10-Q 1 napa-20220131.htm 10-Q napa-20220131
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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 January 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from    to
Commission file number 001-40240

The Duckhorn Portfolio, Inc.
(Exact name of registrant as specified in its charter)
Delaware
81-3866305
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1201 Dowdell Lane
Saint Helena, CA 94574
(Address, including zip code, of Principal Executive Offices)
(707) 302-2658
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareNAPANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  ☐ 

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  

The registrant had outstanding 115,065,210 shares of common stock, $0.01 par value per share, as of February 28, 2022.



Table of Contents





Glossary
The following terms are used in this quarterly report unless otherwise noted or indicated by the context:
"Company," "we," "us," "our," "Duckhorn" and "The Duckhorn Portfolio" refer to The Duckhorn Portfolio, Inc. and its consolidated subsidiaries.
"2016 Equity Plan" refers to the Company's board approved 2016 Equity Incentive Plan.
"2021 Plan" refers to the Company's board approved 2021 Equity Incentive Plan.
"ASC" refers to Accounting Standards Codification developed by the FASB.
"ASU" refers to Accounting Standards Updates issued by the FASB to communicate changes to the ASC.
"Controlled Company" refers to a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity or group.
"COVID-19" refers to the ongoing pandemic surrounding COVID-19, the disease caused by a novel strain of coronavirus that was declared a global pandemic by the World Health Organization in March 2020.
"Credit Facility" refers to the existing first lien credit facility pursuant to that certain First Lien Loan and Security Agreement, dated as of October 14, 2016 (as amended by Amendment No. 1, dated July 28, 2017, as amended by Amendment No. 2, dated as of April 19, 2018, as amended by Amendment No. 3 dated as of August 1, 2018, as amended by Amendment No. 4 dated as of October 30, 2018, as amended by Amendment No. 5 dated as of June 7, 2019, as amended by Amendment No. 6 dated as of August 17, 2020 and as amended by Amendment No. 7 dated as of February 22, 2021), by and among the Company, the borrowers named therein, the lenders named therein and the Bank of the West, as administrative agent.
"DTC channel" and "DTC" refers to our sales and distribution channel through which we sell wine directly to consumers without any licensee intermediaries (wholesale or retail), which is permissible through in-person sales at one of our tasting rooms or, where permitted by law, through our multi-winery e-commerce website.
"ESPP" refers to Employee Stock Purchase Plan
"Estate vineyards" refers to vineyards controlled or owned by the Company.
"Estate wines" refers to wine made with grapes that share geographical provenance and are farmed, fermented, aged and bottled on-site at Company controlled facilities.
"Exchange Act" refers to the Securities Exchange Act of 1934.
"FASB" refers to Financial Accounting Standards Board.
"First Lien Loan Agreement " see Credit Facility.
"Fiscal 2017" refers to our fiscal year ended July 31, 2017.
"Fiscal 2018" refers to our fiscal year ended July 31, 2018.
"Fiscal 2019" refers to our fiscal year ended July 31, 2019.
"Fiscal 2020" refers to our fiscal year ended July 31, 2020.
"Fiscal 2021" refers to our fiscal year ended July 31, 2021.
"Fiscal 2022" refers to our fiscal year ended July 31, 2022.
"IPO" refers to our initial public offering completed in March 2021.
"JOBS Act" refers to the Jumpstart Our Business Startups Act of 2015.
"LIBOR" refers to London Interbank Offered Rate.
"Luxury wine" refers to wines with suggested retail prices of $15 or higher per 750ml bottle.
"Off-premise" refers to retail accounts that are a business with a license that allows a customer to purchase our wines for consumption at a location other than the retailer’s licensed location, such as grocery stores and liquor stores.
3

"On-premise" refers to retail accounts that are a business with a license that allows a customer to purchase our wines and consume them at the licensed location, such as restaurants, bars and hotels.
"Retail" refers to establishments that are licensed to purchase our wine for resale to consumers, such as grocery stores, liquor stores and restaurants.
"SEC" refers to U.S. Securities and Exchange Commission.
"Securities Act" refers to The Securities Act of 1933.
"TSG" refers to TSG Consumer Partners LLC, together with certain affiliates.
"Ultra-luxury wine" refers to wines with suggested retail prices of $25 or higher per 750ml bottle.
"U.S." refers to the United States.
"U.S. GAAP" refers to accounting principles generally accepted in the United States.
"VIE" refers to variable interest entity.
"Wholesale channel" refers to our sales and distribution channel through which we sell wine to distributors and, in California, directly to retail accounts.

