UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 30, 2021

OR

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

Commission file number 001-40240

The Duckhorn Portfolio, Inc.

(Exact name of registrant as specified in its charter)

Delaware	81-3866305
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1201 Dowdell Lane

Saint Helena, CA 94574

(Address, including zip code, of Principal Executive Offices)

(707) 302-2658

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NAPA	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ☒   No  o 

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

    

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

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

The registrant had outstanding 114,381,404 shares of common stock, $0.01 par value per share, as of June 7, 2021.

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:	1
Condensed Consolidated Statements of Financial Position (Unaudited)	1
Condensed Consolidated Statements of Operations (Unaudited)	2
Condensed Consolidated Statements of Changes in Equity (Unaudited)	3
Condensed Consolidated Statements of Cash Flows (Unaudited)	4
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures about Market Risk	38
Item 4. Controls and Procedures	39
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	40
Item 1A. Risk Factors	40
Item 2. Use of Proceeds	40
Item 6. Exhibits	41
Signatures	42

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

The Duckhorn Portfolio, Inc.

Condensed Consolidated Statements of Financial Position

(in thousands, except share and per share amounts)	April 30, 2021		July 31, 2020
ASSETS	(unaudited)
Current assets
Cash	$	5,027	$	6,252
Accounts receivable trade, net	43,955		26,464
Inventories	268,825		245,311
Prepaid expenses and other current assets	8,554		2,686
Total current assets	326,361		280,713
Long-term assets
Property and equipment, net	240,975		242,751
Intangible assets, net	202,468		208,230
Goodwill	425,209		425,209
Other long-term assets	1,991		1,688
Total long-term assets	870,643		877,878
Total assets	$	1,197,004	$	1,158,591
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	7,839	$	3,733
Accrued expenses	28,008		15,511
Accrued compensation	13,772		8,674
Deferred revenue	767		4,148
Derivative instrument	1,008		5,376
Current maturities of long-term debt	11,786		13,430
Other current liabilities	796		935
Total current liabilities	63,976		51,807
Long-term liabilities
Revolving line of credit, net	136,016		239,674
Long-term debt, net of current maturities and debt issuance costs	117,366		125,844
Deferred income taxes	84,638		84,638
Other long-term liabilities	1,498		2,024
Total long-term liabilities	339,518		452,180
Total liabilities	403,494		503,987
Commitments and Contingencies (Note 11)
Equity
Common stock, $0.01 par value; 500,000,000 shares authorized, 115,046,793 issued and 114,381,404 outstanding at April 30, 2021 and 200,000,000 shares authorized, 101,713,460 issued and outstanding at July 31, 2020	1,150		1,017
Additional paid-in capital	725,601		535,372
Retained earnings	66,206		117,658
Total The Duckhorn Portfolio, Inc. equity	792,957		654,047
Non-controlling interest	553		557
Total equity	793,510		654,604
Total liabilities and equity	$	1,197,004	$	1,158,591

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

1

The Duckhorn Portfolio, Inc.

Condensed Consolidated Statements of Operations (unaudited)

	Three months ended April 30,				Nine months ended April 30,
(in thousands, except share and per share amounts)	2021		2020		2021		2020
Net sales (net of excise taxes of $1,368, $759, $3,782 and $2,516, respectively)	$	90,425	$	68,720	$	265,720	$	218,417
Cost of sales	43,496		32,378		132,759		107,458
Gross profit	46,929		36,342		132,961		110,959
Selling, general and administrative expenses	31,142		13,156		65,418		49,703
Casualty gain, net (Note 14)	(421)		(24)		(6,636)		(4,047)
Income from operations	16,208		23,210		74,179		65,303
Interest expense	3,755		4,221		10,947		13,905
Other (income) expense, net	(2,192)		3,183		(5,006)		3,707
Total other expenses	1,563		7,404		5,941		17,612
Income before income taxes	14,645		15,806		68,238		47,691
Income tax expense	5,623		4,189		19,694		12,588
Net income	9,022		11,617		48,544		35,103
Less: Net loss (income) attributable to non-controlling interest	—		2		4		(3)
Net income attributable to The Duckhorn Portfolio, Inc.	$	9,022	$	11,619	$	48,548	$	35,100
Net income per share of common stock:
Basic	$	0.08	$	0.11	$	0.47	$	0.35
Diluted	$	0.08	$	0.11	$	0.47	$	0.35
Weighted average shares of common stock outstanding:
Basic	107,976,264		101,713,460		103,755,180		101,713,460
Diluted	108,404,009		101,713,460		104,123,270		101,713,460

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

2

The Duckhorn Portfolio, Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)

