believes that any pending claims and lawsuits will not have a material impact on the Company’s consolidated financial position or results of operations, the adjudication of such matters are subject to inherent uncertainties and management’s assessment may change depending on future events. The Company records a loss contingency when it is both probable and reasonably estimable. Management's estimates of loss contingencies are based on the latest information available.
Litigation
On November 14, 2022, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Nevada against the Company and certain current and former members of its management team. The lawsuit is captioned Ezzes v. Vintage Wine Estates, Inc., et al. (“Ezzes“), and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of the Company's periodic reports filed with the SEC relating to, among other things, the Company’s business, operations, and prospects, including with respect to the Company’s inventory metrics and overhead burden. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On November 28, 2022, a second purported securities class action lawsuit, captioned Salbenblatt v. Vintage Wine Estates, Inc., et al. (“Salbenblatt”), was filed in the same court, containing similar claims and allegations, and seeking similar relief, as the Ezzes lawsuit. On February 14, 2023, the Court consolidated both actions and appointed the lead plaintiffs. The Salbenblatt action was transferred to and consolidated with the Ezzes action. On May 1, 2023, the lead plaintiffs filed a consolidated amended class action complaint (“amended complaint”). On June 30, 2023 defendants filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed on September 25, 2023, and the court dismissed the case on March 1, 2024. Pursuant to the court's ruling, the plaintiffs have 21 days from the court's ruling to amend their complaint otherwise the court will dismiss the plaintiffs' claims with prejudice. As previously noted, litigation is inherently uncertain, and the Company is unable to predict the outcome of this litigation and is unable to estimate the range of loss, if any, that could result from an unfavorable outcome. The Company also cannot provide any assurance that the ultimate resolution of this litigation will not have a material adverse effect on our reputation, business, prospects, results of operations or financial condition.
The Company is involved in two disputes with One True Vine, LLC and Jayson Woodbridge (the "Claimant") (together, the "Claimants") relating to an Asset Purchase Agreement (“APA”) and a related Non-Compete Agreement/Non-Solicitation Agreement (the “Non-Compete Agreement”) from a 2018 acquisition. Claimant has alleged that the Company did not make certain earnout payments allegedly due under the APA and has alleged that the Company misused alleged rights of publicity with respect to the brands in violation of the Non-Compete Agreement. On or about August 30, 2023, Claimants served a demand for arbitration on the Company. On October 16, 2023, the Company paid the Claimant $
The Company has received a complaint in California Superior Court alleging certain violations of California employment law and seeking class certification for certain current and former employees of the Company. The Company intends to defend the matter vigorously. The Company is unable to predict the outcome of this matter and is unable to estimate the range of loss, if any, that could result from an unfavorable outcome.
In January 2024, the Company was notified of alleged quality breaches in connection with production of wines for a Business-to-Business customer. The customer also alleges a potential breach of contract related to the Company's quality management systems. The Company intends to vigorously defend itself against the claims. The Company has recorded a loss contingency of $
From time to time, the Company is subject to other legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any other material legal proceedings, nor is it aware of any pending or threatened litigation that, in the Company’s opinion, would have a material adverse effect on the business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Indemnification Agreements
In the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising from a breach of representations or covenants or from intellectual property infringement claims made by third parties. These indemnities include indemnities to our directors and officers to the maximum extent permitted under applicable state laws. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. Historically, we have not incurred any significant costs as a result of such indemnifications.
13
Other Commitments
Contracts exist with various growers and certain wineries to supply a significant portion of our future grape and wine requirements. Contract amounts are subject to change based upon actual vineyard yields, grape quality and changes in grape prices.
(in thousands) |
|
|
|
|
Year ending June 30, |
|
Total |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
|
|
$ |
|
|
Grape, bulk wine and cider purchases under contracts totaled $
7. Long-Term and Other Short-Term Obligations
The following table summarizes long-term and other short-term obligations:
|
|
December 31, |
|
|
June 30, |
|
||
(in thousands) |
|
2023 |
|
|
2023 |
|
||
Note to a bank with one month interest at SOFR ( |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Capital expenditures borrowings payable at SOFR ( |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Equipment Term Loan payable at SOFR ( |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Note to a bank with interest fixed at |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Note to a bank with interest fixed at |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Delayed Draw Term Loan with interest at SOFR ( |
|
|
|
|
|
|
||
Total debt |
|
|
|
|
|
|
||
Less: current maturities |
|
|
( |
) |
|
|
( |
) |
Less: unamortized deferred financing costs |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net |
|
$ |
|
|
$ |
|
||
The effective interest rate under the revolving facility was
On October 12, 2023, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Second A&R Loan and Security Agreement by and among the Company, the Borrowers party thereto (the "Borrowers"), the Lenders party thereto (the "Lenders"), and BMO Bank, N.A., as successor in interest to Bank of the West, as Agent (the "Agent"). The Fourth Amendment, among other things: (i) waives certain existing events of default relating to the Company’s failure to comply with the financial covenants and financial reporting requirements set forth in the credit agreement for prior fiscal periods; (ii) reduces the aggregate revolving commitment and the aggregate delayed draw term loan commitment to $
14
“Covenant Modification Period”); (v) suspends the minimum fixed charge coverage ratio covenant for the fiscal quarters ending September 30, 2023 through and including June 30, 2024 and provides for a step-down of the minimum fixed charge coverage ratio to 1.00:1.00 for the remainder of the Covenant Modification Period; (vi) adds an equity cure right for the Company in the event of future breaches of the financial covenants; (vii) reduces revolver availability by (1) $
Debt modification costs of $
As of the date of this filing, the Company is not in compliance with certain covenants contained in the Second A&R Loan and Security Agreement, including (i) failure to maintain Adjusted EBITDA of $
On February 28, 2024, the Company entered into the Forbearance Agreement with respect to the Second A&R Loan and Security Agreement under which the Agent and Lenders have agreed to forbear from enforcing their respective rights and remedies in respect to certain events of default under the agreement, subject to the terms and conditions set forth in the agreement, through March 31, 2024 (the "Forbearance Period") so long as no event of default (other than the Designated Defaults) shall occur, and the Company and the Borrowers (collectively, the "Obligors") comply with the terms of the Forbearance Agreement and otherwise do not assert a defense to their obligations under the Loan Agreement or any other loan documents or make a claim against the Agent or any Lender. The Forbearance Agreement, among other things, (a) reduces the revolving commitments under the Loan Agreement from $
8. Stockholders' Equity
Warrants
At December 31, 2023, there were
The Public Warrants are exercisable commencing on August 11, 2021 and expire
The Private Warrants are exercisable commencing on August 11, 2021 for one common share at an exercise price of $
Meier's Earnout Shares
In connection with the closing of the Meier's business combination with Paul T. Lux Irrevocable Trust pursuant to a merger agreement dated January 18, 2022, Mr. Lux is entitled to receive up to an additional $
15
The Company will make earnout payments based on the product of the amount of adjusted EBITDA in calendar 2022, 2023 and 2024 over an EBITDA threshold, as defined in the merger agreement, and the earnout multiple of seven.
