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WBEV Winc

Filed: 27 Sep 21, 5:21pm
As filed with the Securities and Exchange Commission on September 27, 2021.
Registration No. 333-     
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
Winc, Inc.
(Exact name of registrant as specified in its charter)
Delaware208045-2988960
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
1751 Berkeley St, Studio 3
Santa Monica, CA 90404
(800) 297-1760
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
National Registered Agents, Inc.
160 Greentree Drive, Suite 101
Dover, Delaware 19904
(855) 337-0707
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Drew Capurro
Brian Cuneo
B. Shayne Kennedy
Latham & Watkins LLP
650 Town Center Drive
Costa Mesa, CA 92626
Tel: (714) 540-1235
Matthew Thelen
Chief Strategy Officer and General Counsel
Winc, Inc.
1751 Berkeley St, Studio 3
Santa Monica, CA 90404
Tel: (800) 297-1760
Richard D. Truesdell, Jr.
Pedro J. Bermeo
Jennifer Ying Lan
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
Tel: (212) 450-4000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.   ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.   ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities To Be Registered
Proposed Maximum
Aggregate Offering Price(1)(2)
Amount of
Registration Fee
Common Stock, $0.0001 par value per share$75,000,000$8,182.50
(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)
Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion.
Preliminary Prospectus dated September 27, 2021
PRELIMINARY PROSPECTUS
           Shares
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Common Stock
This is Winc, Inc.’s initial public offering. We are selling           shares of our common stock.
We expect the public offering price to be between $      and $      per share. Currently, no public market exists for the shares of our common stock. We intend to apply to list our common stock on the New York Stock Exchange (the “NYSE”) under the symbol “BEV.”
We are an “emerging growth company” and a “smaller reporting company” as defined under the federal securities laws and are subject to reduced public company disclosure standards. See “Prospectus Summary—Implications of Being an Emerging Growth Company and Smaller Reporting Company.”
While we will not qualify as a “controlled company” as defined under the rules and regulations of the NYSE, our officers, directors and their related parties will collectively control approximately     % of our common stock after the consummation of this offering (assuming no exercise of the underwriters’ option to purchase additional shares) and as a result will be able to exert significant influence over the management and affairs of the company and most matters requiring stockholder approval following the offering.
Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 24 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per ShareTotal
Public offering price$     $     
Underwriting discounts(1)$$
Proceeds to Winc, before expenses$$
(1)
We have agreed to reimburse the underwriters for certain FINRA-related expenses. We refer you to “Underwriting” beginning on page 168 of this prospectus for additional information regarding underwriting compensation.
The underwriters may also exercise their option to purchase up to an additional        shares of common stock from us at the initial public offering price, less the underwriting discounts, for 30 days after the date of this prospectus.
The shares will be ready for delivery on or about                 , 2021.
Joint Book-Runners
BofA SecuritiesCanaccord Genuity
Craig-HallumRoth Capital Partners
Co-Managers
Benchmark Company
The date of this prospectus is           , 2021

 
TABLE OF CONTENTS
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F-1
We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.
 

 
Trademarks and Tradenames
“Winc, Inc.,” “Winc,” “BWSC, LLC,” our logo and other registered or common law trade names, trademarks or service markets of Winc appearing in this prospectus are the property of Winc. This prospectus contains additional trade names, trademarks and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, our trade names, trademarks and service marks referred to in this prospectus appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trade names, trademarks and service marks.
Glossary
As used in this prospectus, unless the context otherwise requires, references to:

Alcoholic Beverages” means wine, spirits and beer and the “Alcoholic Beverages market” or “Alcoholic Beverages industry” means the wine, spirits and beer market in the United States;

AOV” means average order value, which, for any period, represents the sum of DTC net revenues divided by the total orders placed in that period;

CAC” means consumer acquisition cost, which, for any period, represents performance and marketing expense attributable to consumer acquisition less the gross profit from gift card sales, divided by the number of new members that have signed up to participate in the Winc.com membership program for that same period;

case” means a standard 12 bottle case of wine, in which each bottle has a volume of 750 milliliters or nine liters in total;

CPG” means consumer product goods;

core brands” refers to the following brands: (i) “Summer Water” or “SW;” ​(ii) “Wonderful Wine Company” or “WWC;” (iii) “Lost Poet” or “LP;” ​(iv) “Folly of the Beast” or “Folly;” and (v) “Chop Shop, or “Chop;”

DTC” means direct-to-consumer;

LTR” means consumer lifetime revenue, which represents for any member or group of members as of any date the total revenue generated from each member or group of members as of such date on the Winc digital platform;

LTV” means consumer lifetime value, which represents the total gross profit generated from each member on the Winc digital platform on a 5-year historical basis, adjusted for any unused credit breakages; total gross profit generated from each member is determined by reducing revenue for any unused credit breakages, multiplying each month of revenue by the associated average gross margin percentage generated in 2020, and then summing the dollar values on a cumulative basis; to properly account for gross margin differences between the discounted initial purchase and subsequent months, we multiply the average 2020 gross margin percentage from initial discounted purchases to the first month of revenues and the average 2020 gross margin percentages from such segment purchases to the revenues from all subsequent months;

price bands” means the price-point segments in the wine market consisting of:

Value” wines with a $9.99 or lower retail price per bottle;

Premium” wines with a $10.00-$29.99 retail price per bottle; and

Luxury” wines with a $30.00 or higher retail price per bottle; and

three-tier system” means the system for distributing Alcoholic Beverages set up in the United States after the repeal of the prohibition. The three tiers are importers or producers, distributors and retailers. Under the traditional three-tier system, producers can sell their products only to wholesale distributors who then sell to retailers, and only retailers may sell to consumers. Today, sales of Alcoholic Beverages are permitted online outside of the three-tier system, through direct-to-consumer licenses.
 
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PROSPECTUS SUMMARY
This summary highlights information contained in more detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Special Note Regarding Forward-Looking Statements,” and our consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus.
Unless the context requires otherwise, references to “Winc,” the “Company,” “we,” “us,” and “our,” refer to Winc, Inc. and its consolidated subsidiary.
Winc: We Bring Everyone to the Table
We are one of the fastest growing at scale wineries in the United States. Over the past two years we have grown by approximately 80% in case volume sold, with the sale of over 430,000 cases in 2020. Our growth is fueled by the joint capabilities of our data-driven brand development strategy paired with a true omni-channel distribution network. Since March 2020, we have experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much of the United States in response to the COVID-19 pandemic. Industry research and steady consumer demand lead management to believe that this is a permanent shift in consumer behavior. For example, a 2021 Sovos report assessing DTC wine shipment data concluded that the boosts in DTC wine purchasing relating to the impacts of COVID-19 will continue once the pandemic ends and may drive continued growth. Though we cannot guarantee that our historical growth rates will be indicative of future growth, we believe our balanced platform is well-suited to gain market share and drive meaningful long-term growth in the approximately $400 billion Alcoholic Beverages market. Winc's mission is to become the leading brand builder within the alcoholic beverages industry through an omni-channel growth platform.
As product innovators focused on building durable brands that consumers love, we have developed a proprietary process, called Ideate, Launch and Amplify, that has allowed us to consistently produce quality wine brands in a capital-efficient fashion. We believe this process is unique within the Alcoholic Beverages industry. The key components of our brand building strategy are as follows:
Ideate:   The Winc digital platform is the starting point for our brand ideation process. Ongoing analysis of consumer data and ordering habits of our growing member base that consisted of approximately 120,000 members as of June 30,2021 provides near real-time insights into shifting and emerging consumer preferences. For years we have been learning and constantly refining our understanding of the key signals coming from our consumer data that we believe have the greatest predictive power. We then combine those signals with an extensive review of industry data trends and qualitative inputs from our winemakers, sommeliers and creative team to discern the most compelling product opportunities for our development team to begin the brand-building process.
Launch:   After our team has delivered a target product from the Ideate process, we then design the brand and associated beverage formulation. With our asset-light outsourced production model, we produce initial inventories and prepare to launch the product on the Winc digital platform directly into our consumer base. We were able to take the last ten innovation projects launched into the DTC channel from initial bottling to receiving consumer feedback in under two months on average, compared to what our management believes is typically a feedback cycle of 6 to 12 months for traditional winemakers. Once our products begin to be sold on the Winc digital platform, we can quickly identify brands that are demonstrating strong initial traction using a variety of key data points, such as click-through metrics, consumer ratings and social listening and re-order rates. We aim to launch 8-10 innovation brands a year on the digital platform. For those brands showing breakout potential, we further test, refine and iterate in a rapid and capital-efficient manner before ultimately Amplifying the most promising brands to broader distribution.
Amplify:   With validation from consumers and proprietary sell-through data from our Winc digital platform, we aim to take one or two of the best performing new brands each year and Amplify them by scaling the new products across our high-volume omni-channel distribution platform. Our proprietary
 
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data enables us to better predict and validate demand prior to a broad wholesale launch, supported by extensive digital marketing. This both lowers the launch-related risk of our brands and allows for superior targeting capabilities, which we believe increases the attractiveness of our brands to wholesale distributors and retailers, both of whom are eager to add predictably high-velocity and profitable brands to their offerings.
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We believe our Ideate, Launch and Amplify brand development process incorporates the “Best of the New” and “Best of the Old” aspects of Alcoholic Beverages brand creation in a truly omni-channel fashion. The “Best of the New” is highlighted by our data-rich DTC relationships via the Winc digital platform. This data is a critical competitive advantage that we use to help shape the ideation and development of our brands. Our digitally native roots also provide us with a strong core competency in digital marketing and data analytics that allows us to interact in a more targeted and direct fashion with end-consumers and Amplify brands in ways the legacy Alcoholic Beverages companies have yet to consistently utilize. Our “Best of the Old” strategy is encompassed by our appreciation of the value creation potential and durable power of proprietary brand development, as well as the scale benefits that can be achieved by leveraging the legacy wholesale distribution channel. Today, more than 90% of wine is still purchased according to the legacy three-tier system, which mandates a supply chain through which alcohol suppliers may sell only to wholesale distributors, wholesale distributors to retailers and retailers to consumers, unless selling through direct-to-consumer licenses.
The symbiotic relationship of “Best of the New” and “Best of the Old” is highlighted in the graphic below: The “Best of the New”, represented in yellow, highlights our ability to generate a direct connection with consumers that effectively pulls brands into retailers and wholesale distributors, while the “Best of the Old”, represented in black, highlights our ability to effectively partner with wholesale distributors and retailers to push and ultimately scale promising brands to consumers.
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We view our omni-channel platform as highly complementary because it creates a positive feedback loop where incremental scale on either side of our platform begets scale and success on the other. This “Scale Begets Scale” dynamic allows the online and offline businesses to be self-reinforcing rather than competing. As our brand portfolio expands over time, we believe our DTC channel will become more desirable to existing and potential members who will have an increasing number of highly rated and more recognizable products to choose from each month. We believe over time this will lower our consumer acquisition cost, or CAC, improve retention rates and increase average order value, or AOV, thereby allowing us to take a larger share of our consumer’s wine-buying wallet. We expect the resulting growth in our DTC channel to provide us with increased scale and selling, general and administrative expense, or SG&A, leverage that will be used to reinvest in strengthening and better powering our data set, which we consider to be critical to driving innovation and effectively launching successful new core products into the wholesale channel. In turn, we expect this brand portfolio to further solidify our relationship with wholesale distributors, resulting in an expansion of retail accounts and shelf space with retailers and greater brand recognition on the part of consumers, which then strengthens our subscription offering, and the cycle continues. We believe that this increasingly powerful “Scale Begets Scale” dynamic provides us with a highly differentiated and strong competitive position within the rapidly evolving Alcoholic Beverages marketplace.
At one time, this omni-channel approach might have created the perception of a potential for “channel conflict” between us and wholesale distributors and retailers. However, we believe that our partners within the wholesale channel recognize that our Winc digital platform allows us to provide them with key data to help de-risk brand launches and increase the odds that our brands will become high performers on store shelves. Rather than disrupt the traditional wholesale distribution network, we consider our relationships with wholesale distributors and retailers to be more like strategic partnerships as we help them address the next generation of wine buyers with unique branding, digital marketing capabilities and de-risked brand launches.
Our Market Opportunity
At approximately $400 billion in sales within the United States in 2018, the Alcoholic Beverages category represents one of the largest total addressable market opportunities, or TAMs, in the entire consumer product goods, or CPG, landscape, far bigger than other leading sub-sectors, such as salty snacks, soft drinks, coffee and pet food. The attractiveness of the Alcoholic Beverages market is further enhanced by the highly recurring and frequent nature of product usage by consumers. A Wine Market Council survey of U.S. adults found that 54% consume wine at least once a week. Finally, leading Alcoholic Beverages companies have consistently reported among the highest profit margins within the broader CPG space. We believe this combination of market size, frequency of consumption and strong profitability makes the Alcoholic Beverages market a very attractive backdrop for us to pursue our open-ended platform development opportunity across other beverage verticals.
 
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Source: Statista, 2018.
The wine market can be further delineated into three distinct price point ranges: $9.99 or lower retail price per bottle, $10.00—$29.99 retail price per bottle and $30.00 or higher retail price per bottle. We call these three price bands Value, Premium and Luxury, respectively. In 2020, the Premium price band represented 262 million cases of wine, which was nearly 70% of the overall U.S. wine market and the fastest growing price point range from 2015 through 2020. Value, on the other hand, declined over the same period. While we plan to offer products across several price points over time, we have historically achieved our greatest success by focusing on the larger and more attractive Premium category. We believe this is due to consumer preferences for a well-regarded flavor profile, a strong brand and a reasonable price point. In our view, the Premium category is where we believe that meaningful scale can be achieved by a winemaker and it is also where we intend the vast majority of our wines will be positioned going forward.
U.S. Wine Volume Market Share by Price Band
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Source: International Wine and Spirits Record (IWSR), 2020. Includes still, sparkling, fortified, light, aperitif and other wines.
In addition to our broad exposure to the highly attractive Premium segment of the wine category, we believe we are well positioned to benefit from two additional important trends that are currently re-shaping the Alcoholic Beverages industry:
 
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First, from a demographic perspective, we believe the rise of Millennials and Gen-Z drinkers, whom we call “Next-Gen” consumers, has the potential to create a large shift in market-share across the entire Alcoholic Beverages industry, as demonstrated in the wine industry. Over the last 30 years, Baby Boomers and Gen X have driven wine consumption, with approximately 73% market share in 2020. Over the next five years, the demographics of wine drinkers are expected to continue to shift to Millennial and Gen-Z consumers who are developing new taste preferences, discovery patterns, consumption frequencies and price points. With 76% of our Winc.com members aged 44 or younger, and a branding strategy that strongly resonates with these younger consumers, we believe we are well positioned to capitalize on the rapidly evolving demographic shift taking place within the wine industry.
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Source: Silicon Valley Bank: State of Wine Report, 2016.
Second, like many other sectors, the Alcoholic Beverages industry is experiencing a meaningful shift to online purchasing. This shift was accelerated by the COVID-19 pandemic, which drove increases in e-commerce spending within the Alcoholic Beverages category, one that has traditionally been slow to adopt change. As a result, online sales accelerated dramatically over the past eighteen months. The size of the DTC wine market in the U.S. as of the end of 2020 was measured by a 2021 Sovos report as $3.7 billion. However, we believe that the go-forward opportunity remains even greater, as Alcoholic Beverages remain meaningfully under-indexed relative to other CPG categories in-terms of overall e-commerce penetration. According to Information Resources, Inc., or IRI, and the International Wines and Spirits Record, or IWSR, in 2020, alcohol online penetration was only 1.6%, while CPG online penetration reached 7.8%. By 2024, it is forecasted that alcohol online penetration will reach 7.0%. While online alcohol penetration is low in comparison to CPG online penetration, the online penetration figure for alcohol in 2024 is significant because it supports our belief that alcohol will increase towards the penetration levels realized by CPG. Due to our digitally native roots and large current online presence, we believe we are well-positioned to capitalize on these shifting channel dynamics, as more and more consumers routinely discover and order their Alcoholic Beverages products online. Additionally, we believe the biggest winners in the industry will be those that most effectively create a highly synergistic omni-channel purchasing experience for their consumers.
 
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Alcohol vs. CPG Online Penetration
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Source: IRI, International Wine and Spirits Record (IWSR), 2020.
The Competitive Landscape
By incorporating the “Best of the New” and “Best of the Old” into our business model, we currently maintain a highly differentiated competitive position within the Alcoholic Beverages industry, as we sit squarely between the legacy shelf-focused brand developers and the newer breed of DTC online-focused wineries.
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Legacy shelf-focused brand aggregators have historically built and consolidated brands over the course of many years with significant capital investments in physical assets, traditional brand marketing and M&A to create the scale necessary to become preferred partners to wholesale distributors, which in turn, has allowed them to maintain a dominant share of shelf space throughout the wholesale channel.
We firmly believe a true brand builder in the Alcoholic Beverages industry must become a scaled partner to wholesale distributors and retailers, and our aspiration is to become a Top-10 partner to the major wholesale distributors. However, we plan to accomplish this in a manner that is meaningfully different from legacy brand aggregators. First, we believe our unique and modern branding resonates particularly well with the faster-growing and younger generation of wine consumers, which are becoming an increasingly important demographic to the industry. Second, we believe the combination of data generated from the Winc digital platform, our direct relationship with consumers and our digital marketing expertise materially de-risks wholesale brand launches and enables more effective targeting than more traditional branding and marketing techniques. Third, our asset-light production model is far more capital-efficient and dramatically reduces time to market for potential break-out brands, as compared to legacy shelf-focused brand aggregators. Finally, we have found that wholesale distributors and retailers greatly value the additional
 
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insights we bring them from our broader data set, which allows them to better understand emerging trends in the rapidly evolving Alcoholic Beverages market.
In stark contrast to our efforts to become a critical partner to wholesale distributors and retail chains that are seeking to effectively reach the next generation of wine consumers, many online-only wineries with a DTC subscription model have made a strategic decision to completely bypass and disintermediate the traditional wholesale distribution channel. We believe this is a less scalable business model with a substantially smaller TAM.
Our goal is to serve all Alcoholic Beverages consumers across all available distribution channels, whether they choose to purchase product in a store, in a restaurant or online. We believe this is best accomplished by building a large portfolio of durable brands that successfully scales through a true omni-channel distribution platform.
Competitive Strengths
Highly Innovative, Differentiated and Repeatable Brand Development Strategy—We have demonstrated a consistent ability to use our Ideate, Launch and Amplify framework to launch multiple brands that resonate with consumers and remain on strong upward growth trajectories. Since January 1, 2016, we have released five brands that, based on their success in both the DTC and wholesale channels, we consider to be part of our core brand offering today, with two of those being released in the past three years. These five core brands have been Amplified in the wholesale channel, representing approximately 24% of our net revenues for the fiscal year ended December 31, 2020 and 53% year over year core brand net revenues growth from 2019 to 2020. Each of our current core brands has individually generated more than $1.0 million in net revenues through the DTC channel and more than $0.5 million through the wholesale channel in the last 12 months, and we believe has the potential to continue to grow sales through the wholesale channel. We aim to Amplify one or two additional brands each year with similar revenue and growth profiles in both channels from 8-10 innovation launches, which we believe is achievable based on our track record of success. As our digital consumer base continues to grow and our processes and data analytics capabilities are further refined, we anticipate building a larger portfolio of brands that will be marketed broadly both throughout the wholesale channel, as well as on the Winc digital platform. We believe this proven ability to successfully launch brands in a repeatable and predictable fashion is a core competency for us and a durable competitive advantage.
Barrier to Entry Created by Extensive Portfolio of Owned Brands—We have successfully launched and grown multiple highly rated and award-winning wines. Summer Water, Lost Poet, Wonderful Wine Co., Chop Shop and Folly of the Beast form the focus of our portfolio, comprised of a strong and diverse collection of wine brands, our net revenues from our core brands grew by approximately 53% from 2019 to 2020. Collectively, we have won multiple awards, including Summer Water as #56 on the Top 100 wines of 2020 by Wine Enthusiast.
 