(in thousands, except share amounts)	Common Stock			Additional Paid-In Capital		Retained Earnings		Total The Duckhorn Portfolio, Inc. Equity		Non-Controlling Interest		Total Equity
	Shares	Amount
Balances at July 31, 2019	101,713,460	$	1,017	$	534,273	$	85,286	$	620,576	$	556	$	621,132
Net income	—	—		—		8,816		8,816		9		8,825
Equity-based compensation (Note 13)	—	—		289		—		289		—		289
Other	—	—		(55)		(5)		(60)		—		(60)
Balances at October 31, 2019	101,713,460	$	1,017	$	534,507	$	94,097	$	629,621	$	565	$	630,186
Net income (loss)	—	—		—		14,665		14,665		(4)		14,661
Equity-based compensation (Note 13)	—	—		289		—		289		—		289
Balances at January 31, 2020	101,713,460	$	1,017	$	534,796	$	108,762	$	644,575	$	561	$	645,136
Net income (loss)	—	—		—		11,619		11,619		(2)		11,617
Equity-based compensation (Note 13)	—	—		288		—		288		—		288
Balances at April 30, 2020	101,713,460	$	1,017	$	535,084	$	120,381	$	656,482	$	559	$	657,041
Balances at July 31, 2020	101,713,460	$	1,017	$	535,372	$	117,658	$	654,047	$	557	$	654,604
Net income (loss)	—	—		—		17,523		17,523		(1)		17,522
Equity-based compensation (Note 13)	—	—		288		—		288		—		288
Balances at October 31, 2020	101,713,460	$	1,017	$	535,660	$	135,181	$	671,858	$	556	$	672,414
Net income (loss)	—	—		—		22,003		22,003		(3)		22,000
Equity-based compensation (Note 13)	—	—		288		—		288		—		288
Balances at January 31, 2021	101,713,460	$	1,017	$	535,948	$	157,184	$	694,149	$	553	$	694,702
Net income	—	—		—		9,022		9,022		—		9,022
Dividend to parent	—	—		—		(100,000)		(100,000)		—		(100,000)
Initial public offering, net of issuance costs	13,333,333	133		180,691		—		180,824		—		180,824
Equity-based compensation (Note 13)	—	—		8,962		—		8,962		—		8,962
Balances at April 30, 2021	115,046,793	$	1,150	$	725,601	$	66,206	$	792,957	$	553	$	793,510

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

3

The Duckhorn Portfolio, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine months ended April 30,
(in thousands)	2021		2020
Cash flows from operating activities
Net income	$	48,544	$	35,103
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	16,434		17,421
Loss on disposal of assets	62		227
Change in fair value of derivatives	(4,818)		3,427
Amortization of debt issuance costs	1,221		1,590
Loss on debt extinguishment (Note 8)	272		—
Equity-based compensation	9,538		866
Change in operating assets and liabilities:
Accounts receivable trade, net	(17,491)		(5,204)
Inventories	(23,514)		(11,161)
Prepaid expenses and other current assets	(5,848)		(1,431)
Other long-term assets	(304)		97
Accounts payable	4,176		2,334
Accrued expenses	11,677		3,102
Accrued compensation	5,098		(2,122)
Deferred revenue	(3,381)		(2,263)
Other current and long-term liabilities	(130)		(5)
Net cash provided by operating activities	41,536		41,981
Cash flows from investing activities
Purchases of property and equipment	(11,452)		(11,589)
Proceeds from sales of property and equipment	52		50
Net cash used in investing activities	(11,400)		(11,539)
Cash flows from financing activities
Dividend to parent	(100,000)		—
Proceeds from issuance of common stock pursuant to the initial public offering, net of underwriters' discounts and commissions	187,500		—
Payments of deferred offering costs	(3,580)		—
Payments under line of credit	(245,000)		(56,500)
Borrowings under line of credit	140,500		49,000
Extinguishment of long-term debt	(38,131)		—
Issuance of long-term debt	38,131		13,100
Payments of long-term debt	(10,513)		(9,122)
Repayment of capital leases	(8)		(12)
Debt issuance costs	(260)		—
Net cash used in financing activities	(31,361)		(3,534)
Net (decrease) increase in cash	(1,225)		26,908
Cash - Beginning of year	6,252		3,765
Cash - End of year	$	5,027	$	30,673
Non-cash investing and financing activities
Property and equipment additions in accounts payable and accrued expenses	$	639	$	505
Deferred offering costs in accounts payable, accrued expenses and prepaid expenses	$	3,096	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

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Index to Notes

		Page
Note 1	Description of Business	6
Note 2	Basis of Presentation and Significant Accounting Policies	6
Note 3	Revenue	8
Note 4	Inventories	10
Note 5	Property and Equipment	11
Note 6	Goodwill and Other Intangible Assets	11
Note 7	Accounts Payable and Accrued Expenses	12
Note 8	Debt	12
Note 9	Derivative Instruments	13
Note 10	Fair Value Measurements	14
Note 11	Commitments and Contingencies	15
Note 12	Related Party Transactions	17
Note 13	Equity-Based Compensation	17
Note 14	Casualty Gain	20
Note 15	Earnings Per Share	21
Note 16	Income Taxes	21

The Duckhorn Portfolio, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1.    Description of Business

The Duckhorn Portfolio, Inc. (formerly known as Mallard Intermediate, Inc. until its name change, on February 23, 2021) and its subsidiaries (the "Company" or "Management") headquartered in St. Helena, CA, produces luxury and ultra-luxury wine across a portfolio of winery brands, including Duckhorn Vineyards, Paraduxx, Goldeneye, Migration, Decoy, Canvasback, Calera, Kosta Browne, Greenwing and Postmark.