Stock Options
Stock options granted under the 2021 Omnibus Incentive Plan (as amended, the "2021 Plan") prior to May 17, 2023 have a
The following table presents a summary of stock option activity under the 2021 Plan:
|
|
Stock Options |
|
|
Weighted-Average Exercise Price |
|
|
Weighted-Average Remaining Contractual Life (Years) |
|
|
Aggregate Intrinsic Value |
|
||||
Outstanding at June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|||
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
Forfeited or cancelled |
|
|
( |
) |
|
|
|
|
|
|
|
|
- |
|
||
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Total unrecognized compensation expense related to the stock options was $
Restricted Stock Units
Restricted stock units are subject only to service conditions and those issued prior to May 17, 2023 vest, except as set forth in the award agreement, in four equal installments of
The following table presents a summary of restricted stock units' activity:
|
|
Restricted Stock Units |
|
|
Weighted-Average Grant Date Fair Value |
|
||
Outstanding at June 30, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited or cancelled |
|
|
( |
) |
|
|
|
|
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Total unrecognized compensation expense related to the restricted stock units was $
During the six months ended December 31, 2023, the Company granted
16
Earnings Per Share
The following table reconciles the number of common shares used to compute basic and diluted earnings per share attributable to Vintage Wine Estates, Inc., shareholders:
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
||||||||||
(in thousands, except for per share amounts) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Less: loss allocable to noncontrolling interest |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss allocable to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Numerator – Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss allocable to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss allocated to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Numerator – Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss allocated to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss allocated to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator – Basic Common Shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding - Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator – Diluted Common Shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares - Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share – basic: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common Shares |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss per share – diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common Shares |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The following securities have been excluded from the calculations of diluted earnings per share attributable to common shareholders because including them would have been antidilutive:
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Shares subject to warrants to purchase common stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shares subject to options to purchase common stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shares subject to restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
9. Income Taxes
For the three months ended December 31, 2023, the effective tax rate differs from the federal statutory rate of
Other long-term liabilities include $
On February 7, 2023, the Company and Patrick Roney, founder of VWE, entered into a letter agreement (the “Letter Agreement”) whereby Mr. Roney voluntarily elected to transition from Chief Executive Officer of the Company to Executive Chairman of the Board, effective February 7, 2023. Pursuant to the terms of the Letter Agreement, the Employment Agreement between the Company and Mr. Roney effective June 7, 2021 (the “Prior Employment Agreement”) was terminated and upon such termination the Company agreed to provide Mr. Roney his accrued but unpaid Base Salary and PTO (as defined in the Prior Employment Agreement) through February 7, 2023, and any vested amounts or benefits that he is entitled to receive under any plan, program, or policy, as described in Section 5.1 of the Prior Employment Agreement. Mr. Roney expressly waived any claim to the severance benefits described in Section 5.2(b) of the Prior Employment Agreement. On October 17, 2023, the Company and Mr. Roney
17
entered into an amendment to the Letter Agreement pursuant to which his annual base salary was decreased. Pursuant to the terms of the Letter Agreement, as amended, Mr. Roney will receive an annual base salary of $
The Company has a contract with Bin-to-Bottle, a storage and bottling company, partially owned by Mr. Roney, for storage purposes. The Company incurred
The Company has a revenue sharing agreement with Sonoma Brands Partners II, LLC where a portion of B.R. Cohn and Clos Pegase sales during various events throughout the year go to Sonoma Brands Partners II, LLC. Sonoma Brands Partners II, LLC is managed by a member of the Company's board of directors. For the six months ended December 31, 2023 and 2022, payments to Sonoma Brands Partners II, LLC totaled $
Also on February 7, 2023, the Board appointed Jon Moramarco, a member of the Board, as the Company’s Interim Chief Executive Officer. In connection with such appointment, the Company entered into a consulting agreement (the “Consulting Agreement”) with bw166 LLC (“bw166”) and Mr. Moramarco, pursuant to which the Company paid bw166 a monthly fee of $
Immediate Family Member and Other Business Arrangements
We provide at-will employment to several family members of officers or directors who provide various sales, marketing and administrative services to us. Payroll and other expenses to these related parties was $
On July 19, 2023, the Company and Terry Wheatley, President of VWE, entered into a Separation Agreement and Release of all Claims (the "Separation Agreement") whereby Ms. Wheatley voluntarily elected to resign from the Company. Pursuant to the terms of the Separation Agreement, the employment agreement between the Company and Ms. Wheatley effective June 7, 2021 (the "Prior Employment Agreement") was terminated and upon such termination the Company agreed to provide Ms. Wheatley her accrued but unpaid Base Salary and PTO (as defined in the Prior Employment Agreement) through July 19, 2023, and any vested amounts or benefits that she is entitled to receive under any plan, program, or policy, as described in Section 5.1 of the Prior Employment Agreement. Pursuant to the terms of the Separation Agreement, the Company agreed to pay Ms. Wheatley an amount equal to three years of her annual base salary, to be paid in monthly installments over twenty-four consecutive months, a one-time payment of $
In connection with the Separation Agreement, the Company and Ms. Wheatley entered into an asset purchase agreement (the "Wheatley APA") effective as of September 17, 2023, whereby the Company sold Ms. Wheatley all of its intellectual property rights related to its "Purple Cowboy," "Wine Sisterhood" and "Gem+Jane" trademarks for a nominal sum. Pursuant to the Wheatley APA, the Company holds a worldwide, non-exclusive license to use the Purple Cowboy intellectual property ("IP") until June 30, 2024 for the purpose of liquidating its existing Purple Cowboy inventory. Pursuant to the Wheatley APA, Ms. Wheatley is required to purchase, by December 31, 2024, all Purple Cowboy inventory held by the Company that was not sold by June 30, 2024, at cost plus shipping charges. From September 17, 2023 to June 30, 2024, the Company has agreed to make sponsorship payments to “Tough Enough to Wear Pink”, an initiative to raise money for breast cancer awareness, of all gross profits received from sales of inventory associated with the Purple Cowboy IP. The sponsorship payments are to be made at a rate of $
In addition, pursuant to the Wheatley APA, the Company holds a worldwide, partially non-exclusive and partially exclusive license to use the Wine Sisterhood IP for the purpose of liquidating, and until it has liquidated, its existing inventory associated with the Wine Sisterhood IP. Ms. Wheatley has also agreed to pay the Company a royalty of $1.00 per 9-liter case of “Gem+Jane” branded products sold for a period of three years from September 17, 2023.
Financial Advisory Agreement
In April 2022, the Company entered into an arrangement with Global Leisure Partners LLC ("GLP") to act as a financial advisor to the Company in connection with its exploration of acquisitions, mergers, investments and other strategic matters. A director of the Company having the authority to
18
establish policies and make decisions is an executive of GLP. Although members of the board of directors are typically independent from management, members of the board of directors would be considered management based on the definition of management in ASC 850, Related Party Disclosures. Payments to GLP totaled $
11. Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM, or decision-making group, in deciding how to allocate resources and in assessing performance. Our operations are principally managed on a sales distribution basis and are comprised of three reportable segments: Wholesale; Direct-to-Consumer; and Business-to-Business. The factors for determining the reportable segments include the manner in which management evaluates performance for purposes for allocating resources and assessing performance.
We report our segments as follows:
Direct-to-Consumer ("DTC") - We sell our wine and other merchandise directly to consumers through wine club memberships, at wineries’ tasting rooms, and through eCommerce. Winery estates hold various public and private events for customers and our wine club members.
Wholesale - We sell our wine, spirits and cider to wholesale distributors under purchase orders. Wholesale operations generate revenue from product sold to distributors, who then sell them to off-premise retail locations such as grocery stores, wine clubs, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars.
Business-to-Business ("B2B") - Our Business-to-Business segment generates revenue primarily from custom winemaking services and the sale of private label wines and spirits. Annually, we work with our national retail partners to develop private label wines incremental to their wholesale channel businesses. These services are made under contracts with customers, which includes specific protocols, pricing, and payment terms. The customer retains title and control of the product during the process.
Other - Other is included in the tables below for the purpose of reconciliation of revenues and profit but is not considered a reportable segment. We record corporate level expenses, non-direct selling expenses and other expenses not specifically allocated to the results of operations in Other.
The following tables present net revenue and income from operations directly attributable to the Company's segments:
|
|
Three Months Ended December 31, 2023 |
|
|||||||||||||||||
(in thousands) |
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
|||||
Net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Restructuring expense (adjustments) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Loss from operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
Three Months Ended December 31, 2022 |
|
|||||||||||||||||
(in thousands) |
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
|||||
Net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Income (loss) from operations |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
Six Months Ended December 31, 2023 |
|
|||||||||||||||||
(in thousands) |
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
|||||
Net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Restructuring expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
(Loss) Income from operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
19
|
|
Six Months Ended December 31, 2022 |
|
|||||||||||||||||
(in thousands) |
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
|||||
Net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Income (loss) from operations |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
There was no inter-segment activity for any of the reporting periods presented.
Depreciation expense recognized by operating segment is summarized below:
(in thousands) |
|
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
||||||
For the three months ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2023 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
2022 |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
(in thousands) |
|
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
||||||
For the six months ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2023 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
2022 |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Amortization expense recognized by operating segment is summarized below:
(in thousands) |
|
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
||||||
For the three months ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2023 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
2022 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
(in thousands) |
|
|
Direct-to-Consumer |
|
|
Wholesale |
|
|
Business-to-Business |
|
|
Other |
|
|
Total |
|
||||||
For the six months ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2023 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
2022 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
All of our long-lived assets are located within the United States.
