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As filed with the Securities and Exchange Commission on February 23, 2021

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

THE DUCKHORN PORTFOLIO, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2080   81-3866305

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer Identification Number)

1201 Dowdell Lane

Saint Helena, CA 94574

(707) 302-2658

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Alex Ryan

President, Chief Executive Officer and Chairman

The Duckhorn Portfolio, Inc.

1201 Dowdell Lane

Saint Helena, CA 94574

(707) 302-2658

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Thomas Holden

Benjamin Kozik

Ropes & Gray LLP

3 Embarcadero Center

San Francisco, CA 94111

(415) 315-2355

 

Sean Sullivan

Executive Vice President,

Chief Administrative Officer

and General Counsel

The Duckhorn Portfolio, Inc.

1201 Dowdell Lane

Saint Helena, CA 94574

(707) 302-2658

 

Marc D. Jaffe

Ian D. Schuman

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate
Offering Price(1)(2)

  Amount of
Registration Fee

Common Stock, par value $0.01

  $100,000,000   $10,910

 

 

(1)   Includes common stock that may be sold if the underwriters’ option to purchase additional shares is exercised.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

LOGO

Subject to completion, dated February 23, 2021.

Preliminary prospectus

             shares

 

 

LOGO

The Duckhorn Portfolio, Inc.

Common stock

This is the initial public offering of The Duckhorn Portfolio, Inc. We are selling              shares of our common stock. The selling stockholders identified in this prospectus are offering an additional              shares of our common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

The initial public offering price is expected to be between $         and $         per share.

Prior to this offering, there has been no public market for shares of our common stock. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “NAPA.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings.

Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. See “Management—Board composition and director independence.”

 

     
      Per share      Total  

Initial public offering price

   $        $    

Underwriting discounts and commissions

   $        $    

Proceeds to us before expenses(1)

   $        $    

Proceeds to selling stockholders before expenses(1)

   $                    $                

 

 

 

  (1)   See the section “Underwriting” beginning on page 158 for additional information regarding underwriting compensation.  

We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of our common stock at the initial public offering price, less the underwriting discounts and commissions.

Investing in our common stock involves risk. See “Risk factors” beginning on page 21.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our common stock to investors on or about             , 2021.

 

J.P. Morgan   Credit Suisse   Jefferies

 

Barclays    BofA Securities    Citigroup    Evercore ISI    RBC Capital Markets


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LOGO

 

OUR MISSION TO HAVE DUCKHORN WINES POURED AND ENJOYED WHEREVER FINE WINES ARE SERVED THROUGHOUT THEWORLD.


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     Page  

A letter from Alex Ryan, our CEO

     iii  

Prospectus summary

     1  

The offering

     15  

Summary consolidated financial and other data

     17  

Risk factors

     21  

Cautionary note regarding forward-looking statements

     52  

Industry and market data

     54  

Use of proceeds

     55  

Dividend policy

     56  

Capitalization

     57  

Dilution

     59  

Selected consolidated financial and other data

     61  

Management’s discussion and analysis of financial condition and results of operations

     66  

Business

     93  

Management

     122  

Executive and director compensation

     128  

Certain relationships and related party transactions

     142  

Principal and selling stockholders

     144  

Description of certain indebtedness

     145  

Description of capital stock

     148  

Shares eligible for future sale

     152  

Material U.S. federal income tax considerations for Non-U.S. Holders of shares of our common stock

     154  

Underwriting

     158  

Legal matters

     166  

Experts

     166  

Where you can find more information

     166  

Index to consolidated financial statements

     F-1  

Through and including                 , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we nor the selling stockholders nor the underwriters have authorized anyone to provide you with different information, and neither we nor the selling stockholders nor the underwriters take responsibility for any other information others may give you. Neither we nor the selling stockholders nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

For investors outside of the United States: neither we nor the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and observe any restrictions relating to, this offering of the shares of our common stock and the distribution of this prospectus and any such free writing prospectus outside of the United States. See “Underwriting.”

 

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Glossary

The following terms are used in this prospectus unless otherwise noted or indicated by the context:

 

 

“AVA” means American Viticultural Area.

 

 

“Company,” “we,” “us,” “our,” “Duckhorn” and “The Duckhorn Portfolio” refer to The Duckhorn Portfolio, Inc. (formerly Mallard Intermediate, Inc.) and its consolidated subsidiaries.

 

 

“Credit Facility” refers to the existing first lien credit facility pursuant to that certain First Lien Loan and Security Agreement, dated as of October 14, 2016 (as amended by Amendment No. 1, dated July 28, 2017, as amended by Amendment No. 2, dated as of April 19, 2018, as amended by Amendment No. 3 dated as of August 1, 2018, as amended by Amendment No. 4 dated as of October 30, 2018, as amended by Amendment No. 5 dated as of June 7, 2019, as amended by Amendment No. 6 dated as of August 17, 2020 and as amended by Amendment No. 7 dated February 22, 2021), by and among the Company, the borrowers named therein, the lenders named therein and the Bank of the West, as administrative agent.

 

 

“DTC channel” refers to our sales and distribution channel through which we sell wine directly to consumers without any licensee intermediaries (wholesale or retail), which is permissible through in-person sales at one of our tasting rooms or, where permitted by law, through our multi-winery e-commerce website.

 

 

“Fiscal 2015” refers to our fiscal year ended July 31, 2015.

 

 

“Fiscal 2016” refers to our fiscal year ended July 31, 2016.

 

 

“Fiscal 2017” refers to our fiscal year ended July 31, 2017.

 

 

“Fiscal 2018” refers to our fiscal year ended July 31, 2018.

 

 

“Fiscal 2019” refers to our fiscal year ended July 31, 2019.

 

 

“Fiscal 2020” refers to our fiscal year ended July 31, 2020.

 

 

“Fiscal 2021” refers to our fiscal year ended July 31, 2021.

 

 

“Luxury wine” refers to wines sold for $15 or higher per 750ml bottle.

 

 

“On-premise” refers to retail accounts that are a business with a license that allows a customer to purchase our wines and consume them at the licensed location, such as restaurants, bars and hotels.

 

 

“Off-premise” refers to retail accounts that are a business with a license that allows a customer to purchase our wines for consumption at a location other than the retailer’s licensed location, such as grocery stores and liquor stores.

 

 

“Retail” refers to establishments that are licensed to purchase our wine for resale to consumers, such as grocery stores, liquor stores and restaurants.

 

 

“Scale” refers to wine producers who produce at least one million 9L cases per year.

 

 

“TSG” refers to TSG Consumer Partners, LLC, together with certain affiliates.

 

 

“Ultra-luxury wine” refers to wines with suggested retail prices of $25 or higher per 750ml bottle.

 

 

“Wholesale channel” refers to our sales and distribution channel through which we sell wine to distributors and, in California, directly to retail accounts.

 

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A letter from Alex Ryan, our CEO

Dear Prospective Stockholders,

Very few people are fortunate enough to find their life’s calling at their first job. When I joined The Duckhorn Portfolio just a few days after graduating from college in 1988, it was a thrilling time to become a part of the American wine industry. Throughout California’s burgeoning wine country, there was a shared sense of promise and limitless possibility, and a belief that through dedication, hard work, innovation and a commitment to the land, the story of American wine was ours to write.

Back then, The Duckhorn Portfolio was just over a decade old, and our “Portfolio” consisted of Duckhorn Vineyards and a blended wine called Decoy. Today, The Duckhorn Portfolio is one of North America’s premier luxury wine companies, with ten renowned wine brands, eight state-of-the-art wineries, 843 coveted acres spanning 22 sustainably farmed Estate vineyards, over 400 diverse and talented employees, passionate consumers in every state and more than 50 countries and over 55,000 loyal wine club members who eagerly await each new shipment of our wines.

Understanding the evolution of The Duckhorn Portfolio, and the values that have guided us for over 40 years, begins with the vision of our founders, Dan and Margaret Duckhorn. When they established Duckhorn Vineyards in 1976, we were one of just 40 wineries in Napa Valley. Even in those early days, the Duckhorns sought to set themselves apart from the pack. Recognizing that the American palate was developing, they championed Napa Valley Merlot as a standalone varietal wine. It was a bold, daring choice, and one that ultimately established luxury Merlot as one of North America’s favorite wines.

Even then, in the infancy of our industry, we intuited that American wine had the potential to become part of the fabric of consumers’ lives; that wine is more than just what is in the bottle, it is the promise of an experience, and a source of joyful connection to nature and to each other. Understanding this, the Duckhorns cultivated a commitment to excellence that shapes every facet of our business, from how we sustainably grow grapes and make wine to our commitment to holistically support our employees, engage our guests and enrich the communities in which we live and much more.

A willingness to challenge ourselves, to be daring and innovative and to never rest on past accomplishments is hardwired into our DNA. For 32 years, I have endeavored to create a diverse and inclusive culture that attracts and inspires the most talented people in our industry, and then empowers them to change our Company for the better, which has fueled growth from our debut 1978 vintage of 1,600 cases of wine sold in 1981 to more than 1.4 million cases of wine sold in Fiscal 2020.

Perhaps our greatest point of pride is the fact that as we have grown, we believe our wines and team have only gotten better. As a testament to the pedigree of our acclaimed brands, not only are we the largest and one of the most respected pure-play luxury wine companies in the United States, we are the only wine producer this century to have two brands in its portfolio that have won the prestigious “Wine of the Year” award from Wine Spectator magazine.

There is an old adage in the wine industry that the mark of a truly great winery isn’t what you achieve in a perfect vintage, it’s what you achieve in the most challenging vintages. During periods of market adversity, we have created or sought out new opportunities. When others were cautious, we were bold and took deliberate risks that we believe have made us stronger, more engaged stewards of the environment and more profitable. Through these actions, we have established a curated and comprehensive portfolio of highly regarded luxury wines across multiple brands, varietals, appellations and price points that is unique to The Duckhorn Portfolio.

In those early days of The Duckhorn Portfolio, we felt like the future was limitless. And today, we feel this is as true as it has ever been, given the opportunities to introduce new wines, open new accounts, enter new categories and markets, explore new wine regions and find new ways to connect with consumers. We believe our ability to conquer these opportunities is greater than it has ever been and that our best years are yet to come as we begin writing the next exciting chapter in The Duckhorn Portfolio story. I invite you to join us and look forward to toasting our future success together!

Sincerely,

 

LOGO

 

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Prospectus summary

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus and the information set forth in the sections of this prospectus titled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business.” Some of the statements in this prospectus constitute forward-looking statements, see “Cautionary note regarding forward-looking statements” for more information.

The Duckhorn Portfolio: the standard for American fine wine

The Duckhorn Portfolio is the premier scaled producer of luxury wines in North America. We have delighted millions of consumers with authentic, high-quality, approachable wines for over four decades. Founded by our namesake Dan and Margaret Duckhorn in 1976, we began by pioneering merlot wines in Napa Valley and now champion a curated and comprehensive portfolio of highly acclaimed luxury wines across multiple winery brands, varietals, appellations and price points. Our portfolio is focused exclusively on the desirable luxury segment, the fastest-growing segment of the wine market in the United States, according to IRI, which we define as wines sold for $15 or higher per 750ml bottle.

We sell our wines in all 50 states and over 50 countries at suggested retail prices (“SRPs”) ranging from $20 to $200 per bottle under a world-class luxury portfolio of brands, including Duckhorn Vineyards, Decoy, Kosta Browne, Goldeneye, Paraduxx, Calera, Migration, Canvasback, Greenwing and Postmark. We are the largest pure-play luxury wine supplier and the eleventh largest wine supplier by sales value overall in the United States according to IRI for the twelve months ended October 4, 2020.

Our wines have consistently commanded leading market positions in their respective categories and are appealing to a broad consumer base from renowned wine critics to casual wine drinkers. We are the only wine producer this century to have two brands in its portfolio that have won the prestigious Wine of the Year award from Wine Spectator magazine, and we also boast the number one selling luxury cabernet sauvignon in the United States since 2017 according to sales value data from IRI. Another testament to our portfolio strength is the nearly 100,000 consumers who traveled to at least one of our seven renowned tasting rooms located throughout California and Washington for one of our luxury wine experiences in 2019.

Underpinning our success is a relentless focus on quality that has been ingrained in our culture ever since the inaugural harvest of our iconic Three Palms Vineyard in 1978. Today, we collaborate with a vast, diversified network of grape growers and rely on our world-class, company-controlled Estate vineyards to maintain our quality standards and facilitate growth. Each winery brand boasts its own winemaking team to create distinct experiences for consumers, ensure product quality and continuity and galvanize sustainable farming practices. In this era that favors trusted brands with sound values, we believe companies that have a positive impact on society and the environment, like The Duckhorn Portfolio, will be best positioned to thrive. We pride ourselves on being stewards of the land, champions of our employees and communities and committed to the practices and risk management central to good governance. Beyond our winemaking teams is an organization comprised of passionate, talented employees, including a highly tenured executive team that has approximately 100 years of cumulative experience with Duckhorn.

Our powerful omni-channel sales model drives strong margins. We sell our wines in our wholesale channel, to distributors and directly to retail accounts in California, and to consumers in our direct to consumer (“DTC”)

 

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channel, all of which leverage long-standing relationships developed over the past forty years. Our comprehensive sales force builds deep and impactful relationships with distributors and direct to retail accounts in our wholesale channel. In addition, our DTC channel leverages our multi-winery e-commerce website, and it features our award-winning subscription wine clubs and tasting rooms. Combined, our California direct to retail accounts business and DTC channel make up 39% of our net sales, delivering strong margins and greater connectivity with consumers and retailers alike.

We believe our iconic brands, together with our scaled, quality-focused production, omni-channel distribution and dedicated employees, set the standard for North American luxury wine.

 

 

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Our business successes are reflected in our attractive financial profile:

 

 

11 consecutive years of company-wide year-over-year organic growth, which we define as year-over-year growth from winery brands owned within our portfolio, including acquired brands beginning in the fifth full fiscal quarter following the acquisition.

 

 

$153.2 million increase in net sales from Fiscal 2015 to Fiscal 2020, representing an approximately 18% CAGR.

 

 

$22.8 million increase in net income from Fiscal 2015 to Fiscal 2020, representing an approximately 28% CAGR.

 

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$56.7 million increase in adjusted EBITDA from Fiscal 2015 to Fiscal 2020, representing an approximately 17% CAGR.

 

 

Highly attractive adjusted EBITDA margin profile, averaging approximately 40% between Fiscal 2015 and Fiscal 2020.

 

 

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For an explanation of how we calculate adjusted EBITDA and for a reconciliation to net income (loss), the most directly comparable financial measure stated in accordance with U.S. GAAP, see “Selected consolidated financial and other data—Non-GAAP financial measures.”

 

Luxury wine: our large and attractive target market

Our target market

We operate in the large and stable global wine industry that, according to Statista, is projected to exceed $340 billion in sales value in 2020.

A majority of our wine is sold in the growing U.S. market which boasts over 500,000 licensed retail accounts according to Nielsen. According to Statista, the United States consumes more wine than any other nation and is expected to increase its global wine market share by volume from 13.6% in 2012 to 15.8% in 2020. According to data from Statista capturing on-premise and off-premise sales, the total sales value of wine in the United States was more than $53 billion in 2019, having grown steadily since 2012. While the COVID-19 pandemic has adversely impacted on-premise sales, including in bars and restaurants, it has benefited grocery and other off-premise sales. As a result, the total sales value of wine in the United States is expected to remain relatively resilient to the impacts of the COVID-19 pandemic. According to Statista, 2021 is expected to mark a return to long-term category growth, and total sales value of wine in the United States is expected to exceed $55 billion, nearly $2 billion greater than the pre-pandemic 2019 value.

Consumers in the United States have steadily increased their per capita spending on wine over time to $163 per year in 2019, up from $141 in 2017, equating to a 7% CAGR, according to Statista. Compared to peer countries, the United States experienced one of the highest annual growth rates per capita in wine consumption in 2019, and we believe the United States still holds ample opportunity for growth. For example, 2019 per capita consumption in France, the United Kingdom and Australia were $439, $347 and $425, respectively, according to Statista. We believe these favorable trends will continue and that wine will take further alcohol beverage market share in the United States, led by established brands with diversified portfolio offerings.

 

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Luxury wine and premiumization

American Millennials and Generation X adults have come of age in a culture where cooking shows, celebrity chefs, farmers’ markets and food blogs are the norm. U.S. consumers have had an increasing hunger and thirst for high-quality food and drinks and are willing to pay more for items perceived to be superior. Wine has and continues to benefit from this premiumization trend. We believe that Millennial wine buyers are often spending more per bottle than any other generation and that as their careers progress and incomes grow, both Millennials and Generation X wine enthusiasts are poised to spend more on wines, particularly those from experiential brands with authentic heritages.

The luxury wine segment, which we believe comprised between 10% and 15% of the total U.S. wine market in 2019, expanded at nearly double the pace of the broader wine industry from 2012 to 2019, according to sales value data from IRI. With suggested retail prices of $20 to $200 per bottle, our portfolio is strategically positioned to benefit from premiumization.

We have consistently increased our market share in the growing luxury wine segment, both before and during the COVID-19 pandemic, and we believe premiumization will continue to benefit our business as consumers seek trusted brands. According to data from IWSR, wine sold for $20 per 750ml bottle or higher outpaced the overall wine category from 2010 to 2019. During this period, the sales value of wine sold for $20 per bottle or higher grew at an 8.6% CAGR, compared to a 3.1% CAGR for the total U.S. wine industry. According to IRI data, the U.S. luxury wine segment grew at 20% in sales value in the twelve month period ending on October 31, 2020 and encompassing the period of economic uncertainty caused by the COVID-19 pandemic, compared to the same period in the prior year, while the overall wine industry grew 11% over the same period.

 

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We expect premiumization to continue to shape the wine industry in the United States. According to IWSR, the U.S. luxury wine segment aggregate sales value from 2020 to 2024 is expected to generate a CAGR more than four times greater than that of the CAGR of the overall wine industry in the same period.

 

 

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Luxury producer fragmentation and distributor consolidation

As the luxury wine segment is highly fragmented, we have the advantage of being one of only a few luxury wine producers of scale. Our brands compete for consumers with a wide range of competitors, from the vast number of small volume local wineries, to divisions of large conglomerates.

In recent years, extensive growth in the number of wineries in the United States has been accompanied by a decrease in wine distributors, with approximately 1,800 wineries and 3,000 wine distributors in 1995, compared to over 10,400 wineries and 950 wine distributors in 2020, according to Wines Vines Analytics. The substantial consolidation of distributors has been driven primarily by mergers and acquisitions, and we expect this trend to continue.

In this environment of distributor consolidation and a fragmented universe of many subscale luxury producers, we believe our position as a scaled luxury producer is highly appealing to large distributors and retailers and that our comprehensive portfolio offering provides a “one-stop shop” solution for all of their luxury wine needs.

 

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Key drivers of our continued success

We attribute our success to the following strengths:

Curated and comprehensive portfolio of luxury wines.    Our portfolio encompasses ten luxury brands that champion 18 varietals in 25 AVA designations. Duckhorn Vineyards, Decoy and Kosta Browne are the cornerstones of this curated and comprehensive portfolio and reinforce the credibility and brand strength of our entire portfolio. We believe the breadth and depth of our luxury brands, coupled with our scale, position us as a premier supplier of luxury wines. Our singular focus on sustainable luxury winemaking energizes our employees, fosters trust and credibility in our customer and grower relationships, and ultimately results in high-quality, award-winning wines that we believe deeply resonate with consumers.

Our portfolio breadth and depth also allow us to offer tiered pricing within the luxury wine segment, enabling us to attract new consumers with affordable wines and deepen our relationship with them as they seek more premium offerings. The Decoy brand provides high-quality wines at accessible prices, often serving as the customer gateway into our luxury wine offerings across our broader portfolio. Duckhorn Vineyards, Kosta Browne and our other winery brands provide the consumer an opportunity to both elevate and broaden their experience with the wines in our diverse luxury portfolio. While we are unable to predict future shifts in consumer demand, we believe our curated and comprehensive portfolio is well-positioned to meet the needs of distributors, our accounts and consumers.

 

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Focused portfolio of powerful brands

 

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Focused Portfolio Of Powerful Brands Brand Decoy Duckhorn vineyards kosta browne calera paraduxx. goldeneye migration> canvasback greenwing postmark First vintage Primary focus Description SRP Range Tasting Room 1985 California A luxury consumer brand of choice, Decoy is dedicated to crafting serious wines of superior quality at a remarkable price across multiple varieties. Acclaim Wine Brand of the Year, Market Watch (2020); Hot Brand Award - 5X Winner, Impact; Top Growth Brand - 7X Winner, Beverage Information Group; Top Restaurant Wine,- 4X winner Wine & Spirits $20-$35 -- 1978 California Napa Valley A benchmark for American Merlot, Duckhorn has been crafting Napa Valley wines of distinction for over 40 years. Acclaim #1 Wine of the Year (Global), Wine Spectator (2017); Winery of the Year - 9X Winner , Wine & Spirits; Top Restaurant Wine - 13X winner, Wine & Spirits; Top 100 Wines of the Year - 4X winner, Wine Spectator $30 - $155 1997 California Sonoma Coast Kosta Browne is a pinnacle of ultra-luxury California Pinot Noir and Chardonnay. (Acquisition) Acclaim #1 Wine of the Year (Global), Wine Spectator (2017); Top 100 Wines of the Year - 7X winner, Wine Spectator $85 - $200 1976 California Central Coast Calera is a pioneer of luxury American Pinot Noir and is revered throughout the industry for its Mt. Harlan AVA wines. (Acquisition) Acclaim Winery of the Year - 8X Winner , Wine & Spirits; Top Pinot Noir Issue Cover Photo, Wine Spectator (2013); Top 100 Wines of the Year - 3X winner, Wine Spectator $30 - $100 1994 California Napa Valley Paraduxx specializes in producing the world's great red blends in a distinctively Napa Valley style. Acclaim Top 50 Winery in Restaurants, Wine & Spirits (2017) $30 - $100 1997 California Anderson Valley The first dedicated Pinot Noir producer in Anderson Valley, Goldeneye produces ultra-luxury wines from Mendocino County. Acclaim Top Pinot Noir Issue Cover Photo, Wine Spectator (2019); Wine & Spirits Top Restaurant Pinot Noir, Wine & Spirits (2011) $30 - $130 2001 California Sonoma Coast Refined, cool-climate Burgundian wines, Migration wines are sourced from premiere California vineyards in the Sonoma Coast AVA. Acclaim Top 100 Wines of the Year, Wine Spectator (2005) $30 - $70 Mid-2021 2012 Washington Red Mountain Canvasback is dedicated to producing luxury Cabernet Sauvignon from the highly-acclaimed Red Mountain in Washington State. Acclaim Winery to Watch, Wine & Spirits (2017) $30 - $84 2019 Washington Columbia Valley Rooted in Columbia Valley Bordeaux varieties, Greenwing is making some of North America's most exciting next generation wines. Acclaim (New release) 91 points, Wine Enthusiast (2020) $35 -- 2020 California Napa, Paso Postmark Cabernet & Merlot reflect their iconic Napa Valley roots while the brand name enables sourcing of quality grapes wherever they might be grown. Acclaim (New release) 90 points, Wine Enthusiast (2020) $35 -

 

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Exceptional brand strength and critical acclaim.    The Duckhorn Portfolio has consistently received stellar reviews across varietals, geographies and price points from the industry’s top critics and publications. Two of our wines, the Kosta Browne Sonoma Coast Pinot Noir and the Duckhorn Vineyards Napa Valley Three Palms Vineyard Merlot, have received one of the industry’s most prestigious awards, Wine Spectator magazine’s Wine of the Year. We are the only wine company to have more than one winery brand in our portfolio to have received this award in the 21st century. Critics within our industry widely use a 100 point scale to score individual wines, and we take pride in our consistent track record of 90+ point wines, scores that indicate superior quality. The strength of our winery brands is also demonstrated by our market-leading sales in some of the most popular varietals in the U.S. luxury market. During the twelve months ended October 4, 2020, we had the top selling luxury wine for Cabernet Sauvignon (the largest luxury varietal during the period), Sauvignon Blanc (the fastest growing luxury varietal during the period) and Merlot, according to U.S. sales value data from IRI. These three varietals combined represented approximately 31% of the total U.S. luxury wine market during the same period.