On February 23, 2021, the Company changed its legal name from Mallard Intermediate Inc. to The Duckhorn Portfolio, Inc. This legal name change did not result in any other changes to the Company's subsidiaries, structure or operations.

The Company's revenue is comprised of wholesale and direct to consumer ("DTC") sales. Wholesale revenue is generated through sales directly to California retailers and restaurants, sales to distributors and agents located in other states throughout the United States ("U.S.") and sales to export distributors that sell internationally. DTC revenue results from individual consumers purchasing wine directly from the Company through club membership, the Company's website or tasting rooms located in Napa Valley, California; Anderson Valley, California; Sebastopol, California; Hollister, California; and Walla Walla, Washington.

The Company owns or controls through long-term leases certain high-quality vineyards throughout Northern and Central California and Washington. Vinification takes place at wineries owned, leased, or under contract with third parties predominately located in Napa Valley, California; Anderson Valley, California; Hopland, California; Hollister, California; Sebastopol, California; and Walla Walla, Washington.

Fiscal Year

The Company's fiscal year ends on July 31. References to Fiscal 2021, for example, refer to the fiscal year ended July 31, 2021.

Initial Public Offering

In March 2021, the Company completed its initial public offering ("IPO") of common stock, in which it sold 13.3 million shares. The shares began trading on the New York Stock Exchange ("NYSE") on March 18, 2021. The shares were sold at an IPO price of $15.00 per share, resulting in net proceeds to the Company of approximately $180.8 million, after deducting underwriting discounts and commissions of $12.5 million and deferred offering costs of approximately $6.7 million.

Concurrently with the pricing of the IPO, the Company's Board of Directors approved the conversion of 42,579,137 Class M Units previously issued under the 2016 Equity Incentive Plan to shares of common stock previously owned by the Company's parent company, Mallard Holdco, Inc. See Note 13 (Equity-Based Compensation) for further discussion on the Company's equity incentive plans and the related financial statement impacts.

2.    Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Article 10 of the Securities and Exchange Commission’s Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP may be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company's audited annual financial statements and, in the opinion of Management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company's financial information for the interim periods presented. These interim results are not necessarily indicative of the results to be expected for the year ending July 31, 2021, for any other interim period or for any future year.

The condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended July 31, 2020.

6

Principles of Consolidation

The condensed consolidated financial statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated variable interest entity ("VIE") of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation.

Accounting Estimates

The preparation of condensed consolidated financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of long-lived assets, inventory obsolescence and reserves, capitalized indirect inventory costs, allowance for doubtful accounts receivable, calculation of accrued liabilities, customer incentive reserves, uncertain tax positions, contingent liabilities, fair value of assets and liabilities acquired in connection with business combinations, equity-based compensation and deferred revenues. Actual results could differ from those estimates.

Stock Split

On March 9, 2021, the Company's Board of Managers approved a 1,017,134.6-for-1 stock split to the Company's common stock, which was immediately effective. All share and per share data included in these condensed consolidated financial statements give effect to the stock split and have been retroactively adjusted for all periods presented.

Preferred Stock

The Company has 100,000,000 shares of $0.01 par value preferred stock authorized, none of which are issued and outstanding.

Deferred Offering Costs

Deferred offering costs consisted of legal, accounting, underwriting fees and other incurred that were directly related to the IPO. Upon completion of the offering in March 2021, the Company charged deferred offering costs totaling $6.7 million to stockholders' equity.

Net Income per Share

In accordance with Accounting Standards Codification ("ASC") Topic 260, Earnings Per Share, net income per share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period, excluding forfeitures. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock option and upon the vesting of restricted stock.

Variable Interest Entities

The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. At April 30, 2021 and July 31, 2020, the Company's ownership percentage of the sole identified VIE was 76.2%. The VIE's net assets, which may only be used to settle its own obligations, were $2.2 million at both April 30, 2021 and July 31, 2020, respectively.

Recent Accounting Pronouncements

As an “emerging growth company,” the Jumpstart Our Business Startups Act, or the JOBS Act, allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption

7

dates applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

Recently Adopted Accounting Pronouncements:

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The objective of the guidance is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The Company early adopted this standard as of the third quarter of the current fiscal year, which is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. There were no material impacts to the financial statements or disclosures as a result of the early adoption of this ASU.

