Vintage Wine Estates, Inc. - Quarter Report: 2022 September (Form 10-Q)

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 September 30, 2022


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

For the transition period from _______ to______

Commission file number 001-40016

VINTAGE WINE ESTATES, INC.

(Exact name of registrant as specified in its charter)


Nevada				87-1005902
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

937 Tahoe Boulevard, Suite 210

Incline Village, Nevada 89451

(Address of principal executive offices) (Zip code)

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value per share	VWE	The NASDAQ Stock Market LLC
Warrants to purchase common stock	VWEWW	The NASDAQ Stock Market LLC

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

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

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

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


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

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

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

As of November 1, 2022, 61,691,054 shares of the registrant’s common stock were outstanding.


Part I. Financial Information
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets (Unaudited)	1
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)	2
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	3
Condensed Consolidated Statements of Cash Flows (Unaudited)	4
Notes to the Condensed Consolidated Financial Statements (Unaudited)	5
Note 1: Basis of Presentation and Significant Accounting Policies	5
Note 2: Acquisitions	9
Note 3: Inventory	12
Note 4: Assets Held for Sale	12
Note 5: Property, Plant and Equipment	12
Note 6: Goodwill and Intangibles	13
Note 7: Accrued Liabilities	14
Note 8: Fair Value Measurements	14
Note 9: Leases	15
Note 10: Long-Term and Other Short-Term Obligations	17
Note 11: Stockholders' Equity	17
Note 12: Income Taxes	19
Note 13: Commitments and Contingencies	20
Note 14: Related Party Transactions	20
Note 15: Segments	21
Note 16: Earnings Per Share	22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
Part II. Other Information	30
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	31
Signatures	32

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Part I—Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)


	September 30, 2022			June 30, 2022
	(Unaudited)
Assets
Current assets:
Cash	$	44,622		$	45,492
Restricted cash		-			4,800
Accounts receivable, net		38,424			38,192
Other receivables		3,071			3,866
Inventories		201,940			192,102
Assets held for sale		6,553			-
Current interest rate swap asset		5,826			2,877
Prepaid expenses and other current assets		9,478			13,394
Total current assets		309,914			300,723
Property, plant, and equipment, net		228,204			236,100
Operating lease right-of-use assets		35,509			-
Finance lease right-of-use-assets		689			-
Goodwill		154,951			154,951
Intangible assets, net		62,672			64,377
Interest rate swap asset		12,555			6,280
Other assets		5,187			3,464
Total assets	$	809,681		$	765,895
Liabilities, redeemable noncontrolling interest, and stockholders' equity
Current liabilities:
Line of credit	$	140,066		$	144,215
Accounts payable		20,076			13,947
Accrued liabilities and other payables		27,867			24,204
Current operating lease liabilities		5,197			-
Current finance lease liabilities		263			-
Current maturities of long-term debt		14,738			14,909
Total current liabilities		208,207			197,275
Other long-term liabilities		6,140			6,491
Long-term debt, less current maturities		165,577			169,095
Long-term operating lease liabilities		31,637			-
Long-term finance lease liabilities		429			-
Deferred tax liability		29,952			29,979
Deferred gain		10,332			10,666
Total liabilities		452,274			413,506
Commitments and contingencies (Note 13)
Redeemable noncontrolling interest		1,282			1,663
Stockholders' equity:
Preferred stock, no par value, 2,000,000 shares authorized, and none issued and outstanding at September 30, 2022 and June 30, 2022.		-			-
Common stock, no par value, 200,000,000 shares authorized, 61,691,054 issued and 58,819,160 outstanding at September 30, 2022 and 60,461,611 issued and outstanding at June 30, 2022.		-			-
Additional paid-in capital		382,347			377,897
Treasury stock, at cost: 2,871,894 shares held at September 30, 2022 and June 30, 2022, respectively.		(26,034	)		(26,034	)
Retained earnings (accumulated deficit)		406			(571	)
Total Vintage Wine Estates, Inc. stockholders' equity		356,719			351,292
Noncontrolling interests		(594	)		(566	)
Total stockholders' equity		356,125			350,726
Total liabilities, redeemable noncontrolling interest, and stockholders' equity	$	809,681		$	765,895

See notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,
	2022			2021
Net revenues
Wine, spirits and cider	$	52,052		$	36,287
Nonwine		25,810			19,400
		77,862			55,687
Cost of revenues
Wine, spirits and cider		34,522			20,588
Nonwine		13,192			11,662
		47,714			32,250
Gross profit		30,148			23,437
Selling, general, and administrative expenses		34,244			16,983
Amortization expense		1,811			651
Gain on litigation proceeds		(530	)		-
Gain on sale of property, plant, and equipment		(452	)		(340	)
Income (loss) from operations		(4,925	)		6,143
Other income (expense)
Interest expense		(3,381	)		(3,603	)
Net unrealized gain on interest rate swap agreements		9,327			1,393
Other, net		271			39
Total other income (expense), net		6,217			(2,171	)
Income before provision for income taxes		1,292			3,972
Income tax provision		658			1,193
Net income		634			2,779
Net loss attributable to the noncontrolling interests		(343	)		(25	)
Net income attributable to Vintage Wine Estates, Inc.		977			2,804
Accretion on redeemable Series B stock		-			-
Net income allocable to common stockholders	$	977		$	2,804

Net earnings per share allocable to common stockholders
Basic	$	0.02		$	0.05
Diluted	$	0.02		$	0.05
Weighted average shares used in the calculation of earnings per share allocable to common stockholders
Basic		58,819,160			60,461,611
Diluted		58,819,160			60,461,611

See notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share amounts)


	Redeemable Non-Controlling Interest Amount			Common Stock				Treasury Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Non-Controlling Interests			Total Stockholders' Equity
				Shares		Amount		Shares		Amount
Balance, June 30, 2022	$	1,663			61,691,054	$	-		2,871,894	$	(26,034	)	$	377,897		$	(571	)	$	(566	)	$	350,726
Stock-based compensation expense		-			-		-		-		-			4,622			-			-			4,622
Repurchase of public warrants		-			-		-		-		-			(172	)		-			-			(172	)
Shareholder distribution		(66	)		-		-		-		-			-			-			-			-
Net income (loss)		(315	)		-		-		-		-			-			977			(28	)		949
Balance, September 30, 2022	$	1,282			61,691,054	$	-		2,871,894	$	(26,034	)	$	382,347		$	406		$	(594	)	$	356,125


	Redeemable Non-Controlling Interest Amount			Common Stock				Treasury Stock					Additional Paid-In Capital			Retained Earnings			Non-Controlling Interests			Total Stockholders' Equity
				Shares		Amount		Shares		Amount
Balance, June 30, 2021		1,682			60,461,611	$	-		-	$	-		$	360,732		$	-		$	(477	)	$	360,255
Net income (loss)		3			-		-		-		-						2,804			(28	)		2,776
Balance, September 30, 2021	$	1,685			60,461,611	$	-		-	$	-		$	360,732		$	2,804		$	(505	)	$	363,031

See notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Three Months Ended September 30,
	2022			2021
Cash flows from operating activities
Net income	$	634		$	2,779
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		3,215			3,503
Non-cash operating lease expense		37			-
Amortization expense		1,978			750
Stock-based compensation expense		4,622			-
Provision for doubtful accounts		(280	)		(15	)
Net unrealized gain on interest rate swap agreements		(9,327	)		(1,393	)
(Benefit) provision for deferred income tax		(27	)		-
(Gain) on disposition of assets		(118	)		(6	)
Deferred gain on sale leaseback		(334	)		(334	)
Deferred rent		(2,079	)		128
Change in operating assets and liabilities (net of effect of business combinations):
Accounts receivable		48			863
Other receivables		795			(2,850	)
Inventories		(8,138	)		(4,671	)
Prepaid expenses and other current assets		3,916			884
Other assets		(1,766	)		116
Accounts payable		2,087			(3,071	)
Accrued liabilities and other payables		5,532			1,356
Net change in lease assets and liabilities		1,288			-
Net cash provided by (used in) operating activities		2,083			(1,961	)
Cash flows from investing activities
Proceeds from disposition of assets		-			6
Purchases of property, plant, and equipment		(3,454	)		(7,792	)
Label design expenditures		(95	)		(59	)
Net cash used in investing activities		(3,549	)		(7,845	)
Cash flows from financing activities
Principal payments on line of credit		(34,466	)		(6,304	)
Proceeds from line of credit		30,317			17,675
Outstanding checks in excess of cash		4,042			387
Principal payments on long-term debt		(3,753	)		(2,482	)
Principal payments on finance leases		(67	)		-
Distributions to noncontrolling interest		(66	)		-
Repurchase of public warrants		(172	)		-
Payments on acquisition payable		(39	)		(74	)
Net cash (used in) provided by financing activities		(4,204	)		9,202
Net change in cash and restricted cash		(5,670	)		(604	)
Cash and restricted cash, beginning of period		50,292			123,679
Cash and restricted cash, end of period	$	44,622		$	123,075
Supplemental cash flow information
Cash paid during the period for:
Interest	$	3,187		$	2,603
Income taxes	$	-		$	-
Noncash investing and financing activities:
Increase in operating lease assets and liabilities upon adoption of ASC 842	$	36,776		$	-
Increase in finance lease assets and liabilities upon adoption of ASC 842	$	759		$	-

See notes to unaudited condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of all majority-owned or controlled subsidiaries, and all significant intercompany transactions and amounts have been eliminated. The results of businesses acquired or disposed of are included in the condensed consolidated financial statements from the date of the acquisition or up to the date of disposal, respectively.