Scaled luxury platform.    We are the largest pure-play luxury wine company in the United States. We believe our approach and dedicated focus on luxury wines continues to be highly appealing to the modern wine consumer seeking authenticity and enables category excellence versus our more broadly-focused, scaled competitors. We also have an advantage over our fragmented, smaller-scale competitors because our individual brands each benefit from their place in our larger portfolio, leveraging more efficient operational, branding, marketing and distribution capabilities. For example, our depth of operational capabilities enables us to simultaneously present a curated offering of the most popular wine varietals and prudently develop new offerings in new, high-growth categories, all with the credentials of a pure-play luxury producer of scale.

Our large, highly knowledgeable sales force is a key advantage of our scale relative to small luxury producers. We deploy our sales force in the wholesale channel to evangelize our portfolio to our vast network of distributors and retail accounts. Understanding how consumers will connect with winery brands is critical to gaining shelf and menu space, and while smaller luxury wine brands rely on distributors to introduce and promote brands, our sales force takes direct action to strengthen our account relationships. As a credentialed luxury supplier of choice, we expect to benefit from further enhanced distributor prioritization due to sell-through confidence and operational efficiency.

Differentiated omni-channel sales and distribution platform.    Our innovative, scalable platform enables us to fulfill consumer needs through an integrated experience across channels at attractive margins. Our ideal consumers interact with us seamlessly across channels, through our wine clubs and tasting rooms and when grocery shopping or ordering at a restaurant.

We leverage our long-standing wholesale channel nationwide (with over 47,000 accounts), including our direct to retail accounts business in California (with over 2,800 accounts), to build deep, impactful relationships with our trade accounts. These channels provide a critical path for our winery brands to succeed both on-premise and off-premise, across a wide range of outlets and geographies.

Since our founding more than 40 years ago, we have been selling directly to retail accounts in California, a point of distinction among large California wine producers, many of which sell through a distributor in the state. We believe our direct to retail accounts business in California gives us a competitive advantage for several reasons. First, our direct connection with the retail accounts allows us more control over sales, branding and other marketing support. Second, our approach gives us more visibility into sell-through rates. Finally, we enjoy significantly stronger margins selling directly to retail accounts, rather than selling through a distributor.

Our DTC channel is a powerful marketing engine. This part of our business encompasses our multi-winery e-commerce website, featuring award-winning subscription wine clubs, and is reinforced by our seven stylistically

 

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unique and high-touch tasting rooms located throughout Northern California and Washington. Our wine club boasted over 55,000 members as of Fiscal 2020, and we hosted nearly 100,000 consumers at our tasting rooms in 2019. Our ultra-luxury wines, which we consider to be wines with suggested retail prices of $25 or higher per 750ml bottle, are prominently featured in this channel, yielding high average bottle prices. Early access to new releases, a compelling slate of member benefits and active cross-marketing throughout the portfolio drive wine club member loyalty and sales. These strategies maximize each winery brand and property while driving awareness for the Company’s other world-class wines and properties, resulting in more and lasting connections with consumers and wholesale customers.

We believe the strategic combination of our complementary paths to consumers has been an important driver of our sustained growth and will continue to enable long-term scalability, though ultimately the success of our business depends on our ability to develop connections between our customers and our winery brands. We balance the market accessibility of a broad wholesale reach with direct and authentic customer and consumer touchpoints that drive connectivity, insights and trust. Combined, our California direct to retail accounts business and DTC channel make up 39% of our combined net sales.

We believe our comprehensive omni-channel route-to-market is a key differentiator of our leading U.S. luxury wine platform and allows us to engage with distributors, customers and consumers on multiple fronts and meet their needs across price points, varietals and appellations, driving long-term sustainable growth.

Diversified and scalable production model.    The success of The Duckhorn Portfolio is underpinned by our strategic, diversified and scalable supply and production platform. We strive for capital efficiency and secure the majority of our grape supply by leveraging long-standing relationships within a vast, geographically diversified network of more than 225 trusted growers and bulk wine suppliers, designed to help us mitigate agricultural risk, optimize costs and quality and flexibly scale. At our eight state-of-the-art wineries, we are able to directly control the quality of the wine we produce.

To complement this scaled platform, we own 22 distinct Estate vineyards spanning 843 acres. Some of our most prestigious wines are created from Estate grapes grown in these vineyards under our own viticultural heritage utilizing sustainable winegrowing and employing responsible land and water stewardship practices.

This diversified sourcing model provides many benefits:

 

 

Luxury credentials. Estate grapes are used primarily in our DTC-only wines to give a sense of place to our iconic winery brand heritage and showcase our award-winning winemaking capabilities.

 

 

Reliability of supply. We have a long history of creating a portfolio of wines year after year, at scale, that consistently meet the highest standards of quality. Given our industry’s exposure to climate change risks and extreme weather events, we regularly evaluate impacts of climate change on our business and plan to disclose any such impacts to provide transparency with respect to our efforts to effectively manage the risks and opportunities presented by climate change. We are committed to continuing to take measures to achieve climate resiliency and to expand our agile supply chain with highly diversified grape sourcing to help ensure we mitigate the impact of climate change and unforeseen natural events.

 

 

Rapid scalability. Contracted supply from our trusted grape grower and bulk wine supplier network enables us to react to market trends and grow luxury winery brands, like Decoy, quickly while maintaining quality excellence.

 

 

Cost management. Our scale provides us with operating leverage, and we believe our strategy both to Estate-grow and contract our grape supply provides us with increased visibility into our cost structure and makes us less susceptible to market volatility.

 

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Our diversified and scalable production model enables us to efficiently adapt to changing consumer demand, drive toward our environmental sustainability goals and rapidly bring to market diversified case lot sizes.

Exceptional leadership team.    We have an exceptional, culture-driven leadership team at the helm of The Duckhorn Portfolio. The highly tenured executive team has approximately 100 years of cumulative experience with Duckhorn and is led by Alex Ryan, who began his work with luxury wine at Duckhorn nearly 33 years ago. The executive leadership team is made up of six strategic and functionally focused professionals dedicated to the success and growth of The Duckhorn Portfolio. Since 2010, this leadership team has grown net sales by approximately 500%, successfully managing the business through multiple economic cycles, challenging environmental externalities and the integration of two acquisitions. Supporting this leadership team is a deep bench of highly talented managers, many of whom have a long history at the Company and with our winery brands. Throughout our history, we believe we have been able to attract the highest caliber employees in the winemaking industry because of our reputation, prioritization of sustainability and corporate responsibility, holistic focus on our team members and commitment to developing, empowering, supporting and promoting our employees, which is a core element of our leadership.

Our strategy for continuous growth

Our entire organization is growth-oriented. From product innovation and category expansion to expanding points of distribution, every department plays a role in the growth of The Duckhorn Portfolio. We have a long, successful track record of enhancing our growth initiatives and delivering on our commitment to excellence in luxury winemaking.

Our growth plan relies on core competencies demonstrated by our organization throughout our history. We expect to deliver meaningful increases in stockholder value by continuing to execute the following strategies:

Leverage our sales and marketing strength to gain market share in a consolidating marketplace.

We believe our comprehensive sales and marketing plan will continue to increase awareness across our luxury wine portfolio, reinforce the strength of our winery brands and expand our market share.

Our commitment to excellence has resulted in a track record of industry awards, and we believe these recognitions provide our entire luxury wine portfolio with a halo of prestige. The success of our business relies on our ability to maintain the prestige of our portfolio, and we expect to continue to be honored with critical acclaim and 90+ point wine scores, which we believe will drive consumer engagement and further solidify the reputation of our entire luxury wine portfolio.

We believe leveraging our sales and marketing strength will increase brand awareness and grow sales for our winery brands to existing consumers and a new generation of consumers. This plan is made possible by our omni-channel sales platform, which enables us to grow, both through volume increases and through periodic price increases, particularly on our higher-end, smaller lot DTC wines.

We also plan to continue to invest in our wholesale channel sales force to expand our network of distributor and account advocates and grow our retail presence. We expect this differentiated platform advantage will continue to increase our brand awareness and presence in the fragmented luxury wine segment.

Establishing and maintaining the awareness of The Duckhorn Portfolio as a premier luxury winemaker is paramount to our growth and success, and we believe our sales and marketing strength will reinforce this and enable us to gain market share in a consolidating marketplace. Additionally, we are steadfast in our desire to be an industry leader in ESG practices, as we have long believed that investing in sustainable business practices positively correlates with our business success in the luxury wine market.

 

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Insightful and targeted portfolio evolution.

We maintain close connectivity to luxury wine consumers through our omni-channel sales model, which coupled with our high-quality, flexible production assets, allows us to thoughtfully tailor our portfolio to meet consumers’ needs. One of our most successful growth initiatives has been the long-term development and evolution of Decoy, which began with a single offering and now includes 12 different labels across our Decoy and Decoy Limited offerings. We expect to further enhance Decoy as a luxury winery brand and we see great potential for further extensions, as evidenced by some of the following recent innovations. During 2020, we successfully launched four new Decoy labels, each of which received strong consumer reception. Three of these labels are in our new upmarket tier, Decoy Limited, which consists of Napa Valley Cabernet Sauvignon, Napa Valley Red Blend and Sonoma Coast Pinot Noir. In addition, we inaugurated a new category offering, Decoy Brut Cuvée Sparkling. We also launched a line of premium Decoy-branded wine-based seltzers in February 2021, which we believe will have broad appeal to current Decoy wine drinkers and capture an incremental drinking occasion in this dynamic category. We expect to launch other Decoy extensions in the future and intend to continue evolving and strategically broadening The Duckhorn Portfolio to drive future growth.

Our curated and comprehensive portfolio and historical growth result from long-term dedication to continuous evolution and alignment with the luxury wine consumer. As we continue to scale, we believe our growth mindset, coupled with our differentiated production and distribution platform, will enable us to continue to adapt and remain at the forefront of our industry.

Expand and accelerate wholesale channel distribution.

We see an opportunity to continue to expand our retail accounts and increase cases sold per retail account, most prominently by leveraging the strength of our powerhouse Decoy brand. In Fiscal 2020, we increased the number of our accounts by 10% to greater than 47,000. Over the same period, our domestic case sales per account increased by 10% and our number of distribution points increased by approximately 13%. With over 500,000 total licensed retail accounts in the United States, according to Nielsen, there remains ample opportunity to continue broadening distribution of the wines in our portfolio as well as to increase the volume of wine sold to existing accounts. While the wholesale channel has experienced significant distributor consolidation and increased competition in recent years, we believe our long-standing existing commercial relationships coupled with exceptional portfolio strength, built over the last four decades, position us to capture this distribution growth opportunity and accelerate sales to existing distributors and retail accounts in California.

Continue to invest in DTC capabilities.

We plan to continue to invest in our DTC channel, which currently comprises approximately 20% of sales and features seven tasting rooms, and had over 55,000 active wine club members who purchased wine in Fiscal 2020. This robust channel provides an important means for us to engage with consumers, create brand evangelists and drive adoption across our portfolio. This channel also favorably impacts margins, as wines sold through our DTC programs are often more exclusive, higher-priced wines. Over 3,000 new members have signed up for our DTC offerings in Fiscal 2020, which we believe is a meaningful testament to our wines and their appeal to American luxury wine consumers. Our DTC channel will continue to play a critical role in authenticating our luxury credentials with consumers, and we believe our scaled presence and expertise in the channel separates us from our competitors.

Evaluate strategic acquisitions opportunistically.

As part of our ongoing growth strategy, we strategically evaluate acquisition opportunities. While our growth and success are not contingent upon future acquisitions, we believe our leadership and operational teams have the

 

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capabilities and experience to execute and integrate acquisitions to create stockholder value. We continually track and evaluate acquisition opportunities that could create strategic advantages for our business.

This approach has led to the successful acquisition of two winery brands over the past three years: Kosta Browne and Calera. Both brands offer highly acclaimed wines with deeply connected consumer followings. In addition to complementing our portfolio, both acquisitions had unique strategic rationale: Kosta Browne expanded our DTC capabilities and Calera further diversified our supply chain and production resilience by broadening our grape-sourcing relationships within the Central Coast of California. These renowned wineries have continued to thrive and grow in prominence under our stewardship.

Our total outstanding long-term indebtedness was $379.9 million as of October 31, 2020. We intend to use a portion of the net proceeds we receive from this offering to repay $             of outstanding indebtedness under our Credit Facility. See “Use of proceeds.” However, our ability to execute the foregoing growth strategies depends on our ability to maintain sufficient cash flows while continuing to service our remaining indebtedness.

Summary risk factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus, and, in particular, you should evaluate the specific factors set forth under “Risk factors” in deciding whether to invest in our common stock. Among these important risks are the following:

 

 

The success of our business depends heavily on the strength of our winery brands.

 

 

Our advertising and promotional investments may affect our financial results but not be effective.

 

 

We face significant competition with an increasing number of products and market participants that could materially and adversely affect our business, results of operations and financial results.

 

 

Consolidation of the distributors of our wines, as well as the consolidation of retailers, may increase competition in an already crowded space and may have a material adverse effect on our business, results of operations and financial results.

 

 

A reduction in consumer demand for wine, which may result from a variety of factors, including demographic shifts and decreases in discretionary spending, could materially and adversely affect our business, results of operations and financial results.

 

 

Natural disasters, including fires, floods and earthquakes, some of which may be exacerbated by climate change, could destroy, damage or limit access to our wineries and vineyards, and the locations at which we store our inventory, which could materially and adversely affect our business, results of operations and financial results.

 

 

A failure to adequately prepare for adverse events that could cause disruption to elements of our business, including harvesting our grapes, blending, inventory aging or distribution of our wines could materially and adversely affect our business, results of operations and financial results.

 

 

Inclement weather, drought, pests, plant diseases and other factors could reduce the amount or quality of the grapes available to produce our wines, which could materially and adversely affect our business, results of operations and financial results.

 

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The COVID-19 pandemic has affected our customers, our suppliers and our business operations, and the duration and extent to which this and any future global health pandemics will impact our future business, results of operations and financial results remains uncertain.

 

 

Due to the three-tier alcohol beverage distribution system in the United States, we are heavily reliant on our distributors and government agencies that resell alcoholic beverages in all states with the exception of California, where we self-distribute our wines. A significant reduction in distributor demand for our wines would materially and adversely affect our sales and profitability.

 

 

The consumer reception of the launch and expansion of our wine offerings is inherently uncertain. New labels may present new and unknown risks and challenges in production and marketing that we may fail to manage optimally and could have a materially adverse effect on our business, results of operations and financial results.

 

 

Our marketing strategy involves continued expansion into the DTC channel, which may present risks and challenges that we have not yet experienced or contemplated, or for which we are not adequately prepared. These risks and challenges could negatively affect our sales in these channels and our profitability.

 

 

If we are unable to obtain adequate supplies of premium grapes and bulk wine from third-party grape growers and bulk wine suppliers, the quantity or quality of our annual production of wine could be adversely affected, causing a negative impact on our business, results of operations and financial condition.

 

 

As a producer of alcoholic beverages, we are regularly the subject of regulatory reviews, proceedings and audits by governmental entities, any of which could result in an adverse ruling or conclusion, and which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

 

 

We have incurred substantial indebtedness and we may not generate sufficient cash flow from operations to meet our debt service requirements, continue our operations and pursue our growth strategy and we may be unable to raise capital when needed or on acceptable terms.

 

 

TSG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

Implications of being an emerging growth company

We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include, among others:

 

 

the requirement to present only two years of audited financial statements and only two years of related “Management’s discussion and analysis of financial condition and results of operations” in this prospectus;

 

 

reduced disclosure about our executive compensation arrangements;

 

 

no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and

 

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exemption from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues as of the end of our fiscal year, we have more than $700.0 million in market value of our common stock held by non-affiliates as of the end of our second fiscal quarter or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some or all of these reduced disclosure obligations.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public 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 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. Our consolidated financial statements may, therefore, not be comparable to those of other public companies that comply with such new or revised accounting standards.

Our sponsor

TSG is a leading private equity firm focused exclusively on the branded consumer sector. Since its founding in 1987, TSG has been an active investor in the food, beverage, restaurant, fitness, beauty, personal care, household, apparel & accessories and e-commerce sectors. Representative past and present partner companies include Planet Fitness, IT Cosmetics, REVOLVE, BrewDog, Canyon Bicycles, Dutch Bros, Pabst, Backcountry, Power Stop, vitaminwater, thinkThin, popchips, Stumptown, Smashbox Cosmetics and e.l.f. Cosmetics.

Following the completion of this offering, investment funds affiliated with TSG will own approximately        % of our common stock, or        % if the underwriters exercise in full their option to purchase additional shares of our common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange, and TSG will continue to have significant influence over us and decisions made by stockholders and may have interests that differ from yours. See “Risk factors—Risks related to our common stock and this offering—TSG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.”

Corporate information

The Duckhorn Portfolio, Inc. was incorporated in Delaware in September 2016. Our principal executive offices are located at 1201 Dowdell Lane, St. Helena, California 94574, and our telephone number is (707) 302-2658. Our website is                 . The information on, or that can be accessed through, this website and the other Internet websites that we present in this prospectus is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase shares of our common stock.

We own or have rights to trademarks, trade names and service marks that we use in connection with the operation of our business, including Duckhorn Vineyards, Decoy, Goldeneye, Paraduxx, Migration, Canvasback, Calera, Kosta Browne and various other marks. Solely for convenience, the trademarks, trade names and service marks referred to in this prospectus are listed without the ®, SM and TM symbols. We will assert our rights to our trademarks, trade names and service marks to the fullest extent under applicable law.

 

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The offering

 

Common stock offered by us

             shares.

 

Common stock offered by the selling stockholders

             shares.

 

Underwriters’ option to purchase additional shares of common stock from us and the selling stockholders

             shares.

 

Common stock to be outstanding after this offering

             shares (or              shares if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $         million, or approximately $         million if the underwriters exercise in full their option to purchase additional shares of common stock, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, and create a public market for our common stock. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We also intend to use a portion of the net proceeds we receive from this offering to repay $         of outstanding indebtedness under our Credit Facility. We may also use a portion of the net proceeds for acquisitions or strategic investments in complementary businesses, products or services, although we do not currently have any plans or commitments for any such acquisitions or investments. See “Use of proceeds.”

 

Controlled company

Following this offering we will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. See “Management—Board composition and director independence.”

 

Dividend policy

We do not currently intend to pay dividends on our common stock. Any future determination to pay dividends to holders of common stock will be at the sole discretion of our board of directors and will depend upon many factors, including general economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us and

 

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any other factors that our board of directors may deem relevant. See “Dividend policy.”

 

Risk factors

You should read the “Risk factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NYSE symbol

“NAPA”

Unless otherwise indicated, the number of common stock to be outstanding after this offering is based on              shares of common stock outstanding as of                     , 2021 and excludes the following:

 

 

             shares of common stock issuable upon vesting of outstanding restricted stock units;

 

 

             shares of common stock reserved for future issuance under our 2021 Equity Plan; and

 

 

             shares of common stock authorized for sale under the 2021 ESPP, which will become effective prior to the completion of this offering.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

 

the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering; and

 

 

no exercise of the underwriters’ option to purchase additional common stock from us and the selling stockholders identified in this prospectus.

 

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Summary consolidated financial and other data

The following summary consolidated statements of operations data for the fiscal years ended July 31, 2019 and 2020 and the consolidated statement of financial position data as of July 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the three months ended October 31, 2019 and 2020 and the consolidated statement of financial position data as of October 31, 2020 from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial data set forth below have been prepared on the same basis as our audited consolidated financial statements, and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future and our interim results for the three months ended October 31, 2020 are not necessarily indicative of results to be expected for the year ended July 31, 2021, or any other period.

The summary consolidated financial data in this section are not intended to replace the consolidated financial statements and related notes. The tables presented should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

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Consolidated statements of operations data:

 

     
     Fiscal year ended
July 31,
    Three months ended
October 31,
 
(in thousands, except share data)    2019     2020     2019     2020  

Net sales

   $ 241,207   $ 270,648   $ 72,704     $ 91,638  

Cost of sales

     128,204     133,766     36,400       47,363  
  

 

 

 

Gross profit

     113,003     136,882     36,304       44,275  

Selling, general, and administrative expenses

     65,741     65,908     18,443       16,805  

Impairment loss

           11,830            

Casualty (gain) loss

     (8,606     (4,047     118       1,555  
  

 

 

 

Income from operations

     55,868     63,191     17,743       25,915  

Interest expense

     20,937     17,924     4,830       3,580  

Other expense (income), net

     4,988     2,457     945       (1,323
  

 

 

 

Total other expenses

     25,925     20,381     5,775       2,257  
  

 

 

 

Income before income taxes

     29,943     42,810     11,968       23,658  
  

 

 

 

Income tax expense

     7,842     10,432     3,143       6,136  
  

 

 

 

Net Income

     22,101     32,378     8,825       17,522  
  

 

 

 

Less: Net (income) loss attributable to non-controlling interest

     (4     (1     (9     1  
  

 

 

 

Net income attributable to The Duckhorn Portfolio, Inc.

   $ 22,097   $ 32,377   $ 8,816     $ 17,523  

Net Income per share of common stock attributable to common stockholders:

        

Basic

   $ 220.97     $ 323.77     $ 88.16     $ 175.23  

Diluted

   $ 220.97     $ 323.77     $ 88.16     $ 175.23  

Weighted average shares of common stock outstanding:

        

Basic

     100       100       100       100  

Diluted

     100       100       100       100  

Pro forma earnings per share attributable to common stockholders(1):

        

Basic

        

Diluted

        

Pro forma weighted average shares of common stock outstanding(1):

        

Basic

        

Diluted

        

 

 

 

(1)   See Note 2 (Basis of presentation and significant accounting policies) and Note 2 (Basis of presentation and recent accounting pronouncements) in our audited consolidated financial statements and unaudited condensed consolidated financial statements, respectively, included elsewhere in this prospectus for further details on the calculation of our pro forma earnings per share of common stock attributable to common stockholders, basic and diluted, and pro forma weighted average shares of common stock outstanding, basic and diluted.

 

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Consolidated balance sheet data:

 

   
     As of October 31, 2020  
(in thousands)   

Actual

     Pro forma
as adjusted
 

Cash

   $ 1,305     

Working capital(1)

     247,877     

Total assets

     1,222,829   

Long-term debt, including current maturities

     379,911     

Total liabilities

     550,415     

Total equity

     672,414     

 

 

 

(1)   Working capital is defined as total current assets, including cash, minus total current liabilities.

Non-GAAP financial data:

 

     
     Fiscal year ended
July 31,
     Three months ended
October 31,
 
(in thousands)    2019      2020      2019      2020  

Adjusted EBITDA(1)

   $ 98,357    $ 105,080    $ 25,799      $ 33,722  

 

 

(1)   Wherever presented in this prospectus, we define adjusted EBITDA as net income before interest, taxes, depreciation and amortization, non-cash equity-based compensation expense, purchase accounting adjustments, casualty losses or gains, impairment losses, changes in the fair value of derivatives and certain other items which are not related to our core operating performance.

Adjusted EBITDA is a key performance measure we use in evaluating our operational results. We believe adjusted EBITDA is a helpful measure to provide investors an understanding of how we regularly monitor our core operating performance, as well as how we make operational and strategic decisions in allocating resources. We believe adjusted EBITDA also provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparisons of operations, as it eliminates the effects of certain variations unrelated to our overall performance. Adjusted EBITDA has certain limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations include:

 

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

 

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

 

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

 

adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

 

 

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in

 

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this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA.

See “Selected consolidated financial and other data—Non-GAAP financial measures” for an explanation of how we calculate adjusted EBITDA and for reconciliation to the most directly comparable financial measure stated in accordance with U.S. GAAP.

 

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Risk factors

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. Please also see “Cautionary note regarding forward-looking statements.”

Risks related to our competitive position and winery brands

The success of our business depends heavily on the strength of our winery brands.