Recently Issued Accounting Pronouncements Not Yet Adopted:

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842), and several amendments, codified as ASC 842, which supersedes prior guidance on accounting for leases under FASB ASC 840, Leases. ASU No. 2016-02, among other provisions, (i) requires lessees to classify leases as either finance or operating leases, (ii) generally requires all leases to be recorded on the Consolidated Statements of Financial Position through the recognition of right-of-use assets and corresponding lease liabilities and (iii) expands mandatory qualitative and quantitative disclosures regarding leasing activities. The FASB has recently issued ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective dates for certain entities”, which extends the effective date for all other entities, for annual reporting periods beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. The amended standard is effective for the Company beginning with the year ended July 31, 2023. Early adoption is permitted. The Company’s assessment of the lease standard’s impact on the consolidated financial statements is ongoing, and is expected to result in the recognition of right of use assets and lease liabilities related to the Company’s operating leases.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and also issued subsequent amendments to the initial guidance, collectively, ASC 326, to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that requires the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. For many entities with financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which may result in the earlier recognition of credit losses on financial instruments. This guidance will be effective for the Company beginning with the year ended July 31, 2024, with early adoption permitted. The Company is currently evaluating the impact this standard could have on the consolidated financial statements.

In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendment is effective immediately and may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact of reference rate reform and the optional expedients provided by this amendment on its contracts.

3.    Revenue

The Company’s net sales reflect the sale of wine domestically in the U.S. to wholesale distributors, wholesale accounts or DTC, as well as sales of wine to export distributors that sell internationally.

Under ASC Topic 606, Revenue from contracts with customers ("ASC 606"), the Company recognizes revenue when control of the promised good is transferred to the customer in an amount that reflects the consideration for which the Company is expected to be entitled to receive in exchange for those products. Each

8

contract includes a single performance obligation to transfer control of the product to the customer. Control is transferred when the product is either shipped or delivered, depending on the shipping terms, at which point the Company recognizes the transaction price for the product as revenue. The Company has elected to account for shipping and handling as a fulfillment activity, with amounts billed to customers for shipping and handling included in net sales. The Company has elected to record excise taxes as a reduction to revenue, which are recognized in the Condensed Consolidated Statements of Operations when the related product sale is recognized.

The transaction price includes reductions attributable to consideration given to customers through various incentive programs, including depletion-based incentives paid to distributors, volume discounts and pricing discounts on single transactions. This variable consideration is recognized as a reduction to the transaction price based on the expected amounts at the time revenue for the corresponding product is recognized. The determination of the reduction of the transaction price for variable consideration requires certain estimates and judgements that affect the amounts of revenue recognized and if a change to an estimate occurs in a future period, it is recorded as identified. The Company estimates this variable consideration using the expected value method by taking into account factors such as the nature of the incentive program, historical information, current consumer product trends and availability of actual results. Due to the nature of the arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. Consideration given to customers totaled $15.5 million and $12.7 million for the three months ended April 30, 2021 and 2020, respectively and $48.2 million and $35.8 million for the nine months ended April 30, 2021 and 2020, respectively.

•The Company pays depletion-based incentives to its distributors for meeting specific depletion targets, and reviews the allowances using a portfolio approach, grouping contracts with similar attributes, which does not result in a materially different outcome than would be obtained by applying assumptions to each individual contract within the portfolio. The allowances are reassessed at each reporting date to reflect changes in facts and circumstances that could impact allowance estimates.

•Volume pricing discounts are given for meeting volume levels on an individual contract basis. Each incentive is treated as a reduction to the transaction price at the time of revenue recognition.

Products are sold for cash or on credit terms. Credit terms are established in accordance with local and industry practices, and typically require payment within 30-90 days of delivery or shipment, as dictated by the terms of each agreement. The Company has elected the practical expedient to not account for significant financing components as its payment terms are less than one year, and the Company determines the terms at contract inception. The Company’s sales terms do not allow for the right of return except for matters related to manufacturing defects, which are not material.

Disaggregated Revenue Information

The following table presents the percentages of consolidated net sales disaggregated by sales channels:

	Three months ended April 30,				Nine months ended April 30,
	2021		2020		2021		2020
Wholesale - Distributors	59.5	%	52.7	%	64.4	%	59.4	%
Wholesale - California direct to retail(a)	15.7	%	17.1	%	16.5	%	18.1	%
DTC(b)	24.8	%	30.2	%	19.1	%	22.5	%
Net sales	100.0	%	100.0	%	100.0	%	100.0	%

________________________________________________

(a) Includes immaterial sales related to bulk, grape and merchandise sales.

(b) Includes shipping and handling revenue of $1.3 million for both the three months ended April 30, 2021 and 2020 and $2.3 million and $2.1 million for the nine months ended April 30, 2021 and 2020, respectively.

Contract Balances

When the Company receives payment from a customer prior to transferring the product under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company’s deferred revenue is primarily comprised of cash collected from DTC members for purchases ahead of the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance obligation is met.

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The following table reflects the changes in the contract liability balance during the nine months ended April 30, 2021 and the year ended July 31, 2020.