12. Subsequent Events
Restructuring
On January 16, 2024, the Company's Board of Directors approved an organizational restructuring, the 2024 Plan, to monetize assets and reduce non-core lower margin product and service offerings. As part of the 2024 Plan, there is a reduction in force affecting approximately
Cash expenditures for the reduction in force are estimated to be $
Nasdaq Notice
On February 21, 2024, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC ("Nasdaq") indicating that, because the Company has not filed its Form 10-Q within the prescribed time period, the Company is not in compliance with the timely filing requirement for continued listing under Nasdaq Listing Rule 5250(c)(1). The Nasdaq notification letter has no immediate effect on the listing or trading of the Company’s common stock. While the notice provides the Company the opportunity to submit a plan to regain compliance with Nasdaq Listing Rule 5250(c)(1) within 60 days, the Company currently expects to be in compliance with the listing qualification in that timeframe.
Forbearance Agreement
On February 28, 2024, the Company entered into a Forbearance Agreement with respect to the Second A&R Loan and Security Agreement under which the Agent and Lenders have agreed to forbear from enforcing their respective rights and remedies in respect to certain events of default under
20
the agreement, subject to the terms and conditions set forth in the agreement, through March 31, 2024. The Forbearance Agreement, among other things, (a) reduces the revolving commitments under the Loan Agreement from $
Assets Held for Sale
On February 26, 2024, the Company entered into a non-binding letter of intent with respect to a proposed disposition of the stock of a subsidiary of VWE to a third-party purchaser. The sale would allow for the Company to pay down debt. The securities that would be sold under the agreement did not meet all criteria to be classified as assets held for sale as of the balance sheet date, and as such, are not presented and disclosed as assets held for sale in the consolidated financial statements.
During February 2024, the Company determined that certain standalone DTC operations are classified as assets held for sale. The assets held for sale include certain real and intangible property related to these DTC operations. The Company has received indications of interest, which lead the Company to believe that these assets will be sold within twelve months. These assets did not meet all criteria to be classified as assets held for sale as of the balance sheet date, and as such, are not presented and disclosed as assets held for sale in the consolidated financial statements.
Dismissal of Shareholder Lawsuit
On March 1, 2024, the U.S District Court for the District of Nevada dismissed a case that was filed on November 14, 2022, a purported securities class action lawsuit against the Company and certain current and former members of its management team. The lawsuit is captioned Ezzes v. Vintage Wine Estates, Inc., et al. (“Ezzes“), and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of the Company's periodic reports filed with the SEC relating to, among other things, the Company’s business, operations, and prospects, including with respect to the Company’s inventory metrics and overhead burden. On November 28, 2022, a second purported securities class action lawsuit, captioned Salbenblatt v. Vintage Wine Estates, Inc., et al. (“Salbenblatt”), was filed in the same court, containing similar claims and allegations, and seeking similar relief, as the Ezzes lawsuit. On February 14, 2023, the Court consolidated both actions and appointed the lead plaintiffs. The Salbenblatt action was transferred to and consolidated with the Ezzes action. On May 1, 2023, the lead plaintiffs filed a consolidated amended class action complaint (“amended complaint”). On June 30, 2023 defendants filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed on September 25, 2023, and the court dismissed the case on March 1, 2024. Pursuant to the court's ruling, the plaintiffs have
Nasdaq Compliance
The Company’s application for transfer to the Capital Markets was approved by Nasdaq. On March 12, 2024, VWE received confirmation that it has been allowed an additional 180-day extension for the Company to regain compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1), which requires the bid price of VWE Common Shares to close at or above US$
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we,” “us,” “our” and “the Company” are intended to mean the business and operations of Vintage Wine Estates, Inc., a Nevada corporation, and its consolidated subsidiaries.
Business Overview
Vintage Wine Estates, Inc. brings to market a unique portfolio of cider and Super Premium+ wines at $15+ per bottle. The Company focuses on building enduring and differentiated brands that resonate with consumers to generate increasing organic demand in the U.S. It leverages brand-affiliated wine clubs, tasting rooms, and owned ecommerce sites in conjunction with deep wholesale relationships to offer consumers a holistic, omnichannel experience. VWE’s ambition is to be one of the fastest growing players in the branded wine space with best-in-class profitability and consistent cash generation to create value for all stakeholders. The Company is doubling down on a culture that is uniquely consumer-centric and intensely data-driven in service of over fifteen core wine brands spanning approachably priced lifestyle labels and high-scoring premium brands.
Five-Point-Plan
We were presented with several new challenges in 2023, such as supply chain constraints, freight challenges, intense inflation, rapidly increasing interest rates and labor shortages which significantly impacted profitability and liquidity. To address these issues, we implemented our Five-Point Plan in the latter half of 2023, which we believe will enable us to drive stronger earnings, provide a sustainable foundation for future growth and allow us to become a leading wine and cider company that makes the highest quality, Super Premium+ wines and ciders that are accessible and approachable for consumers. We believe our Five-Point Plan, consisting of (1) margin expansion, (2) cost reduction, (3) cash management, (4) monetizing assets and (5) revenue growth will enable us to better scale and grow beyond 2024, which we anticipate will be a transition year for the Company. In 2024, our priorities under our Five-Point Plan are to deliver profitability, generate cash, and reduce debt. In order to meet these objectives our near-term goals are to simplify the business, reduce costs, improve production throughout our operations, focus on key brands, and pay down debt through the monetization of assets and reducing costs, among other things.
Our concerted effort to monetize assets has resulted in indications of interest, bids and a non-binding letter of intent across stand-alone DTC operations, certain production services businesses and other non-core assets.
Restructuring
On July 20, 2023, the Company's executive officers, authorized by the Board of Directors (the "Board") to take such action, approved an organizational restructuring plan (the "2023 Plan") to expand margin through simplification and improved execution, measurably reduce costs, improve cash management, monetize assets, reduce debt and grow revenue of its key brands. As part of the 2023 Plan, there was a reduction in force affecting approximately 25 roles, or 4% of the workforce. The total restructuring expense, substantially all of which is employee severance and related benefit costs, was $3.8 million for the six months ended December 31, 2023.
On January 16, 2024, the Company's Board of Directors approved an organizational restructuring plan (the "2024 Plan") to monetize assets and reduce non-core lower margin product and service offerings. As part of the 2024 Plan, there is a reduction in force affecting approximately 15% of the workforce, which is expected to result in annualized cost savings of $7.1 million. The Company expects the reduction in force to be substantially complete by the end of the third quarter of fiscal 2024.
Cash expenditures for the reduction in force are estimated to be $1.5 million, substantially all of which are related to employee severance and benefits costs. The expense will be accrued in the third quarter of fiscal 2024.
Trends and Other Factors Affecting Our Business
Events, including, but not limited to, the military incursion by Russia into Ukraine, the Israel-Hamas war, inflationary conditions and rising interest rates, have caused disruptions in the U.S. and global economy, and uncertainty regarding general economic conditions, including concerns about a potential U.S. or global recession may affect consumer spending on discretionary items, including wine. This uncertainty could affect our operating results.
There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenue and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through March) and higher sales and net income during our second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.
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
22
available to us for the production of wine from year to year. Our vineyards and properties, as well as other sources from which we purchase grapes, are affected by these factors. For example, the effects of abnormally high rainfall or drought in a given year may impact production of grapes, which can impact both our revenue and costs from year to year. In addition, extreme weather events such as wildfires can result in potentially significant expenses to repair or replace a vineyard or facility as well as impact the ability of grape suppliers to fulfill their obligations to us.
Due to plentiful yields from the 2023 California grape harvest as well as an over supply of bulk wine in the Pacific Northwest, the price of bulk wine has dramatically decreased during 2023. The reduction in demand for our wine coupled with our desire to simplify our business by reducing or monetizing brands has led to us carrying significant quantities of bulk wine. Due to falling prices for bulk wine, the value of our bulk wine decreased to below its historical cost requiring us to write off a portion of the value of our bulk wine inventory. Due to diminished demand for bulk wine it may be difficult for us to monetize the value of our bulk wine in the near term.
Key Measures to Assess the Performance of our Business
We consider a variety of financial and operating measures in assessing the performance of our business, formulating goals and objectives and making strategic decisions. The key GAAP measures we consider are net revenue; gross profit; selling, general and administrative expenses; and income from operations. The key non-GAAP measures we consider are Adjusted EBITDA and Adjusted EBITDA margin. We also monitor our case volume sold from our distributors to retailers to help us forecast and identify trends affecting our growth.
Net Revenue
We generate revenue from our reportable segments: Wholesale, Business-to-Business ("B2B") and Direct-to-Consumer ("DTC"). We recognize revenue from sales when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when the product is shipped, at which point title passes to the customer and control of the promised product or service is transferred to the customer. Our standard terms are free on board, or FOB, shipping point, with no customer acceptance provisions. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products. We recognize revenue net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We account for shipping and handling as activities to fulfill our promise to transfer the associated products. Accordingly, we record amounts billed for shipping and handling costs as a component of net sales and classify such costs as a component of costs of sales. Our products are generally not sold with a right of return, unless the product is spoiled or damaged. Historically, returns have not been significant to us.