Maintaining and expanding our reputation as a premier producer of luxury wine among our customers and the luxury wine market generally is critical to the success of our business and our growth strategy. The luxury wine market is driven by a relatively small number of active and well-regarded wine critics within the industry who have outsized influence over the perceived quality and value of wines. We have consistently produced critically acclaimed, award-winning wines across multiple winery brands in our portfolio, including Duckhorn Vineyards, Decoy, Kosta Browne, Goldeneye, Paraduxx, Calera, Migration, Canvasback, Greenwing and Postmark. However, if we are unable to maintain the actual or perceived quality of our wines, including as a result of contamination or tampering, environmental or other factors impacting the quality of our grapes or other raw materials, or if our wines otherwise do not meet the subjective expectations or tastes of one or more of a relatively small number of wine critics, the actual or perceived quality and value of one or more of our wines could be harmed, which could negatively impact not only the value of that wine, but also the value of the vintage, the particular brand or our broader portfolio. The winemaking process is a long and labor-intensive process that is built around yearly vintages, which means that once a vintage has been released we are not able to make further adjustments to satisfy wine critics or consumers. As a result, we are dependent on our winemakers and tasting panels to ensure that every wine we release meets our exacting quality standards.

With the advent of social media, word within the luxury wine market spreads quickly, which can accentuate both the positive and the negative reviews of our wines and of wine vintages generally. Public perception of our brands could be negatively affected by adverse publicity or negative commentary on social media outlets, particularly negative commentary on social media outlets that goes “viral,” or our responses relating to, among other things:

 

 

an actual or perceived failure to maintain high-quality, safety, ethical, social and environmental standards for all of our operations and activities;

 

 

an actual or perceived failure to address concerns relating to the quality, safety or integrity of our wines and the hospitality we offer to our guests at our tasting rooms;

 

 

our environmental impact, including our use of agricultural materials, packaging, water and energy use, and waste management; or

 

 

an actual or perceived failure by us to promote the responsible consumption of alcohol.

If we do not produce wines that are well-regarded by the relatively small wine critic community, the luxury wine market will quickly become aware and our reputation, winery brands, business and financial results of operation could be materially and adversely affected. In addition, if certain vintages receive negative publicity or consumer reaction, whether as a result of our wines or wines of other producers, our wines in the same vintage could be adversely affected. Unfavorable publicity, whether accurate or not, related to our industry, us,

 

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our winery brands, marketing, personnel, operations, business performance or prospects could also unfavorably affect our corporate reputation, stock price, ability to attract high-quality talent or the performance of our business.

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

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

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

Our advertising and promotional investments may affect our financial results but not be effective.

We have incurred, and expect to continue to incur, significant advertising and promotional expenditures to enhance our winery brands and raise consumer awareness in both existing and emerging categories. For example, we expect to incur new advertising and promotional expenses related to the launch of our premium Decoy-branded line of wine-based seltzers. These expenditures may adversely affect our results of operations in a particular quarter or even a full fiscal year, and may not result in increased sales. Variations in the levels of advertising and promotional expenditures have in the past caused, and are expected in the future to continue to cause, variability in our quarterly results of operations. While we strive to invest only in effective advertising and promotional activities in both the digital and traditional segments, it is difficult to correlate such investments with sales results, and there is no guarantee that our expenditures will be effective in building brand strength or growing long term sales.

We face significant competition with an increasing number of products and market participants that could materially and adversely affect our business, results of operations and financial results.

Our industry is intensely competitive and highly fragmented. Our wines compete in the ultra-luxury and luxury tiers within the wine industry and with many other domestic and foreign wines. Our wines also compete with popularly priced generic wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for drinker acceptance and loyalty, shelf space and prominence in retail stores, presence and prominence on restaurant wine lists and for marketing focus by the Company’s independent distributors, many of which carry extensive portfolios of wines and other alcoholic beverages. This competition is driven by established companies as well as new entrants in our markets and categories. In the United States, wine sales are relatively concentrated among a limited number of large suppliers, including E&J Gallo, Constellation, Trinchero, Jackson

 

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Family Wines, Ste. Michelle and The Wine Group, and these and our other competitors may have more robust financial, technical, marketing and distribution networks and public relations resources than we have. As a result of this intense competition, combined with our growth goals, we have experienced and may continue to face upward pressure on our selling, marketing and promotional efforts and expenses. There can be no assurance that in the future we will be able to successfully compete with our competitors or that we will not face greater competition from other wineries and beverage manufacturers.

If we are unable to successfully compete with existing or new market participants, or if we do not effectively respond to competitive pressures, we could experience reductions in market share and margins that could have a material and adverse effect on our business, results of operations and financial results.

Consolidation of the distributors of our wines, as well as the consolidation of retailers, may increase competition in an already crowded space and may have a material adverse effect on our business, results of operations and financial results.

Other than sales made directly to retail accounts in California or directly to our consumers through our DTC channel, the majority of our wine sales are made through independent distributors for resale to retail outlets, restaurants, hotels and private clubs across the United States and in some overseas markets. Sales to distributors are expected to continue to represent a substantial portion of our future net sales. Consolidation among wine producers, distributors, wholesalers, suppliers and retailers could create a more challenging competitive landscape for our wines. In addition, the increased growth and popularity of the retail e-commerce environment across the consumer product goods market, which has accelerated during the COVID-19 pandemic and the resulting quarantines, “stay at home” orders, travel restrictions, retail store closures, social distancing requirements and other government action, is highly likely to change the competitive landscape for our wines. Consolidation at any level could hinder the distribution and sale of our wines as a result of reduced attention and resources allocated to our winery brands both during and after transition periods, because our winery brands might represent a smaller portion of the new business portfolio. Furthermore, consolidation of distributors may lead to the erosion of margins as newly consolidated distributors take down prices or demand more margin from existing suppliers. Changes in distributors’ strategies, including a reduction in the number of brands they carry or the allocation of resources for our competitors’ brands or private label products, may adversely affect our growth, business, financial results and market share. Distributors of our wines offer products that compete directly with our wines for inventory and retail shelf space, promotional and marketing support and consumer purchases. Expansion into new product categories by other suppliers or innovation by new entrants into the market could increase competition in our product categories.

An increasingly large percentage of our net sales is concentrated within a small number of wholesale customers. Our five largest customers represented approximately 43% of total net sales in Fiscal 2020. Additionally, a substantial portion of our wholesale sales channel is commanded by large retailers. The purchasing power of these companies is significant, and they have the ability to command concessions. There can be no assurance that the distributors and retailers we use will continue to purchase our wines or provide our wines with adequate levels of promotional and merchandising support. The loss of one or more major accounts or the need to make significant concessions to retain one or more such accounts could have a material and adverse effect on our business, results of operations and financial position.

A reduction in consumer demand for wine, which may result from a variety of factors, including demographic shifts and decreases in discretionary spending, could materially and adversely affect our business, results of operations and financial results.

We rely on consumers’ demand for our wine. Consumer preferences may shift due to a variety of factors, including changes in demographic or social trends, changes in discretionary income, public health policies and

 

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perceptions and changes in leisure, dining and beverage consumption patterns. Our continued success will require us to anticipate and respond effectively to shifts in consumer behavior and drinking tastes. If consumer preferences were to move away from our luxury winery brands or labels, our results of operations would be materially and adversely affected.

While over the past several years there has been a modest increase in consumption of wine in the U.S. market, a limited or general decline in consumer demand could occur in the future due to a variety of factors, including:

 

 

a general decline in economic or geopolitical conditions;

 

 

a general decline in the consumption of alcoholic beverage products in on-premise establishments, such as those that may result from smoking bans and stricter laws relating to driving while under the influence of alcohol and changes in public health policies, including those implemented to address the COVID-19 pandemic;

 

 

a generational or demographic shift in consumer preferences away from wines to other alcoholic beverages;

 

 

increased activity of anti-alcohol groups;

 

 

concern about the health consequences of consuming alcoholic beverage products;

 

 

increased federal, state, provincial, and foreign excise, or other taxes on beverage alcohol products and increased restrictions on beverage alcohol advertising and marketing; and

 

 

consumer dietary preferences favoring lower-calorie beverages, such as hard seltzer as well as diet soft drinks, sports drinks and water products.

Our portfolio includes a range of luxury and ultra-luxury wines, and demand for these winery brands may be particularly susceptible to changing economic conditions and consumer tastes, preferences and spending habits, which may reduce our sales of these products and adversely affect our profitability. Many of these consumers are from the Generation X and Baby Boomer generations, and we have not yet seen similar adoption by the Millennial generation. An unanticipated decline or change in consumer demand or preference could also materially impact our ability to forecast for future production requirements, which could, in turn, impair our ability to effectively adapt to changing consumer preferences. Any reduction in the demand for our wines would materially and adversely affect our business, results of operations and financial results.

The consumer reception of the launch and expansion of our product offerings is inherently uncertain. New producers may present new and unknown risks and challenges in production and marketing that we may fail to manage optimally and could have a materially adverse effect on our business, results of operations and financial results.

New product development and innovation is core to our marketing strategy, and a significant portion of our net sales are derived from labels developed within the last five years. To continue our growth and compete with new and existing competitors, we may need to innovate and develop a robust pipeline of new wines. The launch and continued success of a new wine is inherently uncertain, particularly with respect to consumer appeal and market share capture. An unsuccessful launch may impact consumer perception of our existing winery brands and reputation, which are critical to our ongoing success and growth. Unsuccessful implementation or short-lived success of new wines may result in write-offs or other associated costs which may materially and adversely affect our business, results of operations and financial results. In addition, the launch of new product offerings may result in cannibalization of sales of existing products in our portfolio.

 

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Due to the three-tier alcohol beverage distribution system in the United States, we are heavily reliant on our distributors and government agencies that resell alcoholic beverages in all states except California, where we self-distribute our wines. A significant reduction in distributor demand for our wines would materially and adversely affect our sales and profitability.

Due to regulatory requirements in the United States, we sell a significant portion of our wines to wholesalers for resale to retail accounts, and in some states, directly to government agencies for resale. In California we sell directly to retail accounts rather than via a wholesaler, which we refer to as direct to the trade. Additionally, a small percentage of our wines are sold directly to accounts outside of California, including cruise ships, airlines and duty-free shops. Decreased demand for our wines in any of our sales channels would negatively affect our sales and profitability materially. A change in the relationship with any of our significant distributors could harm our business and reduce our sales. The laws and regulations of several states prohibit changes of distributors, except under certain limited circumstances, making it difficult to terminate or otherwise cease working with a distributor for poor performance without reasonable justification, as defined by applicable statutes. Any difficulty or inability to replace distributors, poor performance of our major distributors or our inability to collect accounts receivable from our major distributors could harm our business. In addition, an expansion of the laws and regulations limiting the sale of our wine would materially and adversely affect our business, results of operations and financial results. There can be no assurance that the distributors and accounts to which we sell our wines will continue to purchase our wines or provide our wines with adequate levels of promotional support, which could increase competitive pressure to increase sales and market spending and could materially and adversely affect our business, results of operations and financial results.

Our marketing strategy involves continued expansion into the DTC channel, which may present risks and challenges that we have not yet experienced or contemplated, or for which we are not adequately prepared. These risks and challenges could negatively affect our sales in these channels and our profitability.

The marketplace in which we operate is highly competitive and in recent years has seen the entrance of new competitors and products targeting similar customer groups as our business. To stay competitive and forge new connections with customers, we are continuing investment in the expansion of our DTC channel.

Expanding our DTC channel may require significant investment in tasting room development, e-commerce platforms, marketing, fulfillment, information technology (“IT”) infrastructure and other known and unknown costs. The success of our DTC channel depends on our ability to maintain the efficient and uninterrupted operation of online order-processing and fulfillment and delivery operations. As such, we are heavily dependent on the performance of our shipping and technology partners. Any system interruptions or delays could prevent potential customers from purchasing our wines directly.

Our ability to ship wines directly to our customers is the result of court rulings, including the U.S. Supreme Court ruling in Granholm v. Heald, which allow, in certain circumstances, shipments to customers of wines from out-of-state wineries. Any changes to the judicial, legal or regulatory framework applicable to our DTC business that reduce our ability to sell wines in most states in the DTC channel could have a materially adverse effect on our business, results of operations and financial results.

We may be unable to adequately adapt to shifts in consumer preferences for points of purchase, such as an increase in at-home delivery during the COVID-19 pandemic, and our competitors may react more rapidly or with improved customer experiences. A failure to react quickly to these and other changes in consumer preferences, or to create infrastructure to support new or expanding sales channels may materially and adversely affect our business, results of operations and financial results.

 

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A decrease in wine score ratings by important rating organizations could have a negative impact on our ability to create demand for and sell our wines. Sustained negative scores could reduce the prominence of our winery brands and carry negative association across our portfolio which could materially and adversely affect our sales and profitability.

Our winery brands and individual labels are issued ratings or scores by wine rating organizations, and higher scores often drive greater demand and, in some cases, higher pricing. Many of our winery brands and labels have consistently ranked among the top U.S. luxury wine brands and have generally received positive reviews across multiple appellations, varietals, varieties, styles and price points from many of the industry’s top critics and publications. These positive third-party reviews have been important to maintaining and expanding our reputation as a luxury wine producer. However, we have no control over ratings issued by third parties or the methodology they use to evaluate our wines, which may not continue to be favorable to us in the future. If our new or existing winery brands or labels are assigned significantly lower ratings, if our winery brands or labels consistently receive lower ratings over an extended period of time or if any of our competitors’ new or existing brands are assigned comparatively higher ratings, our customers’ perception of our winery brands and our labels and demand for our wines could be negatively impacted, which could materially and adversely affect our sales and profitability.

Risks related to our production of wine and the occurrence natural disasters

Natural disasters, including fires, floods and earthquakes, some of which may be exacerbated by climate change, could destroy, damage or limit access to our wineries and vineyards, and the locations at which we store our inventory, which could materially and adversely affect our business, results of operations and financial results.

In recent years, we have seen an increase in incidents of extreme temperatures and unusual weather patterns, as well as the increase in both the frequency and severity of natural disasters, including fires and floods. Severe weather events and earthquakes may cause disruptions to our supply chain, which may negatively impact our wines by causing disruption or damage to our wineries, inventory holdings, suppliers, transportation or sales channels.

A significant portion of our agricultural yield, wineries and tasting rooms, and our corporate headquarters, are located in a region of California that is prone to natural disasters such as wildfires, floods and earthquakes. Natural disasters may also interrupt critical infrastructure, such as electricity, which may be suspended for a prolonged period of time as a preventative or reactive measure to natural disasters. In recent years, we have experienced wildfires of varying duration and severity in Napa, Sonoma and the rest of California. At various times during these fires, operations at some or all of our properties were impacted. These fires also resulted in power outages and limited our access to and productivity at our facilities, which negatively impacted our production and operations. The grapes in our vineyards and the vineyards of the growers from which we are contracted to purchase are susceptible to potential smoke damage as a result of wildfires in the region, which, in some cases, can impact the quality of the grapes, making them unusable or decreasing their value in the production of our wine, as occurred as a result of the fires in 2020.

A significant portion of our net sales is derived from our DTC channel, which depends in part on guest visits to our tasting rooms. Natural disasters and severe weather, and negative press coverage of such incidents, have in the past and could in the future negatively impact the number of tourists visiting Northern California, which could, in turn, decrease visits to our tasting rooms. Any decrease in visits to our tasting rooms could negatively impact our DTC channel, which could have a materially adverse impact on our business, results of operations and financial results.

 

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The location of some of our vineyards and wineries are in areas susceptible to flooding. In 2019, substantial flooding in the Russian River Valley caused damage to one of our facilities and tasting rooms and caused more substantial damage to other nearby wineries and vineyards. Additionally, in 2014, a 6.0 magnitude earthquake occurred within Napa County that caused significant damage to certain wineries and businesses in the area. While we have mitigation strategies in place to minimize the damage to our properties, remediate smoke taint present in some wine and mitigate other losses resulting from fires, floods and other natural disasters, we cannot be certain such strategies will be sufficient in the event of future fires, earthquakes or flooding, particularly if such events increase in severity, duration or geographic scope. Failure to adequately mitigate future climate risks or more extreme and adverse conditions at any of our properties or the properties of our suppliers could result in the partial or total loss of physical inventory, production facilities, tasting rooms or event spaces, which could have a materially adverse impact on our business, operations and financial results.

A failure to adequately prepare for adverse events that could cause disruption to elements of our business, including our grape harvesting, blending, inventory aging or distribution of our wines could materially and adversely affect our business, results of operations and financial results.

Disruptions to our operations caused by adverse weather, natural disasters, public health emergencies, including the COVID-19 pandemic, or unforeseen circumstances may cause delays to or interruptions in our operations. A consequence of any of these or supply or supply chain disruptions, including the temporary inability to produce our wines due to the closure of our production sites, could prevent us from meeting consumer demand in the near term or long term for our aged wines. For example, as result of the COVID-19 pandemic, our industry has experienced temporary supply chain disruptions for certain processed materials, such as sparkling wine cages and glass, as well as increased strain on logistics networks and shipping partners. The occurrence of any such disruptions during a peak time of demand for such processed materials could increase the magnitude of the effect on our distribution network and sales. Failure to adequately prepare for and address any such disruptions could materially and adversely affect our business, results of operations and financial results.

A catastrophic event causing physical damage, disruption or failure at any one of our major production facilities could adversely affect our business. As many of our wines require aging for some period of time, we maintain a substantial inventory of aged and maturing wines in warehouses at a number of different locations in California and Washington State. The loss of a substantial amount of aged inventory through fire, accident, earthquake, other natural or man-made disaster, contamination or otherwise could significantly reduce the supply of the affected wine or wines, including our aged wines, which are typically our highest priced and limited production wines.

Any disruptions that cause forced closure or evacuation could materially harm our business, results of operations and financial results. Additionally, should multiple closings occur, we may lose guest confidence resulting in a reduction in visitation to our tasting rooms and direct sales, which could materially and adversely affect our business, results of operations and financial results.

Inclement weather, drought, pests, plant diseases and other factors could reduce the amount or quality of the grapes available to produce our wines, which could materially and adversely affect our business, results of operations and financial results.

A shortage in the supply of quality grapes may result from the occurrence of any number of factors that determine the quality and quantity of grape supply, including adverse weather conditions (including heatwaves, frosts, drought and excessive rainfall), and various diseases, pests, fungi and viruses such as Red Blotch, Pierce’s Disease or the European Grapevine Moth. We cannot anticipate changes in weather patterns and conditions, and we cannot predict their impact on our operations if they were to occur. We also cannot

 

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guarantee that our efforts to prevent and control any pest and plant disease infestation will be successful, or that any such infestations will not have a material impact on the properties of any of our suppliers. Any shortage could cause an increase in the price of some or all of the grape varietals required for our wine production or a reduction in the amount of wine we are able to produce, which could materially and adversely affect our business, results of operations and financial results.

Factors that reduce the quantity of grapes we, or the growers with which we contract, grow may also reduce their quality. Deterioration in the quality of our wines could harm our winery brand strength, and a decrease in our production could reduce our sales and increase our expenses, both of which could materially and adversely affect our business, results of operations and financial results.

If we are unable to obtain adequate supplies of premium grapes and bulk wine from third-party grape growers and bulk wine suppliers, the quantity or quality of our annual production of wine could be adversely affected, causing a negative impact on our business, results of operations and financial condition.

The production of our luxury wines and the ability to fulfill the demand for our wines is restricted by the availability of premium grapes and bulk wines from third-party growers. On average, between 2015 and 2020, more than 10% of our grape inputs per year come from our own Estate vineyards and the remaining amount comes from third parties in the form of contracted grapes, contracted bulk wine, spot grapes and spot bulk wine.

As we continue to grow, we anticipate that a greater percentage of our production will rely on third-party suppliers as the yield from our Estate vineyards is likely to remain stable. If we are unable to source grapes and bulk wine of the requisite quality, varietal and geography, among other factors, our ability to produce wines to the standards, quantity and quality demanded by our customers could be impaired.

Factors including climate change, agricultural risks, competition for quality, water availability, land use, wildfires, floods, disease and pests could impact the quality and quantity of grapes and bulk wine available to our company. Furthermore, these potential disruptions in production may drive up demand for grapes and bulk wine creating higher input costs or the inability to purchase these materials. In recent years, we have observed significant volatility in the grape market. For example, in 2020, we contracted for approximately 22,000 tons of grapes at a cost of $43.7 million, compared to 19,000 tons of grapes for a total cost of $51.1 million in 2019. However, we may experience upward price pressure in future harvest seasons due to factors including the general volatility in the grape and bulk wine markets, widespread insured and/or uninsured losses and overall stress on the agricultural portion of the supply chain. Furthermore, following the 2020 wildfires in Northern California, the price of bulk wine increased substantially in a very short period of time, leading to some wine producers reducing lot sizes of certain wines. Fortunately, we acted quickly and decisively as soon as the wildfires started and were able to purchase our bulk wine prior to meaningful price increases. However, we cannot be sure that we will be able to avoid similar price increases in the future. As a result, our financial results could be materially and adversely affected both in the year of the harvest and future periods.

If we are unable to identify and obtain adequate supplies of quality agricultural, raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies, or if there is an increase in the cost of the commodities or products, our profitability, production and distribution capabilities could be negatively impacted, which would materially and adversely affect our business, results of operations and financial condition.

We use a large volume of grapes and other raw materials to produce and package our wine, including corks, barrels, winemaking additives and water, as well as large amounts of packaging materials, including metal, cork, glass and cardboard. We purchase raw materials and packaging materials under contracts of varying maturities from domestic and international suppliers.

 

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Glass bottle costs are one of our largest packaging components of cost of goods sold. In North America, glass bottles have only a small number of producers. Currently, the majority of our glass containers are sourced from Mexico and a minority are sourced from China. An inability of any of our glass bottle suppliers to satisfy our requirements could materially and adversely affect our business. In addition, costs and programs related to mandatory recycling and recyclable materials deposits could be adopted in states of manufacture, imposing additional and unknown costs to manufacture products utilizing glass bottles. The amount of water available for use is important to the supply of our grapes and winemaking, other agricultural raw materials and our ability to operate our business. If climate patterns change and droughts become more severe, there may be a scarcity of water or poor water quality, which may affect our production costs, consistency of yields or impose capacity constraints. We depend on sufficient amounts of quality water for operation of our wineries, as well as to irrigate our vineyards and conduct our other operations. The suppliers of the grapes and other agricultural raw materials we purchase also depend upon sufficient supplies of quality water for their vineyards and fields. Prolonged or severe drought conditions in the western United States or restrictions imposed on our irrigation options by governmental authorities could have an adverse effect on our operations in the region. If water available to our operations or the operations of our suppliers becomes scarcer, restrictions are placed on our usage of water or the quality of that water deteriorates, we may incur increased production costs or face manufacturing constraints which could negatively affect our production. Even if quality water is widely available to us, water purification and waste treatment infrastructure limitations could increase our costs or constrain operation of our production facilities and vineyards. Any of these factors could materially and adversely affect our business, results of operations and financial results.

Our production facilities also use a significant amount of energy in their operations, including electricity, propane and natural gas. We have experienced increases in energy costs in the past, and energy costs could rise in the future, which would result in higher transportation, freight and other operating costs, such as ageing and bottling expenses. Our freight cost and the timely delivery of our wines could be adversely affected by a number of factors that could reduce the profitability of our operations, including driver shortages, higher fuel costs, weather conditions, traffic congestion, increased government regulation, and other matters. In addition, increased labor costs or insufficient labor supply could increase our production costs.

Our supply and the price of raw materials, packaging materials and energy and the cost of energy, freight and labor used in our productions and distribution activities could be affected by a number of factors beyond our control, including market demand, global geopolitical events (especially their impact on energy prices), economic factors affecting growth decisions, exchange rate fluctuations and inflation. To the extent any of these factors, including supply of goods and energy, affect the prices of ingredients or packaging, or we do not effectively or completely hedge changes in commodity price risks, or are unable to recoup costs through increases in the price of our finished wines, our business, results of operations and financial results could be materially and adversely affected.

Risks related to COVID-19

The COVID-19 pandemic has affected our customers, our suppliers and our business operations, and the duration and extent to which this and any future global health pandemics will impact our business, results of operations and financial results in future periods remains uncertain.