References to the "Company", "we," "our," "us," and similar pronouns in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (this "Form 10-Q") refer to Vintage Wine Estates, Inc., a Nevada corporation, and its majority owned subsidiaries or controlled subsidiaries unless the context requires otherwise.

Our fiscal year ends on June 30. References to fiscal 2023 and 2022 in these condensed consolidated financial statements are to the fiscal years ending or ended June 30, 2023 and June 30, 2022, respectively.

Our unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission ("SEC") instructions to Quarterly Reports on Form 10-Q and include the information and disclosures required by accounting principles generally accepted in the United States ("GAAP") for interim financial reporting.

The ongoing COVID-19 pandemic ("COVID-19"), inflation and supply chain constraints continue to disrupt the U.S. and global economies and there remains uncertainty about the impact on the economy. We cannot estimate with any certainty the length or severity of the economic uncertainties or the related financial consequences on our business and operations, including whether and when historic economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flows.

We expect the economic uncertainties to have a minimal impact on sales revenues

In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Except as disclosed elsewhere in this Form 10-Q, all such adjustments are of a normal and recurring nature. In addition, financial results presented for this fiscal 2023 interim period are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2023 or any other future interim or annual period. These condensed consolidated financial statements are unaudited and accordingly, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the SEC on September 13, 2022. The June 30, 2022 condensed consolidated balance sheet was derived from the audited consolidated financial statements as of that date.

Significant Accounting Policies

A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Except as noted below, there have been no material changes in the Company’s significant accounting policies during the three months ended September 30, 2022.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Significant estimates include, but are not limited to depletion allowance, allowance for doubtful accounts, the net realizable value of inventory, expected future cash flows including growth rates, discount rates, and other assumptions and estimates used to evaluate the recoverability of long-lived assets, estimated fair values of intangible assets in acquisitions, intangible assets and goodwill for impairment, amortization methods and periods, amortization period of label and package design costs, the estimated fair value of long-term debt, the valuation of interest rate swaps, contingent consideration, common stock, stock-based compensation, accounting for income taxes and net assets held for sale. Actual results could differ materially from those estimates.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. Specifically, we reclassified $1.8 million of restricted cash from restricted cash to cash and cash equivalents and reclassified $0.7 million of amortization expense from selling, general and administrative expenses.

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Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sums to the total of the same such amounts as shown in the condensed consolidated statement of cash flows:


(in thousands)	September 30, 2022		June 30, 2022
Cash and cash equivalents	$	44,622	$	45,492
Restricted cash		-		4,800
Total cash, cash equivalents and restricted cash as shown in the consolidated statement of cash flows	$	44,622	$	50,292

In connection with the amended and restated loan and security agreement (see Note 10), the Company entered into a Deposit Control Agreement which required $4.8 million of the total cash received to be placed into a restricted cash collateral account, subject to release upon the completion of certain construction work and certificates of occupancy associated with the Ray's Station production facility. In July 2022, the Deposit Control Agreement was terminated upon certification that the conditions to Ray's Station's were satisfied.

Accounts Receivable and Allowance for Credit Losses

The Company adopted Accounting Standards Update ("ASU") ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326):and its related amendments as of July 1, 2022, see “Recently Adopted Accounting Pronouncements” below.

Accounts receivable are recorded at the invoiced amount. We consider an account past due on the first day following its due date. We monitor past due accounts periodically and establish appropriate reserves to cover expected losses, and consider historical experience, the current economic environment, customer credit ratings or bankruptcies and reasonable and supportable forecasts to develop our allowance for expected credit losses. We review these factors quarterly to determine if any adjustments are needed to the allowance. Account balances are written-off against the established allowance when we feel it is probable the receivable will not be recovered.

The provision for doubtful accounts for the periods ended September 30, 2022 and June 30, 2022, was $400.0 thousand and $120.0 thousand, respectively. We do not accrue interest on past-due amounts. Bad debt expense was insignificant for all reporting periods presented.

Other receivables include insurance related receivables, income tax receivable and other miscellaneous receivables.

Disaggregation of Revenue

The following table summarizes revenue by geographic region:


	Three Months Ended September 30,
(in thousands)	2022		2021
Geographic regions:
United States	$	77,325	$	54,150
International		537		1,537
Total net revenue	$	77,862	$	55,687

The following table provides a disaggregation of revenue based on the pattern of revenue recognition:


	Three Months Ended September 30,
(in thousands)	2022		2021
Point in time	$	66,213	$	46,822
Over a period of time		11,649		8,865
Total net revenue	$	77,862	$	55,687

Concentrations of Risk

Financial instruments that potentially expose us to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. We maintain the majority of our cash balances at multiple financial institutions that management believes are of high-credit quality and financially stable. At times, we have cash deposited with major financial institutions in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance limits. At September 30, 2022 and June 30, 2022, we had $45.2 million and $49.0 million respectively, in major financial institutions in excess of FDIC insurance limits. We sell the majority of our wine through U.S. distributors and the Direct-to-Consumer channel. Receivables arising from these sales are not collateralized. We attempt to limit our credit risk by performing ongoing credit evaluations of our customers and maintaining adequate allowances for potential credit losses.

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The following table summarizes customer concentration of:


	Three Months Ended September 30,
	2022	2021
Revenue as a percent of total revenue
Customer A	18.9%	25.5%
Customer B	*	12.6%

The following table summarizes customer concentration of:


	September 30, 2022	June 30, 2022
Receivables as a percent of total receivables
Customer A	29.4%	26.0%
Customer B	*	*

* Customer revenue or receivables did not exceed 10% in the respective periods.

Revenues for sales from Customer A are included within the Wholesale and Business-to-Business reporting segments and Customer B are included within the Business-to-Business reporting segment.

Inventories

Inventories of bulk and bottled wines, spirits, and ciders and inventories of non-wine products and bottling and packaging supplies are valued at the lower of cost using the FIFO method or net realizable value. Costs associated with winemaking, and other costs associated with the manufacturing of products for resale, are recorded as inventory. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. Inventories are classified as current assets in accordance with recognized industry practice, although most wines and spirits are aged for periods longer than one year.

Leases

The Company adopted ASU 2016-02, Leases ("Topic 842") and its related amendments as of July 1, 2022, see “Recently Adopted Accounting Pronouncements” below. The Company has both operating leases and finance leases. The Company’s non-cancelable leases for winery facilities, vineyards, corporate and administrative offices, tasting rooms, and some equipment are classified as operating leases. The Company’s non-cancelable leases for certain equipment that include a bargain purchase option at the end of the lease term are classified as finance leases.

The Company recognizes a right of use (“ROU”) asset representing its right to use the underlying asset for the lease term on the condensed consolidated balance sheet and related lease liabilities representing its obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The ROU asset also includes adjustments for lease incentives receivable, deferred rent and prepaid rent when applicable. The Company’s lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company has made an accounting policy election not to recognize ROU assets and lease obligations for its short-term leases, which are defined as leases with an initial term of 12 months or less. However, the Company will recognize these lease payments in the condensed consolidated statements of operations and comprehensive income/(loss) on a straight-line basis over the lease term and variable lease payments in the period in which the obligation is incurred.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. For finance leases, the right-of-use asset is amortized to amortization expense and interest expense is recorded in connection with the lease liability. Payments under lease arrangements are primarily fixed, however, most lease agreements also contain some variable payments. Variable lease payments other than those that depend on an index or a rate are expensed as incurred and not included in the operating lease ROU assets and lease liabilities. These amounts primarily include payments for taxes, parking and common area expenses. See Note 9.

Assets Held for Sale

The Company classifies an asset group (‘asset’) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in selling, general and administrative expenses in the period in which the held for sale criteria are met. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for

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sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale.

Segment Information

We operate in three reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker (“CODM”), our Chief Executive Officer, allocates resources and assesses performance based upon discrete financial information at the segment level.