Gross Profit
Gross profit is equal to net revenue less cost of sales. Cost of sales includes the direct cost of manufacturing, including direct materials, labor and related overhead, and physical inventory adjustments, as well as inbound and outbound freight and import duties.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses arising from activities in selling, marketing, warehousing, and administrative expenses. Other than variable compensation, selling, general and administrative expenses are generally not directly proportional to net revenue.
Income from Operations
Income from operations is gross profit less selling, general and administrative expenses; impairment losses on goodwill and intangible assets; acquisition and restructuring related expense or income and amortization of intangible assets. Income from operations excludes interest expense, income tax expense, and other expenses, net. We use income from operations as well as other indicators as a measure of the profitability of our business.
Case Volumes
The primary drivers of net revenue growth in any period are attributable to changes in case volumes and changes in product mix and sales price. Case volumes represent the number of 9-liter equivalent cases of wine that we sell during a particular period. Case volumes for our DTC and Wholesale segments are an important indicator for us to determine what is driving gross margin. This metric also allows us to develop our supply and production targets for future periods for our DTC and Wholesale segments. B2B segment sales are not related to case volumes.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies. These metrics are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.
Beginning for the six months ended December 31, 2023, Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest, income taxes, depreciation and amortization, stock-based compensation expense, casualty losses or gains, impairment losses, changes in the fair value of derivatives, restructuring-related income or expenses, and certain non-cash, non-recurring, or other items included in net
23
income (loss) that we do not consider indicative of our ongoing operating performance. Prior to the six months ended December 31, 2023, we used net income (loss) in our calculation of Adjusted EBITDA. We believe the use of net income (loss) attributable to common stockholders in our calculation of Adjusted EBITDA is more helpful than net income (loss) in evaluating our operating performance because it excludes amounts attributable to non-controlling interests. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by net revenue. Presentations of Adjusted EBITDA and Adjusted EBITDA margin for prior periods have been recast to conform to the current period presentation.
Results of Operations
Total net revenue decreased $10.4 million across all business segments to $68.0 million and gross profit decreased $40.7 million to a gross loss of $15.0 million for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. The decrease in wine net revenue is primarily related to the Company's brand simplification and reallocation of resources, and the decrease in nonwine net revenue is primarily related to a decrease of $3.6 million in sales of bulk spirits. Other factors include customer program timing and softer end market demand. Total cost of revenue for the three months ended December 31, 2023 increased $30.3 million over the three months ended December 31, 2022, primarily due to an increase in inventory reserves of $32.0 million to reduce the value of non-core products and aged inventory as well as bulk wine related to the Company's narrowed brand focus. Selling, general and administrative expenses, excluding amortization expense, decreased $6.9 million resulting from decreased stock compensation expense, reduced marketing expenses on non-core product lines, improved freight management and tighter cost controls. The Company incurred goodwill and intangible asset impairments of $4.7 million and $137.9 million in the three months ended December 31, 2023 and 2022, respectively. Interest expense increased $0.5 million compared to the prior year quarter as a result of higher interest rates. These factors resulted in a net loss attributable to common stockholders of $49.4 million for the three months ended December 31, 2023 compared to net loss of $129.1 million for the three months ended December 31, 2022.
Total net revenue decreased $15.2 million to $141.3 million and gross profit decreased $45.6 million to $9.7 million for the six months ended December 31, 2023 compared to the six months ended December 31, 2022. The decrease in wine net revenue is primarily related to the Company's brand simplification and reallocation of resources, and the decrease in nonwine net revenue is primarily related to the decrease in sales of bulk spirits. Total cost of revenue for the six months ended December 31, 2023 increased $30.3 million over the six months ended December 31, 2022, primarily due to an increase in inventory reserves of $32.0 million, as noted above. Selling, general and administrative expenses, excluding amortization expense, decreased $9.6 million resulting from decreased stock compensation expense, reduced marketing expenses on non-core product lines and tighter cost controls.For the six months ended December 31, 2023, the unrealized loss on interest rate swap agreements increased $11.3 million compared to the prior period. In addition, the Company incurred restructuring expenses of $3.8 million and intangible asset impairments of $4.7 million. These expenses were offset by goodwill and intangible asset impairments of $125.3 million and $12.6 million, respectively, in the six months ended December 31, 2022. These factors resulted in a net loss attributable to common stockholders of $64.4 million for the six months ended December 31, 2023 compared to a net loss attributable to common stockholders of $127.6 million for the six months ended December 31, 2022.
In the latter half of 2023, we implemented our Five-Point Plan which we believe will enable us to drive stronger earnings, provide a sustainable foundation for future growth and allow us to become a leading wine and cider company that makes the highest quality, Super Premium+ wines and ciders. We believe our Five-Point Plan will enable us to better scale and grow beyond 2024, which we anticipate will be a transition year for the Company. As discussed above, the Company has incurred $3.8 million in restructuring expenses. Other costs related to the Five-Point Plan include, but are not limited to, $0.6 million in transportation costs related to inventory management to optimize the distribution of products and $0.6 million in temporary retention costs.
Our financial performance is classified into the following segments: Wholesale, B2B, and DTC. Our corporate operations, including centralized selling, general and administrative expenses are not allocated to the segments, as management does not believe such items directly reflect our core operations. However, we allocate re-measurements of contingent consideration and impairment of goodwill and intangible assets to our segments. Other than our long-term property, plant and equipment for wine tasting facilities, and customer lists, trademarks and trade names specific to acquired companies, our revenue-generating assets are utilized across segments.
We evaluate the performance of our segments on income from operations, which management believes is indicative of operational performance and ongoing profitability. Management monitors income from operations to evaluate past performance and identify actions required to improve profitability. Income from operations assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define income from operations as gross margin less operating expenses that are directly attributable to the segment. Selling expenses that can be directly attributable to the segment are allocated accordingly.
24
Three Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022
DTC Segment Results
|
|
Three Months Ended December 31, |
|
|
Dollar |
|
|
Percent |
||||||
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
Net revenue |
|
$ |
23,651 |
|
|
$ |
26,472 |
|
|
$ |
(2,821 |
) |
|
(10.7%) |
(Loss) income from operations |
|
$ |
(8,400 |
) |
|
$ |
1,424 |
|
|
$ |
(9,824 |
) |
|
n/m |
(n/m) not meaningful
DTC net revenue for the three months ended December 31, 2023 decreased $2.8 million, or 10.7%, from the three months ended December 31, 2022. The decrease was primarily attributable to a $2.3 million decrease in revenue related to customer turnover at Vinesse and Cameron Hughes and a $1.0 million decrease in tasting rooms' and wine clubs' revenue as a result of several non-estate lifestyle wine clubs closing in March 2023. This was partially offset by a $0.7 million increase in freight revenue as the Company strives to recoup freight to customer costs.
DTC income from operations for the three months ended December 31, 2023 decreased $9.8 million from the three months ended December 31, 2022. There was a lower of cost or market adjustment of $7.9 million related to bulk wine. Also, the segment incurred intangible impairment charges of $2.7 million and finished goods inventory reserve charges of $1.8 million as a result of the company exiting certain DTC brands.
Wholesale Segment Results
|
|
Three Months Ended December 31, |
|
|
Dollar |
|
|
Percent |
||||||
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
Net revenue |
|
$ |
17,786 |
|
|
$ |
23,083 |
|
|
$ |
(5,297 |
) |
|
(22.9%) |
Restructuring expense (adjustments) |
|
$ |
(158 |
) |
|
$ |
- |
|
|
$ |
(158 |
) |
|
n/m |
Loss from operations |
|
$ |
(19,729 |
) |
|
$ |
(126,896 |
) |
|
$ |
107,167 |
|
|
(84.5%) |
(n/m) not meaningful
Wholesale net revenue for the three months ended December 31, 2023 decreased $5.3 million, or 22.9%, from the three months ended December 31, 2022. The decrease relates primarily to program timing that shifted to spring/summer 2024 to align with partnership scheduling changes, $2.5 million. In addition, net revenue of an externally managed brand decreased $1.9 million. We are working with the external partner on remediation efforts and alternatives.
Wholesale loss from operations for the three months ended December 31, 2023 decreased $107.2 million from the three months ended December 31, 2022. The decrease was primarily attributable to non-cash goodwill and intangible assets impairments of $116.3 million and $10.3 million, respectively, taken in the three months ended December 31, 2022. This was partially offset by bulk wine inventory reserve charges of $11.3 million and finished goods inventory reserve charges of $6.9 million.