4

Cautionary note regarding forward-looking statements
This Quarterly Report on Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission contains statements that are or may be considered to be, forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:
•    our ability to manage the growth of our business;
•    our reliance on our brand name, reputation and product quality;
•    the effectiveness of our marketing and advertising programs, including the consumer reception of the launch and expansion of our product offerings;
•    general competitive conditions, including actions our competitors may take to grow their businesses;
•    overall decline in the health of the economy, consumer discretionary spending and consumer demand for wine;
•    the occurrence of severe weather events (including fires, floods and earthquakes), catastrophic health events, natural or man-made disasters, social and political conditions or civil unrest;
•    risks associated with disruptions in our supply chain for grapes and raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies;
•    the impact of COVID-19 on our customers, suppliers, business operations and financial results;
•    disrupted or delayed service by the distributors and government agencies we rely on for the distribution of our wines outside of California;
•    our ability to successfully execute our growth strategy;
•    decreases in our wine score ratings by wine rating organizations;
•    quarterly and seasonal fluctuations in our operating results;
•    our success in retaining or recruiting, or changes required in, our officers, key employees or directors;
•    our ability to protect our trademarks and other intellectual property rights, including our brand and reputation;
•    our ability to comply with laws and regulations affecting our business, including those relating to the manufacture, sale and distribution of wine;
•    the risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific to both domestic and to international markets;
•    claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient;
•    our ability to operate, update or implement our IT systems;
•    our ability to successfully pursue strategic acquisitions and integrate acquired businesses;
•    our potential ability to obtain additional financing when and if needed;
•    our substantial indebtedness and our ability to maintain compliance with restrictive covenants in the documents governing such indebtedness;
•    TSG’s significant influence over us and our status as a “controlled company” under the rules of the New York Stock Exchange;
•    the potential liquidity and trading of our securities; and
•    the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events, and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk factors” in our Fiscal 2021 Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a highly competitive
5

environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements whether as a result of new information, future developments or otherwise. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not rely on our forward-looking statements in making your investment decision. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
Investors and others should note that we may announce material information to our investors using our investor relations website (https://ir.duckhorn.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our Company, our business and other issues. It is possible that the information we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
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PART I
Item 1. Financial Statements.

Index to Condensed Consolidated Financial Statements
Page


7

The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Financial Position
(in thousands, except share and per share amounts)January 31, 2022July 31, 2021
ASSETS(unaudited)
Current assets
Cash$4,770 $4,244 
Accounts receivable trade (net of allowance of $400 and $800, respectively)
43,008 33,253 
Inventories297,531 267,737 
Prepaid expenses and other current assets9,524 9,167 
Total current assets354,833 314,401 
Long-term assets
Property and equipment, net255,845 240,939 
Intangible assets, net196,705 200,547 
Goodwill425,209 425,209 
Other long-term assets2,719 2,021 
Total long-term assets880,478 868,716 
Total assets$1,235,311 $1,183,117 
LIABILITIES AND EQUITY
Current liabilities
Accounts payable$9,858 $3,556 
Accrued expenses27,076 21,557 
Accrued compensation12,716 16,845 
Deferred revenue143 3,102 
Current maturities of long-term debt11,244 11,324 
Other current liabilities377 397 
Total current liabilities61,414 56,781 
Long-term liabilities
Revolving line of credit, net133,011 121,348 
Long-term debt, net of current maturities and debt issuance costs109,149 114,625 
Deferred income taxes86,667 86,667 
Other long-term liabilities986 1,458 
Total long-term liabilities329,813 324,098 
Total liabilities391,227 380,879 
Commitments and Contingencies (Note 11)
Equity
Common stock, $0.01 par value; 500,000,000 shares authorized, 115,065,210 issued and outstanding at January 31, 2022 and 115,046,793 issued and outstanding at July 31, 2021
1,151 1,150 
Additional paid-in capital729,508 726,903 
Retained earnings112,839 73,634 
Total The Duckhorn Portfolio, Inc. equity843,498 801,687 
Non-controlling interest586 551 
Total equity844,084 802,238 
Total liabilities and equity$1,235,311 $1,183,117 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Operations (unaudited)
Three months ended January 31,Six months ended January 31,
(in thousands, except share and per share amounts)2022202120222021
Net sales (net of excise taxes of $1,507, $1,150, $2,983 and $2,415, respectively)
$98,736 $83,657 $202,917 $175,295 
Cost of sales49,259 41,900 101,030 89,263 
Gross profit49,477 41,757 101,887 86,032 
Selling, general and administrative expenses23,814 17,471 46,972 34,276 
Casualty loss (gain), net (Note 13)
31 (7,770)80 (6,215)
Income from operations25,632 32,056 54,835 57,971 