Earnings Per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) allocable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. For purposes of the calculation of diluted net income (loss) per share, stock options and warrants to purchase common stock are considered potentially dilutive securities but are excluded from the calculation of diluted net income (loss) per share when their effect is antidilutive. As a result, in certain periods, diluted net loss per share is the same as the basic net loss per share for the periods presented.

The Company does not pay dividends or have participating shares outstanding.

Emerging Growth Company Status

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Topic 842, which supersedes the guidance in ASC 840, Leases. The new standard, as amended by subsequent ASUs on Topic 842 and recent extensions issued by the FASB in response to COVID-19, requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of its classification. Leases with a term of 12 months or less are accounted for in the Company's consolidated statements of operations.

The Company adopted Topic 842 effective July 1, 2022 using the modified retrospective approach, whereby we recognized a transition adjustment at the effective date of Topic 842, rather than at the beginning of the earliest comparative period presented. Prior period information was not restated. In addition, the Company applied the package of transition practical expedients, which allows the Company to carryforward its population of existing leases, the classification of each lease and the treatment of initial direct costs as of the period of adoption. The Company did not elect the practical expedient related to hindsight analysis which allows a lessee to use hindsight in determining the lease term and in assessing impairment of the entity’s ROU assets.

The Company identified the population of real estate and equipment leases to which the guidance applies and implemented changes in its systems, procedures and controls relating to how lease information is obtained, processed and analyzed. Upon adoption, the Company recognized $37.6 million in ROU assets that represent the Company's right to use the underlying assets for the lease term and $39.2 million in lease obligations that represent the Company's obligation to make lease payments arising from the lease. The ROU assets recognized upon adoption of Topic 842, included the reclassification of approximately $2.1 million of deferred rent and $0.4 million of prepaid rent. See Note 9.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses.

The Company adopted ASU No. 2016-13, as amended effective July 1, 2022. We consider historical experience, the current economic environment, customer credit ratings or bankruptcies, and reasonable and supportable forecasts to develop our allowance for credit losses. We review these factors quarterly to determine if any adjustments are needed to the allowance. This guidance did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

The recently issued accounting pronouncements did not have an impact on the Company.

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2. Business Combinations

Vinesse

On October 4, 2021, the Company acquired 100% of the members' interest in Vinesse, LLC, a California limited liability company ("Vinesse"). Vinesse is a direct-to-consumer platform company that specializes in wine clubs with over 60,000 members. Founded in 1993, Vinesse has developed a long-time following by offering boutique wines to a broader audience and making wine accessible and easy to love. The operations of Vinesse align with those of the Company, which management believes provides for expanded synergies and growth through the acquisition.

The purchase price totaling $17.0 million was comprised of cash of $14.0 million, consulting fees of $0.2 million per year for three years totaling $0.6 million and a three-year earnout payable of up to $2.4 million. To fund the cash portion of the purchase consideration, we utilized the line of credit under the amended and restated loan and security agreement.

The preliminary allocation of the consideration for the net assets acquired from the acquisition of Vinesse were as follows:


(in thousands)
Sources of financing
Cash	$	14,000
Accrued other		600
Contingent consideration		2,400
Fair value of consideration		17,000

Assets acquired:
Fixed assets		121
Inventory		2,502
Trade Names and Trademarks		1,200
Customer relationships		3,700
Total identifiable assets acquired		7,523

Goodwill	$	9,477

The Company used the carrying value as of the acquisition date to value fixed assets, as we determined that they represented the fair value at the acquisition date.

Inventory was comprised of finished goods, bulk and raw materials. The fair value of finished goods inventory and bulk inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.

The trade names and trademarks fair value was derived using the Relief-From-Royalty Method (“RFR”). Key assumptions in valuing trade names and trademarks included (i) a royalty rate of 1.8% and (ii) discount rate of 17.5%.

Customer relationships fair value was derived using the Multiple-Period Excess Earnings Method (“MPEEM”), utilizing a discount rate of 18.0%, and Cost Approach. Customer relationships were weighted; 50.0% using the MPEEM model and 50.0% using the Cost Approach.

The results of operations of Vinesse are included in the accompanying condensed consolidated statements of operations from the October 4, 2021 acquisition date.

Transaction costs incurred in the acquisition were insignificant.

ACE Cider

On November 16, 2021, the Company acquired 100% of the capital stock of ACE Cider, the California Cider Company, Inc., a California corporation ("ACE Cider"). ACE Cider is a wholesale platform and specializes in hard cider, an alcoholic beverage fermented from apples. The operations of ACE Cider allow the Company to enter into the beer distribution category.

The purchase price totaling $47.4 million was comprised of a cash payment and contingent consideration.

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The preliminary allocation of the consideration for the net assets acquired from the acquisition of ACE Cider were as follows:


(in thousands)
Sources of financing
Cash	$	46,880
Accrued other		60
Contingent consideration		500
Fair value of consideration		47,440

Assets acquired:
Fixed assets		4,205
Inventory		1,350
Trademarks		6,600
Customer relationships		14,300
Deferred tax liability		(6,554	)
Total identifiable assets acquired		19,901

Goodwill	$	27,539

The Company used the carrying value as of the Acquisition Date to value fixed assets, as we determined that they represented the fair value at the Acquisition Date.

Inventory was comprised of finished goods, bulk cider and raw materials. The fair value of finished goods inventory and bulk cider inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.

The trademarks fair value was derived using the RFR. Key assumptions in valuing trademarks included (i) a royalty rate of 2.75% and (ii) discount rate of 12.5%.

Customer relationships fair value was derived using the MPEEM, utilizing a discount rate of 13.0%, and Cost Approach. Customer relationships were weighted; 90.0% using the MPEEM model and 10.0% using the Cost Approach.

The results of operations of ACE Cider are included in the accompanying condensed consolidated statements of operations from the November 16, 2021 acquisition date.

Transaction costs incurred in the acquisition were insignificant.

Meier's

On January 18, 2022, the Company acquired 100% of the capital stock in Meier's Wine Cellars, Inc., DBA Meier's Beverage Group, an Ohio company ("Meier's"). Meier's is a wholesale and business-to-business company that specializes in custom blending, contract storage, contract manufacturing, and private labeling for wine, beer, and spirits. Over the years, Meier's continued extending their winemaking skills by producing table wines, sparkling wines, dessert wines, vermouths and carbonated grape juice.

The purchase price totaling $25.0 million was comprised of cash of $12.5 million and 1,229,443 shares of common stock with a value of $12.5 million.

The terms of the acquisition also provide for the possibility of additional contingent consideration of up to $10.0 million based on Meier's exceeding current EBITDA levels over each of the next three years.

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The preliminary allocation of the consideration for the net assets acquired from the acquisition of Meier's were as follows:


(in thousands)
Sources of financing
Cash	$	12,500
Shares of common stock		10,521
Contingent consideration		4,900
Settlement of pre-existing relationship		(125	)
Fair value of consideration		27,796

Assets acquired:
Accounts receivable		3,669
Fixed assets		12,859
Inventory		4,280
Other assets		356
Trademarks		700
Customer relationships		6,400
Accounts payable and accrued expenses		(2,682	)
Deferred tax liability		(6,033	)
Total identifiable assets acquired		19,549

Goodwill	$	8,247

The number of shares of common stock were valued based on the Closing Date share price, resulting in a fair value of $12.0 million, less a discount of $1.5 million due to lack of marketability for shares of common stock, resulting in the shares of common stock valued at $10.5 million.

The contingent consideration was fair valued using the Monte Carlo simulation model, resulting in fair value earnout payments of $4.9 million.

The Company valued the fair value of accounts receivable, other assets, accounts payable and accrued expenses and fixed assets at the acquisition date.

Inventory was comprised of finished goods, work in process and raw materials. The fair value of finished goods inventory and work in process inventory was derived using projected cost of goods sold as a percentage of net revenues. Raw materials inventory was valued at its book value.

The trade names and trademarks fair value was derived using the RFR. Key assumptions in valuing trade names and trademarks included (i) a royalty rate of 1.1% and (ii) discount rate of 27.0%.

Customer relationships fair value was derived using the MPEEM, utilizing a discount rate of 28.0%. Customer relationships were weighted 100.0% using the MPEEM model.

The results of operations of Meier's are included in the accompanying condensed consolidated statements of operations from the January 18, 2022 acquisition date.

Transaction costs incurred in the acquisition were insignificant.

The allocations of the fair value of the acquired businesses were based on preliminary valuations of the estimated net fair value of the assets acquired. The fair value estimates are subject to adjustment during the measurement period (up to one year from the acquisition date). The primary areas of accounting for the acquisitions that are not yet finalized relate to the fair value of certain intangible assets acquired and residual goodwill. Goodwill created in the acquisitions were structured as stock sales and therefore, is non tax deductible and non amortizable. The fair values of the net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, we will evaluate any necessary information prior to finalization of the fair value. During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date, if any, that, if known, would have resulted in revised values for these items as of that date. The net working capital adjustments related to the acquisitions are estimated as of the closing date and will be adjusted based on that estimate. Net working capital adjustments, if any, will be recorded in other assets on the condensed consolidated balance sheet. The impact of all changes, if any, that do not qualify as measurement period adjustments are included in current period earnings.