B2B Segment Results
|
|
Three Months Ended December 31, |
|
|
Dollar |
|
|
Percent |
||||||
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
Net revenue |
|
$ |
26,552 |
|
|
$ |
28,814 |
|
|
$ |
(2,262 |
) |
|
(7.9%) |
Loss from operations |
|
$ |
(1,305 |
) |
|
$ |
(1,167 |
) |
|
$ |
(138 |
) |
|
11.8% |
B2B net revenue for the three months ended December 31, 2023 decreased $2.3 million, or 7.9%, from the three months ended December 31, 2022. The decrease was primarily attributable to decreased sales of bulk distilled spirits of $3.6 million, which was partially offset by an increase in private label wine sales of $1.1 million.
B2B loss from operations for the three months ended December 31, 2023 decreased $0.1 million, or 11.8%, from the three months ended December 31, 2022. The segment benefited from a decrease in goodwill and intangible impairment charges of $9 million. This was offset by a decrease in sales of $2.3 million, bulk wine inventory reserve charges of $4.1 million and a loss contingency reserve of $4.0 million.
25
Six Months Ended December 31, 2023 Compared with Six Months Ended December 31, 2022
DTC Segment Results
The following table presents summary financial data for our DTC segment:
|
|
Six Months Ended December 31, |
|
|
Dollar |
|
|
Percent |
||||||
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
Net revenue |
|
$ |
41,633 |
|
|
$ |
46,464 |
|
|
$ |
(4,831 |
) |
|
(10.4%) |
Restructuring expense (adjustments) |
|
$ |
63 |
|
|
$ |
- |
|
|
$ |
63 |
|
|
n/m |
(Loss) income from operations |
|
$ |
(6,186 |
) |
|
$ |
3,393 |
|
|
$ |
(9,579 |
) |
|
n/m |
(n/m) not meaningful
DTC net revenue declined $4.8 million, or 10.4%, from the six months ended December 31, 2022. The decline was primarily attributable to a decrease in digital marketing sales resulting from brand simplification and reallocation of resources.
DTC loss from operations increased $9.6 million from the six months ended December 31, 2022. There was a lower of cost or market adjustment of $7.9 million related to bulk wine. Also, the segment incurred intangible impairment charges of $2.7 million and finished goods inventory reserve charges of $1.8 million as a result of the company exiting certain DTC brands.
Wholesale Segment Results
The following table presents summary financial data for our Wholesale segment:
|
|
Six Months Ended December 31, |
|
|
Dollar |
|
|
Percent |
||||||
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
Net revenue |
|
$ |
36,930 |
|
|
$ |
47,070 |
|
|
$ |
(10,140 |
) |
|
(21.5%) |
Restructuring expense (adjustments) |
|
$ |
2,131 |
|
|
$ |
- |
|
|
$ |
2,131 |
|
|
n/m |
Loss from operations |
|
$ |
(20,764 |
) |
|
$ |
(124,608 |
) |
|
$ |
103,844 |
|
|
(83.3%) |
(n/m) not meaningful
Wholesale net revenue decreased $10.1 million, or 21.5%, for the six months ended December 31, 2023 compared to the six months ended December 31, 2022. The decrease is primarily related to a decrease in net revenue for an externally managed brand of $3.5 million. There was also a decrease of $3.5 million due to various program timing differences and changes.
Wholesale loss from operations decreased $103.8 million, or 83.3%, from the six months ended December 31, 2022. This change was primarily attributable to a decrease in non-cash goodwill and intangible asset impairments of $116.3 million and $10.3 million, respectively, in the current period. This was partially offset by bulk wine inventory reserve charges of $11.3 million and finished goods inventory reserve charges of $6.9 million resulting from the Company's narrowed brand focus.
B2B Segment Results
The following table presents summary financial data for our B2B segment:
|
|
Six Months Ended December 31, |
|
|
Dollar |
|
|
Percent |
||||||
(in thousands, except %) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
Net revenue |
|
$ |
62,700 |
|
|
$ |
62,994 |
|
|
$ |
(294 |
) |
|
(0.5%) |
Income from operations |
|
$ |
3,334 |
|
|
$ |
9,366 |
|
|
$ |
(6,032 |
) |
|
(64.4%) |
B2B net revenue decreased $0.3 million, or 0.5%, in the six months ended December 31, 2023 compared to the six months ended December 31, 2022.
B2B income from operations decreased $6.0 million, or 64.4%, from the six months ended December 31, 2022. The decrease was primarily related to bulk wine inventory reserve charges of $4.1 million, a loss contingency reserve of $4.0 million and a decrease in margin for bulk spirits sales.
Case Volumes
The following table summarizes 9-liter equivalent cases by the DTC and Wholesale segments:
26
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Unit Change |
|
|
% Change |
|
||||
Direct-to-Consumer |
|
|
106 |
|
|
|
125 |
|
|
-19 |
|
|
|
-15.2 |
% |
|
Wholesale |
|
|
357 |
|
|
|
453 |
|
|
|
-96 |
|
|
|
-21.2 |
% |
Total case volume |
|
|
463 |
|
|
|
578 |
|
|
|
-115 |
|
|
|
-19.9 |
% |
|
|
Six Months Ended December 31, |
|
|
|
|
|
|
|
|||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Unit Change |
|
|
% Change |
|
||||
Direct-to-Consumer |
|
|
182 |
|
|
|
224 |
|
|
-42 |
|
|
|
-18.8 |
% |
|
Wholesale |
|
|
806 |
|
|
|
992 |
|
|
|
-186 |
|
|
|
-18.8 |
% |
Total case volume |
|
|
988 |
|
|
|
1,216 |
|
|
|
-228 |
|
|
|
-18.8 |
% |
Non-GAAP Financial Measures
The following is a reconciliation of net (loss) income attributable common stockholders to Adjusted EBITDA and net (loss) income attributable to common stockholders margin to Adjusted EBITDA margin for the periods presented:
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||
(in thousands) |
December 31, 2023 |
|
|
December 31, 2022 |
|
December 31, 2023 |
|
|
December 31, 2022 |
|
||||
Net (loss) income attributable to common stockholders |
$ |
(49,351 |
) |
|
$ |
(129,135 |
) |
$ |
(64,409 |
) |
|
$ |
(127,603 |
) |
Goodwill and intangible asset impairment losses |
|
4,742 |
|
|
|
137,928 |
|
|
4,742 |
|
|
|
137,928 |
|
Interest expense |
|
6,119 |
|
|
|
5,650 |
|
|
11,044 |
|
|
|
9,031 |
|
Depreciation Expense |
|
3,995 |
|
|
|
3,860 |
|
|
8,126 |
|
|
|
7,856 |
|
Restructuring expenses* |
|
(158 |
) |
|
|
- |
|
|
3,844 |
|
|
|
- |
|
Amortization expense |
|
1,888 |
|
|
|
1,805 |
|
|
3,524 |
|
|
|
3,616 |
|
Stock-based compensation expense |
|
1,277 |
|
|
|
3,250 |
|
|
2,546 |
|
|
|
6,690 |
|
Income tax provision |
|
(199 |
) |
|
|
(23,652 |
) |
|
45 |
|
|
|
(22,178 |
) |
Net loss (gain) on interest rate swap agreements |
|
2,726 |
|
|
|
839 |
|
|
2,821 |
|
|
|
(8,488 |
) |
Loss (gain) on insurance and litigation proceeds |
|
148 |
|
|
|
- |
|
|
148 |
|
|
|
(530 |
) |
(Gain) loss on disposition of assets |
|
(2 |
) |
|
|
4,430 |
|
|
(799 |
) |
|
|
4,430 |
|
Adjusted EBITDA |
$ |
(28,815 |
) |
|
$ |
4,975 |
|
$ |
(28,368 |
) |
|
$ |
10,752 |
|
Net revenues |
$ |
67,989 |
|
|
$ |
78,401 |
|
$ |
141,263 |
|
|
$ |
156,481 |
|
Net Income (loss) attributable to common stockholders margin |
n/m |
|
|
(60.7)% |
|
n/m |
|
|
(122.6)% |
|
||||
Adjusted EBITDA margin |
n/m |
|
|
|
6.3 |
% |
n/m |
|
|
|
6.9 |
% |
||
(n/m) not meaningful
* Restructuring expenses are primarily comprised of employee severance and related benefit costs.
Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest, income taxes, depreciation and amortization, casualty losses or gains, stock-based compensation expense, changes in the fair value of derivatives, restructuring and certain non-cash, non-recurring, or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net revenues.
Adjusted EBITDA and Adjusted EBITDA margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance.
Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms Adjusted EBITDA and Adjusted EBITDA margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA and Adjusted EBITDA margin, which are not prepared in accordance with GAAP, should not be construed as an indicator of our operating performance in isolation from, or as a substitute for, respectively, net (loss) income attributable to common stockholders or net (loss) income attributable to common stockholders margin (defined as net (loss) income attributable to common stockholders divided by net revenues), which are indicators prepared in
27
accordance with GAAP. We have presented Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosure because we believe it allows for a more complete analysis of our results of operations. In the future, we may incur expenses such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by these items.
Liquidity and Capital Resources
As a result of the uncertainties discussed below, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.
Debt
As of the date of this filing, the Company is not in compliance with certain financial covenants contained in the Second A&R Loan and Security Agreement (defined in Note 1), including (i) failure to maintain Adjusted EBITDA of $17 million for the two fiscal quarter period ended December 31, 2023, (ii) failure to deliver the agent and lenders unaudited balance sheets and the related statements of income and cash flow for the fiscal quarter ended December 31, 2023 and for the portion of the fiscal year then elapsed within 45 days after the end of such fiscal quarter, and (iii) failure to provide an executed compliance certificate for the fiscal quarter ended December 31, 2023, which are events of default. Upon an event of default under the Second A&R Loan and Security Agreement, the lender has the right to accelerate the maturity of the debt thereunder.
However, on February 28, 2024, the Company entered into a Forbearance Agreement (defined in Note 1) with respect to the Second A&R Loan and Security Agreement under which the Agent and Lenders have agreed to forbear from enforcing their respective rights and remedies in respect to certain events of default under the agreement, subject to the terms and conditions set forth in the agreement, through March 31, 2024 so long as no event of default (other than the Designated Defaults) shall occur, and the Obligors comply with the terms of the Forbearance Agreement and otherwise do not assert a defense to their obligations under the Loan Agreement or any other loan documents or make a claim against the Agent or any Lender. The Forbearance Agreement, among other things, (a) reduces the revolving commitments under the Loan Agreement from $200 million to $180 million, (b) permits the Borrowers to continue to borrow under the Loan Agreement, subject to the terms and conditions set forth therein, during the Forbearance Period, notwithstanding the existence of the Designated Defaults, (c) increases, during the Forbearance Period, the interest rate for revolving loans outstanding or incurred under the Loan Agreement by 100 basis points, (d) provides that, during the Forbearance Period, the Borrowers will not maintain cash in excess of their projected cash needs (with any excess to be used to pay outstanding revolving loans), (e) requires the Obligors to comply with certain specified milestones with respect to business planning during the Forbearance Period and (f) requires the payment of certain fees to the Agent and the Lenders, including a one-time payment to the Agent for the benefit of the Consenting Lenders, as defined in the Forbearance Agreement, equal to 7.5 basis points on the Consenting Lenders' outstanding Loans and Commitments (as modified by the Forbearance Agreement and to the extent such Commitments are not funded).
The Company is currently in discussions with its Lenders regarding potential amendments, however, whether an amendment, waiver or extension of the Forbearance Period is obtained is not within the Company's control, and there can be no assurances that our Lenders and Agent will not accelerate the maturity of the debt. If acceleration occurs, the Company does not have sufficient cash to repay the outstanding debt and would likely be forced to seek bankruptcy protection.
On October 12, 2023, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Second A&R Loan and Security Agreement by and among the Company, the Borrowers party thereto (the "Borrowers"), the Lenders party thereto (the "Lenders"), and BMO Bank, N.A., as successor in interest to Bank of the West (the "Agent"). The Fourth Amendment, among other things: (i) waives certain existing events of default relating to the Company’s failure to comply with the financial covenants and financial reporting requirements set forth in the credit agreement for prior fiscal periods; (ii) reduces the aggregate revolving commitment and the aggregate delayed draw term loan commitment to $200,000,000 and $38,100,000, respectively; (iii) replaces the maximum debt to capitalization financial covenant with a minimum adjusted EBITDA financial covenant of not less than (1) $4,000,000 for the fiscal quarter ending September 30, 2023, (2) $17,000,000 for the two fiscal quarter period ending December 31, 2023, (3) $27,000,000 for the three fiscal quarter period ending March 31, 2024, (4) $34,000,000 for the four fiscal quarter period ending June 30, 2024, and (5) $35,000,000 for each four fiscal quarter period ending thereafter; (iv) adds a minimum liquidity covenant of $25,000,000 (or, for fiscal quarters ending in December, $15,000,000), which applies only for the fiscal quarters ending September 30, 2023 through and including December 31, 2024 (the “Covenant Modification Period”); (v) suspends the minimum fixed charge coverage ratio covenant for the fiscal quarters ending September 30, 2023 through and including June 30, 2024 and provides for a step-down of the minimum fixed charge coverage ratio to 1.00:1.00 for the remainder of the Covenant Modification Period; (vi) adds an equity cure right for the Company in the event of future breaches of the financial covenants; (vii) reduces revolver availability by (1) $15,000,000 during the months of February through September of each year and (2) $10,000,000 during the months of October through January of each year; (viii) suspends the exercise of incremental facilities during the Covenant Modification Period; (ix) restricts all permitted acquisitions during the term of the credit facilities, unless previously approved by the required Lenders; (x) increases in the applicable margin for all credit facilities to 3.00% for the loans subject to SOFR interest rates (the "SOFR Loans") and 2.00% for the loans subject to the Adjusted Base Rate (the "ABR Loans"), which margins will step-up further if certain prepayments of the term loans are not made by certain dates prescribed in the Fourth Amendment; (xi) adds additional mandatory prepayments of (1) $10,000,000 by no later than March 31, 2024, (2) an additional $10,000,000 by no later than June 30, 2024 and (3) an additional $25,000,000 by no later than December 31, 2024; (xii) adds additional mandatory prepayments in the event that the Borrowers maintain a cash balance in excess of $20,000,000; (xiii) permits additional sales of certain real property with an
28
aggregate appraised value of approximately $60,000,000, in addition to related personal property assets; and (xiv) adds certain additional reporting requirements to Agent and the Lenders.
We continue to implement our Five-Point Plan, which we believe will enable us to drive stronger earnings power, provide a sustainable foundation for future growth and allow us to continue as a leading vintner with a strong portfolio of affordable luxury brands, by focusing on the plan's five priorities: (1) margin expansion, (2) cost reduction, (3) cash management, (4) monetizing assets, and (5) revenue growth. In 2024, our priorities under our Five-Point Plan are to deliver profitability, generate cash, and reduce debt. In order to meet these objectives our near-term goals are to simplify the business, reduce costs, improve production throughout our operations, focus on key brands, and pay down debt through the monetization of assets and reducing costs, among other things. Currently, the priority is asset monetization, since it is a key driver in deleveraging, in addition to working capital management and optimization in order to fund operations.
There can be no assurances that the Company will be able to successfully implement these strategies, or if successfully implemented, that we will see the expected benefits from such strategies. Additionally, there can be no assurances that any benefits from cost reduction strategies will enable the Company to be compliant with its financial covenants or provide the Company with sufficient cash to pay the outstanding debt on the Second A&R Loan and Security Agreement if accelerated by the lender.
Cash and Cash Equivalents
Our cash and cash equivalents balance was $21.4 million at December 31, 2023 compared to $18.2 million at June 30, 2023, exclusive of restricted cash. At December 31, 2023, our cash and cash equivalents were held in cash depository accounts with major banks.
Working Capital
As of December 31, 2023, the Company has a working capital deficit of $114.3 million, which is a decrease of $195.9 million compared to June 30, 2023. The decrease is primarily related to the reclassification of long-term debt to current. Refer to the Debt section above for discussion on the reclassification of long-term debt to current.
Cash Flows
The table below presents a summary of our sources and uses of cash:
|
|
December 31, |
|
|
|
|
||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|||
Operating activities |
|
$ |
7,405 |
|
|
$ |
1,050 |
|
|
$ |
6,355 |
|
Investing activities |
|
$ |
(4,982 |
) |
|
$ |
380 |
|
|
$ |
(5,362 |
) |
Financing activities |
|
$ |
956 |
|
|
$ |
(9,295 |
) |
|
$ |
10,251 |
|
Operating Activities
Net cash provided by operating activities was $7.4 million for the six months ended December 31, 2023 compared to net cash provided by operating activities of $1.1 million for the six months ended December 31, 2022, representing an increase in net cash provided of $6.4 million, primarily related to changes in inventory and prepaid expenses, including insurance and bulk wine deposits.