Interest expense1,636 3,612 3,242 7,192 
Other income, net(338)(1,491)(1,431)(2,814)
Total other expenses 1,298 2,121 1,811 4,378 
Income before income taxes24,334 29,935 53,024 53,593 
Income tax expense6,407 7,935 13,784 14,071 
Net income17,927 22,000 39,240 39,522 
Less: Net loss (income) attributable to non-controlling interest5 3 (35)4 
Net income attributable to The Duckhorn Portfolio, Inc.$17,932 $22,003 $39,205 $39,526 
Net income per share of common stock:
Basic$0.16 $0.22 $0.34 $0.39 
Diluted$0.16 $0.22 $0.34 $0.39 
Weighted average shares of common stock outstanding:
Basic115,049,395 101,713,460 115,048,094 101,713,460 
Diluted115,389,502 101,713,460 115,391,011 101,713,460 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Changes in Equity (unaudited)
(in thousands, except share amounts)Common stockAdditional
paid-in capital
Retained
earnings
Total
The Duckhorn Portfolio, Inc. equity
Non-controlling interestTotal equity
SharesAmount
Balances at July 31, 2020101,713,460 $1,017 $535,372 $117,658 $654,047 $557 $654,604 
Net income (loss)— — — 17,523 17,523 (1)17,522 
Equity-based compensation— — 288 — 288 — 288 
Balances at October 31, 2020101,713,460 $1,017 $535,660 $135,181 $671,858 $556 $672,414 
Net income (loss)— — — 22,003 22,003 (3)22,000 
Equity-based compensation (Note 12)
— — 288 — 288 — 288 
Balances at January 31, 2021101,713,460 $1,017 $535,948 $157,184 $694,149 $553 $694,702 
Balances at July 31, 2021115,046,793 $1,150 $726,903 $73,634 $801,687 $551 $802,238 
Net income— — — 21,273 21,273 40 21,313 
Equity-based compensation— — 1,459 — 1,459 — 1,459 
Balances at October 31, 2021115,046,793 $1,150 $728,362 $94,907 $824,419 $591 $825,010 
Net income (loss)— — — 17,932 17,932 (5)17,927 
Initial public offering, net of issuance costs— — (270)— (270)— (270)
Issuance of common stock under equity incentive plans18,417 1 — — 1 — 1 
Equity-based compensation (Note 12)
— — 1,416 — 1,416 — 1,416 
Balances at January 31, 2022115,065,210 $1,151 $729,508 $112,839 $843,498 $586 $844,084 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended January 31,
(in thousands)20222021
Cash flows from operating activities
Net income$39,240 $39,522 
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization11,109 10,881 
(Gain) loss on disposal of assets(13)66 
Change in fair value of derivatives(957)(2,827)
Amortization of debt issuance costs804 823 
Loss on debt extinguishment  272 
Equity-based compensation2,875 576 
Change in operating assets and liabilities:
Accounts receivable trade, net(9,755)(3,272)
Inventories(29,794)(26,363)
Prepaid expenses and other current assets(361)(7,765)
Other long-term assets(217)(166)
Accounts payable6,377 2,250 
Accrued expenses6,621 9,138 
Accrued compensation(4,129)(45)
Deferred revenue(2,960)3,086 
Other current and long-term liabilities(12)(35)
Net cash provided by operating activities18,828 26,141 
Cash flows from investing activities
Purchases of property and equipment(23,408)(9,793)
Proceeds from sales of property and equipment72 45 
Net cash used in investing activities(23,336)(9,748)
Cash flows from financing activities
Payments of deferred offering costs(270) 
Payments under line of credit(52,000)(43,500)
Borrowings under line of credit63,000 37,500 
Extinguishment of long-term debt (38,131)
Issuance of long-term debt 38,131 
Payments of long-term debt(5,696)(7,238)
Repayment of capital leases (8)
Debt issuance costs (125)
Net cash provided by (used in) financing activities5,034 (13,371)
Net increase in cash526 3,022 
Cash - Beginning of year4,244 6,252 
Cash - End of year$4,770 $9,274 
Non-cash investing and financing activities
Property and equipment additions in accounts payable and accrued expenses$193 $279 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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The Duckhorn Portfolio, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

1.    Description of business
The Duckhorn Portfolio, Inc. and its subsidiaries (the "Company" or "Management") headquartered in St. Helena, CA, produces luxury and ultra-luxury wine across a portfolio of winery brands, including Duckhorn Vineyards, Paraduxx, Goldeneye, Migration, Decoy, Canvasback, Calera, Kosta Browne, Greenwing and Postmark.
The Company's revenue is comprised of wholesale and DTC sales. Wholesale revenue is generated through sales directly to California retailers and restaurants, sales to distributors and agents located in other states throughout the U.S. and sales to export distributors that sell internationally. DTC revenue results from individual consumers purchasing wine directly from the Company through club membership, the Company's website or tasting rooms located in Napa Valley, California; Anderson Valley, California; Sebastopol, California; Hollister, California; and Walla Walla, Washington.
The Company owns or controls through long-term leases certain high-quality vineyards throughout Northern and Central California and Washington. Vinification takes place at wineries owned, leased or under contract with third parties predominately located in Napa Valley, California; Anderson Valley, California; Hopland, California; Hollister, California; Sebastopol, California; and Walla Walla, Washington.
Fiscal year
The Company's fiscal year ends on July 31.
Secondary offering
In the first quarter of Fiscal 2022, the Company completed a secondary offering where certain existing shareholders sold 12,000,000 shares of common stock at a price of $20.50 per share. In November 2021, an additional 626,467 shares of common stock were sold pursuant to the partial exercise of the underwriters' option to purchase additional shares. The Company did not receive any of the proceeds from the sale of the shares by the existing stockholders. In connection with the offering, the Company incurred costs of $1.0 million of which $0.4 million was incurred in the fourth quarter of Fiscal 2021. These costs are reflected in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.