(in thousands)	April 30, 2021		July 31, 2020
Outstanding at beginning of period	$	4,148	$	3,863
Increase (decrease) attributable to:
Upfront payments	27,866		34,836
Revenue recognized	(31,059)		(34,328)
Refund	(188)		(223)
Outstanding at end of period	$	767	$	4,148

Revenue recognized during the three months and nine months ended April 30, 2021 and 2020, which was included in the opening contract liability balance for those periods, was primarily revenue from DTC sales.

Costs to Obtain a Contract

The Company has elected the practical expedient to expense the cost of obtaining a contract that is short term in nature when incurred. The Company does not have any contract costs capitalized as of April 30, 2021 or July 31, 2020.

4.    Inventories

Inventories were comprised of the following:

(in thousands)	April 30, 2021		July 31, 2020
Finished goods
Bottled wine	$	91,122	$	100,272
Merchandise	360		408
Work in progress
Bulk wine	167,839		128,436
Packaging	3,383		2,945
Overhead	(261)		2,225
Raw materials
Deferred crop costs	6,382		11,025
Total	$	268,825	$	245,311

The Company capitalizes into inventory depreciation related to property and equipment used in the production of inventory. For the nine months ended April 30, 2021 and the year ended July 31, 2020, the amount capitalized was $9.8 million and $13.9 million, respectively.

10

5.    Property and Equipment

Property and equipment was comprised of the following major components as of:

(in thousands)	April 30, 2021		July 31, 2020
Land	$	120,063	$	120,063
Buildings & improvements	68,307		66,057
Vineyards & improvements	28,734		27,430
Machinery & equipment	48,485		44,147
Barrels	29,321		25,889
Total depreciable property and equipment	294,910		283,586
Less: accumulated depreciation and amortization	(58,539)		(48,171)
Total depreciable property and equipment, net	236,371		235,415
Construction in progress	4,604		7,336
Property and equipment, net	$	240,975	$	242,751

Depreciation expense was $0.3 million and $0.9 million for the three months and nine months ended April 30, 2021 and 2020, respectively. See Note 4 (Inventories) for depreciation expense capitalized into inventory.

6.    Goodwill and Other Intangible Assets

Goodwill

At each of April 30, 2021 and July 31, 2020, the goodwill balance was $425.2 million.

Other Intangible Assets

Intangible assets were comprised of the following components:

	April 30, 2021
(in thousands)	Gross carrying amount		Accumulated amortization		Impairment charges		Net
Definite-lived intangible assets
Customer relationships	$	92,720	$	32,384	$	—	$	60,336
Leasehold interests	1,572		340		—		1,232
Total definite-lived intangible assets	94,292		32,724		—		61,568
Indefinite-lived intangible assets
Trade names	139,600		—		—		139,600
Lane rights	1,300		—		—		1,300
Total indefinite-lived intangible assets	140,900		—		—		140,900
Total other intangible assets	$	235,192	$	32,724	$	—	$	202,468

	July 31, 2020
(in thousands)	Gross carrying amount		Accumulated amortization		Impairment charges		Net
Definite-lived intangible assets
Customer relationships	$	92,720	$	26,715	$	—	$	66,005
Leasehold interests	1,572		247		—		1,325
Total definite-lived intangible assets	94,292		26,962		—		67,330
Indefinite-lived intangible assets
Trade names	151,430		—		11,830		139,600
Lane rights	1,300		—		—		1,300
Total indefinite-lived intangible assets	152,730		—		11,830		140,900
Total other intangible assets	$	247,022	$	26,962	$	11,830	$	208,230

11

The Company’s amortization expense for the three months and nine months ended April 30, 2021 and 2020 was $1.9 million and $5.8 million, respectively. For the next five years, the Company anticipates the annual amortization of the definite-lived intangible assets that have been recorded as of April 30, 2021 to be $7.7 million per year.

7.    Accounts Payable and Accrued Expenses

The Company’s accounts payable balance consisted of the following amounts:

(in thousands)	April 30, 2021		July 31, 2020
Distributor invoices	$	1,720	$	881
Bulk invoices	1,570		599
Other	4,549		2,253
Total	$	7,839	$	3,733

The Company’s accrued expenses balance consisted of the following amounts:

(in thousands)	April 30, 2021		July 31, 2020
Trade spend(a)	$	10,349	$	6,246
Barrel purchase	—		1,917
Deferred compensation liability(b)	2,011		1,576
Income tax payable	6,578		349
Accrued invoices and other accrued expenses	9,070		5,423
Total	$	28,008	$	15,511

________________________________________________

(a) Trade spend refers to estimated amounts the Company owes to distributors for depletion-based incentives granted for meeting specific depletion targets. See further discussion in Note 2 (Basis of Presentation and Significant Accounting Policies).

(b) The Company intends to use the cash surrender value life insurance policies in settling its deferred compensation plan liability. The cash surrender value of the life insurance policies was $1.7 million and $1.4 million at April 30, 2021 and July 31, 2020, respectively.

8.    Debt

The Company is subject to the requirements of various financial covenants pursuant to the term loans and revolving line of credit, including a minimum fixed charge coverage ratio as defined in the First Lien Loan Agreement. As of April 30, 2021, the Company was not in violation of any financial covenant.