Investing Activities
Net cash used in investing activities was $5.0 million for the six months ended December 31, 2023, compared to net cash provided by investing activities of $0.4 million for the six months ended December 31, 2022, representing an increase in net cash used of $5.4 million. Cash flows from investing activities are utilized primarily to fund capital expenditures for new assets and improvements to existing assets and other corporate assets. The increase in net cash used for the six months ended December 31, 2023, was attributable to a decrease in proceeds from the sale of assets of $7.3 million in the current period when compared to the prior year period, partially offset by a decrease in capital expenditures of $2.0 million.
Financing Activities
Net cash provided by financing activities was $1.0 million for the six months ended December 31, 2023 compared to net cash used of $9.3 million by financing activities for the six months ended December 31, 2022, representing an increase in net cash provided of $10.3 million, primarily due to an increase in net borrowings on the line of credit.
Significant Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. For a description of our critical accounting policies, refer to “Critical Accounting Policies and
29
Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K.
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Investors are cautioned that statements that are not strictly statements of historical fact constitute forward-looking statements, including, without limitation, statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and are often identified by words like “believe,” “expect,” “continue,” “goal,” “plan,” “may,” “will,” “should,” “seek,” “anticipate,” “can,” or “could” and similar expressions.
Forward-looking statements are not assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed or implied by forward-looking statements include those discussed under the “Risk Factors” section of our Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q or other reports filed with the SEC.
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly revise or update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of material weaknesses in our internal control over financial reporting as discussed below, our disclosure controls and procedures were not effective as of December 31, 2023. Management’s conclusion was based on discoveries and observations made during the 2022 and 2023 audits.
Material Weaknesses in Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No system of controls, no matter how well designed and implemented, can provide absolute assurance that the objectives of the system of controls are met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud within a company have been detected.
As previously disclosed in Part II, Item 9A. "Controls and Procedures" in the Company's Annual Report on Form 10-K for the Fiscal year ended June 30, 2023, our management has identified material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
30
The Company did not maintain an effective control environment based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") framework, which resulted in a material weakness in the control environment. This material weakness consists of an overall lack of a sufficient control environment to produce materially correct financial statements, including a lack of U.S. GAAP expertise for the types of transactions we have been involved in which resulted in the restatement of the Company’s condensed consolidated financial statements as of and for the interim periods ended September 30, 2022, December 31, 2022, and March 31, 2023.
The material weakness in the control environment related to the following COSO components:
In addition, the material weakness in the control environment contributed to the following material weaknesses:
Management's Plan to Remediate the Material Weaknesses
In October 2023 the Company engaged a globally recognized Assurance and Advisory firm to assist in remediation efforts including risk assessment and SOX framework evaluation, process design walkthroughs, key control identification, control gap and process improvement assessment, training, and control operating effectiveness testing. This firm will leverage the work the Company began performing in fiscal 2023, which included performing comprehensive process walkthroughs and designing and implementing additional controls and procedures to mitigate the risk of material misstatement. The Company has completed its enterprise risk assessment, and the assessment was approved by the Audit Committee of the Board of Directors. We have improved user access review processes, completed several walkthroughs and are prioritizing opportunities for improvement.
Management continues to strengthen key functions throughout the organization including, but not limited to, the accounting and financial reporting teams. We have added and filled a new position effective July 2023, Director of Technical Accounting. This position will improve the Company’s ability to assess, conclude and implement new accounting pronouncements as well as other technical accounting matters. We have added new leadership positions in operations, Vice President of Supply Chain (July 2023) and Vice President of Production (October 2023). Additionally, we have added and filled an Accounts Payable Manager position. These positions will assist in focused control work, including improved cutoff and receiving procedures. In addition, we have augmented staffing needs with contractors to assist in performing and supporting day-to-day operations. The Company intends to continue to assess its staffing needs in order to continually implement process improvements and address any gaps in its internal control processes. As of the date of this report, the Company continues to utilize contractors to support day-to-day operations.
The Company has established a process to ensure account reconciliations are performed at least quarterly. Additional controls and procedures have been implemented to mitigate the risk of a material misstatement include the standardization of our monthly close checklists to facilitate timeliness of activities performed, the formalization of account reconciliation templates, the determination of the appropriate level of review for each account based on an assessment of risk and complexity, and the performance of additional account reconciliation training for relevant staff. Incremental accounting staff (both full time and contractor) were added throughout 2023 to assist in the completion of account reconciliations, including additional review support. During the financial close process for the fiscal year ended June 2023, we concluded that improvements were needed in the controls over the process for confirming and periodically updating management assumptions (e.g., redemption rates used to support liabilities and inventory turns used to absorb overhead costs to cost of goods sold related to custom production activities). Management is currently assessing all key inputs used in supporting account balances and implementing a process to reconfirm and/or reassess quarterly.
The Company issued an updated policy on Travel & Expense Reimbursement. Key process improvements include immediate elimination of manual travel and expense reimbursements, mandatory use of the travel & expense management system, systematic controls requiring receipt submission and manager approval workflow.
31
The Company onboarded a new Chief Executive Officer, effective October 2023, a new Chief Marketing Officer, effective January 2024, and a Senior Vice President of Partnerships, effective February 2024 to continue its focus on better alignment with the business opportunities and improved communications and collaboration.
Changes in Internal Control Over Financial Reporting
Except for the changes described above intended to remediate the material weaknesses identified in the Company’s internal control over financial reporting, which efforts continued into the six months ended December 31, 2023, there were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II—Other Information
Item 1. Legal Proceedings
On November 14, 2022, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Nevada against the Company and certain current and former members of its management team. The lawsuit is captioned Ezzes v. Vintage Wine Estates, Inc., et al. (“Ezzes“), and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misstatements or omissions in certain of the Company's periodic reports filed with the SEC relating to, among other things, the Company’s business, operations, and prospects, including with respect to the Company’s inventory metrics and overhead burden. The lawsuit seeks an unspecified amount of damages and an award of attorney’s fees, in addition to other relief. On November 28, 2022, a second purported securities class action lawsuit, captioned Salbenblatt v. Vintage Wine Estates, Inc., et al. (“Salbenblatt”), was filed in the same court, containing similar claims and allegations, and seeking similar relief, as the Ezzes lawsuit. On February 14, 2023, the Court consolidated both actions and appointed the lead plaintiffs. The Salbenblatt action was transferred to and consolidated with the Ezzes action. On May 1, 2023, the lead plaintiffs filed a consolidated amended class action complaint (“amended complaint”). On June 30, 2023 defendants filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed on September 25, 2023, and the court dismissed the case on March 1, 2024. Pursuant to the court's ruling, the plaintiffs have 21 days from the court's ruling to amend their complaint otherwise the court will dismiss the plaintiffs' claims with prejudice. As previously noted, litigation is inherently uncertain, and the Company is unable to predict the outcome of this litigation and is unable to estimate the range of loss, if any, that could result from an unfavorable outcome. The Company also cannot provide any assurance that the ultimate resolution of this litigation will not have a material adverse effect on our reputation, business, prospects, results of operations or financial condition.
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business that could have a material adverse effect on our business, results of operations or financial condition. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. Except as noted above, there are no material updates to the matters previously disclosed in “Part I, Item 3 — Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and "Part II, Item 1 - Legal Proceedings" of our Quarterly Report on Form 10-Q for the period ended September 30, 2023. The Company is not currently a party to any other material legal proceedings, nor is it aware of any pending or threatened litigation that, in the Company’s opinion, would have a material adverse effect on the business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Item 1A. Risk Factors
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, as supplemented by the information set forth below.
Our management has identified that there is a substantial doubt about our ability to continue as a going concern.
The Company is not in compliance with its debt covenants as of December 31, 2023 as required per our Second A&R Loan and Security Agreement. With an event of default under the Second A&R Loan and Security Agreement, the lender has the right to accelerate the maturity of the debt thereunder. If acceleration occurs, the Company does not have sufficient cash to repay the outstanding debt. The Company is currently in discussions with its lenders regarding potential amendments and waivers to the related financial covenants, however, whether an amendment or waiver is obtained is not within the Company's control, and therefore cannot be deemed probable.