Other Acquisitions

On February 14, 2022, the Company purchased certain intellectual property pertaining or related to a canned cannabis beverage brand. The Company purchased the intellectual property at a purchase price of $0.4 million. The value of the assets acquired were based on the estimated fair

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value and are subject to adjustment during the measurement period (up to one year from the acquisition date). An executive officer of the Company has a related party relationship and serves as a member of the board of directors.

3. Inventory

Inventory consists of the following:


(in thousands)	September 30, 2022		June 30, 2022
Bulk wine, spirits and cider	$	94,924	$	89,038
Bottled wine, spirits and cider		87,393		85,905
Bottling and packaging supplies		18,367		16,328
Nonwine inventory		1,256		831
Total inventories	$	201,940	$	192,102

For the three months ended September 30, 2022 and 2021, the Company did not recognize any impairment of inventory.

For the three months ended September 30, 2022 and fiscal year ended June 30, 2022, the Company's inventory balances are presented net of inventory reserves of zero and $5.1 million, respectively, for bulk wine, spirits and cider inventory, $1.5 million and $1.8 million, respectively, for bottled wine, spirits and cider inventory and $0.4 million and $0.4 million, respectively, for bottling and packaging supplies inventory.

4. Assets Held for Sale

During the period ended September 30, 2022, the Company had two asset groups classified as held for sale. The assets held for sale include certain real property related to Laetitia vineyards land and property, plant and equipment and assumption of a land lease related to the Tamarack Cellars production facility. These assets are being marketed for sale. The Company intends to complete the sales of the assets within twelve months.

The carrying amounts of assets held for sale consists of the following:


(in thousands)	September 30, 2022
Laetitia vineyards land held for sale	$	5,890
Tamarack Cellars property, plant and equipment held for sale		2,767
Less accumulated depreciation and amortization		(2,104	)
Total assets held for sale	$	6,553

The cash flows related to held for sale assets have not been segregated, and remain included in the major classes of assets.

There were no assets classified as held for sale for the year ended June 30, 2022.

5. Property, Plant and Equipment

Property, plant and equipment consists of the following:


(in thousands)	September 30, 2022			June 30, 2022
Buildings and improvements	$	140,975		$	141,324
Land		30,325			36,215
Machinery and equipment		77,935			76,916
Cooperage		9,289			13,015
Vineyards		21,204			21,177
Furniture and fixtures		1,796			1,754
		281,524			290,401
Less accumulated depreciation and amortization		(71,637	)		(71,697	)
		209,887			218,704
Construction in progress		18,317			17,396
	$	228,204		$	236,100

Depreciation and amortization expense related to property and equipment was $3.2 million and $3.5 million for the three months ended September 30, 2022 and 2021, respectively.

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6. Goodwill and Intangible Assets

Goodwill

There were no changes in the carrying amounts of goodwill from fiscal year ended June 30, 2022.

Intangible Assets

The following tables summarize other intangible assets by class:


	September 30, 2022
(in thousands)	Gross Intangible		Accumulated Amortization			Net Intangible		Weighted Average Remaining Amortization Period (in years)
Indefinite-life intangibles
Trade names and trademarks	$	30,203	$	-		$	30,203	N/A
Winery use permits		6,750		-			6,750	N/A
Total Indefinite-life intangibles		36,953		-			36,953

Definite-life intangibles
Customer and Sommelier relationships		30,700		(6,524	)		24,176	4.2
Trade names and trademarks		1,900		(357	)		1,543	3.2
Total definite-life intangibles		32,600		(6,881	)		25,719
Total other intangible assets	$	69,553	$	(6,881	)	$	62,672


	June 30, 2022
(in thousands)	Gross Intangible		Accumulated Amortization			Net Intangible		Weighted Average Remaining Amortization Period (in years)
Indefinite-life intangibles
Trade names and trademarks	$	30,203	$	-		$	30,203	N/A
Winery use permits		6,750		-			6,750	N/A
Total Indefinite-life intangibles		36,953		-			36,953

Definite-life intangibles
Customer and Sommelier relationships		30,700		(4,922	)		25,778	4.4
Trade names and trademarks		1,900		(254	)		1,646	3.5
Total definite-life intangibles		32,600		(5,176	)		27,424
Total other intangible assets	$	69,553	$	(5,176	)	$	64,377

Amortization expense of definite-life intangibles was $1.7 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, estimated future amortization expense for definite-lived assets is as follows:


(in thousands)
2023 remaining	$	5,116
2024		6,811
2025		5,291
2026		4,527
Thereafter		3,974
Total estimated amortization expense	$	25,719

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7. Accrued Liabilities
The major classes of accrued liabilities are summarized as follows:


(in thousands)	September 30, 2022			June 30, 2022
Accrued purchases	$	13,573		$	7,478
Accrued employee compensation		4,551			5,886
Other accrued expenses		5,265			7,115
Non related party accrued interest expense		517			429
Contingent consideration		2,605			2,204
Unearned Income		(60	)		(949	)
Captive insurance liabilities		1,416			2,041
Total Accrued liabilities and other payables	$	27,867		$	24,204

8. Fair Value Measurements

The following tables present assets and liabilities measured at fair value on a recurring basis:


	September 30, 2022
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	36,738	$	-	$	-	$	36,738
Interest rate swaps (2)				18,381				18,381
Total	$	36,738	$	18,381	$	-	$	55,119

Liabilities:
Contingent consideration liabilities (1)	$	-	$	-	$	8,476	$	8,476
Total	$	-	$	-	$	8,476	$	8,476


	June 30, 2022
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	36,616	$	-	$	-	$	36,616
Interest rate swaps (2)			$	9,157			$	9,157
Total	$	36,616	$	9,157	$	-	$	45,773

Liabilities:
Contingent consideration liabilities (1)	$	-	$	-	$	8,515	$	8,515
Total	$	-	$	-	$	8,515	$	8,515

(1) We assess the fair value of contingent consideration to be settled in cash related to acquisitions using probability weighted models for the various contractual earn-outs. These are Level 3 measurements. Significant unobservable inputs used in the estimated fair values of these contingent consideration liabilities include probabilities of achieving customer related performance targets, specified sales milestones, consulting milestones, changes in unresolved claims, projected revenue or changes in discount rates.

(2) The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated Level 2 inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by discounting future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the non-performance risk of the Company and the respective counterparty.

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The following table provides a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


(in thousands)	Contingent Consideration
Balance at June 30, 2022	$	8,515
Acquisitions		-
Payments		(39	)
Change in fair value		-
Balance at September 30, 2022		8,476
Less: current portion		(2,605	)
Long term portion	$	5,871

The current and long-term portion of contingent consideration is included within the accrued liabilities and other payables and other long-term liabilities, respectively, in the condensed consolidated balance sheets.

9. Leases

Leases Under ASC 842

We have lease agreements for certain winery facilities, vineyards, corporate and administrative offices, tasting rooms, and equipment under long-term non-cancelable leases. We determine if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

Beginning July 1, 2022, operating leases are included in operating lease right-of-use assets, current operating lease liabilities and long-term operating lease liabilities in our condensed consolidated balance sheet. Operating lease right-of-use assets and corresponding operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease expense for operating lease assets is recognized on a straight-line basis over the lease term. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable.

Finance leases are included in finance lease right-of-use assets, current finance lease liabilities and long-term finance lease liabilities in our condensed consolidated balance sheet.

Our lease agreements include leases that contain lease components and non-lease components. For all asset classes, we have elected to account for both of these provisions as a single lease component.

We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of 12 months or less. In addition, we elected the package of transition practical expedients permitted under the transition guidance, which allows the Company to carry forward our leases without reassessing, whether any contracts are leases or contain leases, lease classification and initial direct costs.

Our leases have remaining lease terms from two to 10 years. Our lease terms may include options to extend or terminate the lease when it is reasonably certain and there is significant economic incentive to exercise that option.

Beginning fiscal 2022, we no longer had related party lease agreements.