2.    Basis of presentation and recent accounting pronouncements
Basis of presentation
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP and Article 10 of the Securities and Exchange Commission’s Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP may be condensed or omitted. These Condensed Consolidated Financial Statements have been prepared on the same basis as the Company's audited annual financial statements and, in the opinion of Management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company's financial information for the interim periods presented. These interim results are not necessarily indicative of the results to be expected for the year ending July 31, 2022, for any other interim period or for any future year.
The Condensed Consolidated Financial Statements are unaudited and should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended July 31, 2021.
Principles of consolidation
The Condensed Consolidated Financial Statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated VIE of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation.
Accounting estimates
The preparation of Condensed Consolidated Financial Statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues
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and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of long-lived assets, inventory obsolescence and reserves, capitalized indirect inventory costs, allowance for doubtful accounts receivable, calculation of accrued liabilities, customer incentive reserves, uncertain tax positions, contingent liabilities, fair value of assets and liabilities acquired in connection with business combinations, equity-based compensation and deferred revenues. Actual results could differ from those estimates.
Preferred stock
The Company has 100,000,000 shares of $0.01 par value preferred stock authorized, none of which are issued and outstanding.
Variable interest entities
The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. At January 31, 2022 and July 31, 2021, the Company's ownership percentage of the sole identified VIE was 76.2%. The VIE's net assets were $2.4 million and $2.2 million at January 31, 2022 and July 31, 2021, respectively. The assets and liabilities, which may only be used to settle its own obligations, are primarily related to property, equipment and working capital accounts, which generally represent the amounts owed by or to the Company for goods under current contracts.
Recent accounting pronouncements
As an “emerging growth company” as established by the JOBS Act, the Company is permitted to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates available to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. Based on the Company's aggregate worldwide market value of voting and non-voting common equity held by non-affiliates as of January 31, 2022, the Company will become a “large accelerated filer” and lose emerging growth company status beginning with its Annual Report on Form 10-K for the year ending July 31, 2022.
Recently issued accounting pronouncements not yet adopted:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and several amendments, codified as ASC 842, which supersedes prior guidance on accounting for leases under FASB ASC 840, Leases. ASU No. 2016-02, among other provisions, (i) requires lessees to classify leases as either finance or operating leases, (ii) generally requires all leases to be recorded on the Condensed Consolidated Statements of Financial Position through the recognition of right-of-use assets and corresponding lease liabilities and (iii) expands mandatory qualitative and quantitative disclosures regarding leasing activities. The FASB issued ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective dates for certain entities”, which extends the effective date for all other entities, for annual reporting periods beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. The amended standard is effective for the Company beginning with the year ended July 31, 2022. Early adoption is permitted. The Company’s assessment of the new lease accounting standard’s impact on the Condensed Consolidated Financial Statements is ongoing. The Company is evaluating the optional practical expedients and assessing the Company's existing lease portfolio in order to determine the impact to the financial statements, accounting systems, processes, and internal control over financial reporting. While the Company has not yet quantified the impact, adjustments resulting from the adoption of this standard will materially increase total assets and total liabilities with the recognition of right of use assets and lease liabilities related to the Company's operating leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and also issued subsequent amendments to the initial guidance, collectively, ASC 326, to replace the incurred loss impairment methodology in current U.S. GAAP with a
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methodology that requires the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. For many entities with financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which may result in the earlier recognition of credit losses on financial instruments. This guidance will be effective for the Company beginning with the year ended July 31, 2022, with early adoption permitted. The Company is currently evaluating the impact this standard could have on the Condensed Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and further issued subsequent amendments to the initial guidance. In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The standard is effective immediately and may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact of reference rate reform and the optional expedients provided by this standard on its contracts.
In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Entity (Subtopic 815-40), to clarify the accounting for modifications or exchanges of equity-classified warrants. This amendment applies to freestanding stock options, which the Company granted in Fiscal 2021. In accordance with the ASU, if there is a modification and the option is still determined to be classified as equity, the modification should be accounted for as an exchange of the original option for a new option. This guidance will be effective for the Company beginning with the year ended July 31, 2023, with early adoption permitted. The Company is currently evaluating the impact of this update and will monitor for modifications or exchanges of the issued freestanding stock options, but at this time does not anticipate the adoption of ASU 2021-04 to have a material impact on the Condensed Consolidated Financial Statements.
3.    Revenue
Disaggregated revenue information
The following table presents the percentages of consolidated net sales disaggregated by sales channels:
Three months ended January 31,Six months ended January 31,
2022202120222021
Wholesale - distributors67.2 %60.2 %67.9 %66.9 %
Wholesale - California direct to retail(a)
19.8 19.6 18.1 16.9 
DTC(b)
13.0 20.2 14.0 16.2 
Net sales100.0 %100.0 %100.0 %100.0 %
________________________________________________
(a) Includes $0.5 million and $2.2 million of sales related to bulk, grape and merchandise sales for the three months and six months ended January 31, 2022, respectively. Sales of a similar nature were immaterial for the three months and six months ended January 31, 2021.