The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home requirements and closure of non-essential businesses. As an agricultural company that supplies supermarkets, our business is generally deemed essential under current

 

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applicable regulatory guidance. Our farming and winery operations have continued with minimal interruptions as a result of COVID-19, and we implemented new standard operating procedures, including the use of face coverings, social distancing and other workplace safety measures. To protect our employees and guests and comply with applicable regulatory guidance, we have temporarily reduced capacity for guest visits to our tasting rooms and implemented remote work protocols for roles for which in-person performance is not essential. Our ability to host guests in our unique tasting rooms to build winery brand loyalty and encourage future connections and purchases is a unique catalyst for our DTC channel, and any future closures or extended periods of reduced capacity may have an adverse impact on future sales. In addition, in April 2020 we implemented a temporary reduction of approximately 35 employees, predominantly from our hospitality team, during the period of COVID-19-related required closures and a permanent reduction of an additional approximately 35 employees. To the extent similar closures are implemented or persist in the future, we may be required to implement further workforce reductions. While we continue to closely monitor the situation and may adjust our current policies as more information and public health guidance become available, such precautionary measures, or any similar precautionary measures we are required or deem advisable to take in the future could negatively affect our business, results of operations and financial results. Our business may suffer should there be supply disruption due to restrictions on the ability of employees, the grape growers with whom we contract or our suppliers to travel and work, or if government or public health officials limit the travel of individuals impacting our ability to source materials domestically and across international borders. These events may impair our ability to make, bottle and ship our wines, our distributors’ ability to distribute our wines or our ability to grow or obtain the grapes needed to produce our wines. Our operations may become less efficient or otherwise be negatively impacted if critical employees are unable to work or if a significant percentage of the workforce is unable to work.

Beginning in March 2020, the U.S. and global economies have reacted negatively in response to worldwide concerns due to the economic impacts of the COVID-19 pandemic. While we have experienced a shift in the mix of our wines towards greater off-premise sales and lower on-premise sales, the COVID-19 pandemic has not generally resulted in a reduction in demand for our wines and other alcoholic beverages. In December 2020, certain jurisdictions, including California, implemented new stay-at-home orders and other required closures. Consumer purchasing behavior may be impacted by reduced consumption by those who may not be able to leave home or otherwise shop in a normal manner as a result of quarantines or other cancellations of public events and other opportunities to purchase our wines, from bar and restaurant closures, or from a reduction in consumer discretionary income due to reduced or limited work and layoffs. For example, the reduction in guests to our tasting rooms has directly and indirectly impacted our net sales. Because of the reduction of guests, we have seen a reduction in the number of new members of our wine clubs, as tasting rooms represent a significant source of our wine club’s growth. Economic disruption and unanticipated changes in consumer demand may also negatively impact our ability to adequately forecast demand for future years. Demand for our wines may decline in the future, especially in the event of a prolonged economic downturn as a result of the COVID-19 pandemic and any future unforeseen global health emergency. We have also seen a decline in demand for certain of our highest tier wines as a result of decreased business and leisure travel and spending and an increase in net sales through wholesale channel relative to our DTC channel, which has the effect of lowering average selling prices as a result of the use of distributor and retail sales discounts and promotions in our wholesale channel. If we cannot respond to and manage the impact of such events effectively, or if global economic conditions do not improve, or deteriorate further, our business, results of operations and financial results could be materially and adversely affected.

 

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Risks related to our business

The impact of U.S. and worldwide economic trends and financial market conditions could materially and adversely affect our business, liquidity, financial condition and results of operations.

We are subject to risks associated with adverse economic conditions in the United States and globally, including economic slowdown, inflation, and the disruption, volatility and tightening of credit and capital markets. Unfavorable global or regional economic conditions could materially and adversely impact our business, liquidity, financial condition and results of operations. In general, positive conditions in the broader economy promote customer spending on wine, while economic weakness, which generally results in a reduction of customer spending, may have a more pronounced negative effect on spending on wine. Unemployment, tax increases, governmental spending cuts or a return of high levels of inflation could affect consumer spending patterns and purchases of our wines and other alcoholic beverage products. Reduced consumer discretionary spending and reduced consumer confidence could negatively affect the trend towards consuming luxury wines and could result in a reduction of wine and beverage alcohol consumption in the United States generally. In particular, extended periods of high unemployment, lower consumer discretionary spending and low consumer confidence could result in lower DTC sales than expected, lower wholesale sales of our ultra-luxury winery brands in favor of luxury winery brands which have a lower average sales price and generally have lower gross profit margins and lower overall sales, which could negatively impact our business and results of operations. These conditions could also create or worsen credit issues, cash flow issues, access to credit facilities and other financial hardships for us and our suppliers, distributors, accounts and consumers. An inability of our suppliers, distributors and retailers to access liquidity could impact our ability to produce and distribute our wines.

Our financial performance is subject to significant seasonality and variability.

Our sales and pricing are subject to seasonal fluctuations. Our net sales are typically highest in the first half of our fiscal year due to increased consumer demand leading up to and around major holidays. Net sales seasonality differs for wholesale and DTC channels, resulting in quarterly seasonality in our net sales that depends on the channel mix for that period. We typically experience a higher concentration of sales through our wholesale channel during our first and second fiscal quarters due to increased purchasing by distributors in anticipation of higher consumer demand during the holiday season, which has the effect of lowering average selling prices as a result of the shift in sales channel mix as well as the use of distributor and retail sales discounts and promotions in our wholesale channel. In Fiscal 2020, our net sales in the first, second, third and fourth fiscal quarters represented approximately 26.9%, 28.4%, 25.4% and 19.3%, respectively, of our total net sales for the year. In Fiscal 2019, our net sales in the first, second, third and fourth fiscal quarters represented approximately 26.7%, 27.5%, 26.1% and 19.7%, respectively, of our total net sales for the year. Due to the relative importance of the first and second fiscal quarters, slower than anticipated demand for our wines in those quarters could have a materially adverse effect on our annual fiscal results. A failure by us to adequately prepare for periods of increased demand, or any event that disrupts our distribution channels during the first half of each fiscal year, could have a material adverse effect on our business and results of operations.

In addition to the seasonality of demand for our wines, our financial performance is influenced by a number of factors which are difficult to predict and variable in nature. These include cost volatility for raw materials, production yields and inventory availability and the evolution of our sales channel mix, as well as external trends in weather patterns and discretionary consumer spending. A number of other factors which are difficult to predict could also affect the seasonality or variability of our financial performance. Therefore, you should not rely on the results of a single fiscal quarter as an indication of our annual results or future performance.

If we cannot retain our key employees and hire additional, highly qualified employees, we may not be able to successfully manage our business, maintain our reputation as an industry leader and execute our strategic objectives, which could materially and adversely affect our operating efficiency and financial condition.

 

 

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We are highly dependent on the contributions of our senior management team, sales team, and other key employees, such as our winemakers, and certain key employees at our corporate headquarters, wineries, tasting rooms and vineyards. Our ability to deliver on strategic targets is dependent on our ability to recruit, retain and motivate key employees. Competition for such employees can be intense in the locations in which our facilities are located, and the inability to attract and retain qualified employees necessary to expand our activities may impact our ability to achieve our targets. The high cost of housing and other expenses in Napa and Sonoma Counties, and the other areas in which we have significant operations, can inhibit our ability to recruit top talent from outside the area.

We believe that the longevity and nimbleness of our management team has been a major factor in our success and growth. The loss of current key employees could result in the loss of business knowledge, negatively impact relationships with suppliers, distributors or customers or hurt company culture and morale. The inability to attract and retain talent could materially and adversely affect our operating efficiency and financial condition.

If we are unable to secure and protect our intellectual property in domestic and foreign markets, including trademarks for our winery brands, vineyards and wines, the value of our winery brands and intellectual property could decline, which could have a material and adverse effect on our business, results of operations and financial results.

Our future success depends significantly on our ability to protect our current and future winery brands and wines and to enforce and defend our trademarks and other intellectual property rights. We rely on a combination of trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to secure and protect our intellectual property rights. We have been granted 57 trademark registrations in the United States and numerous trademark registrations in other countries covering many of our winery and wine brands, and we have filed, and expect to continue to file, trademark applications seeking to protect newly-developed winery and wine brands. We cannot be sure that trademark registrations will be issued to us under any of our trademark applications. Our trademark applications could be opposed by third parties, and our trademark rights, including registered trademarks, could also be challenged. We cannot assure you that we will be successful in defending our trademarks in actions brought by third parties. There is also a risk that we could fail to timely maintain or renew our trademark registrations or otherwise protect our trademark rights, which could result in the loss of those trademark rights (including in connection with failure to maintain consistent use of these trademarks). If we fail to maintain our trademarks or our trademarks are successfully challenged, we could be forced to rebrand our wineries, wines and other products, which could result in a loss of winery brand recognition and could require us to devote additional resources to the development and marketing of new winery brands.

Notwithstanding any trademark registrations held by us, a third party could bring a lawsuit or other claim alleging that we have infringed that third party’s trademark rights. Any such claims, with or without merit, could require significant resources to defend, could damage the reputation of our winery brands, could result in the payment of compensation (whether as a damages award or settlement) to such third parties, and could require us to stop using our winery brands or otherwise agree to an undertaking to limit that use. In addition, our actions to monitor and enforce trademark rights against third parties may not prevent counterfeit products or products bearing confusingly similar trademarks from entering the marketplace, which could divert sales from us, tarnish our reputation or reduce the demand for our products or the prices at which those products are sold. Any enforcement litigation brought by us, whether or not successful, could require significant costs and resources, and divert the attention of management, which could negatively affect our business, results of operations and financial results. Third parties may also acquire and register domain names that are confusingly similar to or otherwise damaging to the reputation of our trademarks, and we may not be able to prevent or cancel any such domain name registrations.

 

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We may not be fully insured against catastrophic perils, including catastrophic loss or inaccessibility of wineries, production facilities and/or distribution systems resulting from fire, wildfire, flood, wind events, earthquake and other perils, which may cause us to experience a material financial loss.

A significant portion of our vineyards and supplier and other third party warehouses and distribution centers are located in California, which is prone to seismic activity, wildfires and floods, among other perils. For example, in February 2019, one of our wineries experienced a flood resulting in damages to inventory, machinery, equipment and site improvements. If any of these vineyards or facilities were to experience a catastrophic loss in the future, it could disrupt our operations, delay production, shipments and our recognition of revenue, and result in potentially significant expenses to repair or replace the vineyard or facility. If such a disruption were to occur, we could breach agreements, our reputation could be harmed and our business and operating results could be materially and adversely affected. Although we carry insurance to cover property and inventory damage and business interruption, these coverages are subject to deductibles and self-insurance obligations, as well as caps on coverage that could be below the value of losses we could incur in certain catastrophic perils. Furthermore, claims for recovery against our insurance policies can be time-consuming, and may result in significant delays between when we incur damages and when we receive payment under our insurance policies. For example, such a delay occurred with respect to our insurance claims related to our February 2019 flood damages, which were not fully resolved until December 2020. We take steps to minimize the damage that could be caused by potential catastrophic events, but there is no certainty that our efforts will prove successful. If one or more significant catastrophic events occurred damaging our own or third-party assets and/or services, we could suffer a major financial loss and our business, results of operations and financial condition could be materially and adversely affected.

Furthermore, increased incidence or severity of natural disasters has adversely impacted our ability to obtain adequate property damage, inventory and business interruption insurance at financially viable rates, if at all. For example, we have observed certain insurers ceasing to offer certain inventory protection policies, and we have supplemented our insurance coverage recently by purchasing policies at higher premiums. If these trends continue and our insurance coverage is adversely affected, and to the extent we elect to increase our self-insurance obligations, we may be at greater risk that similar future events will cause significant financial losses and materially and adversely affect our business, results of operations and financial results.

From time to time, we may become subject to litigation specifically directed at the alcoholic beverage industry, as well as litigation arising in the ordinary course of business.

We and other companies operating in the alcoholic beverage industry are, from time to time, exposed to class action or other private or governmental litigation and claims relating to product liability, alcohol marketing, advertising or distribution practices, alcohol abuse problems or other health consequences arising from the excessive consumption of or other misuse of alcohol, including underage drinking. Various groups have, from time to time, publicly expressed concern over problems related to harmful use of alcohol, including drinking and driving, underage drinking and health consequences from the misuse of alcohol. These campaigns could result in an increased risk of litigation against the Company and our industry. Lawsuits have been brought against beverage alcohol companies alleging problems related to alcohol abuse, negative health consequences from drinking, problems from alleged marketing or sales practices and underage drinking. While these lawsuits have been largely unsuccessful in the past, others may succeed in the future

From time to time, we may also be party to other litigation in the ordinary course of our operations, including in connection with commercial disputes, enforcement or other regulatory actions by tax, customs, competition, environmental, anti-corruption and other relevant regulatory authorities, or, following this offering, securities-related class action lawsuits, particularly following any significant decline in the price of our securities. Any such litigation or other actions may be expensive to defend and result in damages, penalties or fines as well as

 

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reputational damage to our company and our winery brands and may impact the ability of management to focus on other business matters. Furthermore, any adverse judgments may result in an increase in future insurance premiums, and any judgements for which we are not fully insured may result in a significant financial loss and may materially and adversely affect our business, results of operations and financial results.

Our failure to adequately manage the risks associated with acquisitions or divestitures, or the failure of an entity in which we have an equity or membership interest, could have a material adverse effect on our business, liquidity, financial condition or results of operations.

As part of our growth strategy, we have previously made acquisitions that we believe will provide a strategic fit with our business, including the acquisitions of Calera Wine Company in 2017 and Kosta Browne in 2018, and we may continue to rely on this strategy for growth and expansion. Any future acquisition may come with new or unexpected risks including potential difficulties integrating the company into our operations and culture, possible loss of key accounts, customers or employees or exposure to unknown liabilities. We may not effectively assimilate the business or product offerings of acquired companies into our business or within the anticipated costs or timeframes, retain key customers and suppliers or key employees of acquired businesses or successfully implement our business plan for the combined business. In addition, our final determinations and appraisals of the estimated fair value of assets acquired and liabilities assumed in our acquisitions may vary materially from earlier estimates and we may fail to realize fully anticipated cost savings, growth opportunities or other potential synergies. We cannot assure that the fair value of acquired businesses or investments will remain constant. Acquisitions and investments could also result in additional debt and related interest expenses, issuance of additional shares and result in a reduction in our earning per share or other financial results. If the financial performance of our business, as supplemented by the businesses acquired, does not meet our expectations, it may make it more difficult for us to service our debt obligations and our results of operations may fail to meet market expectations.

We may also consider the potential divestiture of assets or businesses that no longer meet our financial or strategic objectives. When selling assets, we may record material losses as a result of market conditions or unfavorable prices for the assets. Additionally, we may provide various indemnifications in connection with the divestiture of businesses or assets. We may also find it difficult to find a suitable or timely buyer of the assets which may result in financial losses or the delay of strategic objectives. The unfavorable outcome or unforeseen risks associated with acquisitions or divestitures may negatively affect our reputation or materially harm our financial results.

We cannot assure that we will realize the expected benefits of acquisitions, divestitures or investments and also cannot assure these ventures will be profitable or without unknown risks. Additionally, we cannot assure that the internal control over financial reporting of entities which we consolidate as a result of our investment activities will be as robust as the internal control over financial reporting for our wholly-owned winery brands. Our failure to adequately manage the risks associated with acquisitions, divestitures or the failure of an entity with which we have an equity or membership interest could have a material adverse effect on our business, results of operations or financial results.

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

We rely on IT systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided and used by third-parties or their vendors, to assist us in the management of our business. The various uses of these IT systems, networks and services include, but are not

 

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limited to: hosting our internal network and communication systems; tracking bulk wine; supply and demand planning; production; shipping wines to customers; hosting our winery websites and marketing products to consumers; collecting and storing customer, consumer, employee, stockholder, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing and sharing confidential and proprietary research, business plans and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes necessary to manage our business.

Increased IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking and other types of attacks pose a potential risk to the security of our IT systems, networks and services, as well as the confidentiality, availability, and integrity of our data, and we have in the past, and may in the future, experience cyberattacks and other unauthorized access attempts to our IT systems. Because the techniques used to obtain unauthorized access are constantly changing and often are not recognized until launched against a target, we or our vendors may be unable to anticipate these techniques or implement sufficient preventative or remedial measures. If we are unable to efficiently and effectively maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access. In the event of a ransomware or other cyber-attack, the integrity and safety of our data could be at risk or we may incur unforeseen costs impacting our financial position. Although we carry insurance covering cyber-attacks including ransomware, these coverages are subject to deductibles and self-insurance obligation, as well as caps on coverage that could be below the value of losses we could incur. If the IT systems, networks or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information due to any number of causes ranging from catastrophic events, power outages, security breaches, unauthorized use or usage errors by employees, vendors or other third parties and other security issues, we may be subject to legal claims and proceedings, liability under laws that protect the privacy and security of personal information (also known as personal data), litigation, governmental investigations and proceedings and regulatory penalties, and we may suffer interruptions in our ability to manage our operations and reputational, competitive or business harm, which may adversely affect our business, results of operations and financial results. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our employees, stockholders, customers, suppliers, consumers or others. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or technological failure and the reputational damage resulting therefrom, to pay for investigations, forensic analyses, legal advice, public relations advice or other services, or to repair or replace networks and IT systems. As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase the stress on our technology infrastructure and systems. Even though we maintain cyber risk insurance, this insurance may not be sufficient to cover all of our losses from any future breaches or failures of our IT systems, networks and services.

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

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

 

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interpretations and being tested in courts and may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.

A variety of data protection legislation apply in the United States at both the federal and state level, including new laws that may impact our operations. For example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (“CCPA”), which went into effect on January 1, 2020, and began being enforced on July 1, 2020. The CCPA defines “personal information” in a broad manner and generally requires companies that collect, use, share and otherwise process personal information of California residents to make new disclosures about their data collection, use, and sharing practices, allows consumers to opt-out of certain data sharing with third parties or the sale of personal information, allows consumers to exercise certain rights with respect to any personal information collected and provides a new cause of action for data breaches. Moreover, a new privacy law, the California Privacy Rights Act (“CPRA”), which significantly modifies the CCPA, was recently approved by ballot initiative during the November 3, 2020 general election. There remains significant uncertainty regarding the timing and implementation of the CPRA, which may require us to incur additional expenditures to ensure compliance. Additionally, the Federal Trade Commission, and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. The burdens imposed by the CCPA and other similar laws that have been or may be enacted at the federal and state level may require us to modify our data processing practices and policies and to incur substantial expenditures in order to comply.

Global privacy and data protection legislation, enforcement, and policy activity are rapidly expanding and evolving, and may be inconsistent from jurisdiction to jurisdiction. For example, in 2016, the E.U. adopted the General Data Protection Regulation (“GDPR”), which took effect on May 25, 2018. The GDPR imposes requirements that may limit how we are permitted to process data on behalf of ourselves, and we may be required to incur significant additional costs to comply with these requirements. Applicable laws, regulations and court decisions in the E.U. relating to privacy and data protection could also impact our ability to transfer personal information (or personal data as defined by the GDPR) internationally. The GDPR specifies substantial maximum fines for failure to comply. Continued compliance with the GDPR and national laws in the E.U. may require significant changes to our products and practices to ensure compliance with applicable law. On July 16, 2020, the Court of Justice of the European Union, Europe’s highest court, held in the Schrems II case that the E.U.-U.S. Privacy Shield, a mechanism for the transfer of personal information from the E.U. to the United States, was invalid, and imposed additional obligations in connection with the use of standard contractual clauses approved by the European Commission. The impact of this decision on the ability to lawfully transfer personal information from the E.U. to the United States is being assessed and further guidance from European regulators and advisory bodies is awaited. It is possible that the decision will restrict our ability to transfer personal information from the E.U. to the United States and we may, in addition to other impacts, experience additional costs associated with increased compliance burdens, and we face the potential for regulators in the European Economic Area (“EEA”) to apply different standards to the transfer of personal information from the EEA to the United States and to block, or require, ad hoc verification of measures taken with respect to certain information or data flows from the EEA to the United States. The regulatory environment applicable to the handling of EEA residents’ personal information, and our actions taken in response, may cause us to assume additional liabilities or incur additional costs and could result in our business, operating results and financial condition being harmed. We and our customers may face a risk of enforcement actions by data protection authorities in the EEA relating to personal information transfers to us and by us from the EEA. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel, and negatively affect our business, operating results and financial condition. Additionally, we may be or become subject to data localization laws mandating that information or data collected in a foreign country be processed only within that country. If any country in which we have customers were to adopt a data localization law, we could be required to expand our data storage facilities there or build new ones in order to

 

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comply. The expenditure this would require, as well as costs of compliance generally, could harm our financial condition.

Further, in June 2016, the U.K. voted to leave the E.U., which resulted in the U.K. exiting the E.U. on January 31, 2020, subject to a transition period that ended December 31, 2020. Brexit could lead to further legislative and regulatory changes. The U.K. has implemented a Data Protection Act that substantially implements the GDPR. Additionally, the U.K. has implemented a U.K. version of the GDPR (combining the GDPR and the Data Protection Act of 2018) that took effect in January 2021. However, it remains to be seen whether the U.K.’s withdrawal from the E.U. pursuant to Brexit will substantially impact the manner in which U.K. data protection laws or regulations will develop or are enforced in the medium to longer term and how information and data transfers to and from the U.K. will be regulated.

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

Certain data and information in this prospectus were obtained from third-party sources that are subject to certain uncertainties and limitations. If the estimates and assumptions we use to determine the size of our target market are inaccurate, our future growth rate may be impacted and our business could be harmed.

This prospectus contains certain data and information, including regarding our industry and market share, that have been derived from third-party publications and reports that we have not independently verified. Data and information contained in such third-party publications and reports is collected using methodologies that vary based on the source and are subject to certain uncertainties and limitations. For example, data reported by IRI relates to off-premise sales only and does not reflect sales from a significant number of smaller wine suppliers because many subscale wineries have limited or no sales in channels from which IRI generates its reporting data. The sources cited in this prospectus also do not reflect sales data from any retailers and other channel participants who have declined to report sales data to the applicable source. As a result, the market opportunity estimates and growth forecasts contained in this prospectus are subject to uncertainty and are based on data and assumptions that may prove to be incomplete or inaccurate. If the estimates and assumptions we use to determine the size of our target market are inaccurate, our future growth rate may be impacted and our business could be harmed. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. For more information regarding the market data and forecasts cited in this prospectus, see “Industry and market data.”

 

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Risks related to regulation

As a producer of alcoholic beverages, we are regularly the subject of regulatory reviews, proceedings and audits by governmental entities, any of which could result in an adverse ruling or conclusion, and which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We are subject to extensive regulation in the United States by federal, state and local laws regulating the production, distribution and sale of consumable food items, and specifically alcoholic beverages, including by the Alcohol and Tobacco Tax and Trade Bureau (the “TTB”) and the Food and Drug Administration (the “FDA”). These and other regulatory agencies impose a number of product safety, labeling and other requirements on our operations and sales. In California, where most of our wines are made, we are subject to alcohol-related licensing and regulations by many authorities, including the Department of Alcohol Beverage Control (the “ABC”), which investigates applications for licenses to sell alcoholic beverages, reports on the moral character and fitness of alcohol license applicants and the suitability of premises where sales are to be conducted. Any governmental litigation, fines or restrictions on our operations resulting from the enforcement of these existing regulations or any new legislation or regulations could have a material adverse effect on our business, results of operations and financial results. Any government intervention challenging the production, marketing, promotion, distribution or sale of beverage alcohol or specific brands could affect our ability to sell our wines. Because litigation and other legal proceedings can be costly to defend, even actions that are ultimately decided in our favor could have a negative impact on our business, results of operations or financial results. Adverse developments in major lawsuits concerning these or other matters could result in management distraction and have a material adverse effect on our business. Changes to the interpretation or approach to enforcement of regulations may require changes to our business practices or the business practices of our suppliers, distributors or customers. The penalties associated with any violations or infractions may vary in severity, and could result in a significant impediment to our business operations, and could cause us to have to suspend sales of our wines in a jurisdiction for a period of time.