Included in interest expense in the Condensed Consolidated Statements of Operations, and in depreciation and amortization on the Condensed Consolidated Statements of Cash Flows, is amortization related to debt issuance costs of $0.4 million and $0.5 million for the three months ended April 30, 2021 and 2020, respectively and $1.2 million and $1.6 million for the nine months ended April 30, 2021 and 2020, respectively.

Amendments to the First Lien Loan Agreement

On August 17, 2020, the Company entered into an agreement which amended the terms of the First Lien Loan Agreement capital expenditure and term loans. This amendment extended the maturity dates of the capital expenditure loan and term loan (first tranche) to August 1, 2023, and modified the interest rate margins in the credit facility to reflect market conditions. The variable interest rates are now calculated as London Inter-Bank Offered Rate ("LIBOR") plus 190 basis points. The transaction did not result in any additional cash proceeds. The transaction was assessed on a lender-specific level for all syndicated instruments and was accounted for primarily as a debt modification. Where the transaction was determined to be an extinguishment in accordance with ASC 470, Debt, the Company recognized a loss on early extinguishment of $0.3 million in total.

12

On February 22, 2021, the Company amended the terms of its Credit Facility by executing Amendment No. 7. Pursuant to the terms of Amendment No. 7, Selway Wine Company, a wholly-owned subsidiary the Company formed in connection with Amendment No. 7, became the guarantor of all debt outstanding under the Credit Facility. Additional changes within this amendment included revisions to certain covenants of the Credit Facility related to reporting requirements and revisions to terms restricting certain liquidity events and distributions to the Company's equity holders. The transaction did not result in any additional cash proceeds. Consistent with previous amendments, the transaction was assessed on a lender-specific level for all syndicated instruments and was accounted for as a debt modification in accordance with ASC 470.

Revolving Line of Credit

At April 30, 2021, $286.0 million was available to draw under the revolving line of credit, excluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. The weighted-average interest rate was 4.3% on the amount outstanding at April 30, 2021. There were no amounts outstanding on the letter of credit sub-facility or the swingline sub-facility at April 30, 2021.

9.    Derivative Instruments

The Company manages exposure to interest rates and foreign currency movements by entering into derivative contracts from time to time, as movements in such markets could impact the financial results and Condensed Consolidated Statements of Financial Position.

The changes in estimated fair values of derivative instruments result from changes in interest rates and foreign currency exchange rates. Such changes serve to offset exposure in related business assets or liabilities. The Company is exposed to credit loss in the event of nonperformance by a counterparty. Certain of the Company's derivative instruments are subject to master netting agreements. In certain circumstances, this arrangement allows the Company to net-settle amounts payable or receivable related to multiple derivative transactions with the same counterparty. The fair values of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Collateral is generally not required of the Company or of the counterparties to the master netting agreements, and no cash collateral was received or pledged under such agreements as of April 30, 2021 or July 31, 2020. The Company does not enter into derivative instruments for trading or speculative purposes. The Company's accounting policies do not apply hedge accounting treatment to derivative instruments.

As of April 30, 2021, the Company held the following interest rate swap agreements, which fixed the interest rate on the applicable notional amount of outstanding variable rate debt:

Notional amount (in thousands)	Interest rate	Effective date	Expiration date
$150,000	2.781%	December 31, 2020	July 31, 2021
$100,000	0.487%	March 21, 2020	March 23, 2023

On March 26, 2021, the Company modified the interest rate swap with an original effective date of August 10, 2018 and expiration of July 31, 2021, reducing the notional value from $200.0 million to $150.0 million.

As discussed in Note 11 (Commitments and Contingencies), the Company manages the annual barrel program by engaging domestic and foreign cooperages to provide specified barrel quantities on agreed dates. Some of these invoices are paid in Euros. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enters into foreign currency forward contracts aligning settlement dates with expected barrel delivery and the anticipated payments to various coopers.

The total notional amount of the Company’s derivative instruments outstanding were as follows:

(in thousands)	April 30, 2021		July 31, 2020
Derivative instruments not designated as hedging instruments
Interest rate swap contracts	$	250,000	$	300,000
Foreign currency forward contracts	2,369		2,240
	$	252,369	$	302,240

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Results of Period Derivative Activity

The estimated fair value and classification of derivative instruments on the accompanying Condensed Consolidated Statements of Financial Position are as follows:

(in thousands)		April 30, 2021		July 31, 2020
Derivative instruments not designated as hedging instruments
	Classification
Interest rate swap contracts
Derivative instrument	Current liability	$	(1,008)	$	(5,376)
Derivative instrument	Other long-term liabilities	(538)		(1,065)
Total interest rate swap contract liability		$	(1,546)	$	(6,441)
Foreign currency forward contracts
Derivative instrument	Other current assets	$	41	$	118
Total foreign currency contract asset		$	41	$	118