(b) Includes shipping and handling revenue of $0.4 million and $0.6 million for the three months ended January 31, 2022 and 2021, respectively and $0.9 million and $1.1 million for the six months ended January 31, 2022 and 2021, respectively.
Contract liabilities
When the Company receives payment from a customer prior to transferring the product under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company’s deferred revenue is primarily comprised of cash collected from DTC members for purchases ahead of the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance obligation is met.
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As shown on the Condensed Consolidated Statements of Financial Position, the balance of deferred revenue was $3.1 million at July 31, 2021, the beginning of the period, and was $0.1 million at January 31, 2022, the end of the period. Revenue recognized during the six months ended January 31, 2022, which was included in the opening contract liability balance for the corresponding period totaled $3.0 million.
4.    Inventories
Inventories were comprised of the following:
(in thousands)January 31,
2022
July 31
2021
Finished goods
Bottled wine$94,520 $120,876 
Merchandise458 547 
Work in progress
Bulk wine194,186 130,693 
Packaging3,747 3,541 
Overhead1,671 613 
Raw materials
Deferred crop costs2,949 11,467 
Total$297,531 $267,737 
The Company capitalizes into inventory depreciation related to property and equipment used in the production of inventory. For the six months ended January 31, 2022 and the year ended July 31, 2021, the amount of depreciation capitalized was $6.6 million and $12.5 million, respectively.
5.    Property and equipment
Property and equipment was comprised of the following major components as of:
(in thousands)January 31,
2022
July 31,
2021
Land$131,297 $120,063 
Buildings and improvements68,646 68,616 
Vineyards and improvements32,511 29,164 
Machinery and equipment51,618 49,607 
Barrels30,844 26,349 
Total depreciable property and equipment314,916 293,799 
Less: accumulated depreciation and amortization(63,177)(58,542)
Total depreciable property and equipment, net251,739 235,257 
Construction in progress4,106 5,682 
Property and equipment, net$255,845 $240,939 
Depreciation expense was $0.3 million and $0.7 million for three months and six months ended January 31, 2022 and $0.3 million and $0.6 million for three months and six months ended January 31, 2021, respectively. See Note 4 (Inventories) for depreciation expense capitalized into inventory.
Vineyard acquisitions
In the second quarter of Fiscal 2022, the Company completed the purchase of three Napa County, California vineyards and related assets for a total of $14.5 million.
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6.    Other intangible assets
Intangible assets were comprised of the following components:
January 31, 2022
(in thousands)Gross carrying amountAccumulated amortizationNet
Definite-lived intangible assets
Customer relationships$92,720 $38,054 $54,666 
Leasehold interests1,572 433 1,139 
Total definite-lived intangible assets94,292 38,487 55,805 
Indefinite-lived intangible assets
Trade names139,600 — 139,600 
Lane rights1,300 — 1,300 
Total indefinite-lived intangible assets140,900 — 140,900 
Total other intangible assets$235,192 $38,487 $196,705 
July 31, 2021
(in thousands)Gross carrying amountAccumulated amortizationNet
Definite-lived intangible assets
Customer relationships$92,720 $34,274 $58,446 
Leasehold interests1,572 371 1,201 
Total definite-lived intangible assets94,292 34,645 59,647 
Indefinite-lived intangible assets
Trade names139,600 — 139,600 
Lane rights1,300 — 1,300 
Total indefinite-lived intangible assets140,900 — 140,900 
Total other intangible assets$235,192 $34,645 $200,547 
The Company’s amortization expense for both the three months and six months ended January 31, 2022 and 2021 was $1.9 million and $3.8 million, respectively. For the next five years, the Company anticipates the annual amortization of the definite-lived intangible assets that have been recorded as of January 31, 2022 to be $7.7 million per year.
7.    Accrued expenses
The Company’s accrued expenses balance consisted of the following amounts:
(in thousands)
January 31,
2022
July 31,
2021
Trade spend(a)
$16,207 $10,734 
Bulk wine and other received not invoiced607 1,526 
Barrel purchases 936 
Deferred compensation liability(b)
2,144 2,096 
Income tax payable
2,313  
Accrued invoices and other accrued expenses5,805 6,265 
Total
$27,076 $21,557 
________________________________________________
(a) Trade spend refers to estimated amounts the Company owes to distributors for depletion-based incentives granted for meeting specific depletion targets.
(b) The Company intends to use the cash surrender value life insurance policies in settling its deferred compensation plan liability. The cash surrender value of the life insurance policies was $1.9 million and $1.7 million at January 31, 2022 and July 31, 2021, respectively.
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8.    Debt
The Company is subject to the requirements of various financial covenants pursuant to the term loans and revolving line of credit, including a debt to net worth maximum and a fixed charge coverage ratio as defined in the Credit Facility. As of January 31, 2022, the Company was not in violation of any financial covenant.