The following table summarizes the components of lease expense:


	Three Months Ended
(in thousands)	September 30, 2022
Operating lease expense	$	1,808

Finance lease expense
Amortization of right-of-use assets		70
Interest on lease liabilities		9
Total finance lease expense		79
Variable lease expense		157
Short-term lease expense		35
Total lease expense	$	2,079

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The following table summarizes supplemental balance sheet related to leases:


(in thousands)	September 30, 2022
Operating Leases
Operating lease right-of-use assets	$	35,509

Current portion of operating lease liabilities		5,197
Long-term operating lease liabilities		31,637
Total operating lease liabilities		36,834

Finance Leases
Finance lease right-of-use assets		689

Current portion of finance lease liabilities		263
Long-term finance lease liabilities		429
Total finance lease liabilities	$	692

The following table summarizes the weighted-average remaining lease term and discount rate:


Weighted-average remaining lease term (in years)
Operating leases	6.7
Finance leases	2.8

Weighted-average discount rate
Operating leases	5.0	%
Finance leases	5.0	%

The minimum annual payments under our lease agreements as of September 30, 2022 are as follows:


(in thousands)	Operating Leases			Finance Leases
Remaining fiscal 2023	$	4,795		$	219
2024		6,849			285
2025		6,529			157
2026		6,521			79
2027		6,195			-
2028 and thereafter		12,479			-
Total lease payments		43,368			740
Less imputed interest		(6,534	)		(48	)
Present value of lease liabilities		36,834			692
Current portion of lease liabilities		(5,197	)		(263	)
Total long term lease liabilities	$	31,637		$	429

* Table excludes obligations for leases with original terms of 12 months or less which have not been recognized as ROU assets or liabilities in our condensed consolidated balance sheets.

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10. Long-Term and Other Short-Term Obligations

The following table summarizes long-term and other short-term obligations:


(in thousands)	September 30, 2022			June 30, 2022
Note to a bank with interest at LIBOR (1.76%) at September 30, 2022 plus 1.75%; payable in quarterly installments of $1,180 principal with applicable interest; matures in September 2026; secured by specific assets of the Company. Loan amended April 2021. Quarterly payments of $1,066 reduced from $1,180 starting June 2021. Revised maturity date July 2026.	$	75,726		$	76,792

Capital expenditures borrowings payable at LIBOR (0.50%) at September 30, 2022 and June 30, 2022 plus 1.75%, payable in quarterly installments of $1,077 at September 30, 2022 and June 30, 2022 with draw expiring July, 2026.		39,699			40,776

Note to a bank with interest fixed at 3.6%, payable in monthly installments of $60 principal with applicable interest; matures in April 2023.		418			593

Note to a bank with interest fixed at 2.75%, payable in monthly installments of $61 principal with applicable interest; matures in March 2024.		1,071			1,246

Delayed Draw Term Loan ("DDTL") with interest at LIBOR (2.32%) at September 2022 plus 1.75%, payable in quarterly installments of $1,260 starting March 2022. Matures in July 2024.		64,622			65,882
		181,536			185,289
Less current maturities		(14,738	)		(14,909	)
Less unamortized deferred financing costs		(1,221	)		(1,285	)
	$	165,577		$	169,095

Maturities of Long-Term and Other Short-Term Borrowings

As of September 30, 2022, maturities of long-term and other short-term borrowings for succeeding years are as follows:


Remaining 2023	$	11,156
2024		14,152
2025		64,372
2026		8,571
2027		83,285
	$	181,536

Line of Credit

The Company has a $480.0 million amended and restated loan and security agreement consisting of an accounts receivable and inventory revolving facility up to $230.0 million, a term loan in a principal amount of up to $100.0 million, a capital expenditures facility in an aggregate principal of up to $50.0 million, and a delay draw term loan facility up to an aggregate of $100.0 million which was limited to an aggregate of $55.0 million. Upon consummation of the merger transaction, the requirements of the delayed draw term loan were met. The effective interest rate under the revolving facility was 2.6% and 4.0% as of September 30, 2022 and 2021, respectively. The Company had $22.4 million and $22.0 million available under the line of credit as of September 30, 2022 and June 30, 2022, respectively.

On November 8, 2022, we amended the amended and restated loan and security agreement to to revise a definition used in a financial covenant under the agreement for the debt covenant calculation as of September 30, 2022 and subsequent periods.

11. Stockholders' Equity

Common Stock

We had reserved shares of stock, on an as-if converted basis, for issuance as follows:


	September 30, 2022		June 30, 2022
Warrants		25,646,453		25,818,247
Earnout shares		5,726,864		5,726,864
Total		31,373,317		31,545,111

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Warrants

At September 30, 2022, there were 25,646,453 warrants outstanding to purchase shares of the Company's common stock at a price of $11.50 per whole share. The 25,646,453 warrants are made up of 18,000,000 Public Warrants (the "Public Warrants") and 8,000,000 Private Warrants (the "Private Warrants") less the 353,547 warrants that have been repurchased as part of our share repurchase plan.

The Public Warrants are exercisable commencing on August 11, 2021 and expire five years after the commencement date. The Company may accelerate the expiry date by providing 30 days’ prior written notice, if and only if, the closing price of the Company’s common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period. The public warrant holder’s right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of acceleration of the expiry date.

At September 30, 2022, there were 8,000,000 purchased warrants at a price of $1.00 per Private Warrant, with each Private Warrant exercisable commencing on August 11, 2021 for one common share at an exercise price of $11.50, subject to anti-dilution adjustments. The private warrants expire five years after the commencement date.

Earnout Shares

The VWE Legacy shareholders are entitled to receive up to an additional 5,726,864 shares of the Company’s common stock (the “Earnout Shares”) if at any point during the Earnout Period, from June 7, 2021 to June 7, 2023, the Company's closing share price on the Nasdaq on 20 trading days out of 30 consecutive trading days;

is at or above $15 (but below $20), 50% of the Earnout Shares will be issued; and

is at or above $20 (i) to the extent no Earnout Shares have previously been issued, 100% of the Earnout Shares or (ii) to the extent the event Earnout Shares were previously issued, 50% of the Earnout Shares will be issued.

The Earnout Shares will be adjusted to reflect any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible common shares), reorganization, recapitalization, reclassification, combination and, exchange of shares or other like change. The Earnout Shares are indexed to the Company’s equity and meet the criteria for equity classification. The fair value of the Earnout Shares, $32.4 million, was recorded as a dividend to additional paid in capital due to the absence of retained earnings.

No Earnout Shares were issued as of September 30, 2022.

2021 Stock Incentive Plan

Effective June 7, 2021, the Company adopted the 2021 Omnibus Incentive Plan (as amended, the "2021 Plan”). The 2021 Plan provides for the issuance of stock options, stock appreciation rights, performance shares, performance units, stock, restricted stock, restricted stock units and cash incentive awards. The 2021 Plan was approved by shareholders at the Annual Meeting of Shareholders on February 2, 2022.

The following table provides total stock-based compensation expense by award type:


	Three Months Ended
(in thousands)	September 30, 2022		September 30, 2021
Stock option awards	$	1,686	$	-
Restricted stock units		2,936		-
Total stock-based compensation	$	4,622	$	-

Stock-based compensation expense is included as a component of selling, general and administrative expenses in the condensed consolidated statement of operations.

Stock Options

Stock options granted under the 2021 Plan are subject to market conditions. The stock options are exercisable for ten years and only become exercisable if the volume-weighted average price per share of our common stock is at least $12.50 over a 30-day consecutive trading period following the grant date. The fair value of the stock options was estimated using a Monte Carlo simulation valuation model. Stock option awards vest in four equal installments of 25%, with the first installment vesting 18 months after the vesting commencement date with respect to an additional 25% of the total stock-based award on each of the 2nd, 3rd and 4th anniversaries of the vesting commencement date, providing in each case the employee remains in continuous employment or service with the Company or an Affiliate. Compensation expense is recognized ratably over the requisite service period.

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The following table presents a summary of stock option activity under the 2021 Plan:


	Stock Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at June 30, 2022		3,503,527		$	10.50		3.22	$	-
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited or cancelled		(1,250	)		10.50		-		-
Outstanding at September 30, 2022		3,502,277		$	10.50		2.99		-

Total unrecognized compensation expense related to the stock options was $6.4 million, which is expected to be recognized over a weighted-average period of 3.0 years. No stock options were vested and exercisable as of September 30, 2022.

Restricted Stock Units

Restricted stock units are subject only to service conditions and vest ratably over four years.

The following table presents a summary of restricted stock units activity for the periods presented:


	Restricted Stock Units		Weighted-Average Grant Date Fair Value
Outstanding at June 30, 2022		1,902,068	$	8.14
Granted		-		-
Issued		-		-
Forfeited or cancelled		-		-
Outstanding at September 30, 2022		1,902,068	$	8.14

Total unrecognized compensation expense related to the restricted stock units was $7.3 million, which is expected to be recognized over a weighted-average period of 2.6 years. No restricted stock units vested as of September 30, 2022.