New and changing environmental requirements, and new market pressures related to climate change, could materially and adversely affect our business, results of operations and financial results.

There has been significant public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Federal regulations govern, among other things, air emissions, wastewater and stormwater discharges, and the treatment, handling and storage and disposal of materials and wastes. State environmental regulations and authorities intended to address and oversee environmental issues are largely state-level analogs to federal regulations and authorities intended to perform the similar purposes. In California, we are also subject to state-specific rules, such as those contained in the California Environmental Quality Act, California Air Resources Act, Porter-Cologne Water Quality Control Act, California Water Code sections 13300-13999 and Title 23 of the California Administrative Code and various sections of the Health and Safety Code. We are subject to local environmental regulations that address a number of elements of our wine production process, including air quality, the handing of hazardous waste, recycling, water use and discharge, emissions and traffic impacts. Compliance with these and other environmental regulation requires significant resources. Continued regulatory and market trends towards sustainability may require or incentivize us to make changes to our current business operations. We may experience significant future increases in the costs associated with environmental regulatory compliance, including fees, licenses and the cost of capital improvements for our vineyards and wineries to meet environmental regulatory requirements. In addition, we may be party to various environmental remediation obligations arising in the normal course of our business or relating to historical activities of businesses we acquire. Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified

 

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contaminants in our current and former properties, the potential exists for remediation, liability and indemnification costs to differ materially from the costs that we have estimated. We may incur costs associated with environmental compliance arising from events we cannot control, such as unusually severe floods, earthquakes or fires. We cannot assure that our costs in relation to these matters will not exceed our projections or otherwise have a material adverse effect on our business, results of operations and financial results.

Changes in foreign and domestic laws and government regulations to which we are currently subject, including changes to the method or approach of enforcement of these government rules and regulations, may increase our costs or limit our ability to sell our wines into certain markets, which could materially and adversely affect our business, results of operations and financial condition.

Government laws and regulations may result in increased production and sales costs, including an increase on the applicable tax in various state, federal and foreign jurisdictions in which we do business. The amount of wine that we can sell directly to consumers outside of California is regulated, and in certain states we are not allowed to sell wines directly to consumers at all. Changes in these laws and regulations that tighten current rules could have an adverse impact on sales or increase costs to produce, market, package or sell wine. Changes in regulation that require significant additional source data for registration and sale, in the labeling or warning requirements, or limitations on the permissibility of any component, condition or ingredient, in the places in which our wines can be legally sold could inhibit sales of affected products in those markets.

The wine industry is subject to extensive regulation by a number of foreign and domestic agencies, state liquor authorities and local authorities. These regulations and laws dictate such matters as licensing requirements, land use, production methods, trade and pricing practices, permitted distribution channels, permitted and required labeling, advertising, sequestration of classes of wine and relations with wholesalers and retailers. Any expansion of our existing facilities or development of new vineyards, wineries or tasting rooms may be limited by present and future zoning ordinances, use permit terms, environmental restrictions and other legal requirements. In addition, new or updated regulations, requirements or licenses, particularly changes that impact our ability to sell DTC and/or retain accounts in California, or new or increased excise taxes, income taxes, property and sales taxes or international tariffs, could affect our financial condition or results of operations. From time to time, states consider proposals to increase state alcohol excise taxes. New or revised regulations or increased licensing fees, requirements or taxes could have a material adverse effect on our business, financial condition and results of operations.

We are subject to health, safety and labor laws. Regulatory reviews, proceedings and audits by governmental entities could result in an adverse ruling or conclusion, which may have a material adverse effect on our business. Changes to the enforcement or approach of these rules and regulations, may increase our costs or limit our ability to operate, which could materially and adversely affect our business, results of operations and financial condition.

We are required to comply with labor, health and safety laws and regulations in California, Washington and the other states in which we operate. Our operations are subject to periodic inspections by government authorities. The regulations require, among other things, health and safety protocols and procedures, fair and legal employment and in the case of some workers, health benefits. A failure to comply with these laws and any new or changed regulations could increase our operating costs and materially and adversely affect our business, results of operations and financial condition.

 

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Risks related to our indebtedness

We have incurred substantial indebtedness and we may not generate sufficient cash flow from operations to meet our debt service requirements, continue our operations and pursue our growth strategy and we may be unable to raise capital when needed or on acceptable terms.

We have incurred substantial indebtedness to fund various corporate activities and our ongoing operations, which we expect to repay with the net proceeds from the common stock sold by us pursuant to this offering. As of                , 2021, we had $                of indebtedness. Our business may not generate sufficient cash flow from operations to meet all of our debt service requirements, to pay dividends and to fund our general corporate and capital requirements.

Our ability to satisfy our debt obligations will depend upon our future operating performance. We do not have complete control over our future operating performance because it is subject to prevailing economic conditions, interest rates, consumer preferences, and financial, business and other factors.

Our current and future debt service obligations and covenants could limit:

 

 

our ability to pay dividends;

 

our ability to obtain financing for future working capital needs or acquisitions or other purposes;

 

our funds available for operations, expansions, dividends or other distributions; and

 

our ability to conduct our business.

Also, our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, as a result, our ability to withstand competitive pressures may be limited.

Restrictive covenants in our Credit Facility place limits on our ability to conduct our business. Covenants in our Credit Facility include those that restrict our ability to:

 

 

make acquisitions, incur debt, encumber or sell assets;

 

amend our constitutional documents;

 

pay dividends;

 

engage in mergers and consolidations;

 

enter into transactions with affiliates;

 

make investments; and

 

permit our subsidiaries to enter into certain agreements.

Our Credit Facility also contains financial covenants, including a debt to net worth test and fixed charge coverage ratio test.

Our Credit Facility also contains change of control provisions which, if triggered upon the occurrence of a merger or other change of control transaction, may result in an acceleration of our obligation to repay the debt. If we fail to comply with the obligations contained in our Credit Facility or future loan agreements, we could be in default under those agreements, which could require us to immediately repay the related debt and also debt under any other agreements containing cross-acceleration or cross-default provisions.

Our capacity to fund working capital or operational expenses depends upon our net cash available. Any decline in our net cash or changes in the terms of our Credit Facility, lines of credit, bank credit agreements or other sources of credit could limit our access to the capital resources required to fund our expenses.

We rely on cash generated from our operating activities as our primary source of liquidity. To support our operations, execute our growth strategy as planned and pay dividends, if declared, we will need to continue generating significant amounts of cash from operations, including funds required to pay our employees, related

 

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benefits and other operating expenses, finance future acquisitions, invest in technologies and pay for the increased direct and indirect costs associated with operating as a public company. If our business does not generate sufficient cash flow from operations to fund these activities, and if sufficient funds are not available under our Credit Facility, we may need to seek additional capital, including by incurring additional debt. Additional capital may not be available to us on acceptable terms or at all. In addition, incurring indebtedness requires that a portion of cash flow from operating activities be dedicated to interest and principal payments. Debt service requirements could reduce our ability to use our cash flow to fund operations and capital expenditures, to capitalize on future business opportunities, including additional acquisitions, or to pay dividends or increase dividends. Any of these risks could materially adversely affect our business, results of operations or financial condition.

We utilize derivative financial instruments to manage our exposure to interest rate fluctuations associated with our variable rate indebtedness. We may be exposed to interest rate risk based on our ability to hedge effectively, as well as risk related to nonperformance based on the creditworthiness of counterparties to these financial instruments.

We have entered interest rate swap derivative instruments to attempt to limit our exposure to changes in variable interest rates. While our intended strategy is to minimize the impact to our interest cost due to increases in interest rates applicable to our variable rate debt, there can be no guarantee that our strategy will be effective. We are also exposed to potential credit losses due to the risk of non-performance of the counterparty to our interest rate swaps. Consequently, we may experience credit-related losses in the future. See Note 9 (Derivative instruments) to our audited consolidated financial statements and to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

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

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

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

 

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Risks related to our common stock and this offering

We are eligible to be treated as an emerging growth company, and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our ordinary shares less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, among others, (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and (4) the requirement to present only two years of audited financial statements and only two years of related “Management’s discussion and analysis of financial condition and results of operations” in this prospectus. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of the end of the second fiscal quarter in any fiscal year before that time or if we have total annual gross revenues of $1.07 billion or more during any fiscal year before that time, in which case we would no longer be an emerging growth company as of the fiscal year end, or if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time we would cease to be an emerging growth company immediately. We cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards 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 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. Our consolidated financial statements may therefore not be comparable to those of other public companies that comply with such new or revised accounting standards.

As a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock.

We will be required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the Securities and Exchange Commission (the “SEC”) following the date we are no longer an emerging growth company. Any failure to maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by the New York Stock Exchange, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future.

 

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TSG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by investment funds affiliated with TSG. Upon completion of this offering, investment funds affiliated with TSG will control     % of the voting power of our common stock (or     % if the underwriters exercise in full their option to purchase additional shares). As long as TSG owns or controls at least a majority of our outstanding voting power, it will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Even if its ownership falls below 50%, TSG will continue to be able to strongly influence or effectively control our decisions.

Additionally, TSG’s interests may not align with the interests of our other stockholders. TSG is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. TSG may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Certain of our directors have relationships with TSG, which may cause conflicts of interest with respect to our business.

Following this offering, three of our directors will be affiliated with TSG. Our TSG-affiliated directors have fiduciary duties to us and, in addition, have duties to TSG. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and TSG, whose interests may be adverse to ours in some circumstances.

Upon the listing of our shares, we will be a “controlled company” under the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements; you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Because TSG will continue to control a majority of the voting power of our outstanding common stock after completion of this offering, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

 

we have a board of directors that is composed of a majority of “independent directors,” as defined under the New York Stock Exchange rules;

 

 

we have a compensation committee that is composed entirely of independent directors; and

 

 

we have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize all of these exemptions. Accordingly, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

 

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Provisions of our corporate governance documents could make an acquisition of our Company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to TSG’s beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include:

 

 

the division of our board of directors into three classes and the election of each class for three-year terms;

 

 

advance notice requirements for stockholder proposals and director nominations;

 

 

the ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

 

 

the ability of our board of directors to issue new series of, and designate the terms of, preferred stock, without stockholder approval, which could be used to, among other things, institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors;

 

 

limitations on the ability of stockholders to call special meetings and to take action by written consent following the date that the funds affiliated with TSG no longer beneficially own a majority of our common stock; and

 

 

the required approval of holders of at least                % of the voting power of the outstanding shares of our capital stock to adopt, amend or repeal certain provisions of our certificate of incorporation and bylaws or remove directors for cause, in each case following the date that the funds affiliated with TSG no longer beneficially own a majority of our common stock.

Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description of capital stock.”

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $            per share, the midpoint of the range set forth on the cover page of this prospectus, you will experience immediate dilution of $            per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed    % of the aggregate price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. See “Dilution” for more detail.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our certificate of incorporation and bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock,

 

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including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we intend to list shares of our common stock on the New York Stock Exchange under the symbol “NAPA,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations among us, the selling stockholders and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management’s attention.

Prior to this offering, we operated on a private basis. After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the New York Stock Exchange and other applicable securities laws and regulations. Compliance with these laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. However, the incremental costs that we incur as a result of becoming a public company could exceed our estimate. These factors may therefore strain our resources, divert management’s attention and affect our ability to attract and retain qualified members of our board of directors.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is performing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding              shares of common stock based on the number of shares outstanding as of                 , 2021. This includes             shares that we are selling in this offering, as well as the             shares that the selling stockholders are selling and the shares held by our existing stockholders, which may be resold in the public market immediately, and assumes no exercises of outstanding options. Substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under agreements executed in connection with this offering. These shares will, however, be able to be resold after the expiration of the lock-up agreement, as described in the

 

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“Shares eligible for future sale” section of this prospectus. We also intend to file a Form S-8 under the Securities Act to register all shares of common stock that we may issue under our equity compensation plans. In addition, TSG has certain demand registration rights that could require us in the future to file registration statements in connection with sales of our stock by TSG. See “Certain relationships and related party transactions—Registration rights agreement.” Such sales by TSG could be significant. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Since we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend policy” for more detail.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish research on our Company. If no securities or industry analysts commence coverage of our Company, the trading price of our shares would likely be negatively impacted. In the event securities or industry analysts initiated coverage, and one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

Our certificate of incorporation after this offering will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, stockholders or employees.

Our certificate of incorporation will provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

 

any derivative action or proceeding brought on our behalf;

 

 

any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

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any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws;

 

 

any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; and

 

 

any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”).

Our certificate of incorporation will also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. However, Section 22 of the Securities Act provides that federal and state courts have concurrent jurisdiction over lawsuits brought the Securities Act or the rules and regulations thereunder. To the extent the exclusive forum provision restricts the courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce such a provision. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. This provision does not apply to claims brought under the Exchange Act.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

The Duckhorn Portfolio, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiary for cash to fund its operations and expenses, including future dividend payments, if any.

As a holding company, our principal source of cash flow will be distributions from our operating subsidiaries. Therefore, our ability to fund and conduct our business, service our debt and pay dividends, if any, in the future will depend on the ability of our subsidiary to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiary is a separate legal entity, and although it is wholly-owned and controlled by us, it has no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiary to distribute cash to us will also be subject to, among other things, restrictions that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiary and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiary generally will have priority as to the assets of such subsidiary over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiary to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt and pay dividends, if any, could be harmed.

General risks

Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and

 

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volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

 

market conditions in the broader stock market;

 

 

actual or anticipated fluctuations in our quarterly financial and operating results;

 

 

introduction of new wines by us or our competitors;

 

 

issuance of new or changed securities analysts’ reports or recommendations;

 

 

results of operations that vary from expectations of securities analysis and investors;

 

 

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

 

strategic actions by us or our competitors;

 

 

announcement by us, our competitors or our vendors of significant contracts or acquisitions;

 

 

sales, or anticipated sales, of large blocks of our stock;

 

 

additions or departures of key personnel;

 

 

regulatory, legal or political developments;

 

 

public response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

 

litigation and governmental investigations;

 

 

changing economic conditions;

 

 

changes in accounting principles;

 

 

default under agreements governing our indebtedness;

 

 

exchange rate fluctuations; and

 

 

other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

 

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We may require additional debt and equity capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If such capital is not available to us, our business, financial condition and results of operations may be materially and adversely affected.

We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to increase our marketing expenditures to improve our winery brand awareness, build and maintain our product inventory, develop new wines, enhance our operating infrastructure and acquire complementary businesses. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us or at all. Moreover, any debt financing that we secure in the future could involve restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may be forced to obtain financing on undesirable terms or our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, financial condition and results of operations could be materially and adversely affected.

Changes in tax laws or in their implementation may adversely affect our business and financial condition.

Changes in tax law may adversely affect our business or financial condition. On December 22, 2017, the U.S. government enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), which significantly reformed the Internal Revenue Code of 1986, as amended (the “Code”). The TCJA, among other things, contained significant changes to corporate taxation, including a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, the limitation of the tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), the limitation of the deduction for net operating losses (“NOLs”), arising in taxable years beginning after December 31, 2017 to 80% of current year taxable income and elimination of NOL carrybacks for losses arising in taxable years ending after December 31, 2017 (though any such NOLs may be carried forward indefinitely), the imposition of a one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, the elimination of U.S. tax on foreign earnings (subject to certain important exceptions), the allowance of immediate deductions for certain new investments instead of deductions for depreciation expense over time and the modification or repeal of many business deductions and credits.

As part of Congress’s response to the COVID-19 pandemic, the Families First Coronavirus Response Act (the “FFCR Act”) was enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. Both contain numerous tax provisions. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxes the limitation of the tax deductibility for net interest expense by increasing the limitation from 30% to 50% of adjusted taxable income.

Regulatory guidance under the TCJA, the FFCR Act and the CARES Act is and continues to be forthcoming, and such guidance could ultimately increase or lessen impact of these laws on our business and financial condition. It is also likely that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on our Company. In addition, it is uncertain if and to what extent various states will conform to the TCJA, the FFCR Act or the CARES Act.

 

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International operations, worldwide and domestic economic trends and financial market conditions, geopolitical uncertainty or changes to international trade agreements and tariffs, import and excise duties, other taxes or other governmental rules and regulations could have a material adverse effect on our business, liquidity, financial condition and results of operations.

Our wines are sold in numerous countries, and we source production materials from foreign countries, including barrels from France, glass bottles from Mexico and China and cork from Portugal. Risks associated with international operations, any of which could have a material adverse effect on our business, liquidity, financial condition and/or results of operations, include:

 

 

changes in local political, economic, social, and labor conditions;

 

 

potential disruption from socio-economic violence, including terrorism and drug-related violence;

 

 

restrictions on foreign ownership and investments or on repatriation of cash earned in countries outside the United States;

 

 

import and export requirements and border accessibility;

 

 

currency exchange rate fluctuations;

 

 

a less developed and less certain legal and regulatory environment in some countries, which, among other things, can create uncertainty regarding contract enforcement, intellectual property rights, privacy obligations, real property rights and liability issues; and

 

 

inadequate levels of compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act.

Our wine aging programs often incorporate the use of French oak barrels. We contract with barrel cooperages in Europe for French oak wine barrels that meet our specifications. These contracts are paid in Euros once per year. We hedge our exposure to foreign currency fluctuations with respect to Euro-U.S. Dollar conversion rates by entering foreign currency forward contracts. We cannot perfectly hedge our exposure to foreign currency fluctuations, and such exposure could negatively impact our results of operations.

Unfavorable global or regional economic conditions, including economic slowdown and the disruption, volatility and tightening of credit and capital markets, as well as unemployment, tax increases, governmental spending cuts or a return of high levels of inflation, could affect consumer spending patterns and purchases of our wines. These could also create or exacerbate credit issues, cash flow issues and other financial hardships for us and our suppliers, distributors, retailers and consumers. The inability of suppliers, distributors and retailers to access liquidity could impact our ability to produce and distribute our wines.

We are also exposed to risks associated with interest rate fluctuations. We could experience changes in our ability to manage fluctuations in interest rates and, accordingly, there can be no assurance that we will be successful in reducing those risks.

We could also be affected by nationalization of our international operations, unstable governments, unfamiliar or biased legal systems, intergovernmental disputes or animus against the United States. Any determination that our operations or activities did not comply with applicable U.S. or foreign laws or regulations could result in the imposition of fines and penalties, interruptions of business, terminations of necessary licenses and permits, and other legal and equitable sanctions.

The United States and other countries in which we operate impose duties, excise taxes, and/or other taxes on beverage alcohol products, and/or on certain raw materials used to produce our beverage alcohol products, in varying amounts. The U.S. federal government or other governmental bodies may propose changes to

 

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international trade agreements, tariffs, taxes and other government rules and regulations. Significant increases in import and excise duties or other taxes on, or that impact, beverage alcohol products could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Any such tariffs, particularly on imports from Mexico and any retaliatory tariffs imposed by the Mexican government, may have a material adverse effect on our results of operations, including our sales and profitability.

In addition, federal, state, provincial, local and foreign governmental agencies extensively regulate the beverage alcohol products industry concerning such matters as licensing, warehousing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalers and retailers. Certain federal, state or local regulations also require warning labels and signage. New or revised regulations or increased licensing fees, requirements or taxes could have a material adverse effect on our business, liquidity, financial condition and/or results of operations. Additionally, various jurisdictions may seek to adopt significant additional product labeling or warning requirements or limitations on the marketing or sale of our wines because of what our wines contain or allegations that our wines cause adverse health effects. If these types of requirements become applicable to our wines under current or future environmental or health laws or regulations, they may inhibit sales of such products.

These international, economic and political uncertainties and regulatory changes could have a material adverse effect on our business, liquidity, financial condition and/or results of operations, especially to the extent these matters, or the decisions, policies or economic strength of our suppliers and distributors, affect our business, liquidity, financial condition and/or results of operations.

Changes to U.S. and foreign trade policies and tariffs may adversely impact our operating results.

Unfavorable trade policies in the United States or countries in which we sell our wine could result in the decrease of our foreign sales. While we do not import a significant amount of materials with respect to which tariffs may materially harm our costs, we do export approximately five percent of our wines. The United States and other countries in which we operate impose duties, excise taxes and/or other taxes on beverage alcohol products, and/or on certain raw materials used to produce our beverage alcohol products, in varying amounts. The U.S. federal government or other governmental bodies may propose changes to international trade agreements, tariffs, taxes and other government rules and regulations. Significant increases in import and excise duties or other taxes on, or that impact, alcoholic beverage products could result in significant price increase for our customers, and may reduce our ability to complete with local products or products from other localities that are subject to more favorable trade relationships. This may cause a decrease in foreign sales, potentially damage consumer views of our winery brands, and may materially harm our sales and profitability.

 

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Cautionary note regarding forward-looking statements

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

 

our ability to manage the growth of our business;

 

 

our reliance on our brand name, reputation and product quality;

 

 

the effectiveness of our marketing and advertising programs;

 

 

general competitive conditions, including actions our competitors may take to grow their businesses;

 

 

overall decline in the health of the economy and consumer discretionary spending;

 

 

the occurrence of severe weather events (including fires, floods and earthquakes), catastrophic health events, natural or man-made disasters, social and political conditions or civil unrest;

 

 

risks associated with disruptions in our supply chain for grapes and raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies;

 

 

the impact of COVID-19 on our customers, suppliers, business operations and financial results;

 

 

disrupted or delayed service by the distributors and government agencies we rely on for the distribution of our wines outside of California;

 

 

our ability to successfully execute our growth strategy;

 

 

decreases in our wine score ratings by wine rating organizations;

 

 

quarterly and seasonal fluctuations in our operating results;

 

 

our success in retaining or recruiting, or changes required in, our officers, key employees or directors;

 

 

our ability to protect our trademarks and other intellectual property rights, including our brand and reputation;

 

 

our ability to comply with laws and regulations affecting our business, including those relating to the manufacture, sale and distribution of wine;

 

 

the risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific to both domestic and to international markets;

 

 

claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient;

 

 

our ability to operate, update or implement our IT systems;

 

 

our ability to successfully pursue strategic acquisitions and integrate acquired businesses;

 

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our potential ability to obtain additional financing when and if needed;

 

 

our substantial indebtedness and our ability to maintain compliance with restrictive covenants in the documents governing such indebtedness;

 

 

TSG’s significant influence over us and our status as a “controlled company” under the rules of the New York Stock Exchange;

 

 

the potential liquidity and trading of our securities; and

 

 

the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events, and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk factors” and elsewhere in this prospectus. Moreover, we operate in a highly competitive environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We undertake no obligation to update any forward-looking statements whether as a result of new information, future developments or otherwise. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not rely on our forward-looking statements in making your investment decision. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

 

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Industry and market data

This prospectus includes market data and forecasts with respect to the wine industry. We have obtained this market data and certain industry forecasts from various independent third-party sources, including industry publications, reports by market research firms, surveys and other independent sources. Some data and information is based on management’s estimates and calculations, which are derived from our review and interpretation of internal company research and data, surveys and independent sources. We believe the data regarding the industry in which we compete and our market position and market share within this industry generally indicate size, position and market share within this industry; however, this data is inherently imprecise and is subject to significant business, economic and competitive uncertainties and risks due to a variety of factors, including those described in “Risk factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Forward-looking statements.”

These sources of certain statistical data, estimates and forecasts contained in this prospectus include the following independent industry publications or reports:

 

 

Information Resources, Inc. (“IRI”), U.S. food channel ranking, 2012–2020(1);

 

 

IWSR, U.S. Still Wine by Price Band, May 2020;

 

 

IWSR, Luxury Wine Producers (Value), May 2020;

 

 

Nielsen, Open Stores Selling Wine or Spirits Only, December 2020;

 

 

Statista Consumer Market Outlook, as of Oct. 2020; and

 

 

Wines Vines Analytics, U.S. Wineries By State, January 2020.

 

(1)   IRI data captures an estimated one-third of the total U.S. off-premise wine market value. This data does not reflect sales from any retailers or other channel participants who have declined to report sales data to the applicable source. In addition, this data does not reflect sales from a significant number of smaller wine suppliers, because many subscale wineries have limited or no sales in channels from which IRI generates its reporting data. However, we believe IRI provides the most complete data available for our industry.