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Low Turnover in Top 15 Wine Brands in the US 2015 and 2019
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Source: 2020 Wine Handbook, Beverage Information Group.
Attractive Return on New Product Development—We believe our brand development framework allows us to Ideate and Launch brands in a rapid and capital-efficient fashion. In 2019 and 2020, we spent an average of approximately $270,000 per brand to develop and launch new brands. On average, the brand level gross profit from new brands has typically exceeded this initial brand investment in eight months, regardless of whether it is eventually Amplified into the wholesale channel and becomes a core component of our ongoing portfolio. We believe this ability to quickly recoup initial investments by selling newer brands through the Winc.com subscription site helps minimize financial risk associated with new product launches. Moreover, when a potentially higher performing brand is identified, we believe it has the opportunity to become a core brand in our portfolio, with appeal across both DTC and wholesale channels, and represent greater long-term return on invested capital. Each of our core brands currently generate between $1.0 million and $10.0 million in annualized revenues, and in 2020 collectively generated approximately $15.4 million in net revenues, with gross margins averaging approximately 40%.
For the year ended December 31, 2020, our five core brands generated gross profits there were on average 4.6 times greater than the average per-brand development cost of $270,000. Our largest brand, Summer Water, generated a gross profit that was 9.9 times greater than the average per brand development cost of $270,000, and a cumulative gross profit since its launch in 2016 through the end of 2020 that was 32.1 times greater than the average per brand development cost. Even our weakest innovation brand in 2020 still generated a gross profit that was 1.3 times greater than the average development cost of $270,000.
 
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As evidenced by our return on our core brands to date, we believe our brand development framework and portfolio management strategy represents a repeatable process that allows us to generate attractive returns on successful brand launches while minimizing the financial risk associated with new product launches. We believe we have the opportunity to continue to improve on these returns on investments in new products as our omni-channel distribution platform continues to scale with a growing number of Winc.com members and on account of a larger physical retail account presence in the wholesale channel.
Uniquely Scaled Data and Analytics Capabilities—We collect a wealth of proprietary data from the approximaty 120,000 monthly members, as of June 30, 2021, on Winc.com providing over 4.3 million ratings of our wines. We use this data, which includes click-through rates, re-order frequency, consumer feedback and additional metrics to help shape our brand development process, optimize the Winc.com consumer experience and collaborate effectively with wholesale distributors.
However, it is not the data alone that provides us with such a differentiated competitive position, but rather the seven plus years of experience our team has had to optimize the key signal values coming from all this data. It has been a constant learning process that has increasingly deepened our understanding of how to best translate the raw data coming from Winc.com into effective brand development strategies and eventually success in the wholesale channel. We believe that the difficulty of replicating years of constant learning, iteration and improving analytic processes around this accumulating data set, along with the actual data itself, reflects the source of our data-based competitive advantage.
Global Access to Raw Materials and Dynamic Supply Chain—Due to our outsourced production model, we are not reliant on any one vineyard or geographic region to source raw material for our brands. As a scale producer, we are able to procure high quality grapes and raw materials from an ever-growing list of sources and create a supply chain that is both deep and diversified. The depth of our raw material procurement abilities has allowed our winemakers to be very creative in their winemaking formulation and enabled our top brands to scale without significant constraint. Finally, it allows us to manage inventory in a highly capital-efficient fashion. We believe this dynamism represents a meaningful strength in comparison to a more traditional asset-heavy winery built around a finite set of vineyards in one geographic region.
Rapidly Expanding Omni-channel Distribution Network—With approximately 120,000 Winc.com members, as of June 30, 2021, 2020, and a rapidly growing wholesale presence that serviced over 7,700 retail accounts in 2020, we have established a resilient and differentiated omni-channel distribution network. Our goal is to continue to grow both the Winc.com member base and expand our wholesale presence to at least 50,000 retail accounts in the next five years.
In our view, a key driver of success in our industry is an ability to synergistically pair proprietary brands that excite consumers with extensive omni-channel distribution. While there are thousands of small wineries in the United States, the vast majority lack the necessary distribution to achieve broad recognition of their brands through the wholesale channel. A lack of extensive distribution is the key barrier to scale for any small or emerging wine brand.
We are now well down the path of building a fully scaled omni-channel distribution network that will allow us to fully Amplify our brands, both online and offline, to maximize their financial impact, reach
 
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more consumers and maximize brand awareness. As described in our “Scale Begets Scale” strategy, as our DTC channel expands, we expect that we will have increased opportunities to innovate and market new products. Likewise, as our wholesale business scales, we believe that when we launch brands validated through our DTC channel, the brands will scale much more quickly in the wholesale channel. We view this self-reinforcing relationship as an enormous competitive differentiator in the highly fragmented wine industry, where many producers are destined to remain sub-scale due to a lack of distribution in both channels.
Self-Reinforcing Benefits from Omni-Channel Strategy
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Growing Scale with Key Wholesale Distributors and Retailers—Historically, there has been little turnover of top suppliers to the industry’s key wholesale distributors, as scaled brand aggregators and the largest wholesale distributors tend to become entrenched partners. To become a key partner to these critical wholesale distributors and fully capitalize on the growth opportunity presented by the legacy distribution system, we intend to continue presenting key wholesale distributors and retailers with a broad portfolio of differentiated brands that we believe will resonate strongly with consumers based on extensive testing and data analysis through the Winc.com site. We believe our wines are attractive to wholesale distributors due to: (1) the uniqueness of our branding, which resonates strongly with the increasingly important younger average wine drinker; (2) the data-backed evidence of demand for our wines; and (3) superior targeting capabilities due to our data analytic and digital marketing expertise. As sales grow and we expand our portfolio of brands with success across both DTC and wholesale channels, we would expect our relationship with key wholesale distributors to also grow and expand. Once we reach our goal of becoming a top ten wine supplier to the wholesale distributors, these critical relationships become a strong differentiator and large competitive moat for us by helping us grow and maintain shelf space throughout the entire retail landscape.
Attractive Financial Profile Enables Reinvestment to Drive Growth—We believe the recurring nature of our subscription driven DTC revenues, relatively high gross margins and our asset-light business model provide us with sustainable competitive advantages to reinvest in brand building, marketing, consumer acquisition and distribution expansion. Our view is that a strong underlying financial profile that produces
 
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SG&A leverage to invest in building scale is critical to our long-term success. Key differentiators of our financial model are as follows:

Recurring Nature of Revenues—We believe the stickiness of wine brands that achieve scale, high frequency usage patterns of Alcoholic Beverages consumers, recurring subscription-based revenues at Winc.com, as well as durable relationships with key wholesale distributors and retailers will enable us to grow steadily over time.

Attractive Gross Margins within the CPG Industry—Alcoholic Beverage gross margins tend to be well above average when compared to the broader CPG industry. Industry constituents we surveyed had gross margins of 47.0% and 42.3% for the years ended December 31, 2020 and 2019, respectively, and our gross margins were 40.7% and 42.3% for those same periods. In comparison, the S&P 500 Consumer Staples Index had gross margins of 29.5% for the years ended December 31, 2020 and 2019, according to S&P Capital IQ. This allows us to disproportionately invest in growth over the near and intermediate-terms, which we believe will increase our operating margins through SG&A leverage as we continue to scale.

Asset-Light Business Model and Flexible Supply Chain—Our dynamic supply chain and outsourced production model allow us to use SG&A leverage to invest Gross Profit dollars into building brands. It also allows us to satisfy inventory needs in a more predictable and lower-risk fashion than more asset-heavy legacy wineries.
First-Class Management Team and Organizational Structure Built for Brand Innovation—Our management team consists of brand-building specialists and operators with broad experience across the CPG industry, experienced winemakers and proven marketing professionals. Over the past several years, this team has demonstrated an ability to develop a high-growth DTC subscription platform and successfully launch a strong portfolio of wine brands into the wholesale channel with speed and scale in a repeatable fashion.
While we believe these factors will contribute to further growth and success, we cannot assure you that the market or demand for our products will continue to grow as we anticipate or that we will be able to achieve or maintain profitability in the future. For example, beginning in March 2020, we saw an increase in DTC demand, primarily, we believe, as a result of purchases arising from more consumers working remotely during the COVID-19 pandemic and thus, spending more time at home and the unavailability of public venues. If remote work conditions end, more public venues reopen and consumers spend less time at home, our members may elect to purchase fewer products or may elect to purchase products from traditional brick and mortar stores rather than from our website, which could materially and adversely affect our business and results of operations.
If we are unable to accomplish these goals or grow our presence in both DTC and wholesale channels, our business could suffer. We have historically been dependent on a combination of debt and equity financing to fund our operations, we have incurred net losses each year since our inception and we may not be able to achieve or maintain profitability in the future.
Growth Strategies
New Brand Development and Portfolio Optimization—The primary driver of our long-term growth strategy is our ability to consistently and predictably build innovative new products that, in aggregate, become a leading portfolio of owned brands in the Alcoholic Beverages industry. The expansion and optimization of this portfolio remains a key enabler of all our other growth strategies.
Drive Efficient Online Consumer Acquisition at Winc.com—Winc.com is unique in that our leading wine subscription platform is not only designed to delight consumers, but also bring critical information that delivers strategic value to our brand-building efforts. As a result, Winc.com is a key pillar in our broader omni-channel distribution strategy but because online consumer acquisition is not our primary driver of long-term growth, we plan to remain highly disciplined in managing our online marketing initiatives, as demonstrated through CAC. We believe this strategy allows for high returns on consumer acquisition and short payback periods. Our disciplined approach has allowed us to achieve an average LTV/CAC ratio of in excess of 3.0x when observing the 2014-2016 cohorts, which provides data to calculate this on a 5-year
 
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historical basis. Furthermore, on a nearly 5-year historical basis, our 2017 cohort has demonstrated an LTV/CAC ratio in excess of 4.0x to date, as of May 1, 2021. More recently, consumers in our 2020 cohort have already demonstrated a return of 2.3x LTV/CAC in the first year since consumer acquisition and 2.6x on a fully-aged basis, as of May 1, 2021. By increasing wholesale penetration and continuing to provide new products, we also aim to improve the retention rates and AOVs through a variety of digital analytic and marketing strategies. However, our core belief is that over time, the best and most sustainable way to retain members, and expand their purchases on our site, is to develop the strongest possible core portfolio of widely recognized, differentiated and well-loved brands and make them available on Winc.com. We believe this strategy will result in improved CACs and AOVs as well-recognized brands will draw consumers to the Winc.com site in a more organic fashion, improve the likelihood that they will remain members and increase AOVs as we take a larger share of their Alcoholic Beverages buying wallet.
Multiple Levers for Wholesale Expansion—We believe our opportunity to expand in wholesale is multi-faceted, with several key levers to drive outsized growth:

Wholesale Retail Account Expansion: Our goal is to leverage our relationships with national and regional wholesale distributors to meaningfully expand our retail accounts from 7,700 retail accounts serviced in 2020 to over 50,000 retail accounts in the next five years. Recent wins with shelf-space at large chains, such as Target, Walmart, Total Wine and Spirits, Kroger and HEB, as well as strengthening relationships with key wholesale distributors, has increased our confidence in an accelerated path to our retail account growth targets.

New Brands Drive SKU Growth: We plan to capitalize on our ability to develop brands that consumers love in an effort to capture more shelf space with additional stock keeping units, or SKUs, at each retail location, which should grow revenues per retail account.

Increase Shelf Velocity: We plan to continually Amplify and market our core brand portfolio on an ongoing basis to drive sell-through and increase shelf velocity. Additionally, we expect relationships with last-mile delivery providers such as Amazon Prime, GoPuff, Instacart and Drizly will help to continue to increase wholesale channel velocity.
Adjacent Category Expansion—We plan to expand our TAM by creating new innovative products that are closely adjacent to our current wine product offerings, such as Saké, Prosecco and ready to drink wine cocktails. We also believe that our unique, omni-channel platform could be applied to entirely new categories, such as spirits, beer and non-alcoholic celebratory beverages, significantly increasing our addressable market. Our goal is to create the broadest possible portfolio to maximize our exposure to the approximately $400 billion U.S. Alcoholic Beverages market. We believe our Ideate, Launch and Amplify brand development process can be leveraged into these other targeted categories in a seamless fashion.
Growth through Acquisitions in Highly Fragmented Markets—In addition to organic growth of our brand portfolio and distribution scale, we believe we will have opportunity to grow through acquisitions. Per the SVB 2020 State of the U.S. Wine Industry report, more than half of all small wineries have expressed an interest in engaging in M&A over the next several years as an exit opportunity. While our growth and success are not contingent upon future acquisitions, we are constantly evaluating acquisition opportunities and believe our organization is positioned to Amplify any brands we acquire by providing digital marketing expertise and a national wholesale distribution network to accelerate growth and improve a potential target’s existing business.
Despite our confidence in our products and growth strategy, we cannot guarantee that our historical success will be indicative of future growth. For example, the COVID-19 pandemic has significantly accelerated consumer adoption of a wide variety of at-home delivery services, including in the Alcoholic Beverages sector. Since March 2020, we have experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much of the United States in response to the COVID-19 pandemic. Industry research and steady consumer demand lead management to believe that this is a permanent shift in consumer behavior. For example, a 2021 Sovos report assessing DTC wine shipment data concluded that the boosts in DTC wine purchasing relating to the impacts of COVID-19 will continue once the pandemic ends and may drive continued growth.
 
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Our Products
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Our Portfolio of Core Brands
Summer Water, or SW—Launched first as a DTC product, Summer Water gained national acclaim without presence in the legacy wholesale channel. Since launching in the wholesale channel, it has continued to scale by achieving high velocity and becoming the #7 best-selling pure play rosé brand in the United States. Cases of Summer Water sold increased from approximately 29,000 in 2019 to approximately 45,000 in 2020, representing year-over-year growth of 55%. As the brand has scaled, quality has continued to improve as new vintages achieve higher ratings by our members. SW is a nationally recognized brand, ranking #56 on Wine Enthusiast’s top 100 Wines of the Year in 2020 and reaching 75,000 cases of production in 2020 with a single SKU. SW generated approximately $4.3 million in net revenue in the six months ended June 30, 2021. New line extensions include a chilled red “Keep it Chill”, 187 milliliter single serve “Droplets” and “Bubbly” a sparkling rosé.
Wonderful Wine Company, or WWC—Despite being launched during a challenging COVID-19-impacted market, WWC achieved immediate traction with consumers and sold approximately 17,000 cases in 2020. A digital-first strategy built brand awareness rapidly and gained the interest of national retailers, such as Walmart, where the brand launched in the second quarter of 2021 and generated approximately $1.9 million in net revenue during the six months ended June 30, 2021. The brand was the result of proprietary data and insights from our DTC consumers. We expect this “better for you, better for the world” brand platform will see additional releases in environmentally sound Tetra and three-liter box formats this year.
Lost Poet, or LP—The raw material (wine) in LP is our highest-rated red blend with nearly 105,000 ratings in addition to being rated in the top 3% of the world by Vivino in 2017 and has seen increasing ratings ever since. While the high quality of the wine was validated by our DTC consumers, we did not have a scalable brand. To reach a key shopper profile for our retailers, we crafted a brand and marketing strategy to target younger female consumers by partnering with Atticus, a best-selling author and Instagram poet. The highly successful re-launch quickly achieved national press, influencer pick-up and a placement with Target. Our digital approach creates unique opportunities to develop best-in-class products and become a strategic partner in expanding the wine category with their high-value consumers. Cases of Lost Poet sold increased from approximately 5,000 in 2019 to approximately 14,000 in 2020, a 170% year-on-year growth and the brand generated approximately $0.6 million in net revenue in the six months ended June 30, 2021.
Folly of the Beast, or Folly—Our award-winning winemaker Ryan Zotovich, applied his luxury winemaking experience to create uncompromising value in this under $20.00 Pinot Noir. Folly delivers a fresh and bright style favored by younger consumers, having been ordered by approximately 147,000 distinct users. In addition to receiving 93 points from Tasting Panel, Folly is our best-selling and highest rated Pinot Noir that continues to scale in wholesale. The brand includes small-lot single vineyard bottlings from some of the top Pinot Noir vineyards in California and a recently launched Chardonnay. Folly generated approximately $2.0 million in net revenue in the six months ended June 30, 2021.
Chop Shop, or Chop—We positioned Chop as the perfect pairing for America’s favorite culinary past time, BBQ. A favorite of our consumers with a 4.14 rating out of 5.00 and over 145,000 reviews, Chop continues to scale across channels generating approximately $1.4 million in net revenue in the six months ended June 30, 2021.
 