Included in interest expense in the Condensed Consolidated Statements of Operations, and in depreciation and amortization on the Condensed Consolidated Statements of Cash Flows, is amortization related to debt issuance costs of $0.4 million for both the three months ended January 31, 2022 and 2021 and $0.8 million for both the six months ended January 31, 2022 and 2021.
Revolving line of credit
At January 31, 2022, $290.0 million was available to draw under the revolving line of credit, excluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. The weighted-average interest rate was 1.8% on the amount outstanding at January 31, 2022. There were no amounts outstanding on the letter of credit sub-facility or the swingline sub-facility at January 31, 2022.
9.    Derivative instruments
The Company manages exposure to interest rates and foreign currency movements by entering into derivative contracts from time to time, as movements in such markets could impact the financial results and Condensed Consolidated Statements of Financial Position.
The changes in estimated fair values of derivative instruments result from changes in interest rates and foreign currency exchange rates. Such changes serve to offset exposure in related business assets or liabilities. The Company is exposed to credit loss in the event of nonperformance by a counterparty. Certain of the Company's derivative instruments are subject to master netting agreements. In certain circumstances, this agreement allows the Company to net-settle amounts payable or receivable related to multiple derivative transactions with the same counterparty. The fair values of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Collateral is generally not required of the Company or of the counterparties to the master netting agreements, and no cash collateral was received or pledged under such agreements as of January 31, 2022 or July 31, 2021. The Company does not enter into derivative instruments for trading or speculative purposes. The Company's accounting policies do not apply hedge accounting treatment to derivative instruments.
As of January 31, 2022, the Company held the following interest rate swap agreements, which fixed the interest rate on the applicable notional amount of outstanding variable rate debt:
Notional amount
(in thousands)
Interest rateEffective dateExpiration date
$100,0000.487%March 21, 2020March 23, 2023
As discussed in Note 11 (Commitments and contingencies), the Company manages annual barrel purchases by engaging domestic and foreign cooperages to provide specified barrel quantities on agreed delivery dates. Some of these invoices are paid in Euros. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enters into foreign currency forward contracts aligning settlement dates with expected barrel delivery and the anticipated payments to various coopers.
The total notional amounts of the Company’s derivative instruments outstanding are as follows:
(in thousands)January 31,
2022
July 31,
2021
Derivative instruments not designated as hedging instruments
Interest rate swap contracts$100,000 $100,000 
Foreign currency forward contracts 2,369 
Total derivative instruments not designated as hedging instruments$100,000 $102,369 
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Results of period derivative activity
The estimated fair value and classification of derivative instruments on the accompanying Condensed Consolidated Statements of Financial Position are as follows:
(in thousands)January 31,
2022
July 31,
2021
Derivative instruments not designated as hedging instruments
Classification
Interest rate swap contracts
Swap contractOther long-term assets$482 $ 
Derivative instrumentOther long-term liabilities (480)
Foreign currency forward contracts
Derivative instrumentOther current assets$ $5 
The amounts and classification of the gains and losses in the Condensed Consolidated Statements of Operations related to derivative instruments not designated as hedging instruments are as follows:
Three months ended January 31,Six months ended January 31,
(in thousands)Classification2022202120222021
Interest rate swap contractsOther income, net$(515)$(1,279)$(962)$(2,945)
Foreign currency forward contractsOther income, net  5 118 
Total gains$(515)$(1,279)$(957)$(2,827)
10.    Fair value measurements
The Company applies a fair value hierarchy pursuant to ASC 820, Fair Value Measurement, which consists of three levels of inputs that may be used to measure fair value:
Level 1        Inputs to fair value are quoted prices in active markets for identical assets or liabilities;
Level 2        Inputs to fair value are based on observable data other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data such as interest rates or yield curves for substantially the full term of the instrument;
Level 3        Inputs to fair value are based on unobservable data for the instrument and are supported by little or no market activity.
Following is a description of the valuation methodologies used for instruments measured at fair value in the Condensed Consolidated Financial Statements, as well as the general classification of such instruments under the valuation hierarchy.
Interest rate swap contracts: The fair value of the Company’s interest rate swap agreement is estimated with the assistance of a third party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
Foreign currency forward contracts: The fair value of the Company’s outstanding foreign currency forward contracts is estimated with the assistance of a third party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
Deferred compensation plan: Contributions to the Company’s deferred compensation plan are managed by a third-party administrative agent. The fair value of the total contributed plan assets and liabilities are based on inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
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The Company’s other financial instruments consist mainly of cash, accounts receivable, accounts payable, accrued expenses, and debt. The carrying value of all other financial instruments, except debt, approximates fair value due to the short-term nature of these assets and liabilities. The carrying value of the Company's debt approximates fair value as the interest rates are variable and reflective of market rates. Debt is categorized as a Level 2 liability within the fair value hierarchy.