 

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Use of proceeds

We estimate that the net proceeds to us from our issuance and sale of common stock in this offering will be approximately $        million (or approximately $        million if the underwriters exercise their option to purchase additional shares of common stock in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. This estimate assumes an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover of this prospectus would increase (decrease) the net proceeds to us from this offering by $        million, assuming the number of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1,000,000 shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price of $         per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, and create a public market for our common stock. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We also intend to use a portion of the net proceeds we receive from this offering to repay $        million of outstanding indebtedness under our Credit Facility, which matures on August 1, 2023 and bears an interest rate that ranges from the London Interbank Offered Rate (“LIBOR”), plus 125 basis points to LIBOR, plus 175 basis points. See “Description of certain indebtedness.” We may also use a portion of the net proceeds for acquisitions or strategic investments in complementary businesses, products or services, although we do not currently have any plans or commitments for any such acquisitions or investments.

We will not receive any proceeds from the sale of shares by the selling stockholders in this offering. See “Principal and selling stockholders.” We will, however, bear the costs, other than the underwriting discounts and commissions, associated with the sale of these shares.

 

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Dividend policy

We have never declared or paid any cash dividends on our common stock. Our board of directors does not currently intend to pay dividends on our common stock following completion of this offering. However, we expect to re-evaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in our Credit Facility and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our board of directors, which may take into account general economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our Credit Facility and other indebtedness we may incur, and any other factors that our board of directors may deem relevant. The Duckhorn Portfolio, Inc. is a holding company and its operations are conducted through its wholly-owned subsidiaries. In the event that we do pay a dividend, we intend to cause our operating subsidiaries to make distributions to us in an amount sufficient to cover such dividend. Our operating subsidiaries are currently subject to certain restrictions and covenants under the Credit Facility, including limits on amounts of leverage, interest charges and capital expenditures. These restrictions and covenants may restrict the ability of those entities to make distributions to The Duckhorn Portfolio, Inc. See “Management’s discussion and analysis of financial condition and results of operations,” “Description of certain indebtedness” and “Risk factors” included elsewhere in this prospectus regarding restrictions on our ability to pay dividends.

 

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Capitalization

The following table sets forth our cash and capitalization as of October 31, 2020, as follows:

 

 

an actual basis, and

 

 

a pro forma as adjusted basis to give effect to (1) the issuance of shares of common stock by us in this offering and the receipt of approximately $        million in net proceeds from the sale of such shares, assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; (2) the filing and effectiveness of our amended and restated certificate of incorporation; and (3) the repayment of $        million of outstanding indebtedness under our Credit Facility.

Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information together with our audited and unaudited financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings “Selected consolidated financial and other data” and “Management’s discussion and analysis of financial condition and results of operations.”

A $1.00 increase (decrease) in the assumed initial public offering price of $        per common share, the midpoint of the price range set forth on the cover of this prospectus would increase (decrease) the net proceeds to us from this offering by $        million, assuming the number of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated expenses offering payable by us. Similarly, an increase (decrease) of 1,000,000 shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price of $         per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

   
     As of October 31, 2020  
(dollars in thousands)    Actual      Pro forma as
adjusted
 

Cash

   $ 1,305      $            
  

 

 

 

Long-term debt, including current portion:

     

Revolver Facility(1)

     247,500     

Credit Facility(2)

     136,680     
  

 

 

 

Total debt

     384,180     
  

 

 

 

Equity:

     

Preferred stock, $0.01 par value, no shares authorized, issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma as adjusted

         

Common stock, $0.01 par value, 100 shares authorized, issued and outstanding, actual;              authorized and              shares issued and outstanding, pro forma as adjusted

         

Additional paid-in capital

     536,677     

Retained earnings

     135,181     

Non-controlling interests

     556     
  

 

 

 

Total equity

     672,414     
  

 

 

 

Total capitalization

   $ 1,056,594      $    

 

 

 

(1)   Revolver Facility (as defined herein) excludes discount and debt issuance costs of $3.5 million.

 

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(2)   Credit Facility excludes discount and debt issuance costs of $0.8 million.

The table above excludes the following:

 

 

             shares of common stock issuable upon vesting of outstanding restricted stock units;

 

 

             shares of common stock reserved for future issuance under our 2021 Equity Plan; and

 

 

             shares of common stock authorized for sale under the 2021 ESPP, which will become effective prior to the completion of this offering.

 

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Dilution

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share in this offering and the pro forma as adjusted net tangible book value per share after this offering. Dilution results from the fact that the initial public offering price per share of common stock is substantially in excess of the net tangible book value per share attributable to the existing stockholders for our presently outstanding common stock. Our net tangible book value per share represents the amount of our total tangible assets (total assets less goodwill and deferred offering costs) less total liabilities, divided by the number of common stock issued and outstanding.

As of            , 2021, we had a pro forma net tangible book value of $        million, or $        per share of common stock. We calculate pro forma net tangible value (deficit) per share by taking the amount of our total tangible assets (total assets less goodwill and deferred offering costs), reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding on a pro forma basis after giving effect to             .

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to the sale of             shares of common stock in this offering assuming an initial public offering price of $        per share (the midpoint of the price range set forth on the cover page of this prospectus) and the use of a portion of the proceeds to repay $             of outstanding indebtedness under our Credit Facility, assuming an initial public offering price, less the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of             , 2021 would have been approximately $        million, or $        per share. This amount represents an immediate increase in net tangible book value of $         per share to the existing stockholders and immediate dilution of $        per share to investors purchasing our common stock in this offering. Dilution is calculated by subtracting pro forma as adjusted net tangible book value per common share from the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

Assumed initial public offering price per share

            $            

Historical net tangible book value per share as of                 , 2021

   $               

Increase in net tangible book value per share attributable to investors purchasing shares in this offering

     

Pro forma as adjusted net tangible book value per share, after giving effect to this offering

     

Dilution in pro forma as adjusted net tangible book value per share to investors in this offering

     

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after giving effect to this offering by $        million, or by $        per share, assuming no change to the number of shares offered by us as set forth on the front cover page of this prospectus and after deducting the estimated underwriting discounts and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our common stock offered by us would increase (decrease) pro forma as adjusted net tangible book value per share after giving effect to this offering by $        million or by $        per share, assuming no change to the initial public offering price and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes, as of             , 2021, on the pro forma as adjusted basis described above, the total number of shares purchased from us, the total consideration paid to us, and the average price per share of common stock paid by purchasers of such shares and by new investors purchasing shares in this offering.

 

       
     Shares purchased      Total consideration      Average price
per share
 
      Number      Percent      Amount      Percent  

Existing stockholders(1)

              

New investors

                           
  

 

 

 

Total

        100%           100%     

 

 

 

(1)   Does not give effect to the sale of common stock by the selling stockholders in this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors in this offering by $         million and increase (decrease) the percent of total consideration paid by new investors in this offering by     %, assuming no change to the number of shares offered by us as set forth on the front cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our common stock offered by us would increase (decrease) the total consideration paid by new investors in this offering by $         million and increase (decrease) the percent of total consideration paid by new investors in this offering by     %, assuming no change to the initial public offering price and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters were to fully exercise their option to purchase additional common stock from the selling stockholders, the percentage of our common stock held by existing stockholders would be    %, and the percentage of our common stock held by new investors would be    %.

The number of shares to be outstanding after this offering is based on              common stock outstanding as of             , 2021 and excludes the following:

 

 

             shares of common stock issuable upon vesting of outstanding restricted stock units;

 

 

             shares of common stock reserved for future issuance under our 2021 Equity Plan; and

 

 

             shares of common stock authorized for sale under the 2021 ESPP, which will become effective prior to the completion of this offering.

 

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Selected consolidated financial and other data

The following selected consolidated statements of operations data for the fiscal years ended July 31, 2019 and 2020 and the consolidated statements of financial position data as of July 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the three months ended October 31, 2019 and 2020 and the consolidated statements of financial position data as of October 31, 2020 from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial data set forth below have been prepared on the same basis as our audited consolidated financial statements, and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future and our interim results for the three months ended October 31, 2020 are not necessarily indicative of results to be expected for the year ended July 31, 2021, or any other period.

The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and related notes. The tables presented should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

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Consolidated statements of operations data:

 

     
     Fiscal year ended
July 31,
    Three months ended
October 31,
 
(in thousands, except share data)    2019     2020     2019     2020  

Net sales

   $ 241,207   $ 270,648   $ 72,704     $ 91,638  

Cost of sales

     128,204     133,766     36,400       47,363  
  

 

 

 

Gross profit

     113,003     136,882     36,304       44,275  

Selling, general and administrative expenses

     65,741     65,908     18,443       16,805  

Impairment loss

           11,830            

Casualty (gain) loss

     (8,606     (4,047     118       1,555  
  

 

 

 

Income from operations

     55,868     63,191     17,743       25,915  

Interest expense

     20,937     17,924     4,830       3,580  

Other expense (income), net

     4,988     2,457     945       (1,323
  

 

 

 

Total other expenses

     25,925     20,381     5,775       2,257  
  

 

 

 

Income before income taxes

     29,943     42,810     11,968       23,658  
  

 

 

 

Income tax expense

     7,842     10,432     3,143       6,136  
  

 

 

 

Net income

     22,101     32,378     8,825       17,522  
  

 

 

 

Less: Net (income) loss attributable to non-controlling interest

     (4     (1     (9     1  
  

 

 

 

Net income attributable to The Duckhorn Portfolio, Inc.

   $ 22,097   $ 32,377   $ 8,816     $ 17,523  

Net Income per share of common stock attributable to common stockholders:

        

Basic and diluted

   $ 220.97     $ 323.77     $ 88.16     $ 175.23  

Weighted average shares of common stock outstanding:

        

Basic and diluted

     100       100       100       100  

Pro forma earnings per share of common stock attributable to common stockholders(1):

        

Basic

        

Diluted

        

Pro forma weighted average shares of common stock outstanding(1):

        

Basic

        

Diluted

        

 

 

 

(1)   See Note 17 (Earnings per share) and Note 14 (Earnings per share) in our audited consolidated financial statements and unaudited condensed consolidated financial statements, respectively, included elsewhere in this prospectus for further details on the calculation of our pro forma earnings per share of common stock attributable to common stockholders, basic and diluted, and pro forma weighted average shares of common stock outstanding, basic and diluted.

 

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Consolidated balance sheet data:

 

     
     July 31,      October 31,  
(in thousands)    2019      2020      2020  

Cash

   $ 3,765    $ 6,252    $ 1,305  

Working capital(1)

     222,024      228,906      247,877  

Total assets

     1,161,580      1,158,591      1,222,829

Long-term debt, including current maturities

     415,969        378,948        379,911  

Total liabilities

     540,448      503,987      550,415  

Total equity

     621,132      654,604      672,414  

 

 

 

(1)   Working capital is defined as total current assets, including cash, minus total current liabilities.

Non-GAAP financial data:

 

     
     Fiscal year ended
July 31,
     Three months ended
October 31,
 
(in thousands)    2019      2020      2019      2020  

Adjusted EBITDA(1)

   $ 98,357      $ 105,080      $ 25,799      $ 33,722  

 

 

 

(1)   Wherever presented in this prospectus, we define adjusted EBITDA as net income before interest, taxes, depreciation and amortization, non-cash equity-based compensation expense, purchase accounting adjustments, casualty losses or gains, impairment losses, changes in the fair value of derivatives and certain other items which are not related to our core operating performance.

Adjusted EBITDA is a key performance measure we use in evaluating our operational results. We believe adjusted EBITDA is a helpful measure to provide investors an understanding of how we regularly monitor our core operating performance, as well as how we make operational and strategic decisions in allocating resources. We believe adjusted EBITDA also provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparisons of operations, as it eliminates the effects of certain variations unrelated to our overall performance. Adjusted EBITDA has certain limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations include:

 

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

 

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

 

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

 

adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

 

 

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduce their usefulness as comparative measures.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA.

 

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The following table provides a reconciliation of adjusted EBITDA to the most comparable financial measure reported under U.S. GAAP, net income, for the periods presented:

 

     
    Fiscal Year Ended July 31,     Three Months
Ended October 31,
 
(in thousands)   2015     2016     2017     2018     2019     2020     2019     2020  

Net income (loss)

  $ 9,559     $ (2,132 )    $ (19,649 )    $ 60,009     $ 22,097     $ 32,377     $ 8,816     $ 17,523  

Interest expense

    17,797     18,903     14,977     16,359     20,937       17,924       4,830       3,580

Income tax expense (benefit)

    7,442     11,117     (5,538     (36,391     7,842       10,432       3,143       6,136

Depreciation and amortization expense

    10,390     10,169     17,722     17,432     25,070       22,755       4,956       5,116
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    45,188       38,057       7,512       57,409       75,946       83,488       21,745       32,355  

Purchase accounting adjustments(a)

    (455 )     (244 )     18,949     19,486     19,771       5,457       2,141       561

Transaction expenses(b)

    292     882     20,120     1,660     3,900       193       193      

Impairment loss(c)

                          11,830            

Change in fair value of derivatives

    (116         253     (1,171     4,902       2,340       770       (1,548

LIFO adjustments(d)

    624     1,511     4,376                          

Equity-based compensation

    2,800     21,400     11,858         1,126       1,154       289       288

Casualty (gain) loss(e)

                    (8,606     (4,047     118      

Bulk wine loss, net(f)

                          2,815       260      

Loss on debt extinguishment(g)

            872     408     163                   272

IPO preparation costs(h)

                    1,155       475       283       196

Wildfire costs(i)

                                      1,555

COVID-19 costs(j)

                          1,375             43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 48,333     $ 61,606     $ 63,940     $ 77,792     $ 98,357     $ 105,080     $ 25,799     $ 33,722  

 

 

 

(a)   Purchase accounting adjustments relate to the impacts of prior business combination accounting for our acquisition by TSG in Fiscal 2017, our subsequent acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019, respectively, and certain other transactions consummated prior to our acquisition by TSG, which resulted in fair value adjustments to deferred revenue, inventory and long-lived assets. Refer to “Management’s discussion and analysis of financial condition and results of operations—Other factors impacting the comparability of our results of operations” for further information.

 

(b)   Transaction expenses include legal and professional fees and change of control payments incurred in connection with our acquisition of Kosta Browne in August 2018 and our acquisition by TSG in Fiscal 2017. These expenses were incremental to our normal operating expenses and were directly related to the transactions.

 

(c)   Impairment loss relates to impairments for certain of the Company’s trade names identified in Fiscal 2020. The impairments were primarily the result of changes to the Company’s sales forecasts for certain of the Company’s ultra-luxury brands experiencing sales channel and consumer spending disruption due to the COVID-19 pandemic. The impairment charge was also impacted by an increase in the discount rate applied in the fair value calculations due to changes in economic outlook. See Note 6 (Goodwill and other intangible assets) to our consolidated financial statements for additional information.

 

(d)   LIFO adjustments relate to the impacts of the last-in, first-out (“LIFO”) inventory valuation methodology. Beginning in Fiscal 2018 we elected to change the method of accounting from LIFO to first-in, first-out (“FIFO”).

 

(e)   In Fiscal 2019, casualty gain was primarily comprised of the insurance proceeds in excess of recognized losses for the fiscal year due to flood damage at one of our wineries. In Fiscal 2020, casualty gain was primarily comprised of additional insurance proceeds received pursuant to our original claim for the flood event in Fiscal 2019. For the three months ended October 31, 2019, we recognized additional costs due to flood remediation but did not record any proceeds related to our insurance claim that was resolved in December 2020. See Note 16 (Casualty gain) to our consolidated financial statements for additional information.

 

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(f)   Bulk wine loss, net, primarily relates to net losses on bulk wine sold in the spot bulk markets at quantities and price points which were unusual and infrequent for our business. During Fiscal 2020 (during which the 2019 harvest occurred), we observed significant and unprecedented over-supply and price volatility in the bulk wine markets that resulted in premium tiers of bulk wine spot prices reaching historic lows. We have not historically sold a significant quantity of bulk wine into the spot bulk markets. However, during Fiscal 2020, we obtained alternative supply that we believe is of higher quality than certain bulk wine that we held at that time, and we responded by selling certain bulk quantities at a net loss. We do not to expect to engage in sales of significant amounts of bulk quantities to the bulk wine market, and therefore have excluded the loss from these sales from adjusted EBITDA as they are not indicative of our core operational performance.

 

(g)   Loss on debt extinguishment includes charges for unamortized deferred financing fees we recognized in connection with amendments to our Credit Facility. See Note 8 (Debt) to our consolidated financial statements for further information.

 

(h)   IPO preparation costs include professional fees incurred for outside consultants to advise us on legal, accounting and tax matters related to our preparation for becoming a public company, which are not directly attributable to an offering.

 

(i)   Wildfire costs include the cost of unharvested fruit that was damaged and rendered useless, charges we incurred to respond to imminent wildfire threat with fire-fighting crews to protect our assets, clean-up and smoke remediation expenses to restore operations at our tasting rooms after the fires, testing fees to evaluate our fruit for possible smoke damage, and washing or other grape processing costs prior to vinification to reduce the risk of smoke taint in finished wine. See Note 13 (Casualty loss) to our unaudited condensed consolidated interim financial statements for the three months ended October 31, 2020 for additional information. While we expect the potential for wildfires to be an ongoing risk to running an agricultural business in California, we believe the wildfires and related costs we experienced are not indicative of our core operating performance.

 

(j)   COVID-19 costs include certain incremental expenses incurred during the outbreak of the COVID-19 pandemic and the short-term closure mandates imposed by government officials in the jurisdictions in which we operate. These costs include tasting room expenses incurred during a period of mandatory closure and reduced capacity, salaries and severance expenses for certain employees and other immaterial costs to transfer inventory.

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary note regarding forward-looking statements” included elsewhere in this prospectus. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this prospectus.

Overview

The Duckhorn Portfolio is the premier scaled producer of luxury wines in North America. We have delighted millions of consumers with authentic, high-quality, approachable wines for over four decades. Founded by our namesake Dan and Margaret Duckhorn in 1976, we began by pioneering merlot wines in Napa Valley and now champion a curated and comprehensive portfolio of highly acclaimed luxury wines across multiple varietals, appellations, brands and price points. Our portfolio is focused exclusively on the desirable luxury segment, which we define as wines sold for $15 or higher per 750ml bottle, and is the fastest-growing segment of the wine market in the United States according to IRI.

We sell our wines in all 50 states and over 50 countries at prices ranging from $20 to $200 per bottle under a world-class luxury portfolio of winery brands, including Duckhorn Vineyards, Decoy, Kosta Browne, Goldeneye, Paraduxx, Calera, Migration, Canvasback, Greenwing and Postmark. Our wines have a strong record of achieving critical acclaim, vintage after vintage. Each winery brand boasts its own winemaking team to create distinct experiences for consumers, ensure product quality and continuity and galvanize sustainable farming practices. Beyond our winemaking teams is an organization comprised of passionate, talented employees, including a highly tenured executive team that has approximately 100 years of cumulative experience with Duckhorn.

We sell our wines to distributors and directly to retail accounts in California, which together comprise our wholesale channel, and directly to consumers through our DTC channel, which comprised over 20% of our sales in Fiscal 2019 and Fiscal 2020. Our powerful omni-channel sales model drives strong margins by leveraging long-standing relationships developed over the past forty years. We believe our iconic winery brands together with our scaled, quality-focused production, omni-channel distribution and dedicated employees, set the standard for North American luxury wine.

 

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Key financial metrics

We use net sales, gross profit and adjusted EBITDA to evaluate the performance of our business, identify trends in our business, prepare financial forecasts and make capital allocation decisions. We believe the following metrics are useful in evaluating our performance, but adjusted EBITDA should not be considered in isolation or as a substitute for any other financial information depicting our results prepared in accordance with U.S. GAAP. Certain judgments and estimates are inherent in our processes to calculate these metrics.

 

     
     Fiscal year ended
July 31,
     Three months ended
October 31,
 
(in thousands)    2019      2020      2019      2020  

Net sales

   $ 241,207    $ 270,648      $ 72,704      $ 91,638  

Gross profit

   $ 113,003    $ 136,882    $ 36,304    $ 44,275  

Net income

   $ 22,097      $ 32,377      $ 8,816      $ 17,523  

Adjusted EBITDA

   $ 98,357      $ 105,080    $ 25,799    $ 33,722  

 

 

Net sales

Our net sales represent revenues less discounts, promotions and excise taxes.

Gross profit

Gross profit is equal to our net sales less cost of sales. Cost of sales includes all wine production costs, winemaking, bottling, packaging, warehousing and shipping and handling costs. Our gross profit and gross profit margins on net sales are impacted by the mix of winery brands we sell in our portfolio. See “—Components of results of operation and key factors affecting our performance” for additional information.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before interest, taxes, depreciation and amortization, non-cash equity-based compensation expense, purchase accounting adjustments, casualty losses or gains, impairment losses, changes in the fair value of derivatives and certain other items which are not related to our core operating performance. Adjusted EBITDA is a key metric we use to evaluate business performance in comparison to budgets, forecasts and prior year financial results, providing a measure that Management believes reflects the Company’s core operating performance.

For comparative periods presented, our primary operational drivers of adjusted EBITDA have been sustained sales growth in our wholesale channel and steady growth in our DTC channel, management of our cost of sales through our diversified supply planning strategy, and discipline over selling, general and administrative expenses relative to our sales growth.

See “Selected consolidated financial and other data—Non-GAAP financial data” for information regarding the use of adjusted EBITDA and the reconciliation to net income, the most directly comparable U.S. GAAP measure.

Key operating metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, measure our performance, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business but should not be considered in isolation or, solely with respect to price / mix contribution, as a substitute for financial information prepared and presented in accordance with GAAP. Certain judgments and estimates are inherent in our processes to calculate these metrics.

 

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Net sales percentage by channel

We calculate net sales percentage by channel as net sales made through our wholesale channel to distributors, through our wholesale channel directly to retail accounts in California and through our DTC channel, respectively, as a percentage of our total net sales. We monitor net sales percentage across these three routes to market to understand the effectiveness of our omni-channel distribution model and to ensure we are deploying resources effectively to optimize engagement with our customers across our complementary distribution channels.

 

     
     Fiscal year ended
July 31,
     Three months ended
October 31,
 
     2019      2020      2019      2020  

Wholesale—Distributors

     59.4%        60.0%        65.8%        73.1%  

Wholesale—California Direct to Retail

     17.8%        18.9%        17.1%        14.3%  

DTC

     22.8%        21.1%        17.1%        12.6%  

We experienced only small variations in net sales percentage by channel between Fiscal 2019 and Fiscal 2020. We typically experience an increase in net sales percentage for our wholesale—distributors channel in the first fiscal quarter of each fiscal year due to increased purchasing by distributors in anticipation of higher consumer demand during the holiday season. See “—Components of results of operation and key factors affecting our performance—Seasonality.” The variations in net sales percentage by channel between the three months ended October 31, 2019 and 2020 were largely driven by the impact of COVID-19. In particular, the increase in net sales percentage attributable to our wholesale—distributors channel and the decrease in net sales percentage attributable to our DTC channel for the three month comparison periods was primarily driven by (i) shifts in consumer purchasing and consumption patterns away from on-premise sales toward off-premise sales primarily serviced by our wholesale—distributors channel, (ii) a decrease in wholesale-California direct to retail due to a higher concentration of on-premise accounts experiencing sales declines of our higher-priced ultra-luxury wines and (iii) increased purchasing by our distributors in anticipation of increased off-premise demand during the holiday season in anticipation of ongoing COVID-19 related health and safety restrictions at on-premise sale locations. We expect that our channel mix will begin to normalize in future periods as consumer purchasing and consumption patterns return to normal following the COVID-19 pandemic.

Net sales percentage by brand

We calculate net sales percentage by brand as net sales for our Duckhorn Vineyards and Decoy winery brands and net sales for our other winery brands, respectively, as a percentage of our total net sales. We monitor net sales percentage by brand as an important measure of the sales mix contributed by our winery brands, Duckhorn Vineyards and Decoy, and our eight other complementary winery brands. We monitor net sales percentage by brand on an annual basis to normalize the impact of seasonal fluctuations in demand and sale cycles across our brands from quarter to quarter that we do not believe are reflective of the overall performance of our brands or our business. See “—Components of results of operation and key factors affecting our performance—Seasonality.”