The amounts and classification of the gains and losses in the Condensed Consolidated Statements of Operations related to derivative instruments not designated as hedging instruments are as follows:

		Three months ended April 30,				Nine months ended April 30,
(in thousands)	Classification	2021		2020		2021		2020
Interest rate swap contracts	Other (income) expense, net	$	(1,949)	$	2,985	$	(4,895)	$	3,524
Foreign currency forward contracts	Other (income) expense, net	(41)		50		77		(96)
Total (gains) losses		$	(1,990)	$	3,035	$	(4,818)	$	3,428

10.    Fair Value Measurements

The Company applies a fair value hierarchy pursuant to ASC 820, Fair Value Measurement, which consists of three levels of inputs that may be used to measure fair value:

Level 1        Inputs to fair value are quoted prices in active markets for identical assets or liabilities;

Level 2        Inputs to fair value are based on observable data other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data such as interest rates or yield curves for substantially the full term of the instrument;

Level 3        Inputs to fair value are based on unobservable data for the instrument and are supported by little or no market activity.

Following is a description of the valuation methodologies used for instruments measured at fair value in the financial statements, as well as the general classification of such instruments under the valuation hierarchy.

Interest rate swap contracts: The fair value of the Company’s interest rate swap agreement is estimated with the assistance of a third party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).

Foreign currency forward contracts: The fair value of the Company’s outstanding foreign currency forward contracts is estimated with the assistance of a third party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).

Deferred compensation plan: Contributions to the Company’s deferred compensation plan are managed by a third-party administrative agent. The fair value of the total contributed plan assets and liabilities are based on inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).

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The Company’s other financial instruments consist mainly of cash, accounts receivable, accounts payable, accrued expenses, and debt. The carrying value of all financial instruments, except debt, approximates fair value due to the short-term nature of these assets and liabilities. The carrying value of the Company's debt approximates fair value as the interest rates are variable and reflective of market rates. Debt is categorized as a Level 2 liability within the fair value hierarchy.

The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at April 30, 2021, were as follows:

(in thousands)	Fair Value Measurements Using:
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Foreign currency forward contracts	$	—	$	41	$	—	$	41
Deferred compensation plan asset	—		1,701		—		1,701
Liabilities
Interest rate swap contracts	$	—	$	1,546	$	—	$	1,546
Deferred compensation liability	—		2,011		—		2,011

The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at July 31, 2020, were as follows:

(in thousands)	Fair Value Measurements Using:
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Foreign currency forward contracts	$	—	$	118	$	—	$	118
Deferred compensation plan asset	—		1,416		—		1,416
Liabilities
Interest rate swap contracts	$	—	$	6,441	$	—	$	6,441
Deferred compensation liability	—		1,576		—		1,576

For the periods presented, the Company did not identify any transfers of assets or liabilities between fair value measurement levels. Transfers between fair value measurement levels are recognized at the end of each reporting period.

11.    Commitments and Contingencies

Operating Leases

The Company leases approximately 150 acres of vineyard property in California under various third-party operating lease agreements, with terms ranging from two to 30 years, expiring in future years through December 2040. The Company also leases office space, office equipment and visitor centers under third-party operating leases. Some lease agreements contain purchase options and many include renewal options at specified dates throughout the lease term. Rental expense was $1.0 million for both the three months ended April 30, 2021 and 2020 and $3.0 million and $3.1 million for the nine months ended April 30, 2021 and 2020, respectively. A portion of rental expense is capitalized into inventory.

15

At April 30, 2021, the future minimum payments under the non-cancelable operating lease agreements by fiscal year are as follows:

(in thousands)
Remaining portion of 2021	$	1,313
2022	4,085
2023	3,981
2024	3,721
2025	3,442
Thereafter (collectively)	8,580
Total	$	25,122

Long-Term Purchase Contracts

The Company has entered into long-term grape purchase contracts with various growers to supply a significant portion of its future grape requirements. The lengths of the contracts typically vary from one to four years, and prices per ton are either determined at the outset for the contract duration or are negotiated annually. The Company's grape purchase contracts generally include acceptance provisions based on qualitative and quantitative grape quality characteristics. For the 2020 harvest, the Company purchased approximately 12,000 tons of grapes at a total cost of $26.5 million, which was lower than the 2019 harvest, when the Company purchased approximately 19,000 tons of grapes at a total cost of $51.1 million. The decrease was largely attributable to lower quantities available at the Company's contractually-defined quality levels due to wildfires in the first quarter of Fiscal 2021.

Purchase Commitments

The Company has ongoing commitments to purchase approximately 5,000 barrels for a total of $5.5 million, of which approximately $5.1 million will be paid in Euros. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company entered into foreign currency forward contracts aligning settlement dates with expected barrel delivery and the anticipated payments to various coopers. The Company does not enter into these contracts for speculative purposes. Gains and losses on these contracts are recorded in the Consolidated Statements of Operations. See Note 9 (Derivative Instruments) for the total notional value and impact on the current period consolidated financial statements due to foreign currency forward contracts.