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Case Volume Growth by Brand
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Our Portfolio of Non-Core Brands
Cherries and Rainbows—Low-sulfur winemaking has historically been an attribute of the small and fragmented natural wine scene. Our product team worked diligently to perfect high-quality, low-sulfur winemaking at scale before launching. The delicious flavor, low-sulfur and contemporary branding have contributed to this brand’s rapid rise first with Whole Foods and now with HEB. Initially launched as a red wine, the brand’s success led to our extension of the line to include a white wine. The use of our DTC channel to test consumer receptiveness to the white wine extension exemplifies our Ideate, Launch, Amplify brand building strategy. The consumer feedback we have received from our DTC channel and early wholesale channel traction lead us to believe that Cherries and Rainbows will become a core brand over the coming years.
Organic and Sustainable Wines—Internal data indicates that organic and sustainable wines are of growing importance to younger consumers. While the global organic wine market is in its infancy, it is projected by TechSci Research to grow at a compound annual growth rate, or CAGR, of 12% through 2025. This emerging preference is confirmed with the success of our brands, such as WWC and Cherries and Rainbows. Additionally, through the purchase of certain assets of Natural Merchants, Inc., we have introduced an organic Top-100 Wine Enthusiast brand into our portfolio and established supplier relationships with prominent family-owned organic specialists. We believe that our digitally native model will help us increase our access to organic suppliers, providing data-driven insights to create healthier beverages for the future.
Anchor Portfolio—Our asset light production model allows for continual optimization around our consumers’ tastes and preferences. Each year our wine team seeks to improve our DTC experience through a globally diverse and constantly improving selection of over 100 wines.
New Products
Our innovation pipeline broadens the platform and expands on its already large total addressable market. The primary focuses for our product expansion are collaborations, line extensions, new categories, and new formats. Each new launch allows for targeted marketing and provides potential incremental value to both the online and offline channels.
Line extensions—Leveraging the brand equity and consumer base of our core brands creates an opportunity for increase in share and growth.
New brands—The fast-to-market and capital-efficient elements of our platform creates an opportunity to continually innovate within traditional categories to assess breakout potential.
Saké—We are planning for our first launch into an adjacent category to be with saké, a category that is extremely fragmented. We believe market opportunity exists for a category leader in the U.S. market.
 
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We intend to test and iterate in the DTC channel on blends, styles and brand identities in the fourth quarter of 2021 with the data and feedback from our consumers influencing the final product.
Ready to Drink Cocktails—Our innovation pipeline includes formulations and brands to address this rapidly expanding market opportunity with our unique omni-channel strategy and capabilities.
Alternative Packaging Formats—Younger consumers are driving packaging innovation in the wine space. Portability, convenience and environmental impact are key drivers in this innovation. Cans, Tetra, Box, Bag and PET (polyethylene terephthalate) are currently in development.
Spirits and Beer—As the digital landscape continues to evolve and younger consumers purchase across categories and the digital landscape, we are uniquely positioned to successfully expand into other categories within the Alcoholic Beverages industry.
Non-Alcoholic Celebratory Beverages—Our first non-alcoholic wine launched in 2021 and we see expansion opportunities existing in non-alcoholic and functional beverages.
Despite the success and growth of our brands we have experienced to date, we will need to continue to convince consumers and wholesalers of the quality of our products in order to reach our growth potential and achieve and sustain profitability. If more public venues reopen and consumers spend less time at home, we may face increased challenges in expanding our DTC channel, which could materially and adversely affect our growth potential. If we fail to achieve adequate growth or establish adequate brand recognition, and our business could suffer.
Risks Associated with Our Business
Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this Prospectus Summary. These risks include, but are not limited to, the following:

We have a history of net losses and we may not be able to achieve or maintain profitability in the future.

Our historical growth may not be indicative of our future growth and, if we continue to grow rapidly, we may not be able to effectively manage our growth or evaluate our future prospects. If we fail to effectively manage our future growth or evaluate our future prospects, our business could be adversely affected.

Our quarterly operating results may fluctuate, which could cause our stock price to decline.

We must expend resources to maintain consumer awareness of our brand, build brand loyalty and generate interest in our brands. As our marketing strategies and channels evolve, our efforts may not be successful.

The success of our business depends heavily on the strength of brands, and our brands and reputation may be diminished due to real or perceived quality, safety, efficacy or environmental impact issues with our brands, which could have an adverse effect on our business, financial condition, results of operations and prospects.

If we fail to cost-effectively acquire new consumers or retain our existing consumers, our business could be adversely affected. Our sales and profit are dependent upon our ability to expand our existing consumer relationships and acquire new consumers.

Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel.

We rely on third-party suppliers, producers, retailers and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.

Our business may be adversely affected if we are unable to provide our consumers with a technology platform that is able to respond and adapt to rapid changes in technology, if our
 
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platform encounters disruptions in usability or if our consumers find our platform less usable or attractive than our competitors’.

Consumer demand for wine could decline for a variety of reasons. Reduced demand could harm our results of operations, financial condition and prospects.

The occurrence of an environmental catastrophe could disrupt our business. Climate change, wildfires, disease, pests, weather conditions and problems with water supply could also have adverse effects on our business.

Due to the legacy alcohol beverage distribution system in the United States, we are heavily reliant on wholesale distributors and government agencies that resell Alcoholic Beverages in all states. A significant reduction in wholesale distributor demand for our wines would materially and adversely affect our sales and profitability.

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

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

As a producer of Alcoholic Beverages, we are regularly the subject of regulatory reviews, proceedings and audits by governmental entities, any of which could result in an adverse ruling or conclusion, and which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Corporate Information
We were initially formed as a limited liability company under the laws of the state of Colorado in June 2011 under the name Club W. In August 2011, we changed our name to Club W, Inc. and converted to a Delaware corporation. In September 2016, we changed our name to Winc, Inc. Our principal executive offices are located at 1751 Berkeley St, Studio 3, Santa Monica, CA 90404, the address of our registered office in the State of Delaware is National Registered Agents, Inc., 160 Greentree Drive, Suite 101, Dover, Delaware 19904 and our telephone number is (800) 297-1760. Our website address is www.winc.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into, and is not a part of, this prospectus or the registration statement of which this prospectus forms a part.
Implications of Being an Emerging Growth Company and a Smaller Reporting Company
We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

the option to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002;

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
 
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We will remain an emerging growth company until the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion; (ii) the date that we become a “large accelerated filer” with at least $700 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.
We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide may be different than the information you receive from other public companies in which you hold stock.
Emerging growth companies can also take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period and, as a result, our operating results and financial statements may not be comparable to the operating results and financial statements of companies who have adopted the new or revised accounting standards.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.
As a result of these elections, some investors may find our common stock less attractive than they would have otherwise. The result may be a less active trading market for our common stock, and the price of our common stock may become more volatile.
 
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THE OFFERING
Common stock offered by us
                shares
Common stock to be outstanding after this offering
                shares (or               shares if the underwriters exercise their option to purchase additional shares in full)
Option to purchase additional shares
We have granted the underwriters a 30-day option to purchase up to               additional shares of our common stock at the public offering price, less the underwriting discounts and commissions.
Use of proceeds
We estimate that the net proceeds to us from this offering will be approximately $      million (or approximately $      million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. We currently intend to use the net proceeds we receive from this offering for general corporate purposes. These purposes may include operating expenses, working capital and capital expenditures for future growth, including marketing and DTC advertising investments, innovation and adjacent product category expansion, international growth investment and organizational capabilities investments. We may also use a portion of the proceeds for the acquisition of, or investment in, assets, technologies, solutions, or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time. See “Use of Proceeds.”
Risk factors
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 24 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.
Listing
We intend to apply to list our common stock on the                 NYSE under the symbol “BEV.”
The number of shares of our common stock to be outstanding after this offering is based on 91,533,888 shares of our common stock outstanding (which includes 6,543,818 shares of common stock that remain subject to vesting and forfeiture) as of June 30, 2021, which excludes:

4,488,527 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock under our 2013 Stock Plan, or 2013 Plan, outstanding as of June 30, 2021, at a weighted-average exercise price of $0.48 per share;

            shares of our common stock issuable upon the exercise of options to purchase shares of our common stock under our 2013 Plan granted after June 30, 2021, at a weighted-average exercise price of $      per share;

3,229,683 shares of our common stock issuable upon the exercise of warrants to purchase our redeemable convertible preferred stock that were outstanding as of June 30, 2021, at a weighted-average exercise price of $1.60 per share, which warrants will convert into warrants to purchase our common stock immediately prior to the closing of this offering;
 
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            shares of our common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with the completion of this offering; and

            shares of our common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or the 2021 ESPP, which will become effective in connection with this offering.
In addition, unless otherwise indicated, the information in this prospectus reflects and assumes:

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws in connection with the closing of this offering;

a           -for-           reverse stock split of our common stock effected on           , 2021;

the conversion of all 67,092,839 outstanding shares of our redeemable convertible preferred stock as of June 30, 2021 into 67,092,839 shares of our common stock immediately prior to the closing of this offering, or the Preferred Stock Conversion;

the conversion of all 3,229,683 warrants to purchase our redeemable convertible preferred stock that were outstanding as of June 30, 2021 into warrants to purchase up to an aggregate of 3,229,683 shares of our common stock at a weighted-average exercise price of $1.60 per share immediately prior to the completion of this offering;

no exercise of the outstanding options or warrants referred to above; and

no exercise of the underwriters’ option to purchase additional shares of our common stock.
 
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data for the periods and as of the dates indicated. The summary statements of operations data for the years ended December 31, 2020 and 2019 are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The summary statements of operations data for the six months ended June 30, 2021 and 2020 and balance sheet data as of June 30, 2021 are derived from our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and, in the opinion of management, reflect all normal, recurring adjustments that are necessary to state fairly the unaudited interim condensed financial statements. Our historical results are not necessarily indicative of results that may be expected in the future, and the results for the six months ended June 30, 2021 are not necessarily indicative of results that may be expected for the full year or any other period. You should read the summary financial data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary financial data in this section are not intended to replace our consolidated financial statements and the related notes and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.
Year Ended
December 31,
Six Months Ended
June 30, (unaudited)
2020201920212020
(in thousands, except share and per share data)
Statements of operations data:
Net revenues(1)
$64,707$36,447$35,116$29,166
Cost of revenues38,35221,03819,95318,224
Gross profit26,35515,40915,16310,942
Operating expenses
Marketing17,3888,5787,9796,948
Personnel7,5826,3285,3873,466
General and administrative7,5457,3305,5673,373
Production and operations169885489
Creative development8317715654
Total operating expenses32,76722,50119,14313,930
Loss from operations(6,412)(7,092)(3,980)(2,988)
Interest expense(834)(1,364)(421)(531)
Change in fair value of warrants(208)(137)(893)(229)
Other income5235591,9729
Total other expense, net(519)(942)658(751)
Loss before income taxes(6,931)(8,034)(3,322)(3,739)
Income tax expense2715157
Net loss$(6,958)$(8,049)$(3,337)$(3,746)
Net loss per common share—basic and diluted$(0.97)$(1.11)$(0.24)$(0.53)
Weighted average common shares outstanding—basic and diluted7,138,6717,232,04114,038,8647,116,479
Pro forma net loss per share—basic and diluted (unaudited)(2)
$(0.11)$(0.04)
Weighted average shares used to compute pro forma
net loss per share, basic and diluted (unaudited)
62,034,83577,742,935
(1)
Net revenues is comprised of DTC, wholesale, and a non-reportable segment that is comprised of a small business line focused on testing new products to determine if they have long-term viability prior to integration into the DTC and/or wholesale distribution channels. See Note 14 to the consolidated financial statements and Note 15 to our unaudited interim condensed consolidated financial statements.
 
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(2)
The unaudited pro forma net loss per share for the year ended December 31, 2020 and six months ended June 30, 2021 was computed using the weighted-average number of shares of common stock outstanding, including the pro forma effect of the conversion of all outstanding shares of convertible preferred stock into shares of common stock, as if such conversion had occurred at the beginning of the period, or their issuance dates, if later.
As of June 30, 2021
(unaudited)
Actual
Pro forma(1)
Pro forma
as adjusted(2)
(in thousands)
Balance Sheet Data:
Cash$2,396$2,396
Working capital(3)
5,3715,371
Total assets43,83743,837
Borrowings under our Credit Agreements2,5902,590
Redeemable convertible preferred stock68,896
Accumulated deficit(60,409)(60,409)
Total stockholders’ equity (deficit)(59,834)9,062
(1)
The pro forma balance sheet data gives effect to (i) the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 67,092,839 shares of common stock prior to the completion of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation in connection with the closing of this offering.
(2)
The pro forma as adjusted balance sheet data gives effect to (i) the pro forma adjustments set forth in footnote (1) above and (ii) the issuance and sale of                 shares of our common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, working capital, total assets and total stockholders’ equity (deficit) by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, working capital, total assets and total stockholders’ equity (deficit) by $      million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3)
We define working capital as current assets less current liabilities.
 
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Key Financial and Operating Metrics
In addition to GAAP measures of performance, we review the following key business measures and non-GAAP financial measures to assess our performance, make strategic decisions and build our financial projections.
Year Ended December 31,
Six months ended June 30,
(unaudited)
2020201920212020
(dollars in thousands, except average order value data)
Core brand net revenues(1)
$15,409$10,061$10,158$8,895
Consolidated
Adjusted EBITDA(2)
$(5,104)$(5,678)$(2,919)$(2,600)
Adjusted EBITDA margin(2)
(7.9)%(15.6)%(8.3)%(8.9)%
DTC
DTC net revenues(4)
$54,854$29,628$26,852$24,823
DTC gross profit(5)
$23,055$12,967$11,496$9,421
Average order value(3)
$63.04$60.56$69.20$58.96
Average monthly consumer retention rate(6)
89.7%92.2%91.8%88.7%
Wholesale
Wholesale net revenues(7)
$8,237$6,819$7,624$4,023
Wholesale gross profit(8)
$2,393$2,442$3,301$1,338
Retail accounts(9)
7,8694,8097,8395,148
(1)
Core brand net revenues refers to the amount of total net revenues generated by our core brands in the respective period.
(2)
Our management believes Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts and other interested parties because these measures can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors and other interested parties to evaluate and assess performance. We define Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, stock based compensation expense and other items we believe are not indicative of our operating performances, such as gain or loss attributable to the fair value of warrants. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net revenues. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Some of these limitations include:

Adjusted EBITDA and Adjusted EBITDA margin do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or cash requirements for our working capital needs; and

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

Other companies, including other companies in our industry, may not use such measures or may calculate the measures differently than as presented in this prospectus, limiting their usefulness as comparative measures.
 
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A reconciliation of net loss to Adjusted EBITDA and net loss margin to Adjusted EBITDA margin is set forth below. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by net revenues.
Year ended December 31,Six months ended June 30,
2020201920212020
(dollars in thousands)
Net loss$(6,958)$(8,049)$(3,337)$(3,746)
Interest expense$834$1,364$421$531
Income tax expense$27$15$15$7
Depreciation and amortization expense$510$633$294$269
EBITDA$(5,587)$(6,037)$(2,607)$(2,939)
Stock based compensation expense$275$222$172$110
Forgiveness of loan under Paycheck Protection Program$(1,377)$
Change in fair value of warrants(a)
$208$137$893$229
Adjusted EBITDA$(5,104)$(5,678)$(2,919)$(2,600)
Net loss margin(10.8)%(22.1)%(9.5)%(12.8)%
Adjusted EBITDA margin(7.9)%(15.6)%(8.3)%(8.9)%
(a)
The Company has issued warrants to purchase redeemable convertible preferred stock in conjunction with certain debt and equity financings. Changes in the fair value of the warrants are recognized in earnings during each period.
The non-GAAP information in this prospectus should be read in conjunction with, and not as a substitute for, or in isolation from, our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus.
(3)
Average order value is the sum of DTC net revenues divided by the total orders placed in that period. Total orders are the summation of all completed individual purchase transactions in a given period.
(4)
DTC net revenues is net revenues generated from consumers through our monthly membership or individual orders on our digital platform.
(5)
DTC gross profit is DTC net revenues less DTC cost of revenues as discussed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations.”
(6)
Average monthly consumer retention rate represents the number of consumers who bought in one month and made a subsequent purchase in the following month.
(7)
Wholesale net revenues is net revenues generated from wholesale distributors, state-operated licensees and directly to retail accounts.
(8)
Wholesale gross profit is wholesale net revenues less wholesale cost of revenues as discussed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations.”
(9)
Represents the number of retail accounts in which we sold our products in a given period.
See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics” for more information.
 