 

   
     Fiscal year ended
July 31,
 
     2019      2020  

Duckhorn Vineyards & Decoy

     71.1%        73.0%  

Other Winery Brands

     28.9%        27.0%  

 

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Net sales percentage by brand attributable to Duckhorn Vineyards and Decoy increased slightly from Fiscal 2019 to Fiscal 2020, primarily as a result of the continued growth in consumer demand for those brands. We expect Duckhorn Vineyards and Decoy to continue to drive the substantial majority of our net sales in future periods.

Net sales growth contribution

Net sales growth is defined as the percentage increase of net sales in the period compared to the prior period. Net sales growth contribution is calculated based on the portion of changes in net sales for a given period that is driven by two factors: changes in sales volume and changes in sales price and mix. Volume contribution presents the percentage increase in cases sold in the current period compared to the prior period. Price / mix contribution presents net sales growth less volume contribution and reflects that, in addition to changes in sales volume, changes in net sales are primarily attributable to changes in sales price and mix.

 

     
     Fiscal year
ended July 31,
    Three months ended
October 31,
 
     2019     2020     2019     2020  

Net sales growth

     22.9     12.2     13.0     26.0

Volume contribution

     11.5     19.9     22.9     39.8

Price / mix contribution

     11.4     (7.7 )%      (9.9 )%      (13.8 )% 

For Fiscal 2020 and the three months ended October 31, 2020, growth in net sales was attributable to strong volume contribution and partially offset by negative price / mix contribution, demonstrating that increased sales volumes continues to be the primary driver of our net sales growth. We typically experience lower or negative price / mix contribution in the first fiscal quarter of each fiscal year due to a seasonal increase in net sales percentage for our wholesale—distributors channel during the quarter. See “—Net sales percentage by channel.” The negative price / mix contribution for Fiscal 2020, and the additional decrease in price / mix contribution for the three months ended October 31, 2020 compared to three months ended October 31, 2019, were primarily attributable to (i) increases in sales of our luxury winery brands, which sell at lower average sales prices than our ultra-luxury winery brands, (ii) decreases in average selling prices as a result of the COVID-19 pandemic-driven shift away from on-premise sales, which have historically accounted for a larger portion of sales of our higher priced ultra-luxury wines and (iii) our consistent use of distributor and retail sales discounts and promotions in our wholesale channel to maintain and to capture market share, which presented downward pressure on price / mix contribution given the increase in net sales from our wholesale channel relative to total net sales during the periods. We expect that price / mix contribution will begin to revert toward historical levels as consumption and purchasing habits return to normal following the COVID-19 pandemic, but we expect that volume contribution will continue to be the primary driver of changes in our net sales in future periods.

Components of results of operation and key factors affecting our performance

Net sales

Our net sales consist primarily of wine sales to distributors and directly to retail accounts in California, which together comprise our wholesale channel, and directly to individual consumers through our DTC channel. Net sales generally represent wine sales and shipping, when applicable. Sales are generally recorded at the point of shipment and are recorded net of returns, consideration provided to customers through various incentive programs, other promotional discounts and excise taxes.

We refer to the volume of wine we sell in terms of cases, each of which represents a standard 12 bottle case of wine (in which each bottle has a volume of 750 milliliters). Cases sold represent wine sales through our

 

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wholesale and DTC channels. Depletions, in turn, represent sell-through from our distributors, including our California wholesale sales channel, to retail accounts nationally.

The following factors and trends in our business have driven net sales growth over the past two fiscal years and are expected to be key drivers of our net sales growth for the foreseeable future:

 

 

Further leverage brand strength. We believe our comprehensive growth plan will continue to increase brand awareness and grow sales of our winery brands to our existing consumer base and a new generation of consumers. This plan is made possible by our omni-channel platform, which enables us to grow, both through increased volume with existing and new customers and accounts as well as through periodic price increases, particularly on our higher end, smaller lot DTC wines.

 

 

Insightful and targeted portfolio evolution. Our curated portfolio and historical growth result from long-term dedication to continuous evolution and alignment with the luxury wine consumer. We believe we can drive additional sales through our wholesale and DTC channels. As we continue to scale, we believe our growth mindset, coupled with our differentiated production and distribution platform, will enable us to adapt and remain at the forefront of our industry. For example, we launched a line of premium Decoy-branded wine-based seltzers in February 2021, which we believe will have broad appeal to current Decoy wine drinkers and capture an incremental drinking occasion in this dynamic category.

 

 

Distribution expansion and acceleration. Purchasing by distributors and loyal accounts that continue to feature our wines are key drivers of net sales. We plan to continue broadening distribution of the wines in our portfolio as well as increase the volume of wine sold to existing accounts. We believe our long-standing existing commercial relationships coupled with exceptional portfolio strength position us to capture distribution growth opportunities and accelerate sales to existing distributors and retail accounts in California.

 

 

Continued investment in DTC channel. We expect to continue to invest in our DTC channel, leveraging wine clubs and brand-specific tasting rooms to engage with our consumers, create brand evangelists and drive adoption across our portfolio.

 

 

Opportunistic evaluation of strategic acquisitions. Our strategic and opportunistic approach to evaluating acquisitions has led to the successful acquisition of two winery brands in the past three years: Kosta Browne and Calera. While our growth and success are not contingent upon future acquisitions, we believe our team has the capabilities and track record both to execute and integrate meaningful acquisitions when opportunities arise to create stockholder value.

Our net sales growth has outpaced luxury wine growth rates in the U.S. wine industry every year since 2012, and because of these growth drivers, we expect that trend to continue for the foreseeable future.

The primary market for our wines is the United States, which represented approximately 95% of our net revenue in Fiscal 2019 and Fiscal 2020. Accordingly, our results of operations are primarily dependent on U.S. consumer discretionary spending.

Sales channels

Our sales and distribution platform is based on long-standing relationships with a highly-developed network of distributor accounts in all U.S. states (except California, where we sell directly to retail accounts) and in over 50 countries globally. We also have developed strong relationships with consumers who buy our wines directly from us in the DTC channel. Channel mix can affect our performance and results of operations, particularly gross profit and gross profit margin.

 

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Wholesale channel. Consistent with sales practices in the wine industry, sales to retailers in California and to distributors in other states occur below SRP. We work closely with our distributors to increase the volume of our wines and number of products that are sold by the retail accounts in their respective territories. In California, where we make sales directly to retail accounts, we benefit from greater control over our sales and higher profit margins by selling directly to retailers in the state. Our wholesale channel comprises a greater proportion of our net sales than our DTC channel.

 

 

DTC channel. Wines sold through our DTC channels are generally sold at SRP. Our DTC channel continues to grow as a result of a number of factors, including expanding e-commerce capabilities, which has been a focus of our investment.

Wholesale channel sales made on credit terms generally require payment within 90 days of delivery, and a substantial majority are collected within 60 days. In periods where the net sales channel mix reflects a greater concentration of wholesale sales (which typically occurs in our first and second fiscal quarters), we typically experience an increase in accounts receivable for the period to reflect the change in sales mix, with payment collections in the subsequent period generally reducing accounts receivable and having a positive impact on cash flows in such subsequent period.

While we seek to increase sales in both channels, we expect that our future sales will continue to be substantially comprised of sales in the wholesale channel. We intend to maintain and strengthen our long-standing relationships within our network of distributors, which we believe will be critical to our continued growth and success. In the wholesale channel, we are positioned as a one-stop luxury and ultra-luxury wine shop, offering a diverse mix of high-quality winery brands and varietals at varying luxury and ultra-luxury price points. We believe this strategy will enable us to continue increasing our share of the wholesale luxury and ultra-luxury wine market in the future, as customers will have greater opportunity to engage with and experience wines across our broad portfolio. We continue to innovate with new products at all price points within the portfolio. We strive to enhance customer engagement and increase sales as new customers encounter our wines and existing customers trade up to higher-priced wines.

Our sales mix within our wholesale channel has shifted in favor of off-premise sales while on-premise sales have experienced variability during the COVID-19 pandemic, which began impacting our sales in March 2020. Our responses to periods of historical disruption in the wholesale channel have focused on strengthening relationships with our accounts and distributors, introducing new products and maintaining and strengthening our winery brand engagement. We believe this approach has enabled us to strengthen our portfolio and increase our market share relative to competitors during this period of market disruption.

We routinely offer sales discounts and promotions through various programs to distributors around the country and retail accounts in California. These programs, where permissible, include volume-based discounts on sales orders, depletion-based incentives we pay distributors and certain other promotional activities. The expense associated with these discounts and promotions is estimated and recorded as a reduction in total sales in order to arrive at reported net sales. While our promotional activities may result in some variance in total net sales from quarter to quarter, historically, the total impact of such activities on annual net sales has been generally stable, and we expect this trend to continue in the future.

In the DTC channel, our holistic approach to consumer engagement both online and offline is supported by an integrated e-commerce platform and portfolio wine shop, seven distinctive tasting room experiences located throughout Northern California and Washington, and several award-winning wine clubs, all of which enable us to cross-sell wines within our portfolio. These strategies are designed to maximize each winery brand and property while driving awareness for the Company’s other world-class wines and properties, resulting in more and deeper customer connections. We strive to evolve our offerings, experiences and communication to match the generational shifts in wine engagement preferences and related purchasing decisions. In addition, we

 

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anticipate that our holistic consumer engagement approach will help our DTC sales remain strong through the near-term impact of the COVID-19 pandemic on consumer purchasing behaviors.

Increasing customer engagement is a key driver of our business and results of operations. We continue to invest in our DTC channel and in performance marketing to drive customer engagement. In addition to developing new product offerings and cross-selling wines in our portfolio of winery brands, we focus on increasing customer conversion and customer retention. As we continue to invest in enhancing our DTC channel, we expect to continue to increase customer engagement, which we believe will result in greater customer satisfaction and retention.

Seasonality

Our net sales are typically highest in the first half of our fiscal year due to increased consumer demand around major holidays. Net sales seasonality differs for wholesale and DTC channels, resulting in quarterly seasonality in our net sales that depends on the channel mix for that period. We typically experience a higher concentration of sales through our wholesale channel during our first and second fiscal quarters due to increased purchasing by distributors in anticipation of higher consumer demand during the holiday season, which has the effect of lowering average selling prices as a result of the use of distributor and retail sales discounts and promotions in our wholesale channel. See “—Key operating metrics.” In Fiscal 2020, our net sales in the first, second, third and fourth fiscal quarters represented approximately 26.9%, 28.4%, 25.4% and 19.3%, respectively, of our total net sales for the year. In Fiscal 2019, our net sales in the first, second, third and fourth fiscal quarters represented approximately 26.7%, 27.5%, 26.1% and 19.7%, respectively, of our total net sales for the year.

Gross profit

Gross profit is equal to our net sales, minus our cost of sales. Cost of sales includes grape and bulk wine purchase costs. For grapes we grow, cost of sales includes amounts incurred to develop and farm the vineyards we own and lease. Cost of sales also includes all winemaking and processing charges, bottling, packaging, warehousing and shipping and handling. Costs associated with storing and maintaining wines that age longer than one year prior to sale continue to be capitalized until the wine is bottled and available for sale.

Gross profit improved from $113.0 million in Fiscal 2019 to $136.9 million in Fiscal 2020. As we continue to grow our business in the future, we expect gross profit to increase as our sales grow and as we effectively manage our cost of sales, subject to any future unexpected volatility in the grape and bulk wine markets and increased seasonal labor costs. Additionally, we expect gross profit as a percentage of net sales to remain consistent with historical levels or to improve to the extent we observe a return to normalized consumer spending behavior across the industry and within our business, particularly with respect to on-premise sales in the wholesale channel, which would favorably influence our gross profit margins on net sales.

Agribusiness

We have developed a diversified sourcing and production model, supported by our eight wineries and 22 world-class and strategically located Estate vineyards and strong relationships with quality-oriented growers. In addition, our sourcing model includes the purchase of high-quality bulk wine from established suppliers to add a highly flexible element of diversity to our supply model. Generally, over 85% of our total production is sourced from third-party growers and, to a significantly lesser extent, the bulk wine market. Our ability to adjust the composition of a particular vintage among our grape and bulk wine sourcing supply channels allows us to tailor inputs based on varying market or seasonal factors, which we believe enables us to produce the highest possible quality wine while optimizing gross profit.

 

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Consistent with other agriculture enterprises, the cost of our wine fluctuates due to annual harvest yields, which vary due to weather and other events. In addition to agricultural factors, price volatility in the grape and bulk wine markets, competition for supply and seasonal labor costs also impact our cost of sales. We may continue to experience fluctuations in the costs of producing wine, which could impact our gross profit.

Selling, general and administrative expenses

Selling, general and administrative expenses consists of selling expenses, marketing expenses and general and administrative expenses. Selling expenses consist primarily of direct selling expenses in our wholesale and DTC channels, including payroll and related costs, product samples and tasting room operating costs, including processing fees and outside services. Marketing expenses consist primarily of advertising costs to promote winery brand awareness, customer retention costs, payroll and related costs. General and administrative expenses consist primarily of payroll and related costs, administrative expenses to support corporate functions, legal and professional fees, depreciation, accounting and information technology, tenancy expenses and other costs related to management. Although we expect selling, general and administrative expenses to increase as sales and related support needs expand, we expect our sales growth rate to outpace the rate of increased selling, general and administrative expenses as we achieve further efficiencies of scale. We also expect to incur greater selling, general and administrative expenses as a result of operating as a publicly traded company.

Other expenses

Other expenses consist primarily of interest expense we incur on balances outstanding under the terms of our Credit Facility and unrealized gains or losses on our derivative instruments.

Income tax expense

Income tax expense consists of federal and state taxes payable to various federal, state and local tax authorities.

Inventory lifecycle

Grape growing on our Estate vineyards

Although generally over 85% of our wine is typically derived from grapes grown by third party growers and, to a significantly lesser extent, bulk wine we purchase, the remainder is sourced from our Estate vineyards that we own or lease. Once a vineyard reaches consistent yield levels, approximately three to five years after planting, it will generally produce a relatively consistent amount of fruit for approximately 15 to 25 years, at which time blocks of the vineyard will gradually be replanted in stages after a period of lying fallow. The length of time between initial investment and ultimate sale of our Estate wines, coupled with the ongoing investment required to produce quality wine, is not typical of most agricultural industries. In the future, as our business grows, we expect Estate vineyards to represent a smaller relative share of our overall sourcing model.

Harvest-to-release

Of the total case volume we produce and sell, the majority is comprised of red wines from grape varietals such as cabernet sauvignon, pinot noir and merlot, which can have production lifecycles spanning months and years from harvest until the time the wine is released, depending on the aging requirements prescribed by the winemakers responsible for each of our winery brands. Our red wines generally have a harvest-to-release inventory lifecycle that can range from 15 to 48 months. Our white, rosé and sparkling wines generally have a harvest-to-release inventory lifecycle that can range from five to 35 months. During aging and storage, we continue to capitalize overhead costs into the carrying value of the wine.

 

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Given the long-term nature of our investment, grape purchasing and bulk wine purchasing decisions, our production planning processes are designed to mitigate the risk of over-supply by sourcing a portion of our production needs in the spot markets to the degree appropriate based on winery brand and vintage. This opportunistic approach to grape purchases also helps us reduce our exposure to future grape price volatility.

Other factors impacting the comparability of our results of operations

Impacts of COVID-19

In March 2020, the World Health Organization declared a global pandemic due to the spread of COVID-19, the disease caused by a novel strain of coronavirus. While governmental authorities implemented measures limiting the activities of businesses and individuals to reduce the spread of COVID-19, wine producers in the United States are classified as essential businesses, which enabled us to continue producing and selling our wine. Our operational response for the safety of our employees and the individuals with whom we work was to adapt our policies and protocols to meet applicable federal, state and local requirements, which we continue to revise as appropriate.

Historically, our ultra-luxury winery brands, which deliver higher gross profit margins, generally sell in larger volumes on-premise than our luxury winery brands, which typically see higher sales volumes at off-premise retailers. At the outset of the COVID-19 pandemic, we experienced a significant decrease in sales of ultra-luxury wines on-premise and a significant increase of sales of ultra-luxury and luxury wines off-premise. As the economy reopens following the COVID-19 pandemic, we expect on-premise sales to increase from their pandemic lows, which we believe will result in further increased sales of our ultra-luxury winery brands. At the same time, the significant growth in off-premise sales that we are experiencing during the pandemic may be tempered and the rate of growth may marginally slow at off-premise retailers. We believe that the diverse offerings of The Duckhorn Portfolio, which include a broad spectrum of price points, mitigates some of the risk to our future operations in periods in which the on- and off-premise relative mix fluctuates.

During the pandemic our tasting rooms have experienced lower tasting fee revenue due to closed or reduced capacities in order to comply with applicable regulations despite sustained operating levels of expenses, primarily comprised of tasting room operating expenses during periods of capacity restrictions or mandatory closure. Conversely, e-commerce sales increased substantially as customers sought to purchase our wines in a manner that reduced human contact. We believe that our tasting rooms will see significant increases in tasting fee revenue as the pandemic wanes, tourism increases and regulations addressing occupancy are eased. At the same time, we believe that customers who used e-commerce platforms to purchase our wines will continue to enjoy the convenience of those platforms to purchase wines from The Duckhorn Portfolio.

Impact of wildfires

During Fiscal 2020 and the first quarter of Fiscal 2021, several wildfires occurred in Northern California. These fires have adversely affected industry grape supplies, though the full extent is not yet known. Other than smoke taint to grapes that had not been harvested, our own vineyards did not sustain damage during the fires. However, smoke and fire damage to vineyards in the primary regions and markets where we source fruit rendered some of the available grapes unacceptable for the Company’s production needs, and the evaluation is ongoing. In response, we have taken steps to obtain alternative sources of supply that we believe will substantially mitigate the impact of the fires on our supply. Wildfires and smoke damage to grape yields in 2020 and in future vintages could result in changes to our production plan, changes to the quantity or release timing of expected case sales in our sales forecast, and changes to future gross profit margins as compared to prior periods. We cannot yet estimate the full impact of wildfire-related disruption to the 2020 harvest, nor can we estimate the potential future impact on our sales for the fiscal years in which the 2020 vintage would be

 

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available for sale. Repeated instances of wildfires disrupting overall grape supply may result in significant price volatility, which could also impact our business.

We continue to enhance our wildfire response plan and to mitigate the supply risk associated with wildfires in the following ways:

 

 

our diversified sourcing strategy, with a mix of our owned or leased Estate properties and high-quality grower contracts, covers a wide geographic footprint across California and Washington; and

 

 

we have assembled a team of winemakers and operational leadership with deep industry experience, enabling us to respond effectively to supply disruption in our active grape sourcing markets or to expand into new sourcing markets if needed.

Impacts of purchase accounting due to prior acquisitions

We were acquired by TSG in Fiscal 2017, and subsequently completed acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019, respectively. In applying business combination accounting pursuant to U.S. GAAP authoritative literature in connection with each of these transactions, we recorded acquired assets and liabilities at their fair values. The impacts of these purchase accounting adjustments primarily resulted in reductions to deferred revenue, increases to inventory, increases to long-lived assets and recognition of indefinite-lived intangible assets and definite-lived intangible assets which amortize over their assigned useful lives ranging from 9 to 14 years. See Note 3 (Acquisitions) and Note 6 (Goodwill and other intangible assets) to our consolidated financial statements for additional information.

In Fiscal 2019 and Fiscal 2020, the effects of purchase accounting adjustments on our operational performance caused our pre-tax income from operations to be lower than we would otherwise have recognized due to reduced revenue for the fair value adjustment to deferred revenue, increased cost of sales due to step-up on inventory and increased operating expenses due to step-up depreciation on property and equipment and amortization of definite-lived intangible assets. The table below reflects the line items of our Consolidated Statements of Operations impacted by these purchase accounting adjustments:

 

     
     Fiscal year ended
July 31,
    Three months ended
October 31,
 
(in thousands)            2019             2020             2019             2020  

Purchase accounting adjustment to deferred revenue

   $ (1,875   $     $     $  
  

 

 

 

Impact of purchase accounting on net sales

     (1,875                  

Purchase accounting adjustments to cost of sales

     17,896       5,457       2,141       561  
  

 

 

 

Impact of purchase accounting on gross profit

     (19,771     (5,457     (2,141     (561

Amortization of customer relationships and other intangible assets

     7,683       7,683       1,921       1,921  
  

 

 

 

Impact of purchase accounting on selling, general and administrative expenses

     7,683       7,683       1,921       1,921  
  

 

 

 

Impact of purchase accounting on income before income taxes

   $ (27,454   $ (13,140   $ (4,062   $ (2,482

 

 

Casualty gain

In February 2019, one of our wineries experienced a flood resulting in damages to inventory, machinery and equipment, and site improvements. As a result of the flood, we filed an insurance claim which was settled in

 

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December 2020 for $32.5 million. The casualty gain consists of payments we received from our insurer throughout Fiscal 2019 and Fiscal 2020 in excess of recognized losses.

Results of operations

The following table sets forth our results of operations for the periods presented and expresses the relationship of each line item shown as a percentage of net sales for the periods indicated. The table below should be read in conjunction with the corresponding discussion and our audited annual consolidated financial statements, our unaudited condensed consolidated interim financial statements and related footnotes included elsewhere in this prospectus:

 

     
    Fiscal year ended
July 31,
    Three months ended
October 31,
 
(in thousands, except percentages)   2019     2020     2019     2020  

Net sales

  $ 241,207     100.0%     $ 270,648     100.0%     $ 72,704     100.0%     $ 91,638       100.0%  

Cost of sales

    128,204     53.2     133,766     49.4     36,400     50.1     47,363       51.7  
 

 

 

 

Gross profit

    113,003     46.8     136,882     50.6     36,304     49.9     44,275     48.3  

Selling, general and administrative expenses

    65,741     27.3     65,908     24.4     18,443     25.4       16,805     18.3  

Impairment loss

                11,830     4.4                        

Casualty (gain) loss

    (8,606     (3.6     (4,047     (1.5     118     0.2     1,555     1.7  
 

 

 

 

Income from operations

    55,868     23.2     63,191     23.3     17,743     24.4     25,915       28.3  

Interest expense

    20,937     8.7     17,924     6.6     4,830     6.6     3,580       3.9  

Other expense (income), net

    4,988     2.1     2,457     0.9     945     1.3     (1,323     (1.4
 

 

 

 

Total other expenses

    25,925     10.7     20,381     7.5     5,775     7.9     2,257       2.5  
 

 

 

 

Income before income taxes

    29,943     12.4     42,810     15.8     11,968     16.5     23,658       25.8  
 

 

 

 

Income tax expense

    7,842     3.3     10,432     3.9     3,143     4.3     6,136     6.7  
 

 

 

 

Net income

    22,101     9.2     32,378     12.0     8,825     12.1     17,522       19.1  
 

 

 

 

Less: Net (income) loss attributable to non-controlling interest

    (4           (1           (9           1      
 

 

 

 

Net income attributable to The Duckhorn Portfolio, Inc.

  $ 22,097     9.2%     $ 32,377     12.0%     $ 8,816     12.1%     $ 17,523       19.1%  

 

 

Comparison of the three months ended October 31, 2019 and 2020

Net sales

 

     
     Three months ended
October 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Net sales

   $ 72,704    $ 91,638    $ 18,934        26.0%  

 

 

Net sales for the three months ended October 31, 2020 increased $18.9 million, or 26.0%, to $91.6 million compared to $72.7 million for the three months ended October 31, 2019. This increase was primarily driven by higher sales to wholesale accounts net of increased discounts, which contributed to sales growth and steady sell-through of inventory by distributors and retail accounts.

 

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Cost of sales

 

     
     Three months ended
October 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Cost of sales

   $ 36,400    $ 47,363    $ 10,963        30.1%  

 

 

Cost of sales increased $11.0 million, or 30.1% to $47.4 million for the three months ended October 31, 2020 compared to $36.4 million for the three months ended October 31, 2019, with the increase directly driven by higher sales for the period.