The Company enters into various contracts with third-parties for custom crush, storage and mobile bottling services. The costs related to these contracts are recorded in the period the service is provided. The contracts for custom crush services typically have minimums that the Company is required to pay if certain grape volume thresholds are not delivered. The Company does not record these minimums related to service contracts as contingent liabilities on the Condensed Consolidated Statements of Financial Position given the harvest yield size and resulting volumes of grape deliveries are not known or estimable until harvest, when all related contingencies would be resolved.

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 virus. During the pandemic, the Company incurred incremental costs during periods of capacity restrictions or mandatory closure for the three months and nine months ended April 30, 2021. These costs include tasting room expenses and other immaterial costs.

The Company continues to monitor the impacts of COVID-19, as the situation is evolving rapidly. The estimates and assumptions made by Management to quantify the effect of COVID-19 disruption are based on available information at the time each assumption is made. At this time, the Company is unable to fully estimate the long-term impacts to the business, financial condition, operational results or future cash flows, as the pandemic is ongoing in all markets in which the Company operates.

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Contingent Liabilities

The Company evaluates pending or threatened litigation, operational events which could result in regulatory or civil penalties, environmental risks, and other sources of potential contingent liabilities during the year. In accordance with applicable accounting guidance, the Company establishes an accrued liability when those matters present loss contingencies which are both probable and reasonably estimable. As of April 30, 2021, there were no material contingent obligations requiring accrual or disclosure.

In the ordinary course of business, the Company enters into agreements containing standard indemnification provisions. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain, as these involve potential future claims against the Company that have not occurred. The Company expects the risk of any future obligations under these indemnification provisions to be remote. As of April 30, 2021 and July 31, 2020, no amounts have been accrued related to such indemnification provisions.

12.    Related Party Transactions

In February 2021, the Company’s Board of Managers declared a $100.0 million cash dividend to the Company's parent at the time of the declaration and, prior to the IPO, the Company's sole stockholder. On February 24, 2021, the Company paid the dividend using funds drawn under the Revolver Facility.

13.    Equity-Based Compensation

2016 Equity Incentive Plan

The Board of Managers of Mallard Holdco, LLC, the entity which wholly owned The Duckhorn Portfolio, Inc. before the Company's IPO, approved the issuance of profit interest units ("Class M Common Units", "awards" or "units") to certain employees of the Company. The units, issued in accordance with the 2016 Equity Incentive Plan ("2016 Plan"), were considered equity awards for purposes of calculating compensation expense, and equity-classified in the Condensed Consolidated Statements of Financial Position.

The units awarded in the first grant vest ratably by 20% on each anniversary of the vesting date, subject to continued service through each vesting date ("Time-Based Units"). The units awarded in the second grant were subject to both a service and a performance condition specific to the investors having achieved specified levels of return on investment ("Performance-Based Units").

Upon consummation of the IPO, several events occurred around the previously awarded 2016 Plan units. The performance and market conditions were considered probable at the time of the IPO and the acceleration clause in the awards was triggered, resulting in an acceleration of the requisite service period from five years to four years. One tranche of awards under the plan was accelerated by the Board of Directors to align the vesting periods of all 2016 Plan awards. Lastly, the Class M Common Units were exchanged, on a value for value basis, for common shares of the Company post-IPO and further by unrestricted or restricted shares, depending on the satisfaction of the respective service period vesting. The changes to these awards were deemed to be Type I modification events under ASC Topic 718. Accordingly, the Company recognized catch-up equity-based compensation expense in the third quarter of Fiscal 2021, including incremental fair value resulting from the modification, as applicable to each award grant, amounting to a cumulative catch-up expense of $8.5 million presented in selling, general and administrative expenses in the third quarter of the current fiscal year.

In connection with the adoption of the Company's 2021 Equity Plan, discussed below, the Company will no longer grant additional awards under the 2016 Plan. However, the terms and conditions of the 2016 Plan will continue to govern the previously granted awards, to the extent applicable.

17

Class M Units

Activity for the units is shown below:

	Time-Based Units	Weighted-Average Grant-Date Fair Value
Unvested as of July 31, 2020	14,640,454	$	0.16
Granted	—	—
Vested	14,640,454	0.16
Forfeited	—	—
Unvested as of April 30, 2021	—	$	—

	Performance-Based Units	Weighted-Average Grant-Date Fair Value
Outstanding as of July 31, 2020	7,203,820	$	0.19
Granted	—	—
Vested	2,881,528	0.19
Forfeited	—	—
Exchanged	(4,322,292)	0.19
Outstanding as of April 30, 2021	—	$	—

The total fair value of Class M Units that vested during the nine months ended April 30, 2021 was $2.9 million.

Restricted Shares

As discussed above, the unvested Class M Units were exchanged for restricted shares of the Company. A summary of the restricted shares is shown below:

	Performance-Based Units	Weighted-Average Grant-Date Fair Value
Unvested as of July 31, 2020	—	$	—
Granted	—