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the accompanying notes thereto included elsewhere in this prospectus, before deciding whether to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects, as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business
We have a history of net losses and we may not be able to achieve or maintain profitability in the future.
We have incurred net losses each year since our inception and we may not be able to achieve or maintain profitability in the future. We incurred net losses of approximately $7.0 million and $8.0 million in the years ended December 31, 2020 and 2019, respectively, and of approximately $3.3 million and $3.8 million in the six months ended June 30, 2021 and 2020, respectively. In addition to increases in expenses as a result of becoming a public company, we expect our expenses will increase in the future as we develop and launch new product offerings and platform features, expand in existing and new markets, increase our sales and marketing efforts and continue to invest in our platform. These efforts may be more costly than we expect and may not result in increased revenue or growth in our business. These offerings may require significant capital investments and recurring costs, maintenance, depreciation, asset life and asset replacement costs, and if we are not able to maintain sufficient levels of utilization of such assets or such offerings are otherwise not successful, our investments may not generate sufficient returns and our financial condition may be adversely affected. Any failure to increase our revenue sufficiently to keep pace with our investments and other expenses could prevent us from achieving or maintaining profitability or positive cash flow on a consistent basis. If we are unable to successfully address these risks and challenges as we encounter them, our business, financial condition, results of operations and prospects could be adversely affected. If we are unable to generate adequate revenue growth and manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.
Additionally, as a result of our relatively short operating history at our current scale, we have limited financial data that can be used to evaluate our business and future prospects. Any evaluation of our business and prospects must be considered in light of our limited operating history, which may not be indicative of future performance. Because of our limited operating history, we face increased risks, uncertainties, expenses, and difficulties, including the risks and uncertainties discussed in this section.
Our historical growth may not be indicative of our future growth and, if we continue to grow rapidly, we may not be able to effectively manage our growth or evaluate our future prospects. If we fail to effectively manage our future growth or evaluate our future prospects, our business could be adversely affected.
We have experienced significant growth since our founding in 2011. For example, our net revenues increased from approximately $36.4 million in 2019 to $64.7 million in 2020, and from $29.2 million in the six months ended June 30, 2020 to $35.1 million in the six months ended June 30, 2021. This growth has placed significant demands on our management, financial, operational, technological and other resources. The anticipated growth and expansion of our business depends on a number of factors, including our ability to:

increase awareness of our portfolio of brands in order to successfully compete with other companies;

efficiently drive online consumer acquisition;

expand our relationships with wholesale distributors;

introduce products in beverage categories beyond wine;
 
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maintain and improve our technology platform supporting the Winc digital platform;

expand our supplier and fulfillment capacities; and

maintain quality control over our brand offerings.
These investments may not result in the growth of our business. Even if these investments do result in the growth of our business, if we do not effectively manage our growth, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy consumer requirements or maintain high-quality brand offerings, any of which could adversely affect our business, financial condition, results of operations and prospects. You should not rely on our historical rate of revenue growth as an indication of our future performance or the rate of growth we may experience in the future.
In addition, to support continued growth, we must effectively integrate, develop and motivate a large number of new employees while maintaining our corporate culture. We face significant competition for personnel. To attract top talent, we have had to offer, and expect to continue to offer, competitive compensation and benefits packages before we can validate the productivity of new employees. We may also need to increase our employee compensation levels to remain competitive in attracting and retaining talented employees. The risks associated with a rapidly growing workforce will be particularly acute as we choose to expand into new beverage categories and markets. Additionally, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs or successfully integrate new hires, our efficiency, ability to meet forecasts and employee morale, productivity and retention could suffer, which could have an adverse effect on our business, financial condition, results of operations and prospects.
We are also required to manage numerous relationships with various vendors and other third parties. Further growth of our operations, vendor base, fulfillment centers, information technology systems or internal controls and procedures may not be adequate to support our operations. If we are unable to manage the growth of our organization effectively, our business, financial condition, results of operations and prospects may be adversely affected.
Failure to introduce and effectively market new brands may adversely affect our ability to continue to grow.
A key element of our growth strategy depends on our ability to develop and market new brands that meet our standards for quality and appeal to our consumers. The success of our innovation and product development efforts is affected by our ability to successfully leverage consumer data, the technical capability of our innovation staff, developing and testing product formulas and prototypes, our ability to comply with applicable governmental regulations, and the success of our management and sales and marketing teams in introducing and marketing new brands. Our brand offerings have changed since our launch, which makes it difficult to forecast our future results of operations. There can be no assurance that we will successfully develop and market new brands that appeal to consumers. For example, product blends or formulas we develop may not contain the attributes desired by our consumers. Any such failure may lead to a decrease in our growth, sales and ability to achieve profitability, which could adversely affect our business, financial condition, results of operations and prospects.
Additionally, the development and introduction of new brands requires substantial marketing expenditures, which we may be unable to recoup if new brands do not gain widespread market acceptance. If we are unsuccessful in meeting our objectives with respect to new or improved brands, our business, financial condition, results of operations and prospects could be adversely affected.
We must expend resources to maintain consumer awareness of our brand, build brand loyalty and generate interest in our brands. As our marketing strategies and channels evolve, our efforts may not be successful.
In order to remain competitive and expand and keep market share for our brands across our various channels, we may need to increase our marketing and advertising spending to maintain and increase consumer awareness, protect and grow our existing market share or promote new brands, which could impact our operating results. Substantial advertising and promotional expenditures may be required to maintain or improve our brands’ market position or to introduce new brands to the market, and we are
 
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increasingly engaging with non-traditional media, including consumer outreach through social media and web-based channels, which may not prove successful. An increase in our marketing and advertising efforts may not maintain our current reputation or lead to increased brand awareness. Further, social media platforms frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, or may increase the costs of such advertising, which can negatively affect the placement of our links and, therefore, reduce the number of visits to our website and social media channels or make such marketing cost-prohibitive. In addition, social media platforms typically require compliance with their policies and procedures, which may be subject to change or new interpretation with limited ability to negotiate, which could negatively impact our marketing capabilities. If we are unable to maintain and promote a favorable perception of our brands on a cost-effective basis, our business, financial condition, results of operations and prospects could be adversely affected.
If we fail to cost-effectively acquire new consumers or retain our existing consumers, our business could be adversely affected. Our sales and profit are dependent upon our ability to expand our existing consumer relationships and acquire new consumers.
Our success, and our ability to increase revenue and achieve profitability, depend in part on our ability to cost-effectively acquire new consumers, retain existing consumers and keep existing consumers engaged so that they continue to purchase our brands. While we intend to continue to invest significantly in sales and marketing to educate consumers about our brands, there is no assurance that these efforts will generate further demand for our brands or expand our consumer base. Our ability to attract new consumers and retain our existing consumers will depend on, among other items, the perceived value and quality of our brands, the success of our omni-channel approach, demand for Alcoholic Beverages, our ability to offer high-quality and culturally relevant brands and the effectiveness of our marketing efforts. We may also lose loyal consumers to our competitors if we are unable to meet consumer demand in a timely manner. If we are unable to cost-effectively acquire new consumers, retain existing consumers and keep existing consumers engaged, our business, financial condition, results of operations and prospects could be adversely affected.
Any strategies we employ to pursue this growth are subject to numerous factors outside of our control. Our retailers continue to aggressively market their private label or competitive products, which could reduce demand for our brands. The expansion of our business also depends on our ability to increase sales through our ecommerce channel and increase breadth and depth of distribution at retailers. Any growth within our existing distribution channels may also affect our existing consumer relationships and present additional challenges, including those related to pricing strategies. Our direct connections to our consumers may become more limited as we expand our non-DTC channels. Additionally, we may need to increase or reallocate spending on marketing and promotional activities, such as temporary price reductions, off-invoice discounts and other trade activities, and these expenditures are subject to risks, including risks related to consumer acceptance of our efforts. Our failure to obtain new consumers, or expand our business with existing consumers, could have an adverse effect on our business, financial condition, results of operations and prospects.
We also use paid and non-paid advertising. Our paid advertising may include search engine marketing, display, paid social media and product placement and traditional advertising, such as direct mail, television, radio, podcasts and magazine advertising. Our non-paid advertising efforts include search engine optimization, non-paid social media and e-mail marketing. We drive a significant amount of traffic to our website via search engines and, therefore, rely heavily on search engines. Search engines frequently update and change the logic that determines the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to our website can be negatively affected. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results, causing our website to place lower in search query results.
We also drive a significant amount of traffic to our website via social networking or other ecommerce channels used by our current and prospective consumers. As social networking and ecommerce channels continue to rapidly evolve, we may be unable to develop or maintain a presence within these channels. If we are unable to cost-effectively drive traffic to our website, or if the popularity of our social media, online or offline presence declines, our ability to acquire new consumers could be adversely affected. Additionally,
 
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if we fail to increase our revenue per active consumer, generate repeat purchases or maintain high levels of consumer engagement, our business, financial condition, results of operations and prospects could be adversely affected.
We may not be able to compete successfully in our highly competitive market.
The markets in which we operate are highly competitive and rapidly evolving, with many new brands and product offerings emerging in the marketplace. We face significant competition from both established, well-known players in the wine industry and emerging brands. Numerous brands and products compete for limited shelf space in the retail channel, and for members in the ecommerce channel. We compete based on various product attributes including taste, quality, brand aesthetic and cultural relevance, as well as our ability to establish direct relationships with our consumers through our ecommerce channel.
Our wines compete with popularly priced generic wines and with other alcoholic and, to a lesser degree, non-Alcoholic Beverages, for drinker acceptance and loyalty, shelf space and prominence in retail stores, presence and prominence on restaurant wine lists and for marketing focus by independent wholesale distributors, many of which carry extensive portfolios of wines and other Alcoholic Beverages. This competition is driven by established companies as well as new entrants in our markets and categories. In the United States, wine sales are relatively concentrated among a limited number of large suppliers. Many of these competitors have substantially greater financial and other resources than us and products that are well-accepted in the marketplace today. Many also have longer operating histories, larger fulfilment infrastructures, greater technical capabilities, faster shipping times, lower freight costs, lower operating costs, greater financial, marketing, institutional and other resources and larger consumer bases than we do. These factors may also allow our competitors to derive greater revenue and profits from their existing consumer bases, acquire consumers at lower costs or respond more quickly than we can to new or emerging technologies and changes in product trends and consumer shopping behavior. These competitors may engage in more extensive research and development efforts, enter or expand their presence in any or all of the ecommerce or retail channels where we compete, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies, which may allow them to build larger consumer bases or generate revenue from their existing consumer bases more effectively than we do. As a result, these competitors may be able to offer comparable or substitute products to consumers at similar or lower costs. This could put pressure on us to lower our prices, resulting in lower revenue and margins or cause us to lose market share even if we lower prices.
We cannot be certain that we will successfully compete with larger competitors that have greater financial, sales, technical and other resources. Companies with greater resources may acquire our competitors or launch new products, and they may be able to use their resources and scale to respond to competitive pressures and changes in consumer preferences by reducing prices or increasing promotional activities, among other things. Retailers also market competitive products under their own private labels, which are generally sold at lower prices, and may change the merchandising of our brands so that they have less favorable placement. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing expenditures, or increase the use of discounting or promotional campaigns, each of which would adversely affect our margins and could result in a decrease in our operating results and ability to achieve or maintain profitability.
We expect competition in the wine industry to continue to increase. We believe that our ability to compete successfully in this market depends upon many factors both within and beyond our control, including:

the size and composition of our consumer base;

the number of brands that we offer and feature across our sales channels;

our information technology infrastructure;

the quality and responsiveness of our customer service;

our selling and marketing efforts;

the quality and price of the brands that we offer;
 
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the convenience of the shopping experience that we provide on our website;

our ability to distribute our brands and manage our operations; and

our reputation and brand strength.
If we fail to compete successfully in this market, our business, financial condition, results of operations and prospects could be adversely affected.
Consolidation of the wholesale distributors of our wines, as well as the consolidation of retailers, may increase competition in an already crowded space and may have a material adverse effect on our business, results of operations and financial results.
Sales not made directly to consumers through our DTC channel are made through independent wholesale distributors for resale to retail outlets, restaurants, hotels and private clubs across the United States and in some overseas markets. Sales to wholesale distributors are expected to continue to represent a substantial portion of our future net sales. Consolidation among wine producers, wholesale distributors, suppliers and retailers could create a more challenging competitive landscape for our wines, including through our DTC channel, to the extent consolidation impairs general consumer awareness of our brands. In addition, the increased growth and popularity of the retail ecommerce environment across the consumer product goods market, which has accelerated during the COVID-19 pandemic and the resulting quarantines, “stay at home” orders, travel restrictions, retail store closures, social distancing requirements and other government action, is highly likely to change the competitive landscape for our wines. Consolidation at any level could hinder the distribution and sale of our wines as a result of reduced attention and resources allocated to our winery brands both during and after transition periods, because our winery brands might represent a smaller portion of the new business portfolio. Furthermore, consolidation of wholesale distributors may lead to the erosion of margins as newly consolidated wholesale distributors take down prices or demand more margin from existing suppliers. Changes in wholesale distributors’ strategies, including a reduction in the number of brands they carry or the allocation of resources for our competitors’ brands or private label brands, may adversely affect our growth, business, financial results and market share. Wholesale distributors of our wines offer products that compete directly with our wines for inventory and retail shelf space, promotional and marketing support and consumer purchases. Expansion into new product categories by other suppliers or innovation by new entrants into the market could increase competition in our product categories.
An increasingly large percentage of our net sales is concentrated within a small number of wholesale distributors. There can be no assurance that the wholesale distributors and retailers we use will continue to purchase our wines or provide our wines with adequate levels of promotional and merchandising support. The loss of one or more major retail accounts or the need to make significant concessions to retain one or more such retail accounts could have a material and adverse effect on our business, results of operations and financial position.
A retailer may take actions that affect us for reasons that we cannot always anticipate or control, such as their financial condition, changes in their business strategy or operations, the introduction of competing products or the perceived quality of our brands. Despite operating in different channel segments, our ecommerce platform and retailers sometimes compete for the same consumers. Because of actual or perceived conflicts resulting from this competition, third-party retailers may take actions that negatively affect us. Consequently, our financial results may fluctuate significantly from period to period based on the actions of one or more significant third-party retailers.
Our marketing strategy involves continued expansion into the DTC channel, which may present risks and challenges that we have not yet experienced or contemplated, or for which we are not adequately prepared. These risks and challenges could negatively affect our sales in these channels and our profitability.
The marketplace in which we operate is highly competitive and in recent years has seen the entrance of new competitors and products targeting similar consumer groups as our business. To stay competitive and forge new connections with consumers, we are continuing investment in the expansion of our DTC channel. Expanding our DTC channel may require significant investment in ecommerce platforms,
 
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marketing, fulfillment, information technology infrastructure and other known and unknown costs. The success of our DTC channel depends on our ability to maintain the efficient and uninterrupted operation of online order-processing and fulfillment and delivery operations. As such, we are heavily dependent on the performance of third-parties for shipping and technology. Any system interruptions or delays could prevent potential consumers from purchasing our wines directly.
Our consumer acquisition strategy, in our DTC channel or otherwise, may also prove to be inefficient or unsuccessful. We devote substantial time, money and effort acquiring new consumers and our consumer acquisition strategies may prove to be less effective or more costly than our competitors. Any failure in our consumer acquisition strategy may be damaging to our business or results of operations.
Additionally, we may be unable to adequately adapt to shifts in consumer preferences for points of purchase, such as an increase in at-home delivery during the COVID-19 pandemic, and our competitors may react more rapidly or with improved consumer experiences. A failure to react quickly to these and other changes in consumer preferences, or to create infrastructure to support new or expanding sales channels may materially and adversely affect our business, results of operations and financial results.
We rely significantly on revenue from members and may not be successful in maintaining or expanding our subscription-based offerings, our level of engagement with members or their spending with us, which could harm our business, financial condition, or operating results.
Historically, the majority of our revenue has been derived from members who purchase subscription-based offerings. These subscriptions can be canceled at any time. We significantly rely, and expect to continue to significantly rely in the short-term, on these members for a majority of our revenue. The introduction of competitors’ offerings with lower prices for consumers, fluctuations in prices, a lack of member satisfaction with our monthly themes or brands, changes in consumer purchasing habits, including an increase in the use of competitors’ products or offerings and other factors could result in declines in our subscriptions and in our revenue, which would have an adverse effect on our business, financial condition and results of operations. Because we derive a majority of our revenue from members who purchase these subscription-based brands, any material decline in demand for these offerings could have an adverse impact on our future revenue and results of operations. In addition, if we are unable to successfully introduce new subscription-based offerings, our revenue growth may decline, which could have a material adverse effect on our business, financial condition, and results of operations.
If existing members no longer find our brands appealing or appropriately priced, they may make fewer purchases and may cancel their subscriptions or stop purchasing our brands. Even if our existing members continue to find our offerings appealing, they may decide to reduce their subscription and purchase less merchandise over time as their demand for new brands declines. A decrease in the number of members, a decrease in member spending on the brands we offer, or our inability to attract high-quality members could negatively affect our operating results.
Failure to leverage our brand value propositions to compete against private label products, especially during an economic downturn, may adversely affect our ability to achieve or maintain profitability.
We compete not only with other widely advertised branded products, but also with private label products that generally are sold at lower prices. Consumers are more likely to purchase our brands if they believe that our brands provide greater value than less expensive alternatives. If the difference in perceived value between our brand and private label products narrows, or if there is a perception of such a narrowing, consumers may choose not to buy our brands at prices that are profitable for us. We believe that in periods of economic uncertainty, such as the current economic uncertainty surrounding the COVID-19 pandemic, consumers may purchase more lower-priced private label or other economy brands. To the extent this occurs, we could experience a reduction in the sales volume of our brands or an unfavorable shift in our brand mix, which could have an adverse effect on our business, financial condition, results of operations and prospects.
The success of our business depends heavily on the strength of brands, and our brands and reputation may be diminished due to real or perceived quality, safety, efficacy or environmental impact issues with our brands, which could have an adverse effect on our business, financial condition, results of operations and prospects.
Maintaining and expanding our reputation as a premier producer of premium wine among our consumers and the premium wine market generally is critical to the success of our business and our growth
 
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strategy. Maintaining, promoting and positioning our brand and reputation will depend on, among other factors, the success of our brands, product safety, quality assurance, marketing and merchandising efforts, our continued focus on delivering high-quality and culturally relevant brands to our consumers and our ability to provide a consistent, enjoyable consumer experience.
However, if we are unable to maintain the actual or perceived quality of our wines, including as a result of contamination or tampering, environmental or other factors impacting the quality of our grapes or other raw materials, or if our wines otherwise do not meet the subjective expectations or tastes of one or more of a relatively small number of wine critics, the actual or perceived quality and value of one or more of our wines could be harmed, which could negatively impact not only the value of that wine, but also the value of the vintage, the particular brand or our broader portfolio. As a result, we are dependent on our winemakers and tasting panels to ensure that every wine we release meets our exacting quality standards. Any negative publicity, regardless of its accuracy, could have an adverse effect on our business. Brand value is based on perceptions of subjective qualities, and any incident that erodes the loyalty of our consumers, suppliers, wholesale distributors or retailers, including changes to our brands or packaging, adverse publicity or a governmental investigation, litigation or regulatory enforcement action, could significantly reduce the value of our brand and adversely affect our business, financial condition, results of operations and prospects.
With the advent of social media, word spreads quickly within the premium wine market, which can accentuate both the positive and the negative reviews of our wines and of wine vintages generally. Public perception of our brands could be negatively affected by adverse publicity or negative commentary on social media outlets, particularly negative commentary on social media outlets that goes “viral,” or our responses relating to, among other things:

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

an actual or perceived failure to address concerns relating to the quality, safety or integrity of our wines;

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

an actual or perceived failure by us to promote the responsible consumption of alcohol.
If we do not produce wines that are well-regarded by the relatively small wine critic community, the premium wine market could quickly become aware of this determination and our reputation, brands, business and financial results of operation could be materially and adversely affected. In addition, if certain vintages receive negative publicity or consumer reaction, whether as a result of our wines or wines of other producers, our wines in the same vintage could be adversely affected. Unfavorable publicity, whether accurate or not, related to our industry, us, our winery brands, marketing, personnel, operations, business performance or prospects could also unfavorably affect our corporate reputation, stock price, ability to attract high-quality talent or the performance of our business.
Any contamination or other quality control issue could have an adverse effect on sales of the impacted wine or our broader portfolio of brands. If any of our wines become unsafe or unfit for consumption, cause injury or are otherwise improperly packaged or labeled, we may have to engage in a brand recall and/or be subject to liability and incur additional costs. A widespread recall, multiple recalls, or a significant product liability judgment against us could cause our wines to be unavailable for a period of time, depressing demand and our brand equity. Even if a product liability claim is unsuccessful or is not fully pursued, any resulting negative publicity could adversely affect our reputation with existing and potential consumers and retail accounts, as well as our corporate and individual winery brands image in such a way that current and future sales could be diminished. In addition, should a competitor experience a recall or contamination event, we could face decreased consumer confidence by association as a producer of similar products.
We also have no control over our brands once purchased by consumers. For example, consumers may store or use our brands under conditions and for periods of time inconsistent with approved storage guidelines, which may adversely affect the quality and safety of our products.
 