Gross profit

 

     
     Three months ended
October 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Gross profit

   $ 36,304      $ 44,275    $ 7,971        22.0%  

 

 

Gross profit increased $8.0 million, or 22.0% to $44.3 million for the three months ended October 31, 2020 compared to $36.3 million for the three months ended October 31, 2019. The change in gross profit was primarily the result of:

 

 

higher sales volume; and

 

 

a reduction in step-up cost of wine sold for the fiscal quarter ended October 31, 2020 versus the same quarter prior year, due to lower balance of remaining inventory with associated step-up from purchase accounting in previous periods.

Gross profit margin was 48.3% for the three months ended October 31, 2020 compared to 49.9% for the three months ended October 31, 2019, depicting the shift in sales mix in favor of luxury wines sold in the wholesale channel for the first quarter of Fiscal 2021.

Operating expenses

Selling, general and administrative expenses

 

     
     Three months ended
October 31,
     Change  
(dollars in thousands)    2019      2020      $     %  

Selling expenses

   $ 9,803    $ 8,324    $ (1,479     (15.1)%  

Marketing expenses

     2,101      1,746      (355     (16.9)  

General and administrative expenses

     6,539      6,735        196       3.0  
  

 

 

 

Total selling, general and administrative expenses

   $ 18,443    $ 16,805    $ (1,638     (8.9)%  

 

 

Selling, general and administrative expenses decreased $1.6 million, or 8.9%, to $16.8 million for the three months ended October 31, 2020 compared to $18.4 million for the three months ended October 31, 2019, largely driven by a reduction in selling expenses.

Selling expenses were lower for the first quarter of Fiscal 2021 versus the same quarter in Fiscal 2020 due to reduced business travel and the related costs of in-person sales activities that have been constrained due to COVID-19 restrictions in key markets where we operate. We typically expect selling expenses to follow our sales

 

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growth as the activities are intended to generate revenues. Marketing expenses were down $0.4 million for the comparative periods due to a reduction in marketing and promotional events during the pandemic. Total selling, general and administrative expenses decreased as a percentage of net sales from 25.4% to 18.3% for the periods ended October 31, 2019 and 2020, respectively, coming more in line with historical averages, though we expect this trend to normalize with a broader economic reopening.

Casualty loss

 

     
     Three months ended
October 31,
     Change  
(dollars in thousands)            2019      2020      $      %  

Casualty loss

   $ 118      $ 1,555    $ 1,437        1,217.8%  

 

 

Casualty loss increased by $1.4 million for the three months ended October 31, 2020 to $1.6 million compared to $0.1 million for the three months ended October 31, 2019, primarily due to the 2020 fires and resulting fruit damage in addition to other direct costs which exceeded the portion of casualty losses related to our February 2019 flood damages recognized in the first quarter of Fiscal 2020.

Other expenses

 

     
     Three months ended
October 31,
    Change  
(dollars in thousands)            2019      2020     $     %  

Interest expense

   $ 4,830    $ 3,580   $ (1,250     (25.9 )% 

Other expense (income), net

     945      (1,323     (2,268     (240.0
  

 

 

 

Total other expenses, net

   $ 5,775    $ 2,257     $ (3,518     (60.9 )% 

 

 

Other expenses decreased by $3.5 million, or 60.9% to $2.3 million for the three months ended October 31, 2020 compared to $5.8 million for the three months ended October 31, 2019. The change in our other expenses was primarily driven by a reduction to interest expense due to lower debt balances outstanding for the period, in conjunction with lower average interest rates on our variable rate debt. See “—Liquidity and capital resources” for discussion of our Credit Facility. The downward pressure on LIBOR also reduced the liability balance for our interest rate swap, resulting in a gain for the first quarter of Fiscal 2021.

Income tax expense

 

     
     Three months ended
October 31,
     Change  
(dollars in thousands)            2019      2020      $      %  

Income tax expense

   $ 3,143    $ 6,136    $ 2,993        95.2%  

 

 

Income tax expense increased $3.0 million, or 95.2% to $6.1 million for the three months ended October 31, 2020 compared to $3.1 million for the three months ended October 31, 2019. The change in our income tax expense was primarily driven by an increase in taxable income due to profitable operating results for the period.

 

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Comparison of the fiscal years ended July 31, 2019 and 2020

Net sales

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Net sales

   $ 241,207    $ 270,648    $ 29,441      12.2%  

 

 

Total net sales increased by $29.4 million or 12.2%, from Fiscal 2019 to Fiscal 2020, fueled by growth in our wholesale channel and consistent sell-through depletion of distributor and retailer inventory during the year. Wholesale sales accounted for a proportionately greater portion of growth in the back half of Fiscal 2020 as compared to Fiscal 2019 given the impact of the pandemic, driving higher sales that were partially offset by higher discounts as compared to the prior year and resulting in a lower average net sales price per case sold.

Cost of sales

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Cost of sales

   $ 128,204    $ 133,766    $ 5,562      4.3%  

 

 

Total cost of sales increased by $5.6 million or 4.3%, from Fiscal 2019 to Fiscal 2020, primarily due to an increase in cost of wine sold of $13.4 million given higher sales volume for the year, increased delivery and warehousing costs of $1.7 million due to increased sales, and a $2.9 million increase in cost of bulk wine sold, partially offset by a $12.4 million decrease in step-up cost of wine sold as compared to prior year due to the lessening impact of purchase accounting adjustments in connection with the Kosta Browne acquisition.

Gross profit

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Gross profit

   $ 113,003    $ 136,882    $ 23,879      21.1%  

 

 

Gross profit increased $23.9 million or 21.1% from Fiscal 2019 compared to Fiscal 2020 due to higher sales and lower impact in Fiscal 2020 due to step-up on inventory from purchase accounting. Gross profit margin improved from 46.8% in Fiscal 2019 to 50.6% in Fiscal 2020.

Operating expenses

Selling, general and administrative expenses

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $     %  

Selling expenses

   $ 31,322    $ 35,085    $ 3,763     12.0%  

Marketing expenses

     6,661      6,801      140     2.1

General and administrative expenses

     27,758      24,022      (3,736     (13.5
  

 

 

 

Total selling, general and administrative expenses

   $ 65,741    $ 65,908    $ 167     0.3%  

 

 

 

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Total selling, general and administrative expenses increased by $0.2 million from Fiscal 2019 to Fiscal 2020. Within selling, general and administrative expenses, we experienced an increase in our selling expenses of $3.8 million, primarily driven by an increase in salaries and related expenses. The increased expense resulted in part from increased headcount to support increased sales volumes, as well as an increase in direct selling activities to generate sales growth. This was offset by a decrease in our general and administrative expenses predominantly due to transaction costs surrounding the Kosta Browne acquisition of $3.9 million recorded in Fiscal 2019, compared to $0.2 million in Fiscal 2020.

Impairment loss

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Impairment loss

   $      $ 11,830    $ 11,830        100.0

 

 

Contributing to an increase in operating expenses in Fiscal 2020 was an impairment charge we recorded for certain trade names in the amount of $11.8 million. The impairment was driven by reductions to our sales forecasts for certain of our ultra-luxury winery brands experiencing sales channel and consumer spending disruption due to the COVID-19 pandemic, as well as changes in discount rates. See Note 6 (Goodwill and other intangible assets) to our consolidated annual financial statements for additional information.

Casualty gain

 

     
     Fiscal year ended
July 31,
    Change  
(dollars in thousands)    2019     2020     $      %  

Casualty gain

   $ (8,606   $ (4,047   $ 4,559      (53.0 )% 

 

 

The casualty gain in both Fiscal 2019 and Fiscal 2020, related to a flood at one of our wineries, decreased by $4.6 million or 53.0%, from Fiscal 2019 to Fiscal 2020. The casualty gain represents insurance proceeds we received in amounts that exceeded our recorded losses for each period presented. See Note 16 (Casualty gain) to our consolidated annual financial statements for additional information.

Other expenses

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $     %  
                            

Interest expense

   $ 20,937    $ 17,924    $ (3,013     (14.4 )% 

Other expense, net

     4,988      2,457      (2,531     (50.7
  

 

 

 

Total other expenses

   $ 25,925    $ 20,381    $ (5,544     (21.4 )% 

 

 

Total other expenses decreased by $5.5 million or 21.4%, from Fiscal 2019 to Fiscal 2020. Interest expense decreased by $3.0 million or 14.4% for Fiscal 2020 compared to Fiscal 2019 primarily due to an overall decrease in the LIBOR-based interest rate on our Credit Facility as well as a net reduction of our outstanding debt balances during the year. Other expense, net decreased by $2.5 million or 50.7% from Fiscal 2019 to Fiscal 2020 due to unrealized gains in the interest rate swap balance we use to hedge our exposure to floating interest rates on our Credit Facility. See “—Liquidity and capital resources” for additional information.

 

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Income tax expense

 

     
     Fiscal year ended
July 31,
     Change  
(dollars in thousands)    2019      2020      $      %  

Income tax expense

   $ 7,842    $ 10,432    $ 2,590      33.0%  

 

 

Income tax expense increased $2.6 million or 33.0%, from Fiscal 2019 to Fiscal 2020, directly related to an increase in our taxable income, offset by a slight decrease in our effective tax rate from 26.1% in Fiscal 2019 to 24.4% in Fiscal 2020. Income tax expense of $10.4 million for the year ended July 31, 2020 (an effective tax rate of 24.4%) differs from the expected tax expense (computed by applying the current U.S. Federal corporate tax rate of 21% to earnings before taxes) primarily due to state income taxes and non-deductible equity-based compensation costs.

Income tax expense of $7.8 million for the year ended July 31, 2019 (an effective tax rate of 26.1%) differs from the expected tax expense (computed by applying the current U.S. federal corporate tax rate of 21% to earnings before taxes) primarily due to state income taxes as well as non-deductible expenses related to transaction costs incurred for the Kosta Browne acquisition and equity-based compensation.

The Kosta Browne acquisition transaction costs accounted for 193 basis points of our effective tax rate in Fiscal 2019. See Note 11 (Income taxes) to our consolidated annual financial statements for additional information on our effective tax rate and the reconciliation to the expected federal statutory rate.

 

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Quarterly results of operations and other financial and operational data

The following tables set forth selected unaudited quarterly results of operations and other financial and operational data for the seven quarters ended October 31, 2020, as well as the percentage that each line item represents of net sales. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus. We believe the quarterly information presented includes all appropriate adjustments necessary for the fair statement of our consolidated results of operation for these periods. This data should be read in conjunction with the consolidated financial statements and notes included elsewhere in this prospectus. Our quarterly results of operations are not necessarily indicative of the operating results for any future period, and future results will vary.

 

               
(in thousands)    April 30,
2019
     July 31,
2019
    October 31,
2019
    January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
 

Net sales

   $ 62,902    $ 47,524   $ 72,704   $ 76,993   $ 68,720   $ 52,231     $ 91,638

Cost of sales

     33,097      23,851     36,400     38,680     32,378     26,308       47,363
  

 

 

 

Gross profit

     29,805      23,673     36,304     38,313     36,342     25,923       44,275

Selling, general, and administrative expenses

     15,584      16,373     18,443     18,104     13,156     16,205       16,805

Impairment loss

                                    11,830        

Casualty loss (gain)

     3,689      (12,295     118     (4,141     (24           1,555
  

 

 

 

Income (loss) from operations

     10,532      19,595     17,743     24,350     23,210     (2,112     25,915

Interest expense

     5,272      4,989     4,830     4,854     4,221     4,019       3,580

Other expense (income), net

     903      1,741     945     (421     3,183     (1,250     (1,323
  

 

 

 

Total other expenses

     6,175      6,730     5,775     4,433     7,404     2,769       2,257
  

 

 

 

Income (loss) before income taxes

     4,357      12,865     11,968     19,917     15,806     (4,881     23,658
  

 

 

 

Income tax expense (benefit)

     1,162      2,465     3,143     5,256     4,189     (2,156     6,136
  

 

 

 

Net income (loss)

     3,195      10,400     8,825     14,661     11,617     (2,725     17,522
  

 

 

 

Less: Net income (loss) attributable to non-controlling interest

     1      4     (9     4     2     2       1
  

 

 

 

Net income (loss) attributable to The Duckhorn Portfolio, Inc.

   $ 3,196    $ 10,404   $ 8,816   $ 14,665   $ 11,619   $ (2,723   $ 17,523

 

 

 

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      April 30,
2019
     July 31,
2019
    October 31,
2019
     January 31,
2020
    April 30,
2020
     July 31,
2020
    October 31,
2020
 

Net sales

     100.0%        100.0%       100.0%        100.0%       100.0%        100.0%       100.0%  

Cost of sales

     52.6      50.2     50.1      50.2     47.1      50.4       51.7
  

 

 

 

Gross profit

     47.4      49.8     49.9      49.8     52.9      49.6       48.3

Selling, general, and administrative expenses

     24.8      34.5     25.4      23.5     19.1      31.0       18.3

Impairment loss

                                      22.6        

Casualty loss (gain)

     5.9      (25.9     0.2      (5.4                  1.7
  

 

 

 

Income (loss) from operations

     16.7      41.2     24.4      31.6     33.8      (4.0     28.3

Interest expense

     8.4      10.5     6.6      6.3     6.1      7.7       3.9

Other expense (income), net

     1.4      3.7     1.3      (0.5     4.6      (2.4     (1.4
  

 

 

 

Total other expenses

     9.8      14.2     7.9      5.8     10.8      5.3       2.5
  

 

 

 

Income (loss) before income taxes

     6.9      27.1     16.5      25.9     23.0      (9.3     25.8
  

 

 

 

Income tax expense (benefit)

     1.8      5.2     4.3      6.8     6.1      (4.1     6.7
  

 

 

 

Net income (loss)

     5.1      21.9     12.1      19.0     16.9      (5.2     19.1
  

 

 

 

Less: Net income (loss) attributable to non-controlling interest

                                             
  

 

 

 

Net income (loss) attributable to The Duckhorn Portfolio, Inc.

     5.1%        21.9%       12.1%        19.0%       16.9%        (5.2 )%      19.1%  

 

 

 

               
(in thousands)    April 30,
2019
     July 31,
2019
     October 31,
2019
     January 31,
2020
     April 30,
2020
     July 31,
2020
    October 31,
2020
 

Net sales

   $ 62,902    $ 47,524    $ 72,704    $ 76,993    $ 68,720    $ 52,231   $ 91,638

Gross profit

   $ 29,805    $ 23,673    $ 36,304    $ 38,313    $ 36,342    $ 25,923   $ 44,275

Net income (loss)

   $ 3,196    $ 10,404    $ 8,816    $ 14,665    $ 11,619    $ (2,723   $ 17,523

Adjusted EBITDA(1)

   $ 28,253    $ 14,879    $ 25,799    $ 30,215    $ 31,236    $ 17,830   $ 33,722

 

 
(1)   For the definition of Adjusted EBITDA, see the section captioned “Selected Consolidated Financial and Other Data—Other Financial and Operating Data” for information regarding the use of this measure. See below for its reconciliation to net income (loss), the most directly comparable U.S. GAAP measure.

 

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The following table represents the reconciliation of Adjusted EBITDA to net income (loss):

 

               
(in thousands)    April 30,
2019
     July 31,
2019
    October 31,
2019
     January 31,
2020
    April 30,
2020
    July 31,
2020
    October 31,
2020
 

Net income (loss)

   $ 3,196    $ 10,404   $ 8,816    $ 14,665   $ 11,619     $ (2,723   $ 17,523  

Interest expense

     5,272      4,989     4,830      4,854     4,221       4,019       3,580  

Income tax expense (benefit)

     1,162      2,465     3,143      5,256     4,189       (2,156     6,136  

Depreciation and amortization expense

     7,186      5,689     4,956      6,349     6,116       5,334       5,116  
  

 

 

 

EBITDA

     16,816      23,547     21,745      31,124     26,145       4,474       32,355  

Purchase accounting adjustments(a)

     5,774      1,221     2,141      2,454     241       621       561  

Transaction expenses(b)

                  193                         

Impairment loss(c)

                                     11,830        

Change in fair value of derivatives

     981      1,763     770      (379     3,036       (1,087     (1,548

Equity-based compensation

     282      289     289      289     288       288       288  

Casualty loss (gain)(d)

     3,689      (12,295     118      (4,141     (24            

Bulk wine loss, net(e)

                  260      819     1,243       493        

Loss on debt extinguishment(f)

                                           272  

IPO preparation costs(g)

     711      354     283      49     31       112       196  

Wildfire costs(h)

                                           1,555  

COVID-19 costs(i)

                               276       1,099       43  
  

 

 

 

Adjusted EBITDA

   $ 28,253    $ 14,879   $ 25,799    $ 30,215   $ 31,236     $ 17,830     $ 33,722  

 

 

 

(a)   Purchase accounting adjustments relate to the impacts of prior business combination accounting for our acquisition by TSG in Fiscal 2017, our subsequent acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019, respectively, and certain other transactions consummated prior to our acquisition by TSG, which resulted in fair value adjustments to deferred revenue, inventory and long-lived assets. Refer to “Management’s discussion and analysis of financial condition and results of operations—Other factors impacting the comparability of our results of operations” for further information.
(b)   Transaction expenses include legal and professional fees and change of control payments incurred in connection with our acquisition of Kosta Browne in August 2018 and our acquisition by TSG in Fiscal 2017. These expenses were incremental to our normal operating expenses and were directly related to the transactions.
(c)   Impairment loss relates to impairments for certain of the Company’s trade names identified in Fiscal 2020. The impairments were primarily the result of changes to the Company’s sales forecasts for certain of the Company’s ultra-luxury brands experiencing sales channel and consumer spending disruption due to the COVID-19 pandemic. The impairment charge was also impacted by an increase in the discount rate applied in the fair value calculations due to changes in economic outlook. See Note 6 (Goodwill and other intangible assets) to our consolidated financial statements for additional information.
(d)   In Fiscal 2019, casualty gain was primarily comprised of the insurance proceeds in excess of recognized losses for the fiscal year due to flood damage at one of our wineries. In Fiscal 2020, casualty gain was primarily comprised of additional insurance proceeds received pursuant to our original claim for the flood event in Fiscal 2019. For the three months ended October 31, 2019, we recognized additional costs due to flood remediation but did not record any proceeds related to our insurance claim that was resolved in December 2020. See Note 16 (Casualty gain) to our consolidated financial statements for additional information.
(e)   Bulk wine loss, net, primarily relates to net losses on bulk wine sold in the spot bulk markets at quantities and price points which were unusual and infrequent for our business. During Fiscal 2020 (during which the 2019 harvest occurred), we observed significant and unprecedented oversupply and price volatility in the bulk wine markets that resulted in premium tiers of bulk wine spot prices reaching historic lows. We have not historically sold a significant quantity of bulk wine into the spot bulk markets. However, during Fiscal 2020, we obtained alternative supply that we believe is of higher quality than certain bulk wine that we held at that time, and we responded by selling certain bulk quantities at a net loss. We do not to expect to engage in sales of significant amounts of bulk quantities to the bulk wine market, and therefore have excluded the loss from these sales from adjusted EBITDA as they are not indicative of our core operational performance.

 

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(f)   Loss on debt extinguishment includes charges for unamortized deferred financing fees we recognized in connection with amendments to our Credit Facility. See Note 8 (Debt) to our consolidated financial statements for further information.
(g)   IPO preparation costs include professional fees incurred for outside consultants to advise us on legal, accounting and tax matters related to our preparation for becoming a public company, which are not directly attributable to an offering.
(h)   Wildfire costs include the cost of unharvested fruit that was damaged and rendered useless, charges we incurred to respond to imminent wildfire threat with fire-fighting crews to protect our assets, clean-up and smoke remediation expenses to restore operations at our tasting rooms after the fires, testing fees to evaluate our fruit for possible smoke damage, and washing or other grape processing costs prior to vinification to reduce the risk of smoke taint in finished wine. See Note 13 (Casualty loss) to our unaudited condensed consolidated interim financial statements for the three months ended October 31, 2020 for additional information. While we expect the potential for wildfires to be an ongoing risk to running an agricultural business in California, we believe the wildfires and related costs we experienced are not indicative of our core operating performance.
(i)   COVID-19 costs include certain incremental expenses incurred during the outbreak of the COVID-19 pandemic and the short-term closure mandates imposed by government officials in the jurisdictions in which we operate. These costs include tasting room expenses incurred during a period of mandatory closure and reduced capacity, salaries and severance expenses for certain employees and other immaterial costs to transfer inventory.

Liquidity and capital resources

Sources of liquidity

Our primary cash needs are for working capital purposes, such as producing or purchasing inventory and funding operating and capital expenditures. We fund our operational cash requirements with cash flows from operating activities and borrowings under our Credit Facility. As of October 31, 2020, we had $1.3 million in cash and cash equivalents and $207.5 million available in undrawn capacity on our revolving line of credit, subject to the terms of our Credit Facility.

In response to the COVID-19 pandemic, we implemented measures designed to protect the health and safety of our workforce, as described in “—Other factors impacting the comparability of our results of operations—Impacts of COVID-19”. Our response also included evaluating risks related to our inventory and liquidity management, which we determined to be sufficiently mitigated, subject to reassessment in the future in response to pandemic-related impacts as they occur.

Due to the seasonal nature of our operations, our cash needs are greater during harvest, a period which can span from August to November based on agricultural conditions and other factors outside our control. We believe that our expected operating cash flows, cash on hand and borrowing capacity on our revolving line of credit, will be adequate to meet our cash needs for at least the next 12 months. However, changes in our business growth plan, planned capital expenditures or responses to an ever-changing and highly competitive industry landscape may result in changes to our cash requirements. As a result, we may seek alternative or incremental funding sources to respond to changes in our business. To the extent required, we may fund additional liquidity through debt or equity financing, although we can provide no assurance that such forms of capital will be available when needed, if at all, or available on terms that are acceptable.

Cash flows

The following table presents the major components of net cash flows for the periods indicated.

 

     
     Fiscal year ended
July 31,
    Three months ended
October 31,
 
(in thousands)    2019     2020     2019     2020  

Cash flows provided by (used in):

        

Operating activities

   $ 42,466   $ 55,179   $ 15,655   $ 2,487  

Investing activities

     (221,412     (13,535     (8,026     (7,686

Financing activities

     129,547     (39,157     (7,737     252  
  

 

 

 

Net (decrease) increase in cash

   $ (49,399   $ 2,487   $ (108   $ (4,947

 

 

 

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Operating activities

Our cash flows from operating activities consist primarily of net income adjusted for certain non-cash transactions, including depreciation and amortization, amortization of debt issuance costs, changes in the fair values of derivatives, equity-based compensation and deferred income taxes. Operating cash flows also reflect the periodic changes in working capital, primarily inventory, accounts receivable, prepaid expenses, accounts payable and accrued expenses.

For the three months ended October 31, 2020, net cash provided by operating activities was $2.5 million compared to $15.7 million for the three months ended October 31, 2019, a decrease of $13.2 million. The decrease in cash provided by operating activities was driven by the following factors:

 

 

Operating cash flow increased due to an increase in net income of $6.7 million after adjusting for non-cash items;

 

 

Increases in accounts receivable outpaced the increase in net sales, reducing operating cash flows $7.2 million primarily due to an increase in wholesale sales channel mix and, consequently, a greater proportion of net sales subject to credit terms;

 

 

Operating cash flows decreased $3.4 million due to increased prepaid insurance premiums; and

 

 

Changes in accounts payable and accrued expenses reduced operating cash flows $9.5 million due to grape grower and bulk wine supply management decisions and timing of invoices.

For Fiscal 2020, net cash provided by operating activities was $55.2 million compared to $42.5 million in Fiscal 2019, an increase of $12.7 million. The increase in cash provided by operating activities was driven by the following factors:

 

 

Operating cash flow increased due to an increase in net income of $15.6 million after adjusting for non-cash items;

 

 

Relative to an overall increase in net sales, the increase in the wholesale sales channel, generally subject to credit terms, was greater than the increase in the DTC channel. This change in sales mix resulted in a corresponding increase in