We continue to implement our Five-Point Plan, which we believe will enable us to drive stronger earnings power, provide a sustainable foundation for future growth and allow us to continue as a leading vintner with a strong portfolio of affordable luxury brands, by focusing on the plan's five priorities: (1) margin expansion, (2) cost reduction, (3) cash management, (4) monetizing assets, and (5) revenue growth. In 2024, our priorities under our Five-Point Plan are to deliver profitability, generate cash, and reduce debt. In order to meet these objectives our near-term goals are to simplify the business, reduce costs, improve production throughout our operations, focus on key brands, and pay down debt through the monetization of assets and reducing costs, among other things. Currently, the priority is asset monetization, since it is a key driver in deleveraging, in addition to working capital management and optimization in order to fund operations.
32
There can be no assurances that the Company will be able to successfully implement these strategies, or if successfully implemented, that we will see the expected benefits from such strategies. Additionally, there can be no assurances that any benefits from cost reduction strategies will enable the Company to be compliant with its financial covenants or provide the Company with sufficient cash to pay the outstanding debt on the Second A&R Loan and Security Agreement if accelerated by the lender.
As a result of these uncertainties, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited financial statements included in this Form 10-Q for the period ended December 31, 2023 were issued. The condensed consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern. If we are unable to continue as a going concern, holders of our securities might lose their entire investment. These factors, among others, may make it difficult to raise any additional capital and may cause us to be unable to continue to operate our business or force us to seek bankruptcy protection.
We may not be able to repay, refinance, or restructure our substantial indebtedness owed to our lenders, which would have a material adverse effect on our financial condition and may cause us to seek bankruptcy protection.
The VWE credit facility contains various covenants and restrictions including financial debt covenants. The Company did not meet certain financial debt covenants as required per our Second Amended and Restated Loan and Security Agreement (the "Second A&R Loan and Security Agreement") beginning with the quarter ended December 31, 2023, which constitutes an event of default. If the event of default is not cured or waived, the payment of the Company’s outstanding debt under the Second A&R Loan and Security Agreement may be accelerated.
If the lender accelerates the maturity of the indebtedness under the Second A&R Loan and Security Agreement, we do not have sufficient cash to repay the outstanding debt on a timely basis, if at all, and there is no guarantee that we would be able to repay, refinance or restructure the outstanding balance due under the Second A&R Loan and Security Agreement. Management is actively engaged in conversations with the lender under the Second A&R Loan and Security Agreement regarding potential amendments and waivers to the related financial covenants, however, whether an amendment or waiver is obtained is not within the Company's control, and therefore cannot be deemed probable.
The outstanding principal balance under the Second A&R Loan and Security Agreement was $305.6 million as of December 31, 2023. If we are unable to monetize assets or raise additional capital, we would not have sufficient cash on hand or available liquidity that can be utilized to repay the outstanding debt if the lender accelerated the maturity of all amounts outstanding under the Second A&R Loan and Security Agreement. The lender has the right to exercise its rights and remedies to collect, which includes foreclosing on our assets if we are unable to pay the amounts due. Accordingly, a default leading to the lender accelerating the maturity of the indebtedness under the Second A&R Loan and Security Agreement would have a material adverse effect on our business and, if the lender exercises its rights and remedies, we would likely be forced to seek bankruptcy protection.
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:
Under the VWE credit facility, VWE also is required to maintain compliance with a minimum fixed charge coverage ratio covenant (not less than 1.00:1.00) beginning with the fiscal quarter ending September 30, 2024.
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 regain compliance with these covenants and other restrictions or be able to obtain waivers for noncompliance
33
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 have repayments accelerated or 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.
The Company did not meet certain financial debt covenants as required per our Second A&R Loan and Security Agreement beginning with the quarter ended December 31, 2023, which constitutes an event of default. If the event of default is not cured or waived, the payment of the Company’s outstanding debt under the Second A&R Loan and Security Agreement may be accelerated. The outstanding principal balance under the Second A&R Loan and Security Agreement was $305.6 million as of December 31, 2023. If we are unable to monetize assets or raise additional capital, we would not have sufficient cash on hand or available liquidity that can be utilized to repay the outstanding debt if the lender accelerated the maturity of all amounts outstanding under the Second A&R Loan and Security Agreement. Accordingly, if the lender exercises its rights and remedies by accelerating the maturity of the indebtedness under the Second A&R Loan and Security Agreement, it would have a material adverse effect on our business and we would likely be forced to seek bankruptcy protection.
Our ability to comply with the covenants, restrictions and specified financial ratios contained in the Second A&R Loan and Security Agreement may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions, and other corporate opportunities that we believe would be beneficial to us.
We are currently not in compliance with the Nasdaq continued listing requirements. If we are unable to regain compliance with Nasdaq’s listing requirements, our securities could be delisted, which could affect our common stock’s market price and liquidity and reduce our ability to raise capital.
On September 13, 2023, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet Nasdaq Listing Rule 5450(a)(1), which requires listed companies to maintain a minimum bid price of at least $1 per share.
We did not regain compliance with the minimum bid price requirement by March 11, 2024, the end of the initial 180-day compliance period. On March 1, 2024, Nasdaq approved our application to transfer to the Nasdaq Capital Market, and, on March 12, 2024, we were granted a second 180-day compliance period to regain compliance with the minimum bid price requirement by September 9, 2024.
We intend to monitor the closing bid price of our common stock and consider our available options in the event the closing bid price of our common stock remains below $1 per share. On December 12, 2023, our stockholders approved a proposal to amend our Articles of Incorporation to effectuate a reverse stock split of our issued and outstanding shares of common stock, at a ratio of no less than 1-for-5 and no more than 1-for-25 (the "Reverse Stock Split"), with the final decision of whether to proceed with the Reverse Stock Split, the effective time of the Reverse Stock Split, and the exact ratio of the Reverse Stock Split to be determined by our Board of Directors, in its sole discretion and without further action by our stockholders, for a period of up to one year from December 12, 2023. We may implement the Reverse Stock Split, if approved by the Board, as a means to regain compliance with the Nasdaq minimum bid price requirement during the second 180-day compliance period. There can be no assurance that, if we were to effect the Reverse Stock Split, the Reverse Stock Split would cause our common stock to meet the bid price requirement. If we fail to regain compliance with the Nasdaq continued listing standards, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal that determination to a Nasdaq hearings panel.
We cannot assure you that we will be able to regain compliance with Nasdaq listing standards. Our failure to continue to meet the minimum bid requirement would result in our common stock being delisted from Nasdaq. We and holders of our securities could be materially adversely impacted if our securities are delisted from Nasdaq. In particular:
34
We plan to sell certain assets; however, we may be unable to sell these assets at acceptable terms and conditions, if at all, or within targeted timeframes.
As part of our turnaround strategy, we plan, from time to time, to sell certain assets, with the primary purpose of paying down debt. As we actively market and look to sell certain assets, general economic conditions, rising interest rates, and/or asset-specific issues may negatively affect the value of our assets, prevent us from selling the asset on acceptable terms, or prevent us from selling assets quickly enough. We cannot guarantee that we will be able to consummate any such sales on commercially reasonable terms or at all, or that we will realize any anticipated benefits from such sales. Dispositions of assets can be particularly difficult in a challenging economic environment as financing alternatives are often limited for potential buyers. As a result, economic conditions and rising interest rates may prevent potential purchasers from obtaining financing on acceptable terms, if at all, thereby delaying or preventing our ability to sell the assets selected for disposition. Additionally, there is no assurance that we will successfully close a sale once a letter of intent has been entered into, whether binding or non-binding, or once an agreement has been signed. Our inability to sell assets, or to sell such assets at attractive prices, could have an adverse impact on our ability to realize proceeds to repay our debt and execute our long-term strategy. In addition, even if we are successful in consummating sales of certain assets, such dispositions may result in losses.
Item 5. Other Information
None of the Company's directors or executive officers
35
Item 6. Exhibits
Exhibit Number |
|
Description of Exhibit |
|
|
|
10.1† |
|
|
|
|
|
10.2 |
|
|
|
|
|
10.3 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.* |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents.* |
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document).* |
* |
Filed herewith. |
** |
Furnished herewith. |
◆ |
Indicates management compensatory plan, contract or arrangement. |
† |
Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. |
36
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Vintage Wine Estates, Inc. |
||
|
|
|
|
Date: March 12, 2024 |
By: |
|
/s/ SETH KAUFMAN |
|
Name: |
|
Seth Kaufman |
|
Title: |
|
President and Chief Executive Officer |
|
|
|
|
Date: March 12, 2024 |
By: |
|
/s/ KRISTINA JOHNSTON |
|
Name: |
|
Kristina Johnston |
|
Title: |
|
Chief Financial Officer |
37