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at January 31, 2022, were as follows:
(in thousands)Fair value measurements using:
Quoted prices in active markets (Level 1)Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Total
Assets
Interest rate swap contracts$ $482 $ $482 
Deferred compensation plan asset 1,920 $ 1,920 
Liabilities
Deferred compensation liability$ $2,144  $2,144 
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at July 31, 2021, were as follows:
(in thousands)Fair value measurements using:
Quoted prices in active markets (Level 1)Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Total
Assets
Foreign currency forward contracts$ $5 $ $5 
Deferred compensation plan asset 1,719  1,719 
Liabilities
Interest rate swap contracts$ $480 $ $480 
Deferred compensation liability 2,096  2,096 
11.    Commitments and contingencies
Operating leases
The Company leases approximately 150 acres of vineyard property in California under various third-party operating lease agreements, with terms ranging from one to 30 years, expiring in future years through December 2046. The Company also leases office space, office equipment and visitor centers under third-party operating leases. Some lease agreements contain purchase options and many include renewal options at specified dates throughout the lease terms. Rental expense was $1.0 million and $2.0 million for three months and six months ended January 31, 2022, respectively, and $0.9 million and $2.0 million for the three months and six months ended January 31, 2021, respectively, the majority of which is capitalized into inventory.
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At January 31, 2022, the future minimum payments under the non-cancelable operating lease agreements by fiscal year are as follows:
(in thousands)
Remaining portion of 2022
$2,068 
20234,122 
20244,106 
20254,070 
20262,686 
Thereafter (collectively)10,836 
Total$27,888 
The Company is also party to non-cancelable sublease agreements. Sublease income was immaterial for the three and six months ended January 31, 2022 and is accounted for as other income in the Consolidated Statements of Operations. The terms of the agreements range between three and five years and the total future minimum payments for these subleases is immaterial.
Long-term purchase contracts
The Company has entered into long-term grape purchase contracts with various growers to supply a significant portion of its future grape requirements. The lengths of the contracts typically vary from one to eight years, and prices per ton are either determined at the outset for the contract duration or are negotiated annually. The Company's grape purchase contracts generally include acceptance provisions based on qualitative and quantitative grape quality characteristics. For the 2021 harvest, the Company contracted for approximately 34,000 tons of grapes at a cost of $68.1 million in Fiscal 2022. For the 2020 harvest, the Company purchased approximately 12,000 tons of grapes at a total cost of $26.5 million in Fiscal 2021. The increase was largely attributable to lower quantities available for the 2020 harvest at the Company's contractually defined quality levels due to wildfires compounded with higher demand and production levels in current and future periods.
Purchase commitments
The Company enters into various contracts with third-parties for custom crush, storage and mobile bottling services. The costs related to these contracts are recorded in the period the service is provided. The contracts for custom crush services typically have minimums that the Company is required to pay if certain grape volume thresholds are not delivered. The Company does not record these minimums related to service contracts as contingent liabilities on the Condensed Consolidated Statements of Financial Position given the harvest yield size, resulting volumes and qualities of grape deliveries are not known or estimable until harvest, when all related contingencies would be resolved.
Contingent liabilities
The Company evaluates pending or threatened litigation, operational events which could result in regulatory or civil penalties, environmental risks, and other sources of potential contingent liabilities during the year. In accordance with applicable accounting guidance, the Company establishes an accrued liability when those matters present loss contingencies, which are both probable and reasonably estimable. As of January 31, 2022, there were no material contingent obligations requiring accrual or disclosure.
In the ordinary course of business, the Company enters into agreements containing standard indemnification provisions. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain, as these involve potential future claims against the Company that have not occurred. The Company believes the probability of incurring future obligations under these indemnification provisions is sufficiently remote. As of January 31, 2022 and July 31, 2021, no amounts have been accrued related to such indemnification provisions.
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12.    Equity-based compensation
2016 Equity Plan
The Company recognized equity compensation expense related to the 2016 Plan in selling, general and administrative expenses due to units vesting over their requisite service periods in the aggregate amounts of $0.1 million and $0.2 million for the three months and six months ended January 31, 2022, respectively, and $0.3 million and $0.6 million for the three months and six months ended January 31, 2021, respectively. The total unrecognized compensation expense related to the 2016 Plan was $0.2 million as of January 31, 2022, which is expected to be recognized over a weighted-average period of 0.5 years.
Restricted shares
Performance-based sharesWeighted-average grant-date fair value
Unvested as of July 31, 2021
399,234 $14.23 
Granted  
Vested(133,076)14.23 
Forfeited  
Unvested as of January 31, 2022
266,158 $14.23 
The total fair value of restricted shares that vested during the six months ended January 31, 2022 was $1.9 million.
2021 Equity incentive plan
The Company recognized in selling, general and administrative expenses equity compensation expense related to the 2021 Plan totaling $1.1 million and $2.2 million for the three months and six months ended January 31, 2022, respectively, due to units vesting over their requisite service period. In addition, the Company capitalized into inventory $0.2 million and $0.4 million for the three months and six months ended January 31, 2022, respectively.