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Additionally, third parties may sell wines or inferior brands that imitate our brands or that are counterfeit versions of our labels, and consumers could be duped into thinking that these imitation labels are our authentic wines. A negative consumer experience with such a wine could cause them to refrain from purchasing our brands in the future and damage our brand integrity. Any failure to maintain the actual or perceived quality of our wines could materially and adversely affect our business, results of operations and financial results.
Damage to our reputation or loss of consumer confidence in our wines for any of these or other reasons could result in decreased demand for our wines and could have a material adverse effect on our business, operational results and financial results, as well as require additional resources to rebuild our reputation, competitive position and winery brand strength.
If our brands are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet our consumers’ expectations, our relationships with consumers could suffer, the appeal of our brand could be diminished, we may need to recall some of our brands and/or become subject to regulatory action, and we could lose sales or market share or become subject to boycotts or liability claims. In addition, safety or other defects in our competitors’ products or products using similar names to those of our brands could reduce consumer demand for our own brands if consumers view them to be similar. Any such adverse effect could be exacerbated by our market positioning as a purveyor of high-quality and culturally relevant brands and may significantly reduce our brand value. Issues regarding the safety, efficacy, quality or environmental impact of any of our brands, regardless of the cause, may have an adverse effect on our brand, reputation and operating results. Further, the growing use of social and digital media by us, our consumers and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative publicity about us, our brands on social or digital media could seriously damage our brand and reputation. Any loss of confidence on the part of consumers in the quality, safety, efficacy or environmental suitability of our brands would be difficult and costly to overcome, even if such concerns were based on inaccurate or misleading information. If we do not maintain the favorable perception of our brand, our business, financial condition, results of operations and prospects could be adversely affected.
Economic downturns or a change in consumer preferences, perception and spending habits in the wine category, in particular, could limit consumer demand for our brands and negatively affect our business.
We have positioned our brand to capitalize on growing consumer interest in high-quality and culturally relevant brands. The wine beverage industry is sensitive to national and regional economic conditions and the demand for the brands that we distribute may be adversely affected from time to time by economic downturns that impact consumer spending, including discretionary spending. Future economic conditions such as employment levels, business conditions, housing starts, interest rates, inflation rates, energy and fuel costs and tax rates could reduce consumer spending or change consumer purchasing habits. Among these changes could be a reduction in the number of wine brands that consumers purchase where there are alternatives, given that many products in this category often have higher retail prices than other alcoholic or non-alcoholic alternatives.
Further, the markets in which we operate are subject to changes in consumer preference, perception and spending habits. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the markets in which we operate. Such factors include consumer preference, consumer confidence, consumer income, consumer perception of the safety and quality of our brands and shifts in the perceived value for our brands relative to alternatives. In addition, media coverage regarding the safety or quality of our brands or the raw materials, ingredients or processes involved in their production may damage consumer confidence in our brands. A general decline in the consumption of our brands could occur at any time as a result of change in consumer preference, perception, confidence and spending habits, including an unwillingness to pay a premium or an inability to purchase our brands due to financial hardship or increased price sensitivity, which may be exacerbated by the effects of the COVID-19 pandemic. If consumer preferences shift away from our brands, our business, financial condition and results of operations could be adversely affected.
The success of our brands depends on a number of factors including our ability to accurately anticipate changes in market demand and consumer preferences, our ability to differentiate the quality of our brands from those of our competitors, and the effectiveness of our marketing and advertising campaigns
 
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for our brands. We may not be successful in identifying trends in consumer preferences and developing brands that respond to such trends in a timely manner. We also may not be able to effectively promote our brands by our marketing and advertising campaigns and gain market acceptance. If our brands fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, we may not be able to fully recover costs and expenses incurred in our operation, and our business, financial condition, results of operations and prospects could be adversely affected.
Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel.
Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel. The loss of the services of any of these individuals could have an adverse effect on our business, financial condition, results of operations and prospects.
In addition, our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees. The market for such positions is competitive. Qualified individuals are in high demand and we may incur significant costs to attract them. In addition, the loss of any of our senior management or other key employees or our inability to recruit and develop mid-level managers could adversely affect our ability to execute our business plan and we may be unable to find adequate replacements. All of our employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we fail to retain talented senior management and other key personnel, or if we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition, results of operations and prospects could be adversely affected.
Use or ineffective use of social media and influencers may adversely affect our reputation or subject us to fines or other penalties.
We use third-party social media platforms as, among other things, marketing tools. For example, we maintain Instagram, Facebook, Pinterest and Twitter accounts. We also maintain relationships with thousands of social media influencers and engage in sponsorship initiatives. As existing ecommerce and social media platforms continue to rapidly evolve and new platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we use change their policies or algorithms, we may not be able to fully optimize such platforms, and our ability to maintain and acquire consumers and our financial condition may suffer. Furthermore, as laws and regulations and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have an adverse effect on our business, financial condition, results of operations and prospects.
In addition, an increase in the use of social media influencers for product promotion and marketing may cause an increase in the burden on us to monitor compliance of the content they post, and increase the risk that such content could contain problematic product or marketing claims in violation of applicable laws and regulations. For example, in some cases, the Federal Trade Commission, or the FTC, has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser. We do not control the content that our influencers post, and if we were held responsible for any false, misleading or otherwise unlawful content of their posts or their actions, we could be fined or subjected to other monetary liabilities or forced to alter our practices, which could have an adverse impact on our business.
Negative commentary regarding us, our brands or influencers and other third parties who are affiliated with us may also be posted on social media platforms and may be adverse to our reputation or business. Influencers with whom we maintain relationships could engage in behavior or use their platforms to communicate directly with our consumers in a manner that reflects poorly on our brand and may be attributed to us or otherwise adversely affect us. It is not possible to prevent such behavior, and the
 
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precautions we take to detect this activity may not be effective in all cases. The harm may be immediate, without affording us an opportunity for redress or correction.
We may be unable to accurately forecast revenue and appropriately plan our expenses in the future, and any failure to meet forecasted revenue or other financial figures may have an adverse impact on our financial position and stock price.
Revenue and results of operations are difficult to forecast because they generally depend on the volume, timing and type of orders we receive across our various channels, all of which are uncertain. Forecasts may be particularly challenging as we expand into new markets and geographies and develop and market new brands. We base our expense levels and investment plans on our estimates of revenue and gross profit. We cannot be sure the same growth rates and trends are meaningful predictors of future growth. If our assumptions prove to be wrong, we may spend more than we anticipate acquiring and retaining consumers or may generate lower revenue per consumer than anticipated, either of which could have an adverse effect on our business, financial condition, results of operations and prospects.
We rely heavily on consumer data and certain of the data that we track is subject to inherent challenges in measurement, and any inaccuracies in such data may negatively affect our business.
We rely heavily on certain data that we track using internal data analytics tools and we rely on data received from third parties, including third-party platforms, which have certain limitations. Data from these sources may include information relating to fraudulent accounts and interactions with our sites or the social media accounts of our business or of our influencers (including as a result of the use of bots, or other automated or manual mechanisms to generate false impressions that are delivered through our sites or their accounts). We have only a limited ability to verify data from our sites or third parties, and perpetrators of fraudulent impressions may change their tactics and may become more sophisticated, which would make it still more difficult to detect such activity.
Our methodologies for tracking data may also change over time. If we undercount or overcount performance due to the internal data analytics tools we use or experience issues with the data received from third parties, or if our internal data analytics tools contain algorithmic or other technical errors, the data we track may not be accurate. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies. If we are not able to obtain and track accurate data, our business, financial condition, results of operations and prospects could be adversely affected.
The consumer reception of the launch and expansion of our brands is inherently uncertain and may present new and unknown risks and challenges in production and marketing that we may fail to manage optimally and which could have a materially adverse effect on our business, results of operations and financial results.
New brand development and innovation is core to our marketing strategy and a significant portion of our net revenues are derived from new brands. For example, our core brands collectively accounted for 23.8% of our net revenues for 2020 and for 28.9% of our net revenues for the six months ended June 30, 2021. To continue our growth and compete with new and existing competitors, we may need to innovate and develop a robust pipeline of new brands. The launch and continued success of new brands is inherently uncertain, particularly with respect to consumer appeal and market share capture. An unsuccessful launch may impact consumer perception of our existing brands and reputation, which are critical to our ongoing success and growth. Unsuccessful implementation or short-lived success of new brands may result in write-offs or other associated costs which may materially and adversely affect our business, results of operations and financial results. In addition, the launch of new brand offerings may result in cannibalization of sales of existing brands in our portfolio.
Our results of operations may be impacted by price concessions, promotional activities, credits and other factors.
We have incurred, and expect to continue to incur, significant advertising and promotional expenditures to enhance our brands and raise consumer awareness in both existing and emerging categories. These expenditures may adversely affect our results of operations in a particular quarter or even a full
 
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fiscal year and may not result in increased sales. Variations in the levels of advertising and promotional expenditures have in the past caused, and are expected in the future to continue to cause, variability in our quarterly results of operations. While we strive to invest only in effective advertising and promotional activities in both the digital and traditional segments, it is difficult to correlate such investments with sales results, and there is no guarantee that our expenditures will be effective in building brand strength or growing long term sales.
Additionally, retailers may at times require price concessions that would negatively impact our margins and our ability to achieve or maintain profitability. If we are not able to lower our cost structure adequately in response to consumer pricing demands, and if we are not able to attract and retain a profitable consumer mix and a profitable product mix, our ability to achieve or maintain profitability could be adversely affected.
In addition, we periodically offer credits through various programs to wholesale distributors, including temporary price reductions, off-invoice discounts, and other trade activities. We anticipate that these price concessions and promotional activities could adversely impact our revenue and that changes in such activities could adversely impact period-over-period results. If we are not correct in predicting the performance of such promotions, or if we are not correct in estimating credits, our business, financial condition, results of operations and prospects could be adversely affected.
Our inability to develop and maintain strong relationships with retailers in order to maximize our presence in retail stores could adversely impact our revenue, and in turn our business, financial condition, results of operations and prospects could be adversely affected.
Our operations include sales through wholesale distributors to retail stores and their related websites, which accounted for approximately 13% of our net revenues in 2020. The successful growth of our wholesale business is dependent in part on our continuing development of strong relationships with major retail chains. The loss of our shelf space with Whole Foods or any other large retailer could have a significant impact on our revenue. In addition, we may be unable to secure adequate shelf space in new markets, or any shelf space at all, until we develop relationships with the retailers that operate in such markets. Consequently, growth opportunities through our retail channel may be limited and our revenue, business, financial condition, results of operations and prospects could be adversely affected if we are unable to successfully establish relationships with other retailers in new or current markets.
We also face severe competition to display our brands on store shelves and obtain optimal presence on those shelves. Due to the intense competition for limited shelf space, retailers are in a position to negotiate favorable terms of sale, including price discounts, allowances and brand return policies. To the extent we elect to increase discounts or allowances in an effort to secure shelf space, our operating results could be adversely affected. We may not be able to increase or sustain our volume of retail shelf space or offer retailers price discounts sufficient to overcome competition and, as a result, our sales and results of operations could be adversely affected. In addition, many of our competitors have significantly greater financial, production, marketing, management and other resources than we do and may have greater name recognition, a more established distribution network and a larger base of wholesale distributors. If our competitors’ sales surpass ours, retailers may give higher priority to our competitors’ products, causing such retailers to reduce their efforts to sell our brands and resulting in the loss of advantageous shelf space, which in turn could adversely impact our revenue, and in turn our business, financial condition, results of operations and prospects could be adversely affected.
Significant product returns or refunds could harm our business.
We allow our DTC consumers to return products and we offer refunds, subject to our return and refunds policy. If product returns or refunds are significant or higher than anticipated and forecasted, our business, financial condition, results of operations and prospects could be adversely affected. Further, we and our retailers modify policies relating to returns or refunds from time to time, and may do so in the future, which may result in consumer dissatisfaction and harm to our reputation or brand, or an increase in the number of product returns or the amount of refunds we make. From time to time our products are damaged
 
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in transit, which can increase return rates and harm our brand, which in turn could adversely impact our revenue, and in turn our business, financial condition, results of operations and prospects could be adversely affected.
Our business may be adversely affected if we are unable to provide our consumers with a technology platform that is able to respond and adapt to rapid changes in technology, if our platform encounters disruptions in usability or if our consumers find our platform less usable or attractive than those of our competitors.
The number of people who access the Internet through devices other than personal computers, including mobile phones, tablets, television set-top devices and similar hand-held devices, has increased dramatically in recent years. Adapting our services and/or infrastructure to these devices as well as other new Internet, networking or telecommunications technologies could be time-consuming and could require us to incur substantial expenditures, which could have an adverse effect on our business, financial condition, results of operations and prospects. Ultimately, the versions of our website and mobile applications developed for these devices may not be compelling to consumers.
Additionally, as new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for alternative devices and platforms and we may need to devote significant resources to the creation, support and maintenance of such applications. If we or our retailers are unable to attract consumers to our or their websites or mobile applications through these devices or are slow to develop a version of such websites or mobile applications that are more compatible with alternative devices, we may fail to capture a significant share of new consumers and could also lose existing consumers, which could have an adverse effect on our business, financial condition, results of operations and prospects.
Further, we continually upgrade existing technologies and business applications and we may be required to implement new technologies or business applications in the future. The implementation of upgrades and changes requires significant investments. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure. In the event that it is more difficult for our consumers to buy brands from us on their mobile devices, or if our consumers choose not to buy brands from us on their mobile devices or to use mobile products or platforms that do not offer access to our website, we could lose existing consumers and fail to attract new consumers. Even if we build and maintain a platform that is effective and attractive to our consumers, there is no guarantee our platforms will not encounter disruptions or outages and diminish our consumers’ satisfaction. As a result, our consumer growth could be harmed and our business, financial condition, results of operations and prospects could be adversely affected.
We are subject to risks related to online payment methods, including third-party payment processing-related risks.
We currently accept payments using a variety of methods, including credit card, debit card, Apple Pay, PayPal and gift cards. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements, fraud and other risks. We also rely on third parties to provide payment processing services, and for certain payment methods, we pay interchange and other fees, which may increase over time and raise our operating costs and affect our ability to achieve or maintain profitability. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard, or PCI-DSS, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we (or a third-party processing payment card transactions on our behalf) suffer a security breach affecting payment card information, we may have to pay onerous and significant fines, penalties and assessments arising out of the major card brands’ rules and regulations, contractual indemnifications or liability contained in merchant agreements and similar contracts, and we may lose our ability to accept payment cards for payment for our goods and services, which could materially impact our operations and financial performance.
Furthermore, as our business changes, we may be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently incur for compliance. As we offer new payment options to consumers, including by way of integrating emerging mobile and other payment methods, we may be subject to additional regulations, compliance requirements and fraud. If we fail to
 
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comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card payments from consumers or facilitate other types of online payments.
We may in the future incur losses from various types of fraud, including stolen credit card numbers, claims that a consumer did not authorize a purchase, merchant fraud and consumers who have closed bank accounts or have insufficient funds in open bank accounts to satisfy payments. We occasionally receive orders placed with fraudulent data and we may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal transaction and be required by card issuers to pay charge-back fees. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the underlying money transfer amount. If our charge-back rate becomes excessive, card associations also may require us to pay fines or refuse to process our transactions. In addition, under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. Further, we may be subject to additional fraud risk if third-party service providers or our employees fraudulently use consumer information for their own gain or facilitate the fraudulent use of such information. Although we have measures in place to detect and reduce the occurrence of fraudulent activity in our marketplace, those measures may not always be effective. Our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action and additional expenses and our business, financial condition, results of operations and prospects could be adversely affected. If any of these events were to occur, our business, financial condition, results of operations and prospects could be adversely affected.
We intend to grow our business through acquisitions of, or investments in, new or complementary businesses, assets, facilities, technologies or products, or through strategic alliances, and the failure to manage these acquisitions, investments or alliances, or to integrate them with our existing business, could have an adverse effect on us.
From time to time, we may consider opportunities to acquire or make investments in new or complementary businesses, assets, facilities, technologies, offerings, or products, or enter into strategic alliances, that may enhance our capabilities, expand our outsourcing and supplier network, complement our current brands or expand the breadth of our markets. For example, in 2021 we purchased certain assets of Natural Merchants, Inc., an international wine importer.
Acquisitions, investments and other strategic alliances involve numerous risks, including:

problems integrating the acquired business, assets, facilities, technologies or products, including issues maintaining uniform standards, procedures, controls and policies;

risks associated with quality control and brand reputation;

unanticipated costs associated with acquisitions, investments or strategic alliances;

diversion of management’s attention from our existing business;

adverse effects on existing business relationships with suppliers, wholesale distributors and retailers;

risks associated with any dispute that may arise with respect to such strategic alliance;

risks associated with entering new markets in which we may have limited or no experience;

potential loss of key employees of acquired businesses; and

increased legal and accounting compliance costs.
Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, assets, facilities, technologies and products and to obtain any necessary financing. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. If we are unable to identify suitable acquisitions or strategic relationships, or if we are unable to integrate any acquired businesses, assets,
 