Stock and Warrant Repurchase Plan

On March 8, 2022, the Company's board of directors approved a repurchase plan authorizing the Company to purchase up to $30.0 million in aggregate value of our common stock and/or warrants through September 8, 2022. Purchases under the repurchase program may be made on the open market, in privately negotiated transactions or in other manners as permitted by the federal securities laws and other legal and contractual requirements and are expected to comply with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases will depend on a number of factors, including price, trading volume, general market conditions and legal requirements, among others. The repurchase program does not require the Company to acquire a specific number of shares or warrants. The cost of the shares and warrants that are repurchased will be funded from available working capital.

For accounting purposes, common stock and/or warrants repurchased under our repurchase plan are recorded based upon the settlement date of the applicable trade. Such repurchased shares are presented using the cost method. During the quarter ended September 30, 2022, the Company repurchased 171,994 warrants at an average price of $1.00 per warrant. The total cost of the shares and/or warrants repurchased was $0.2 million.

The table below summarizes the changes in repurchases of common stock and warrants:


(in thousands)	September 30, 2022
Balance at June 30, 2022		3,053,447
Repurchases of common stock		-
Repurchases of warrants		171,994
Balance at September 30, 2022		3,225,441

The Stock and Warrant Repurchase Plan expired on September 9, 2022.

12. Income Taxes

The increase in our effective tax rate for the three months ended September 30, 2022 was primarily due to changes in pre-tax income and permanent items, which primarily consist of non-deductible officer compensation expense, as compared to the three months ended September 30, 2021.

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For the three months ended September 30, 2022, our effective tax rate differs from the federal statutory rate of 21% primarily due to permanent items, which primarily relate to non-deductible officer compensation, and state taxes. For the three months ended September 30, 2021, our effective tax rate differs from the federal statutory rate of 21% due to permanent items, which primarily consist of the R&D Tax Credit.

The provisional measurements of fair value for income taxes payable and deferred taxes for the acquisitions of Vinesse, ACE Cider and Meier may be subject to changes as additional information is received and certain tax returns are finalized. The Company expects to finalize the fair value measurements as soon as practicable, but not later than one year from the date of acquisition.

13. Commitments and Contingencies

We are subject to a variety of claims and lawsuits that arise from time to time in the ordinary course of business. Although management believes that any pending claims and lawsuits will not have a significant impact on the Company’s consolidated financial position or results of operations, the adjudication of such matters are subject to inherent uncertainties and management’s assessment may change depending on future events.

Indemnification Agreements

In the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. These indemnities include indemnities to our directors and officers to the maximum extent permitted under applicable state laws. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. Historically, we have not incurred any significant costs as a result of such indemnifications and are not currently aware of any indemnification claims.

Other Commitments

Contracts exist with various growers and certain wineries to supply a significant portion of our future grape and wine requirements. Contract amounts are subject to change based upon actual vineyard yields, grape quality and changes in grape prices. Estimated future minimum grape and bulk wine purchase commitments are as follows:


(in thousands)	Total
Remaining 2023	$	40,524
2024		20,706
2025		18,158
	$	79,388

Grape and bulk wine purchases under contracts totaled $15.8 million and $10.3 million for the three months ended September 30, 2022 and 2021, respectively. The Company expects to fulfill all of these purchase commitments.

14. Related Party Transactions

Immediate Family Member and Other Business Arrangements

We provide at will employment to several family members of officers or directors who provide various sales, marketing and administrative services to us. Payroll and other expenses to these related parties was $125.0 thousand and $71.0 thousand for the three months ended September 30, 2022 and 2021, respectively.

We pay for sponsorship and marketing services and point of sale marketing materials to unincorporated businesses that are managed by immediate family members of a Company executive officer. For the three months ended September 30, 2022 and 2021, payments related to sponsorship and marketing services totaled $87.0 thousand and $75.0 thousand, respectively.

Financial Advisory Agreement

In April 2022, the Company entered into an arrangement with Global Leisure Partners LLC ("GLP") to act as a financial advisor to the Company in connection with its exploration of acquisitions, mergers, investments and other strategic matters. A director of the Company having the authority to establish policies and make decisions is an executive of GLP. Although members of the board of directors are typically independent from management, members of the board of directors would be considered management based on the definition of management in ASC 850, Related Party Disclosures. During the three months ended September 30, 2022 and 2021, payments in respect of capital markets and mergers and acquisitions matters totaled $50.5 thousand and zero, respectively.

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15. Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM, or decision-making group, in deciding how to allocate resources and in assessing performance. When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. Our operations are principally managed on a sales distribution basis and are comprised of three reportable segments: Wholesale; Direct-to-Consumer; and Business-to-Business. The factors for determining the reportable segments include the manner in which management evaluates performance for purposes for allocating resources and assessing performance.

We report our segments as follows:

Wholesale Segment—We sell our wine, spirits and cider to wholesale distributors under purchase orders. Wholesale operations generate revenue from product sold to distributors, who then sell them off to off-premise retail locations such as grocery stores, wine clubs, specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars.

Direct-to-Consumer Segment—We sell our wine and other merchandise directly to consumers through wine club memberships, at wineries’ tasting rooms, at Sommelier wine tasting events, and through the Internet. Winery estates hold various public and private events for customers and our wine club members. The certified Sommeliers provide guided tasting experiences customized for each audience through virtual and in-person events globally.

Business-to-Business Segment—Our Business-to-Business sales channel generates revenue primarily from the sale of private label wines and spirits, and custom winemaking services. Annually, we work with our national retail partners to develop private label wines incremental to their wholesale channel businesses.

Corporate and Other Segment—Our Corporate and Other segment generates revenues from grape and bulk sales and storage services. Other, non-allocable expenses include corporate expenses, non-direct selling expenses and other expenses not specifically allocated to an identified reporting segment.

The following tables present net revenues and income from operations directly attributable to the Company's segments:


	Three Months Ended September 30, 2022
(in thousands)	Wholesale		Direct-to-Consumer		Business-to-Business		Corporate and Other			Total
Segment Results
Net revenues	$	23,381	$	20,497	$	34,084	$	(100	)	$	77,862
Income (loss) from operations	$	1,828	$	2,355	$	12,761	$	(21,869	)	$	(4,925	)


	Three Months Ended September 30, 2021
(in thousands)	Wholesale		Direct-to-Consumer		Business-to-Business		Corporate and Other			Total
Segment Results
Net revenues	$	16,203	$	14,915	$	24,467	$	102		$	55,687
Income (loss) from operations	$	4,188	$	2,539	$	7,514	$	(8,098	)	$	6,143

There was no inter-segment activity for any of the given reporting periods presented.

Depreciation expense recognized by operating segment is summarized below:


(in thousands)		Wholesale		Direct-to-Consumer		Business-to-Business			Corporate and Other		Total
For the periods ended September 30:
	2022	$	38	$	291	$	(477	)	$	455	$	307
	2021	$	-		300	$	-		$	-	$	300

Amortization expense recognized by operating segment is summarized below:


(in thousands)		Wholesale		Direct-to-Consumer		Business-to-Business		Corporate and Other		Total
For the periods ended September 30:
	2022	$	596	$	745	$	364	$	-	$	1,705
	2021	$	-		500	$	-	$	-		500

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Excluding the property, plant, and equipment specific to assets located at our tasting facilities, and the customer Sommelier relationships and intangible assets specific to the Sommelier acquisition, given the nature of our business, revenue generating assets are utilized across segments, therefore, discrete financial information related to segment assets and other balance sheet data is not available and the information continues to be aggregated.

16. Earnings Per Share

The following table reconciles the number of common shares used to compute basic and diluted earnings per share attributable to Vintage Wine Estates, Inc., shareholders:


	Three Months Ended September 30,
(in thousands, except for per share amounts)	2022			2021
Net income	$	634		$	2,779
Less: income (loss) allocable to noncontrolling interest		(343	)		25
Net income allocable to common shareholders	$	977		$	2,804

Numerator – Basic EPS
Net income allocable to common shareholders	$	977		$	2,804
Net income allocated to common shareholders	$	977		$	2,804

Numerator – Diluted EPS
Net income allocated to common shareholders	$	977		$	2,804
Net income allocated to common shareholders	$	977		$	2,804

Denominator – Basic Common Shares
Weighted average common shares outstanding - Basic		58,819,160			60,461,611

Denominator – Diluted Common Shares
Weighted average common shares - Diluted		58,819,160			60,461,611

Net income per share – basic:
Common Shares	$	0.02		$	0.05
Net income per share – diluted:
Common Shares	$	0.02		$	0.05

The following securities have been excluded from the calculations of diluted earnings per share attributable to common shareholders because including them would have been antidilutive:


	Three Months Ended September 30,
	2022		2021
Shares subject to warrants to purchase common stock		25,646,453		26,000,000
Shares subject to options to purchase common stock		3,502,277		-
Total		29,148,730		26,000,000

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “us”, “our” and “the Company” are intended to mean the business and operations of Vintage Wine Estates, Inc., a Nevada corporation and its consolidated subsidiaries.