Stock options
Stock option activity and activity regarding shares available for grant under the 2021 Plan is shown below:
Number of optionsWeighted-average exercise priceWeighted-average remaining contractual life
(in years)
Aggregate intrinsic value
(in thousands)
Outstanding at July 31, 2021
1,552,648 $17.11 
Granted   
Vested  
Forfeited(2,799)17.00 
Outstanding at January 31, 2022
1,549,849 $17.11 9.1$5,888 
The total unrecognized compensation expense related to the 2021 Plan stock options was $5.6 million as of January 31, 2022, which is expected to be recognized over a weighted-average period of 3.1 years. No options were vested and exercisable as of January 31, 2022.
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Restricted stock units
RSU grant activity under the 2021 Plan is shown below:
Number of unitsWeighted-average grant-date fair value per share
Unvested as of July 31, 2021
555,950 $16.95 
Granted22,333 20.24 
Vested(18,417)15.34 
Forfeited(932)17.00 
Unvested as of January 31, 2022
558,934 $17.13 
The total fair value of restricted stock that vested during the six months ended January 31, 2022 was $0.3 million. The total unrecognized compensation expense related to the 2021 Plan RSUs was $7.4 million as of January 31, 2022, which is expected to be recognized over a weighted-average period of 2.9 years.
Employee Stock Purchase Plan
In connection with the IPO, the Company adopted the 2021 Employee Stock Purchase Plan, which allows for the issuance of up to a total of 1,250,509 shares of the Company's common stock. The ESPP, pursuant to Internal Revenue Code Section 423, allows eligible participants to purchase shares using payroll deductions of up to 15% of their total compensation, subject to a $25,000 calendar year limitation on contributions. The purchase price of each share will be 85% of the lesser of the fair market value of the stock as determined on the applicable grant date or the applicable purchase date for each offering period.
Each offering period is six months in duration. The first offering period for the Employee Stock Purchase Plan began on January 3, 2022. Thereafter, offering periods will begin on the first business day of January and July. No purchases have been made under the ESPP as of January 31, 2022.
The fair value of ESPP shares is estimated at the date of grant using the Black-Scholes option-pricing valuation model. The following assumptions were applied in the model to estimate the grant-date fair value of the ESPP for the initial offering period that began on January 3, 2022.
Expected term (in years)(a)
0.5
Expected dividend yield(b)
 
Risk-free interest rate(c)
0.22 %
Expected volatility(d)
47 %
Stock price$23.33 
________________________________________________
(a) Based on the contractual terms of the 2021 ESPP Agreement and equal to each option period.
(b) The Company has not historically paid and does not expect to pay dividends in the foreseeable future.
(c) The risk-free rate was estimated from the U.S. Constant Maturity Treasury Yield Curve for a period consistent with the expected term in effect at the grant date.
(d) The expected volatility was estimated based on analysis of the Company's historical and implied volatility, and considering a group of guideline public companies deemed to be comparable public peers within the Company’s industry.
The equity-based compensation expense related to the ESPP is generally recognized evenly over the service period unless otherwise stipulated by the award agreement. The service period is the period over which the employee performs the related services, which is normally the same as the six month ESPP offering period.
As of January 31, 2022, total estimated unrecognized compensation expense related to the ESPP was $0.1 million. That cost is expected to be recognized over the remaining term of the offering period of 0.4 years.
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13.    Casualty loss
Wildfires
Several wildfires occurred in northern California in the first quarter of Fiscal 2021. Other than smoke exposure to unharvested grapes, the Company's owned and leased vineyards did not sustain damage during the fires. Fire and smoke exposure related expenses are reported on the casualty loss line in the Condensed Consolidated Statement of Operations and were immaterial in the current fiscal year. Smoke and fire damage to vineyards in the primary markets where the Company sources fruit rendered some of the available grapes unacceptable for the Company’s production needs. Based on an internal analysis of the impacts of these wildfires, Management believes the potential impact to the Company's operational results to be immaterial and intend to continue to monitor the ongoing effects to the business for any material changes to that conclusion.
Flood
In Fiscal 2021, as discussed in the 2021 Form 10-K, the Company received proceeds from an insurance claim related to losses incurred in February 2019 due to a flood at a winery. Any incremental charges in the fiscal year ended July 31, 2021, offset by insurance proceeds received, which were reported on the casualty gain, net line item in the Consolidated Statements of Operations and did not recur in Fiscal 2022.
14.    Earnings per share
Basic earnings per share is calculated by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into shares of common stock.
The following is a reconciliation of the Company's basic and diluted income per share calculation:
Three months ended January 31,Six months ended January 31,
(in thousands, except share and per share amounts)2022202120222021
Numerator - Net income attributable to The Duckhorn Portfolio, Inc.$17,932 $22,003 $39,205 $39,526 
Denominator:
Weighted average number of shares of common stock outstanding - basic115,049,395 101,713,460 115,048,094 101,713,460 
Dilutive stock options and restricted stock(a)
340,107  342,917  
Weighted average number of shares of common stock outstanding - assuming dilution115,389,502 101,713,460 115,391,011 101,713,460 
Earnings per share attributable to The Duckhorn Portfolio, Inc.
Basic$0.16 $0.22 $0.34 $0.39 
Diluted$0.16 <