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facilities, technologies and products effectively, our business, financial condition, results of operations and prospects could be adversely affected. Further, while we employ several different methodologies to assess potential business opportunities, the new businesses may not meet or exceed our expectations, which could result in write-downs of assets or goodwill or impairment charges.
The COVID-19 pandemic could have an adverse effect on our business, financial condition, results of operations and prospects.
In connection with the COVID-19 pandemic, governments implemented significant measures, including closures, quarantines, travel restrictions and other social distancing directives, intended to control the spread of the virus. Companies have also taken precautions, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses. Although as of June 2021, the global economy has begun to recover and the widespread availability of vaccines has encouraged greater economic activity, we are continuing to monitor the situation, and we cannot predict for how long, or the ultimate extent to which, the pandemic may disrupt our operations. The COVID-19 pandemic has had and continues to have an adverse impact on global economic conditions and consumer confidence and spending, which could adversely affect our supply chain as well as the demand for our brands. The fluid nature of the COVID-19 pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil, which could also have an adverse effect on our business, financial condition, results of operations and prospects.
The impact of the COVID-19 pandemic on any of our suppliers, wholesale distributors, retailers or ecommerce vendors or transportation or logistics providers may negatively affect the price and availability of our materials and impact our supply chain. If the disruptions caused by the COVID-19 pandemic continue for an extended period of time, our ability to meet the demands of our consumers may be materially impacted. For example, government restrictions may limit the personnel available to receive or ship brands at our distribution centers. In addition, the continuing effects caused by the COVID-19 pandemic may negatively impact collections of accounts receivable and cause some of our retailers to go out of business, all of which could adversely affect our business, financial condition, results of operations and prospects.
Further, the COVID-19 pandemic may impact consumer demand and demand from wholesale distributors and retailers. Retail stores may be impacted if governments continue to implement regional business closures, quarantines, travel restrictions and other social distancing directives to slow the spread of the virus. Further, to the extent our retailers’ operations are negatively impacted, our consumers may reduce demand for or spending on our products, or consumers or retailers may delay payments to us or request payment or other concessions. There may also be significant reductions or volatility in consumer demand for our products due to travel restrictions or social distancing directives, as well as the temporary inability of consumers to purchase our products due to illness, quarantine or financial hardship, shifts in demand away from one or more of our products, decreased consumer confidence and, any of which may negatively impact our results, including as a result of an increased difficulty in planning for operations. Additionally, we may be unable to effectively modify our trade promotion and advertising activities to reflect changing consumer viewing and shopping habits due to event cancellations, reduced in-store visits and travel restrictions, among other things.
Beginning in March 2020, we saw an increase in DTC demand, primarily, we believe, as a result of purchases arising from more consumers working remotely during the COVID-19 pandemic and thus, spending more time at home and the unavailability of public venues. If remote work conditions end, more public venues reopen and consumers spend less time at home, our members may elect to purchase fewer products or may elect to purchase products from traditional brick and mortar stores rather than from our website, which could materially and adversely affect our business and results of operations.
The extent of the COVID-19 pandemic’s effect on our operational and financial performance will also depend on future developments, including the duration and intensity of the pandemic, and the emergence of variants of COVID-19 and related developments, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of the COVID-19 pandemic on our business. However, if the pandemic continues to persist as a severe worldwide health crisis, the disease could have an adverse effect on our business, financial condition,
 
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results of operations and prospects, and may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Our business performance by segment may be subject to significant variability.
Consumer demand and net sales among our wholesale and DTC channels are subject to seasonal fluctuations. While we have not in the past experienced significant variability among our results of operations in the aggregate, our business performance by segment has displayed seasonal trends. A failure by us to adequately prepare for periods of changed demand within any particular segment, or any event that disrupts our distribution channels during those periods, could have a material adverse effect on our business and results of operations.
In addition to the seasonality of our wholesale and DTC channels, our financial performance is influenced by a number of factors which are difficult to predict and variable in nature. These include cost volatility for raw materials, production yields and inventory availability and the evolution of our sales channel mix, as well as external trends in weather patterns and discretionary consumer spending. A number of other factors which are inherently difficult to predict could affect the seasonality or variability of our financial performance in any impacted segment. Therefore, the performance of our wholesale or DTC segments may vary on a quarterly basis, and the results of a section during one period may not be indicative of that segment’s results during any other future period.
The agreements governing our indebtedness will require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise capital through additional debt financing, the terms of any new debt could further restrict our ability to operate our business.
We are party to a credit agreement, or the PMB Credit Agreement, with Pacific Mercantile Bank providing for a $7.0 million revolving line of credit, or the PMB Line of Credit. The PMB Line of Credit bears interest at a variable annual rate equal to 1.25% plus the prime rate and matures on March 31, 2022. Under the PMB Credit Agreement, we are required to pay an annual fee equal to 0.25% of the revolving credit commitment in effect on the date that the fee is due. The PMB Credit Agreement also contains various affirmative and negative covenants and restrictions that limit our ability to engage in certain activities, including, among other things, incurring certain types of additional indebtedness (including certain guarantees or other contingent obligations) or consolidating, merging, selling or otherwise disposing of all or substantially all of our assets or acquiring all or substantially all of the assets or business of another person. We are also party to a loan and security agreement, the Multiplier LSA, with Multiplier Capital II, LP, or Multiplier, providing for a term loan of $5.0 million, or the Multiplier Term Loan. The Multiplier Term Loan matures on June 29, 2022 and bears interest at a variable annual rate equal to the prime rate plus 6.25%, with a minimum interest rate of 11.5% per annum and a maximum interest rate of 14.0% per annum. The Multiplier Term Loan also carries certain fees, including (i) a $100,000 loan fee due on the earliest of the maturity date, the date the loan is paid in full and the date of any event of default that results in the acceleration of our obligations under the Multiplier LSA, and (ii) a prepayment fee equal to 5.0% of the amount prepaid, if the prepayment occurs on or prior to the first anniversary of the when funds were first disbursed under the Multiplier LSA, or the Disbursement Date, 3.0% of the amount prepaid if the prepayment occurs between the first and second anniversaries of the Disbursement Date and 1.0% of the amount prepaid if the prepayment occurs after the second anniversary of the Disbursement Date. The Multiplier Term Loan is secured by substantially all of our assets. We refer to the PMB Credit Agreement and the Multiplier LSA collectively as our Credit Agreements. As of June 30, 2021, we had $1 million outstanding under our Credit Agreements.
Our Credit Agreements contain affirmative and negative covenants, indemnification provisions and events of default. The affirmative covenants include, among others, administrative, reporting and legal covenants, in each case subject to certain exceptions. The negative covenants include, among others, limitations on our and our subsidiaries’ abilities to, in each case subject to certain exceptions:

make restricted payments including dividends and distributions;

use proceeds from the PMB Line of Credit for purposes other than for working capital;

incur additional indebtedness;
 
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incur liens;

enter into fundamental changes including mergers and consolidations;

engage in certain sale leaseback transactions;

sell assets, including capital stock of subsidiaries;

make certain investments;

create negative pledges or restrictions on the payment of dividends or payment of other amounts owed from subsidiaries

make prepayments or modify documents governing material debt that is subordinated with respect to right of payment;

enter into certain transactions with affiliates;

change our fiscal year; and

change our lines of business.
The Multiplier LSA also contains a financial covenant that requires us to maintain a minimum cash balance of $1.25 million and mutually agreed upon minimum amounts of earnings, defined as net income or loss before interest, taxes, depreciation and other non-cash amortization expenses, less capital software development expenses. As a result of the restrictions described above, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We have previously breached similar covenants in prior credit facilities. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or amend the covenants.
Our ability to comply with the covenants and restrictions contained in the Credit Agreements may be affected by economic, financial and industry conditions beyond our control. The restrictions in the Credit Agreements may also prevent us from taking actions that we believe would be in the best interests of our business and may make it difficult for us to execute our business strategy successfully or effectively compete with companies that are not similarly restricted. Even if the Credit Agreements are terminated, any additional debt that we incur in the future could subject us to similar or additional covenants.
The Credit Agreements include customary events of default, including failure to pay principal, interest or certain other amounts when due; material inaccuracy of representations and warranties; violation of covenants; specified cross-default and cross-acceleration to other material indebtedness; certain bankruptcy and insolvency events; certain events relating to the Employee Retirement Income Security Act of 1974; certain undischarged judgments; material invalidity of guarantees or grant of security interest; and change of control, in certain cases subject to certain thresholds and grace periods.
Our failure to comply with the restrictive covenants described above as well as other terms of our indebtedness could result in an event of default, which, if not cured or waived, could result in the lenders declaring all obligations, together with accrued and unpaid interest, immediately due and payable and take control of the collateral, potentially requiring us to renegotiate the Credit Agreements on terms less favorable to us. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our business, results of operations, financial condition and future prospects could be adversely affected. In addition, such a default or acceleration may result in the acceleration of any future indebtedness to which a cross-acceleration or cross-default provision applies. If we are unable to repay our indebtedness, lenders having secured obligations, such as the lenders under the Credit Agreements, could proceed against the collateral securing the indebtedness. In any such case, we may be unable to borrow under our credit facilities and may not be able to repay the amounts due under our credit facilities. This could have an adverse effect on our business, financial condition, results of operations and prospects and could cause us to become bankrupt or insolvent.
 
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We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our consumers would have to pay for our offering and adversely affect our operating results.
On June 21, 2018, the U.S. Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state retailers even if those retailers lack any physical presence within the states imposing sales taxes. Under Wayfair, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states, both before and after the Supreme Court’s ruling, have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state retailers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment of these laws, and it is possible that states may seek to tax out-of-state retailers, including for prior tax years. Although we believe that we currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers since Wayfair was decided, a successful assertion by one or more jurisdictions requiring us to collect sales taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some sales taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by state governments of sales tax collection obligations on out-of-state retailers in jurisdictions where we do not currently collect sales taxes, whether for prior years or prospectively, could also create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors and decrease our future sales, which could have an adverse effect on our business, financial condition, results of operations and prospects.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses since inception. As of December 31, 2020, we had federal and state net operating loss carryforwards of approximately $47.5 million and $47.1 million, respectively. The federal loss carryforwards, except the federal loss carryforwards arising in tax years beginning after December 31, 2017, begin to expire in 2032 unless previously utilized. Federal net operating losses, or NOLs, arising in tax years beginning after December 31, 2017 have an indefinite carryforward period and do not expire, but the deduction for these carryforwards is limited to 80% of current-year taxable income for taxable years beginning after 2020. In general, under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” ​(generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience ownership changes in the future, and are currently evaluating with our independent tax advisors whether and to what extent our NOLs may be currently limited. In addition, for state income tax purposes, there may be periods during which the use of NOLs or tax credits is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example, California recently imposed limits on the usability of California NOLs and certain tax credits to offset California taxable income or California tax liabilities in tax years beginning after 2019 and before 2023. Additionally, state net operating loss carryforwards begin to expire in 2028. As a result, to the extent that we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income and our ability to use our tax credits to reduce our tax liabilities may be subject to limitations.
If we cannot maintain our company culture or focus on our purpose as we grow, our success and our business and competitive position may be harmed.
We believe our culture and our mission have been key contributors to our success to date and that the critical nature of the platform that we provide promotes a sense of greater purpose and fulfillment in our employees. Any failure to preserve our culture or focus on our mission could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our corporate objectives. As we grow and develop the infrastructure of a public company, we may find it difficult to maintain these important values. If we fail to maintain our company culture or focus on our mission our competitive position and business, financial condition, results of operations and prospects could be adversely affected.
 
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Risks Related to Production, Supply and Service Providers
We rely on our proprietary technology and data to forecast consumer demand and to manage our supply chain, and any failure of this technology or other failure to accurately forecast demand for our brands could materially adversely affect our business, financial condition and operating results.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our third-party suppliers before firm orders are placed by our consumers or our retailers. We rely on our proprietary technology and data to forecast demand and predict our consumers’ orders, determine the amounts of grapes, wine and other supplies to purchase, and to optimize our in-bound and out-bound logistics for delivery and transport of our supply to our fulfillment centers and of our brand offerings to consumers. If this technology fails or produces inaccurate information or results at any step in this process—such as if the data we collect from consumers is insufficient or incorrect, if we over or underestimate future demand or if we fail to optimize delivery routes to our consumers—our inventory could become unsalable, we could experience shortages in key ingredients, the operational efficiency of our supply chain may suffer (including as a result of excess or shortage of fulfillment center capacity) or our consumers could experience delays or failures in the delivery of our brand offerings. Moreover, forecasts based on historical data, regardless of any historical patterns or the quality of the underlying data, are inherently uncertain, and unforeseen changes in consumer tastes or external events could result in material inaccuracy of our forecasts, which could result in disruptions in our business and our incurrence of significant costs and waste. Factors that could affect our ability to accurately forecast demand for our brands include: an unanticipated increase or decrease in demand for our brands; our failure to accurately forecast acceptance for our new brands; brand introductions by competitors; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers; the impact on demand due to unseasonable weather conditions; weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our brands; and terrorism or acts of war, or the threat thereof, or political or labor instability or unrest, which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials.
Inventory levels in excess of consumer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and harm our business. In addition, if we underestimate the demand for our brands, our third-party manufacturers may not be able to produce brands to meet our consumer requirements, and this could result in delays in the shipment of our brands and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and wholesale distributor relationships.
The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our brands could adversely affect our business, financial condition, results of operations and prospects.
Our business, including our costs and supply chain, is subject to risks associated with sourcing, production, warehousing, distribution and logistics, and the loss of any of our key suppliers or logistical service providers could negatively impact our business.
We do not grow our own grapes and instead rely on third parties to supply grapes and bulk wine. All of the brands we offer are made up of ingredients that are produced by a relatively limited number of third-party producers, and as a result we may be subject to price fluctuations or demand disruptions. Our operating results would be negatively impacted by increases in the costs of our brands, and we have no guarantees that costs will not rise. In addition, as we expand into new categories and brand types, we expect that we may not have strong purchasing power in these new areas, which could lead to higher costs than we have historically seen in our current categories. We may not be able to pass increased costs on, which could adversely affect our operating results. Moreover, in the event of a significant disruption in the supply of the materials used in the production of the brands we offer, we and the vendors that we work with might not be able to locate alternative suppliers of materials of comparable quality at prices consistent with our historical experience.
 
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In addition, products and merchandise we receive from wineries and suppliers may not be of sufficient quality or free from damage, or such products may be damaged during shipping, while stored in our warehouse fulfillment centers or with third-party retail consumers or when returned by consumers. We may incur additional expenses and our reputation could be harmed if consumers and potential consumers believe that our brands do not meet their expectations, are not properly labeled or are damaged.
We purchase significant amounts of product supply from a limited number of suppliers with limited supply capabilities. There can be no assurance that our current suppliers will be able to accommodate our anticipated growth or continue to supply current quantities at preferential prices. An inability of our existing suppliers to provide materials in a timely or cost-effective manner could impair our growth and have an adverse effect on our business, financial condition, results of operations and prospects. We generally do not maintain long-term supply contracts with any of our suppliers and any of our suppliers could discontinue selling to us at any time. If an agreement with one of our primary suppliers is terminated or is not renewed, if one of our primary suppliers becomes insolvent, ceases or significantly reduces its operations or experiences financial distress, as a result of the COVID-19 pandemic or otherwise, or if any environmental, economic or other outside factors impact their operations, our ability to procure grapes, juice, wine, or other product materials may be temporarily impaired, or we may face increased costs related to such products. The loss of any of our primary suppliers, or the discontinuance of any preferential pricing or exclusive incentives they currently offer to us could have an adverse effect on our business, financial condition, results of operations and prospects.
We continually seek to expand our base of suppliers, especially as we identify new brands that necessitate new or additional materials. We also require our new and existing suppliers to meet our ethical and business partner standards. Suppliers may also have to meet governmental and industry standards and any relevant standards required by our consumers, which may require additional investment and time on behalf of suppliers and us. If we are unable to identify or enter into distribution relationships with new suppliers or to replace the loss of any of our existing suppliers, we may experience a competitive disadvantage, our business may be disrupted and our business, financial condition, results of operations and prospects could be adversely affected.
Our principal suppliers currently provide us with certain incentives, such as volume purchasing, trade discounts, cooperative advertising and market development funds. A reduction or discontinuance of these incentives would increase our costs and could reduce our ability to achieve or maintain profitability. Similarly, if one or more of our suppliers were to offer these incentives, including preferential pricing, to our competitors, our competitive advantage would be reduced, which could have an adverse effect on our business, financial condition, results of operations and prospects.
Unanticipated changes in consumer demands and preferences could have adverse effects on our ability to manage supply and capture growth opportunities.
Our ability to effectively manage production and inventory is inherently linked to actual and expected consumer demand for our brands, particularly given the long product lead time and agricultural nature of the wine business. Unanticipated changes in consumer demand or preferences in the future could have adverse effects on our ability to manage supply and capture growth opportunities.
A disruption in our operations, or the operations of third-parties upon which we rely, could have an adverse effect on our business.
Our operations, including those of our third-party manufacturers, suppliers and delivery service providers, are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in information systems, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters, pandemics or other public health emergencies, border disputes, acts of terrorism and other external factors over which we and our third-party manufacturers, suppliers and delivery service providers have no control. The loss of, or damage to, the manufacturing facilities or fulfillment centers of our third-party manufacturers, suppliers and delivery service providers could have an adverse effect on our business, financial condition, results of operations and prospects.
 