Business Overview

Vintage Wine Estates, Inc., is a leading vintner in the United States ("U.S."), offering a collection of wines produced by award-winning, heritage wineries, popular lifestyle wines, innovative new wine brands, packaging concepts, as well as craft spirits. Our name brands include Layer Cake, Cameron Hughes, Clos Pegase, B.R. Cohn, Firesteed, Bar Dog, Kunde, Cherry Pie and many others. Since our founding over 20 years ago, we have grown organically through wine brand creation and through acquisitions to become the 14th largest wine producer based on cases of wine shipped in California.

Growth Strategy

Our strategy is to continue to grow organically and through acquisitions with a view towards making two to three acquisitions per year over the next five years. These acquisitions have allowed us to diversify our wine sourcing into regions outside of California, expand our portfolio of brands, increase our vineyard assets and provide our direct-to-consumer and retail customers with a range of wines to choose from.

Trends and Other Factors Affecting Our Business

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

Economic Uncertainties

We expect the economic uncertainties to have a minimal impact on sales revenues

Invasion of Ukraine

Russia's invasion of Ukraine has not had a direct impact on the Company. The Company does not have assets, operations or human capital resources located in Russia or Ukraine, does not invest or hold securities that trade in those areas and does not rely on goods or services sourced in Russia or Ukraine. However, the Company receives its capsules for wine bottles from a supplier in Italy, who has plants located in Ukraine, Italy and Poland. While the Company has not been impacted directly by supply chain disruptions as a result of the invasion, including potential cybersecurity risks and other indirect operational or supply chain challenges, the competition to secure wine bottle capsules has increased from suppliers due to the closing of the plant in Ukraine.

Weather Conditions

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

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

Seasonality

There is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenues and net income. Typically, we have lower sales and net income during our third fiscal quarter (January through

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March) and higher sales and net income during our second fiscal quarter (October through December) due to usual timing of seasonal holiday buying, as well as wine club shipments. We expect these trends to continue.

Key Measures to Assess the Performance of our Business

We consider a variety of financial and operating measures in assessing the performance of our business, formulating goals and objectives and making strategic decisions. The key GAAP measures we consider are net revenues; gross profit; selling, general and administrative expenses; and income from operations. The key non-GAAP measure we consider is Adjusted EBITDA. We also monitor our case volume sold and depletions from our distributors to retailers to help us forecast and identify trends affecting our growth.

Net Revenues

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

Gross Profit

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

Selling, General and Administrative Expenses

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

Income from Operations

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

Case Volumes

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

Depletions

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

Non-GAAP Financial Measures

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

Adjusted EBITDA is defined as earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, casualty losses or gains, impairment losses, changes in the fair value of derivatives, restructuring related income or expenses, acquisition and integration costs, and certain non-cash, non-recurring, or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net revenues.

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Results of Operations

Our financial performance is classified into the following segments: Wholesale, B2B, DTC and Corporate and Other. Our corporate operations, including centralized selling, general and administrative expenses and other factors, such as the re-measurements of contingent consideration and impairment of intangible assets and goodwill are not allocated to the segments, as management does not believe such items directly reflect our core operations. Other than our long-term property, plant and equipment for wine tasting facilities, and customer lists, trademarks and trade names specific to acquired companies, our revenue generating assets are utilized across segments. Accordingly, the foregoing items are not allocated to the segments and are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above.

We evaluate the performance of our segments on income from operations, which management believes is indicative of operational performance and ongoing profitability. Management monitors income from operations to evaluate past performance and identify actions required to improve profitability. Income from operations assists management in comparing the segment performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect the core operations and, therefore, are not included in measuring segment performance. We define income from operations as gross margin less operating expenses that are directly attributable to the segment. Selling expenses that can be directly attributable to the segment are allocated accordingly.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Wholesale Segment Results

The following table presents summary financial data for our Wholesale segment:


	Three Months Ended September 30,				Dollar			Percent
(in thousands, except %)	2022		2021		Change			Change
Net revenues	$	23,381	$	16,203	$	7,178		44.3%
Income from operations	$	1,828	$	4,188	$	(2,360	)	-56.4%

Wholesale net revenues for the three months ended September 30, 2022 increased $7.2 million, or 44.3%, from the three months ended September 30, 2021. The increase was attributable to an increase in sales of $6.9 million related to acquisition case volumes.

Wholesale income from operations for the three months ended September 30, 2022 decreased $2.4 million, or 56.4%, from the three months ended September 30, 2021. The decrease was attributable to higher costs due to inflation and supply chain challenges as well as $2.7 million in overhead burden, partially offset by $0.7 million related to acquisitions.

B2B Segment Results

The following table presents summary financial data for our B2B segment:


	Three Months Ended September 30,				Dollar		Percent
(in thousands, except %)	2022		2021		Change		Change
Net revenues	$	34,084	$	24,467	$	9,617	39.3%
Income from operations	$	12,761	$	7,514	$	5,247	69.8%

B2B net revenues for the three months ended September 30, 2022 increased $9.6 million, or 39.3%, from the three months ended September 30, 2021. The increase was primarily attributable to increased custom production as well as an increase of $4.9 million related to acquisitions.

B2B income from operations for the three months ended September 30, 2022 increased $5.2 million, or 69.8%, from the three months ended September 30, 2021. The increase was attributable to increased margin on bulk distilled alcohol sales partially offset by a loss from operations of $0.7 million related to acquisitions.

DTC Segment Results

The following table presents summary financial data for our DTC segment:


	Three Months Ended September 30,				Dollar			Percent
(in thousands, except %)	2022		2021		Change			Change
Net revenues	$	20,497	$	14,915	$	5,582		37.4%
Income from operations	$	2,355	$	2,539	$	(184	)	-7.2%

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DTC net revenues for the three months ended September 30, 2022 increased $5.6 million, or 37.4%, from the three months ended September 30, 2021. The increase was primarily attributable to increased e-commerce and wine club revenues as well as an increase of $3.1 million related to acquisitions.

DTC income from operations for the three months ended September 30, 2022 remained flat from the three months ended September 30, 2021.

Corporate and Other Segment Results

The following table presents summary financial data for our Corporate and Other segment:


	Three Months Ended September 30,						Dollar			Percent
(in thousands, except %)	2022			2021			Change			Change
Net revenues	$	(100	)	$	102		$	(202	)	198.0%
Income (loss) from operations	$	(21,869	)	$	(8,098	)	$	(13,771	)	-170.1%

Corporate and Other net revenues for the three months ended September 30, 2022 remained relatively flat, down $0.2 million from the three months ended September 30, 2021.

Corporate and Other loss from operations for the three months ended September 30, 2022 increased $13.7 million, or 170.1%, from the three months September 30, 2021. The increase in losses was due to $4.6 million of share-based compensation expense, continued increased costs of labor of $1.2, increased costs of freight of $1.0 million, depreciation expense of $0.5 million as well as increased infrastructure costs required to be a public company and the continued increased costs of warehousing and insurance.

Case Volumes

The following tables summarize 9-liter equivalent cases by segment:


	Three Months Ended September 30,
(in thousands)	2022		2021		Unit Change		% Change
Wholesale		539		209		330		157.9	%
B2B	*		*		*		*
DTC		99		60	39			65.0	%
Total case volume		638		269		369		137.2	%

*B2B segment sales are primarily not related to case volumes, therefore the Company has elected to not report case volumes for this segment as it would not be indicative of the underlying performance of the business.

The increase in case volumes was primarily due to wholesale which was driven by the ACE Cider acquisition that ships higher case volumes of lower priced product. Increased DTC volumes were driven by QVC and Wine Clubs.

Non-GAAP Financial Measures

The following is a reconciliation of net income to Adjusted EBITDA for the periods presented:


	Three Months Ended September 30
	2022				2021
Net income (loss)	$	634			$	2,779
Interest expense		3,381		-		3,603
Income tax provision		658				1,193
Depreciation		3,215				3,623
Amortization		1,811				531
Stock-based compensation expense		4,622				-
Net unrealized gain on interest rate swap agreements		(9,327	)			(1,393	)
Gain on disposition of assets		(118	)			(340	)
Deferred rent adjustment		-				128
Acquisition integration costs		391				-
Deferred gain on sale leaseback		(334	)			-
Gain on litigation proceeds		(530	)			-
Inventory acquisition basis adjustment		663				437
Adjusted EBITDA	$	5,066			$	10,561
Revenue	$	77,862			$	55,687
Adjusted EBITDA margin		6.5	%			19.0	%

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Adjusted EBITDA and Adjusted EBITDA Margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assists these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance.

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

Liquidity and Capital Resources

We currently believe that, based on available capital resources and projected operating cash flows, we have adequate capital resources to fund our currently anticipated working capital needs; capital expenditures, business acquisitions, debt obligations, and tax payments over the next 12 months and beyond.