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We depend heavily on ocean container delivery to receive shipments of our products from our third-party suppliers located overseas and contracted third-party delivery service providers to deliver our products to our fulfillment centers located in California and Pennsylvania, and from there to our consumers and retailers. Further, we rely on postal and parcel carriers for the delivery of products sold directly to consumers through the Winc digital platform. Interruptions to or failures in these delivery services could prevent the timely or successful delivery of our brands. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as labor unrest or natural disasters. For example, a labor strike at a port could negatively impact the delivery of our imported grapes, juice, wine or other product materials, and trade disputes between the United States and countries from which we import grapes, juice, wine and other product materials may in the future restrict the flow of the goods from such countries to the United States. Any failure to provide high-quality delivery services to our consumers may negatively affect the shopping experience of our consumers, damage our reputation and cause us to lose consumers.
Our ability to meet the needs of our consumers and retailers depends on our proper operation of our fulfillment centers in California and Pennsylvania, where most of our inventory that is not in transit is housed. Although we currently insure our inventory, our insurance coverage may not be sufficient to cover the full extent of any loss or damage to our inventory or fulfillment centers, and any loss, damage or disruption of our facilities, or loss or damage of the inventory stored there, could have an adverse effect on our business, financial condition, results of operations and prospects.
We may be unable to manage the complexities created by our omni-channel operations, which may have a material adverse effect on our business, financial condition, operating results and prospects.
Our omni-channel operations, such as offering our brands through our website, on third party websites, through wholesale distributors and in traditional brick and mortar stores, create additional complexities in our ability to manage inventory levels, as well as certain operational issues, including timely shipping and refunds. Accordingly, our success depends to a large degree on continually evolving the processes and technology that enable us to plan and manage inventory levels and fulfill orders, address any related operational issues and further align channels to optimize our omni-channel operations. If we are unable to successfully manage these complexities, it may have a material adverse effect on our business, financial condition, operating results and prospects.
The occurrence of an environmental catastrophe could disrupt our business. Climate change, wildfires, disease, pests, weather conditions and problems with water supply could also have adverse effects on our business.
Our ability to conduct business in the ordinary course, fulfilling consumer 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, could negatively impact the quality and quantity of grapes available to us and our producers for wine production.
We source grapes and juice from a variety of producers, but in significant volumes from certain suppliers. Although there is more than one supplier for most of the grapes bought by us, and the right variety and quality of grapes is usually readily available when needed, there is no assurance that this will always be the case, particularly in the adverse circumstances mentioned above and below. A shortage of grapes of the required variety and quality could impair our business and results of operations both in the year of harvest and thereafter.
We may not be fully insured against risk of catastrophic loss to wineries, production facilities, fulfillment centers, customer service centers, data centers, corporate officers or distribution systems as a result of earthquakes, fires or other events. Some of the vineyards we source from, and their and our facilities, are located in California, which is prone to seismic activity and has recently experienced landslides and wildfires, which have been increasing in frequency and intensity. If any of our facilities or the vineyards or facilities of our significant suppliers were to experience catastrophic loss, that event could disrupt operations, delay production, shipments and revenue and could result in potentially significant expenses to repair or replace the vineyard or facility. If such a disruption were to occur, then we could breach agreements, our reputation could be harmed, and our results or operations, financial condition and business could be adversely affected. Further, we may not be able to efficiently relocate our fulfillment and delivery operations due to
 
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disruptions in service if one of these events occurs, and our insurance coverage may be insufficient to compensate us for such losses. While we take steps to minimize the damage that would be caused by a catastrophic event, including relying on diversity of suppliers and wholesale distributors, there is no certainty that such efforts would prove successful.
Wine is also subject to diseases, pests and weather conditions that can affect the quality and quantity of grapes. Various diseases, pests, fungi, viruses, drought, floods, frosts and other weather conditions can affect the quality and quantity of grapes, decreasing the supply of our brands and negatively impacting us. We cannot guarantee that independent grape suppliers will succeed in preventing disease in their vineyards. For example, Pierce’s disease is a vine bacterial disease spread by insects that kills grapevines and for which there is no known cure. If vineyards used by our suppliers become contaminated with this or other diseases, then our results of operations would likely decline. Additionally, future government restrictions regarding the use of materials used in grape growing could increase vineyard costs and reduce production.
We are also subject to the adverse effects of climate change. Restrictions on access to or an increase in the cost of water and energy, and the inability of independent suppliers to adapt to and mitigate against climate change, could negatively impact our ability to effectively source grapes and wine for production. While we are diversified in our grape production, climate change is an unfolding phenomenon with uncertain outcomes. Furthermore, governmental actions to reduce the impacts of climate change such as packaging waste and emission reduction targets could adversely impact our profit margins.
Additionally, the amount of water available for us is important to the supply of grapes and winemaking, other agricultural raw materials and our ability to operate our business. If climate patterns change and droughts become more severe, there may be a scarcity of water, poor water quality or water right restrictions, which could affect production costs, consistency of yields or impose capacity constraints. The suppliers of the grapes and other agricultural raw materials purchased by us depend upon sufficient supplies of quality water for their vineyards and fields. The availability of adequate quantities of water for application at the correct time can be vital for grapes to thrive. Whether particular vineyards are experiencing water shortages depends, in large part, on their location. An extended period of drought across much of California would restrict the use and availability of water for agricultural uses, and in some cases governmental authorities might divert water to other uses. Lack of available water could reduce grape harvest and access to grapes and adversely impact us. Scarcity of adequate water in grape growing areas could also result in legal disputes among landowners and water users. If water available to the operations of our suppliers becomes scarcer, restrictions are placed on usage of water or the quality of that water deteriorates, then we may incur increased production costs or face manufacturing constraints that could negatively affect production. Even if quality water is widely available, water purification and waste treatment infrastructure limitations could increase our costs or constrain operation of production facilities and vineyards of our suppliers. Any of these factors could adversely affect our business, results of operations and financial results.
Grape supply and price volatility affects our results of operations.
Volatility and increases in the costs of grapes, labor and other necessary supplies or services have in the past negatively impacted, and in the future may negatively impact, our results of operations and financial condition. If such increases occur or exceed our estimates and if we are unable to increase the prices of our brands or achieve cost savings to offset the increases, then our results of operations will be harmed. Even if we increase brand prices in response to cost increases, such price increases may not be sustainable and could lead to declines in market share as competitors may not increase their prices or consumers may decide not to pay the higher prices. In the alternative, an extreme oversupply of grapes can lead to a glut of grape supply and declines in the value of the harvest. Future swings in grape supply and price volatility may affect our results of operations.
If we are unable to identify and obtain adequate supplies of quality agricultural, raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies, or if there is an increase in the cost of the commodities or products, then our profitability could be negatively impacted, which would adversely affect our business, results of operations and financial condition.
We use a large volume of raw materials, in addition to grapes, to produce and package wine, including corks, barrels, winemaking additives and water, as well as large amounts of packaging materials
 
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such as metal, cork, glass and cardboard. We purchase raw materials and packaging materials under contracts of varying maturities from domestic and international suppliers.
Glass bottle costs are one of our largest packaging components of cost of revenues. In North America, glass bottles have only a small number of producers. Currently, the majority of our glass containers are sourced from China, the United States and Mexico, while a minority are sourced from Taiwan and Chile. An inability of any of our glass bottle suppliers to satisfy our requirements could materially and adversely affect our business. In addition, costs and programs related to mandatory recycling and recyclable materials deposits could be adopted in states of manufacture, imposing additional and unknown costs to manufacture products utilizing glass bottles. Increases in the costs of, or any difficulty in acquiring adequate supply of, raw materials may significantly impact our supply chain and our business. For example, our industry has recently experienced a glass shortage that has made it more difficult and more expensive to acquire the bottles we require for our brands.
Our production facilities also use a significant amount of energy in their operations, including electricity, propane and natural gas. We have experienced increases in energy costs in the past, and energy costs could rise in the future, which would result in higher transportation, freight and other operating costs, such as ageing and bottling expenses. Our freight cost and the timely delivery of wines could be adversely affected by a number of factors that could reduce the profitability of operations, including driver shortages, higher fuel costs, weather conditions, traffic congestion, increased government regulation, and other matters. In addition, increased labor costs or insufficient labor supply could increase our production costs.
The supply and the price of raw materials, packaging materials and energy and the cost of energy, freight and labor used in our productions and distribution activities could be affected by a number of factors beyond our control, including market demand, global geopolitical events (especially their impact on energy prices), economic factors affecting growth decisions, exchange rate fluctuations and inflation. To the extent that any of these factors, including supply of goods and energy, affect the prices of ingredients or packaging, or we do not effectively or completely hedge changes in commodity price risks, or are unable to recoup costs through increases in the price of finished wines, our business, results of operations and financial condition could be adversely affected.
If we are unable to obtain adequate supplies of premium grapes and bulk wine from third-party grape growers and bulk wine suppliers, the quantity or quality of our annual production of wine could be adversely affected, causing a negative impact on our business, results of operations and financial condition.
The production of our wines and the ability to fulfill the demand for our wines is restricted by the availability of premium grapes and bulk wines from third-party growers. The entirety of our grape inputs per year come from third parties in the form of contracted grapes, contracted bulk wine, spot grapes and spot bulk wine. Additionally, in 2020 approximately 64% of our wine came from grapes purchased from California-based growers. Any delay or other disruption in the supply of California grapes from these growers could have a significant adverse effect on our business. Many of these risks remain outside our control, or the control of the growers upon whom we rely, including, for example, the risks of fires or other natural disasters.
As we continue to grow, we anticipate that our production will continue to rely on third-party suppliers. If we are unable to source grapes and bulk wine of the requisite quality, varietal and geography, among other factors, our ability to produce wines to the standards, quantity and quality demanded by our consumers could be impaired.
Factors including climate change, agricultural risks, competition for quality, water availability, land use, wildfires, floods, disease and pests could impact the quality and quantity of grapes and bulk wine available to our company. Furthermore, these potential disruptions in production may drive up demand for grapes and bulk wine creating higher input costs or the inability to purchase these materials. In recent years, we have observed significant volatility in the grape and juice market. For example, in 2020, we contracted for approximately 580,000 gallons of bulk wine at a cost of approximately $6.1 million, compared to approximately 350,000 gallons of bulk wine for a total cost of approximately $3.8 million in 2019. We may experience upward price pressure in future harvest seasons due to factors including the general volatility in the grape and bulk wine markets, widespread insured and/or uninsured losses and overall stress on the agricultural portion of the supply chain. Furthermore, following the 2020 wildfires in Northern California,
 
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the price of bulk wine increased substantially in a very short period of time, leading to some wine producers reducing lot sizes of certain wines. While we were able to purchase much of our bulk wine prior to meaningful price increases, we cannot be sure that we will be able to avoid similar price increases in the future. As a result, our financial results could be materially and adversely affected both in the year of the harvest and future periods.
A reduction in our access to or an increase in the cost of the third-party facilities we use to produce our wine could harm our business.
We use third-party alternating proprietorship bottling and winemaking facilities in the production of many of our wines, which means we rely on production capacity at several third-party facilities to bring certain of our brands to market. Our ability to utilize these facilities may be limited by several factors outside our control, including, among others, increased processing costs, damage to the facility or temporary or permanent shutdown for hygienic, mechanical, regulatory or other reasons. The inability to use these or alternative facilities, or to quickly find alternative facilities, at reasonable prices or at all, could increase our costs or reduce the amounts we produce, which could reduce our sales and earnings.
Moreover, we do not have long-term agreements with any of these facilities, and they may provide facility space and services to competitors at a price above what we are willing to pay, which could force us to locate new facilities. The activities conducted at outside facilities include crushing, fermentation, storage, blending, and bottling. The reliance on these third parties varies according to the type of production activity. As production increases, we must increasingly rely upon these third-party production facilities. Reliance on third parties will also vary with annual harvest volumes.
Moving production to a new third-party service provider could negatively impact our financial results.
Shipping is a critical part of our business and any changes in our shipping arrangements or any interruptions in shipping could adversely affect our operating results.
We primarily rely on one major vendor for our DTC shipping requirements. If we are not able to negotiate acceptable pricing and other terms with our vendors or they experience performance problems or other difficulties, it could negatively impact our operating results and our consumer experience. For example, the costs and difficulty in procuring adequate trucking and other shipping services have increased recently as a result of, among other things, the COVID-19 pandemic. Ongoing or recurring challenges relating to our shipping processes or that of any third parties that we rely on could have a material impact on our business and results of operations.
Shipping vendors may also impose shipping surcharges from time to time. In addition, our ability to receive inbound inventory efficiently and ship brands to consumers and retailers may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, trade embargoes, customs and tax requirements and similar factors. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our brands are not delivered in a timely fashion or are damaged or lost during the delivery process, our consumers could become dissatisfied and cease shopping on our site or retailer or third-party ecommerce sites, which could have an adverse effect on our business, financial condition, operating results and prospects.
If we do not successfully optimize, operate and manage the expansion of the capacity of our warehouse fulfillment centers, our business, financial condition, results of operations and prospects could be adversely affected.
We have warehouse fulfillment centers located in California and Pennsylvania. If we do not optimize and operate our warehouse fulfillment centers successfully and efficiently, it could result in excess or insufficient fulfillment capacity, an increase in costs or impairment charges or harm our business in other ways. In addition, if we do not have sufficient fulfillment capacity or experience a problem fulfilling orders in a timely manner, our consumers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our consumers. As a result of the continuing effects of the COVID-19 pandemic, we may experience disruptions to the operations of our fulfillment centers, which may negatively
 
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impact our ability to fulfill orders in a timely manner, which could harm our reputation, relationships with consumers and business, financial condition, results of operations and prospects.
We have designed and established our own fulfillment center infrastructure, including customizing inventory and package handling software systems, which is tailored to meet the specific needs of our business. If we continue to add fulfillment and warehouse capabilities, add new businesses or categories with different fulfillment requirements or change the mix in brands that we sell, our fulfillment network will become increasingly complex and operating it will become more challenging. Failure to successfully address such challenges in a cost-effective and timely manner could impair our ability to timely deliver purchases to our DTC consumers and merchandise inventory to our retailers and could have an adverse effect on our reputation and ultimately, our business, financial condition, results of operations and prospects.
We may also need to add an additional warehouse fulfillment center and/or other distribution capacity as our business continues to grow. We cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. If we are unable to secure new facilities for the expansion of our fulfillment operations, recruit qualified personnel to support any such facilities, or effectively control expansion-related expenses, our business, financial condition, results of operations and prospects could be adversely affected. If we grow faster than we anticipate, we may exceed our fulfillment center capacity sooner than we anticipate, we may experience problems fulfilling orders in a timely manner or our consumers may experience delays in receiving their purchases, which could harm our reputation and our relationships with our consumers, and we would need to increase our capital expenditures more than anticipated and in a shorter time frame than we currently anticipate. Our ability to expand our fulfillment center capacity, including our ability to secure suitable facilities and recruit qualified employees, may be substantially affected by the spread of COVID-19 and related governmental orders and there may be delays or increased costs associated with such expansion as a result of the spread and impact of the COVID-19 pandemic. Many of the expenses and investments with respect to our fulfillment centers are fixed, and any expansion of such fulfillment centers will require additional investment of capital. We expect to incur higher capital expenditures in the future for our fulfillment center operations as our business continues to grow. We would incur such expenses and make such investments in advance of expected sales, and such expected sales may not occur. Any of these factors could have an adverse effect on our business, financial condition, results of operations and prospects.
We rely on third-party suppliers, producers, retailers and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
We do not own or operate any vineyards. We use multiple third-party suppliers and producers based primarily in the United States, and other countries to a lesser extent, to source all of our grapes and juice, under our owned brand. We engage many of our third-party suppliers and manufacturers on a purchase order basis and in some cases are not party to long-term contracts with them. The ability and willingness of these third parties to supply and manufacture our products may be affected by competing orders placed by other companies and the demands of those companies. If we experience significant increases in demand, or need to replace a significant number of existing suppliers or manufacturers, there can be no assurance that additional supply and manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer will allocate sufficient capacity to us in order to meet our requirements. Furthermore, our reliance on suppliers and manufacturers outside of the United States, the number of third parties with whom we transact and the number of jurisdictions to which we sell complicates our efforts to comply with customs duties and excise taxes; any failure to comply could adversely affect our business.
In addition, quality control problems, such as the use of materials and delivery of products that do not meet our quality control standards and specifications or comply with applicable laws or regulations, could harm our business. Quality control problems could result in regulatory action, such as restrictions on importation, products of inferior quality or product stock outages or shortages, harming our sales and creating inventory write-downs for unusable products.
 