Cash and Cash Equivalents

Our cash and cash equivalents balance was $44.6 million at September 30, 2022 compared to $50.3 million at June 30, 2022, exclusive of restricted cash. At September 30, 2022, our cash and cash equivalents were held in cash depository accounts with major banks.

Cash Flows

The table below presents a summary of our sources and uses of cash:


	Three Months Ended September 30,
(in thousands)	2022			2021			Change
Operating activities	$	2,083		$	(1,961	)	$	4,044
Investing activities	$	(3,549	)	$	(7,845	)	$	4,296
Financing activities	$	(4,204	)	$	9,202		$	(13,406	)

The cash flows related to held for sale assets have not been segregated, and remain included in the major classes of assets.

Cash Flows provided by (used in) Operating Activities

Net cash provided by operating activities was $2.1 million for the three months ended September 30, 2022 compared to net cash used in operating activities of $2.0 million for the three months ended September 30, 2021, representing an increase in net cash provided of $4.0 million. The increase in net cash provided was primarily attributable to the decrease in net income of $2.1 million, net changes in certain non-cash adjustments of 4.8 million to reconcile net income to operating cash flow and net changes in other operating assets and liabilities of $11.0 million as detailed on the condensed consolidated statement of cash flows.

Cash Flows provided by (used in) Investing Activities

Net cash used in investing activities was $3.5 million for the three months ended September 30, 2022, compared to net cash used in investing activities of $7.8 million for the three months ended September 30, 2021, representing an decrease in net cash used of $4.3 million. Cash flows from

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investing activities are utilized primarily to fund acquisitions, capital expenditures for improvements to existing assets and other corporate assets. The decrease in net cash used was primarily attributable to reduced purchases of property, plant and equipment of $4.3 million.

Cash Flows provided by (used in) Financing Activities

Net cash used in financing activities was $4.2 million for the three months ended September 30, 2022 compared to net cash provided by of $9.2 million for the three months ended September 30, 2021, representing an increase in net cash used of $13.4 million. The increase in net cash used consisted primarily of $16.8 million of payments from our line of credit and long-term debt, net of proceeds on our line of credit.

Contractual Obligations

There have been no material changes to our contractual obligations from what was previously disclosed in our Annual Report on Form 10-K filed with the SEC.

Off-Balance Sheet Arrangements

As of September 30, 2022, the Company had no off-balance sheet arrangements.

Significant Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. For a description of our critical accounting policies, refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K. As a result of adopting ASC 842 as of July 1, 2022, there have been material changes to our lease accounting policies during the three months ended September 30, 2022, that are described in Note 1 to our condensed consolidated financial statements included in Part I, Item I of this Form 10-Q.

Recent Accounting Pronouncements

For information regarding new accounting pronouncements, see Note 1, Basis of Presentation and Significant Accounting Policies in the notes to our unaudited condensed consolidated financial statements.

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Investors are cautioned that statements that are not strictly historical statements of fact constitute forward-looking statements, including, without limitation, statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and are often identified by words like “believe,” “expect,” “may,” “will,” “should,” “seek,” “anticipate,” or “could” and similar expressions.

Forward-looking statements are not assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed or implied by forward-looking statements include those discussed under the “Risk Factors” section of our Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q or other reports filed with the SEC.

Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date of this report. We undertake no obligation to publicly revise or update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes to our quantitative and qualitative disclosures about market risk from what was previously disclosed in our Annual Report on Form 10-K filed with the SEC.

Inflation

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs, particularly if inflationary pressures continue during an economic downturn. These matters could harm our business, results of operations or financial condition.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of a material weakness in our internal control over financial reporting and discussed below, our disclosure controls and procedures were not effective as of September 30, 2022. Management's conclusion was based on discoveries and observations made during the fiscal 2022 audit.

Material Weakness in Internal Control Over Financial Reporting

The Company's material weakness first identified during the audit of our fiscal 2021 consolidated financial statements, as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, related to business processes and controls to perform reconciliations of certain account balances on a regular basis, has not been fully remediated, and, as a result, our internal control over financial reporting was not effective as of September 30, 2022.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

Management's Plan to Remediate the Material Weakness

Control Activity—The Company did not have effective business processes and controls to perform reconciliations of balance sheet accounts timely.

In the course of our financial close process for the fiscal years ended June 30, 2022 and 2021, we identified a material weakness in our internal control over financial reporting. The material weakness identified relates to our process and controls over financial reporting related to balance sheet account reconciliations, which includes the prior year identification of certain inventory-related account balances and the current year identification of interest rate swap derivatives account balances. Management concluded that this material weakness arose because we did not have effective business processes and controls to perform timely reconciliations of balance sheet account balances.

The Company has developed a comprehensive strategy in an effort to remediate this material weakness. We engaged a consulting firm to assist the Company in the continued development of improved business processes and control activities and we have engaged a separate consultant to focus specifically on inventory system processes improvements.

During fiscal 2022, we also conducted an assessment of staffing needs. Since this assessment, we have hired a Director of Inventory and Costing, a Controller and additional permanent and engaged temporary finance team members, each with relevant wine industry and accounting process experience. Additionally, on March 7, 2022, the Company appointed Kristina L. Johnston as Chief Financial Officer of the Company. The Company believes Ms. Johnston's experience with public company internal controls and accounting processes, as well as her significant leadership experience will further enhance our internal control environment.

Additionally, the Company has started to design and implement additional controls and procedures designed to mitigate the risk of material misstatement including the standardization of our monthly close checklists and account reconciliation templates. The Company will need to assess its staffing needs on an ongoing basis in order to implement processes to ensure the completeness and the timely preparation and review of all balance sheet accounts and the establishment of defined segregation of duties between preparation and review.

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The Company acknowledges it will take time and resources to fully integrate these new controls and processes described above and confirm them to be effective and sustainable. As the Company continues to refine and improve our financial reporting process, additional controls and procedures may also be required over time.

Changes in Internal Control over Financial Reporting

Other than changes intended to remediate the material weakness noted above, there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

None.

Issuer Purchases of Equity Securities

The following table provides information about repurchases of our common stock and warrants during the quarter ended September 30, 2022:


Repurchases	Total number of shares purchased		Average price paid per share		Total number of warrants purchased		Average price paid per warrant		Total number of shares and warrants purchased as part of publicly announced plans or programs (1)		Approximate dollar value of shares and warrants that may yet be purchased under the plans or programs
July 1, 2022 - July 31, 2022		-	$	-		9,495	$	1.34		9,495	$	3,787,832
August 1, 2022 - August 31, 2022		-		-		113,099		0.99		113,099		3,675,864
September 1, 2022 - September 30, 2022		-		-		49,400		0.96		49,400		3,628,440
Total		-	$	-		171,994	$	1.00		171,994

(1) on March 8, 2022, the Company announced that our board of directors approved a repurchase plan authorizing us to purchase up to $30.0 in aggregate value of our common stock and/or warrants through September 8, 2022. The repurchase program expired on September 9, 2022 and is more fully disclosed in Note 11, Stockholders' Equity, of the Notes to the Condensed Consolidated Financial Statements. As of September 30, 2022, we repurchased an aggregate 2,871,894 shares of our common stock in the open market and 353,547 warrants pursuant to our repurchase program.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

On November 8, 2022, we entered into an amendment to the Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with Bank of the West as administrative and collateral agent for the lenders that are parties to the Loan Agreement (the “Amendment”) to amend the definition of Adjusted EBITDA by adding an additional adjustment to the definition of Adjusted EBITDA. Adjusted EBITDA is used in the calculation of the fixed charge coverage ratio covenant under the Loan Agreement. A copy of the Amendment will be filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ending December 31, 2022.

Item 6. Exhibits


Exhibit Number		Description of Exhibit

3.1		Articles of Incorporation of Vintage Wine Estates, Inc., a Nevada corporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed with the SEC on June 11, 2021).

3.2		Bylaws of Vintage Wine Estates, Inc., a Nevada corporation (incorporated by reference to Annex C to the Prospectus forming part of the Company's Registration Statement on Form S-4/A (Registration No. 333-254260), filed with the SEC on May 3, 2021)

10.1		Employment Agreement between Vintage Wine Estates, Inc., a Nevada Corporation, and Kristina Johnston, effective as of March 7, 2022. ◆

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document.

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File (embedded within the Inline XBRL document).


◆	Indicates management compensatory plan, contract or arrangement.

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Signatures

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Vintage Wine Estates, Inc.

Date: November 9, 2022	By:	/s/ PATRICK RONEY
	Name:	Patrick Roney
	Title:	Chief Executive Officer & Director

Date: November 9, 2022	By:	/s/ KRISTINA JOHNSTON
	Name:	Kristina Johnston
	Title:	Chief Financial Officer