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We have also outsourced portions of our fulfillment process, as well as certain technology-related functions, to third-party service providers. Specifically, we rely on third parties in a number of foreign countries and territories, we are dependent on third-party vendors for credit card processing, and we use third-party hosting and networking providers to host our sites. The failure of one or more of these entities to provide the expected services on a timely basis, or at all, or at the prices we expect, or the costs and disruption incurred in changing these outsourced functions to being performed under our management and direct control or that of a third party, could have an adverse effect on our business, financial condition, results of operations and prospects. We are not party to long-term contracts with some of our retailers, and upon expiration of these existing agreements, we may not be able to renegotiate the terms on a commercially reasonable basis, or at all.
Further, our third-party manufacturers, suppliers and retail and ecommerce vendors may:

have economic or business interests or goals that are inconsistent with ours;

take actions contrary to our instructions, requests, policies or objectives;

be unable or unwilling to fulfill their obligations under relevant purchase orders, including obligations to meet our production deadlines, quality standards, pricing guidelines and product specifications, and to comply with applicable regulations, including those regarding the safety and quality of products;

have financial difficulties;

encounter raw material or labor shortages;

encounter increases in raw material or labor costs which may affect our procurement costs;

encounter difficulties with proper payment of custom duties or excise taxes;

disclose our confidential information or intellectual property to competitors or third parties;

engage in activities or employ practices that may harm our reputation; and

work with, be acquired by, or come under control of, our competitors.
If our third-party suppliers and manufacturers do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, financial condition, results of operations and prospects could be harmed.
Our reputation and our consumers’ willingness to purchase our brands depend in part on our suppliers’, manufacturers’, and retailers’ compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, safe and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not exercise control over our suppliers, manufacturers, and retailers and cannot guarantee their compliance with ethical and lawful business practices. If our suppliers, manufacturers, or retailers fail to comply with applicable laws, regulations, safety codes, employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations, norms, or ethical standards, our reputation and brand image could be harmed, and we could be exposed to litigation, investigations, enforcement actions, monetary liability, and additional costs that would harm our reputation, business, financial condition, results of operations and prospects.
Our wholesale operations and wholesale revenues depend largely on independent wholesale distributors whose performance and continuity is not assured.
Our wholesale operations generate revenue from brands sold to wholesale distributors, who then sell our products to off-premise retail locations such as grocery stores and specialty and multi-national retail chains, as well as on-premise locations such as restaurants and bars. Sales to wholesale distributors are expected to continue to represent a substantial portion of our revenues in the future. A change in our relationship with one or more significant wholesale distributors could harm our business and reduce sales. The laws and regulations of several states prohibit changes of wholesale distributors except under certain limited circumstances, which makes it difficult to terminate a wholesale distributor for poor performance
 
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without reasonable cause as defined by applicable statutes. Difficulty or inability with respect to replacing wholesale distributors, poor performance of major wholesale distributors or inability to collect accounts receivable from major wholesale distributors could harm our business. Also, there can be no assurance that existing wholesale distributors and retailers will continue to purchase our brands or provide our brands with adequate levels of promotional support. Consolidation at the retail tier, among club and chain grocery stores in particular, can be expected to heighten competitive pressure to increase marketing and sales spending or constrain or reduce prices. These pressures, if present, with our wholesale distributors would harm our reputation, business, financial condition, results of operations and prospects.
We may face difficulties as we expand our business and operations into jurisdictions in which we have no prior operating experience.
We plan in the future to expand our operations and business into jurisdictions outside of the jurisdictions where we currently carry on business, including internationally. There can be no assurance that any market for our products will develop in any such foreign jurisdiction. We may face new or unexpected risks or significantly increase our exposure to one or more existing risk factors, including economic instability, new competition, changes in laws and regulations, including the possibility that we could be in violation of these laws and regulations as a result of such changes, and the effects of competition.
In addition, it may be difficult for us to understand and accurately predict taste preferences and purchasing habits of consumers in new markets. It is costly to establish, develop and maintain operations and develop and promote our brands in new jurisdictions. As we expand our business into other jurisdictions, we may encounter regulatory, legal, personnel, technological and other difficulties that increase our expenses and/or delay our ability to become profitable in such countries, which may have a material adverse effect on our business and brand. These factors may limit our capability to successfully expand our operations in, or export our products to, those other jurisdictions.
Risks Related to Intellectual Property and Data Privacy
If we are unable to secure, maintain, protect or enforce our intellectual property in domestic and foreign markets, including trademarks for our winery brands, vineyards and wines, the value of our winery brands and intellectual property could decline, which could have a material and adverse effect on our business, results of operations and financial results.
Our future success depends significantly on our ability to protect our current and future brands and to obtain, maintain, protect, enforce and defend our trademarks and other intellectual property rights. We rely on a combination of trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to secure and protect our intellectual property rights. We have been granted numerous trademark registrations in the United States and abroad covering many of our wine brands, and we have filed, and expect to continue to file, trademark applications seeking to protect newly developed wine brands. We cannot be sure that trademark registrations will be issued to us under any of our trademark applications. Our trademark applications could be opposed by third parties, and our trademark rights, including registered trademarks, could also be challenged. We cannot assure you that we will be successful in defending our trademarks in actions brought by third parties. There is also a risk that we could fail to timely maintain or renew our trademark registrations or otherwise protect our trademark rights, which could result in the loss of those trademark rights (including in connection with failure to maintain consistent use of these trademarks). Any of our intellectual property rights, including our trademark registrations, may lapse, be abandoned, be challenged, circumvented, declared generic or otherwise invalidated through administrative process or litigation. If we fail to maintain our trademarks or our trademarks are successfully challenged, we could be forced to rebrand our wines and other products, which could result in a loss of brand recognition and could require us to devote additional resources to the development and marketing of new brands.
Notwithstanding any trademark registrations or other intellectual property held by us, third parties have brought claims in the past, and may bring claims in the future alleging that we have infringed, misappropriated, or otherwise violated that third party’s trademark or other intellectual property rights. Any such claims, with or without merit, could require significant resources to defend, could damage the
 
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reputation of our winery brands, could result in the payment of compensation (whether as a damages award or settlement) to such third parties, and could require us to stop using our winery brands or other intellectual property rights, enter into costly royalty or licensing agreements or otherwise agree to an undertaking to limit our use of such trademarks or other intellectual property rights. In addition, we may be unable to obtain or utilize on terms that are favorable to us, or at all, licenses or other rights with respect to trademarks and other intellectual property rights we do not own. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. Any payments we are required to make and any injunctions we are required to comply with as a result of these claims would result in additional cost and could result in additional liability to us. In addition, our actions to monitor and enforce trademark rights against third parties may not prevent counterfeit products or products bearing confusingly similar trademarks from entering the marketplace, which could divert sales from us, tarnish our reputation or reduce the demand for our brands or the prices at which those brands are sold. Any enforcement litigation brought by us, whether or not successful, could require significant costs and resources, and divert the attention of management, which could negatively affect our business, results of operations and financial results. Third parties may also acquire and register domain names that are confusingly similar to or otherwise damaging to the reputation of our trademarks, and we may not be able to prevent or cancel any such domain name registrations. Any of the foregoing could have a material adverse effect on our business, results of operations and financial results.
We may be unable to adequately obtain, maintain, protect and enforce our intellectual property rights.
We regard our brands, consumer lists, trademarks, trade dress, domain names, trade secrets, proprietary technology, including the source code for our platform, and similar intellectual property as critical to our success. We rely on trademark, copyright trade secret protection, and confidentiality agreements with our employees and others to protect our proprietary rights.
Effective intellectual property protection may not be available in every country in which our brands are, or may be made, available. In addition, unilateral actions in the United States or other countries, including changes to or the repeal of laws recognizing trademark or other intellectual property rights, could have an impact on our ability to obtain, maintain and enforce our trademark and other intellectual property rights. Furthermore, the laws of some foreign countries may not protect trademark and other intellectual property rights to the same extent as the laws of the United States, and it may be more difficult for us to successfully obtain, maintain, protect and enforce our trademark and other intellectual property rights in these countries. The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing, misappropriating or otherwise violating our proprietary rights, and we may be unable to broadly enforce all of our intellectual property rights. Any of our intellectual property rights may be challenged by others or invalidated through administrative process or litigation.
Our pending and future trademark applications may never be granted. Additionally, the process of obtaining trademark protection is expensive and time-consuming, and we may be unable to prosecute all necessary or desirable trademark or other intellectual property applications at a reasonable cost or in a timely manner. We may also allow certain of our registered intellectual property rights, or our pending applications for intellectual property rights, to lapse or become abandoned if we determine that obtaining or maintaining the applicable registered intellectual property rights is no longer worthwhile. There can be no assurance that our registered trademarks or pending applications, if issued or registered, will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of trademark and other intellectual property rights are constantly evolving and vary by jurisdiction. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights. If any third party copies our brands or products in a manner that projects lesser quality or carries a negative connotation or otherwise uses trademarks that are identical or similar to our trademarks, it could lead to market confusion and have a material adverse effect on our brand image and reputation. In some cases there may be third-party trademark owners who have prior rights to our trademarks or third parties who have prior rights to similar trademarks, and we may not be able to prevent such third parties from using and marketing any such trademarks.
 
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We also rely on unpatented proprietary technology, such as the source code of our platform. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary. It is also possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require our employees and certain of our consultants, contract employees, suppliers and independent contractors, including some of our manufacturers who use our formulations to manufacture our brands to enter into confidentiality agreements, which generally require that all information made known to them be kept strictly confidential. The effectiveness of these agreements are important as some of our formulations have been developed by or with our suppliers and manufacturers. However, we may fail to enter into confidentiality agreements with all parties who have access to our trade secrets or other confidential information. In addition, parties may breach such agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches. Further, such agreements may not be enforceable in full or in part in all jurisdictions and any breach could have a negative effect on our business and our remedy for such breach may be limited. The contractual provisions that we enter into may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even if we are successful in prosecuting such claims, any remedy awarded may be insufficient to fully compensate us for the improper disclosure or misappropriation. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us and our competitive position would be harmed.
In the United States, the Defend Trade Secrets Act of 2016, or the DTSA, provides a federal cause of action for misappropriation of trade secrets. Under the DTSA, an employer may not collect enhanced damages or attorneys’ fees from an employee or contractor in a trade secret dispute brought under the DTSA, unless certain advanced provisions are observed. The full benefit of the remedies available under the DTSA requires specific language and notice requirements present in the relevant agreements with such employees and contractors, which may not be present in all of our agreements. We cannot provide assurance that our existing agreements with our employees, consultants, contract employees and independent contractors contain notice provisions that would enable us to seek enhanced damages or attorneys’ fees in the event of any dispute for misappropriation of trade secrets brought under the DTSA.
We might be required to spend significant resources to monitor and protect our intellectual property rights. For example, we may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or other proprietary rights or to establish the validity of such rights. However, we may be unable to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits challenging our intellectual property rights and if such defenses, counterclaims or countersuits are successful, we may lose valuable intellectual property rights. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which could have an adverse effect on our business, financial condition, results of operations and prospects.
The loss of any registered trademark or other intellectual property could enable other companies to compete more effectively with us.
We consider our trademarks to be valuable assets that reinforce our brands and consumers’ perception of our brands. We have invested a significant amount of time and money in establishing and promoting our trademarked brands. Our continued success depends, to a significant degree, upon our ability to protect and preserve our registered trademarks and to successfully obtain additional trademark registrations in the future.
 
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We may not be able to obtain trademark protection in all territories that we consider to be important to our business. While we have obtained or applied for registrations of our trademarks, we have not registered our trademarks in all categories, or in all foreign countries in which we currently, or may in the future, source or offer our products. In addition, we cannot assure you that the steps we have taken to establish and protect our trademarks are adequate, that our trademarks can be successfully defended and asserted in the future or that third parties will not infringe upon any such rights. Our trademark rights and related registrations may be challenged, opposed, infringed, cancelled, circumvented or declared generic, or determined to be infringing on other marks by third parties and if such third parties are successful, we may lose our trademark rights. Failure to protect our trademark rights could prevent us in the future from challenging third parties who use names and logos similar to our trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of our brands. Moreover, any trademark disputes may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether we are successful. Such proceedings may be protracted with no certainty of success, and an adverse outcome could subject us to liabilities, force us to cease use of certain trademarks or other intellectual property or force us to enter into licenses with others. Any one of these occurrences could have a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail to comply with our obligations under our existing license agreements or cannot license rights to use technologies on reasonable terms or at all, we may be unable to license rights that are critical to our business.
We license certain intellectual property and technology which are critical to our business. If we fail to comply with any of the obligations under our license agreements, we may be required to pay damages and the licensor may have the right to terminate the license. Licensing intellectual property or technology from third parties also exposes us to increased risk of being the subject of intellectual property infringement due to, among other things, our lower level of visibility into the development process with respect to such technology and the care taken to safeguard against infringement risks. We cannot be certain that our licensors do not or will not infringe on the intellectual property rights of third parties or that our licensors have or will have sufficient rights to the licensed intellectual property in all jurisdictions. Some of our agreements with our licensors may be terminated by them for convenience, or otherwise provide for a limited term. Termination by the licensor would cause us to lose valuable rights, and could inhibit our ability to commercialize our brands. If any contract interpretation disagreement were to arise, the resolution could narrow what we believe to be the scope of our rights to the relevant intellectual property or increase what we believe to be our financial or other obligations under the relevant agreement. Any of the foregoing could adversely impact our business, financial condition and results of operations.
In addition, in the future we may identify additional third-party intellectual property we may need to license in order to engage in our business, including to develop or commercialize new brands. However, such licenses may not be available on acceptable terms or at all. The licensing or acquisition of third-party intellectual property rights is a competitive area, and companies with greater size and capital resources than us may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. Even if such licenses are available, we may be required to pay the licensor substantial royalties or other fees. If we are unable to enter into the necessary licenses on acceptable terms or at all, it could have an adverse effect on our business, financial condition, results of operations and prospects.
Our reliance on software-as-a-service, or SaaS, technologies from third parties may adversely affect our business and results of operations.
We rely on SaaS technologies from third parties in order to operate critical functions of our business, including financial management services, consumer relationship management services, supply chain services and data storage services. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, or for any other reason, our expenses could increase, our ability to manage our finances could be interrupted, our processes for managing sales of our offerings and supporting our consumers could be impaired, our ability to communicate with our suppliers could be weakened and our ability to access or save data stored to the cloud may be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could have an adverse effect on our business, financial condition, results of operations and prospects.
 
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We must successfully maintain, scale and upgrade our information technology systems, and our failure to do so could have an adverse effect on our business, financial condition, results of operations and prospects.
We have identified the need to significantly expand, scale and improve our information technology systems and personnel to support recent and expected future growth. As such, we are in the process of implementing, and will continue to invest in and implement, significant modifications and upgrades to our information technology systems and procedures, including replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality, hiring employees with information technology expertise and building new policies, procedures, training programs and monitoring tools. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to leverage our Retail channel or fulfill consumer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, the need to acquire and retain sufficiently skilled personnel to implement and operate the new systems, demands on management time, the introduction of errors or vulnerabilities and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Additionally, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures, failures or delays in developing and deploying patches and other remedial measures to adequately address vulnerabilities or our inability to successfully modify our information systems to respond to changes in our business needs may cause disruptions in our business operations and could have an adverse effect on our business, financial condition, results of operations and prospects.
We are increasingly dependent on information technology and our ability to process data in order to operate and sell our goods and services, and if we (or our vendors) are unable to protect against software and hardware vulnerabilities, service interruptions, data corruption, cyber-based attacks, ransomware or security breaches, or if we fail to comply with our commitments and assurances regarding the privacy and security of such data, our operations could be disrupted, our ability to provide our goods and services could be interrupted, our reputation may be harmed and we may be exposed to liability and loss of consumers and business.
We rely on information technology networks and systems and data processing (some of which are managed by third-party service providers) to market, sell and deliver our brands and services, to fulfill orders, to collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of share, and otherwise process (which we collectively refer to as Process) large amounts of information, including confidential information, intellectual property, proprietary business information, financial information, and personal information of our consumers, employees and contractors, to manage a variety of business processes and activities, for financial reporting purposes, to operate our business, process orders and to comply with regulatory, legal and tax requirements (which we collectively refer to as Business Functions). These information technology networks and systems, and the Processing they perform, may be susceptible to damage, interruptions, disruptions or shutdowns, software or hardware vulnerabilities, security incidents, cyberattacks, phishing attacks, ransomware attacks, social engineering attacks, supply-side attacks, malicious code, employee theft or misuse, fraud, denial or degradation of service attacks, unauthorized access or use by persons inside our organization, or persons with access to systems inside our organization, failures during the process of upgrading or replacing software, databases or components, power outages, fires, natural disasters, hardware failures, computer viruses, terrorism, war, attacks by computer hackers, telecommunication and electrical failures, user errors or catastrophic events. The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusion, including by computer hackers, foreign governments or state-sponsored actors and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased and evolved. Due to the COVID-19 pandemic, our personnel and our third party service providers are temporarily working remotely and relying on their own computers, routers and other equipment, which may pose additional data security risks to networks, systems and data, and may create additional opportunities for cybercriminals to exploit vulnerabilities. Any material disruption of our networks, systems or Processing activities, or those of our third-party service providers, could disrupt our ability to undertake, and cause a material adverse impact to, our Business Functions and our business, reputation and financial condition. If our information technology networks and systems or Processing (or of our third-party service providers) suffers damage, security breaches, vulnerabilities, disruption or shutdown, and we do not effectively resolve the issues in a
 
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timely manner, they could cause a material adverse impact to, our Business Functions and our business, reputation and financial condition. Our DTC and ecommerce operations are critical to our business and our financial performance. Our website serves as an effective extension of our marketing strategies by exposing potential new consumers to our brand, brand offerings and enhanced content. Due to the importance of our website and DTC operations, any material disruption of our networks, systems or Processing activities related to our websites and DTC operations could reduce DTC sales and financial performance, damage our brand’s reputation and materially adversely impact our business.
Despite our efforts to ensure the security, privacy, integrity, confidentiality, availability, and authenticity of information technology networks and systems, Processing and information, we may not be able to anticipate or to implement effective preventive and remedial measures against all data security and privacy threats. The recovery systems, security protocols, network protection mechanisms and other security measures that we have integrated into our systems, networks and physical facilities, which are designed to protect against, detect and minimize security breaches, may not be adequate to prevent or detect service interruption, system failure data loss or theft, or other material adverse consequences. No security solution, strategy, or measures can address all security threats or block all methods of penetrating a network or otherwise perpetrating a security incident. The risk of unauthorized circumvention of our security measures or those of our third-party providers, clients and any strategic partners has been heightened by advances in computer and software capabilities and the increasing sophistication of hackers who employ complex techniques, including without limitation, the theft or misuse of personal and financial information, counterfeiting, “phishing” or social engineering incidents, ransomware, extortion, publicly announcing security breaches, account takeover attacks, denial or degradation of service attacks, malware, fraudulent payment and identity theft. Because the techniques used by hackers change frequently, we may be unable to anticipate these techniques or implement adequate preventive measures. We also may experience security breaches that remain undetected for an extended period of time. Our applications, systems, networks, software and physical facilities could have material vulnerabilities, be breached or personal or confidential information could be otherwise compromised due to employee error or malfeasance, if, for example, third parties attempt to fraudulently induce our personnel or our consumers to disclose information or usernames and/or passwords, or otherwise compromise the security of our networks, systems and/or physical facilities. Third parties may also exploit vulnerabilities in, or obtain unauthorized access to, platforms, software, applications, systems, networks, sensitive information, and/or physical facilities utilized by our vendors. Improper access to our systems or databases could result in the theft, publication, deletion or modification of personal information, confidential or proprietary information, financial information and other information. An actual or perceived breach of our security systems or those of our third-party service providers may require notification under applicable data privacy regulations or contractual obligations, or for consumer relations or publicity purposes, which could result in reputational harm, costly litigation (including class action litigation), material contract breaches, liability, settlement costs, loss of sales, regulatory scrutiny, actions or investigations, a loss of confidence in our business, systems and Processing, a diversion of management’s time and attention, and significant fines, penalties, assessments, fees and expenses.
The costs to respond to a security breach and/or to mitigate any security vulnerabilities that may be identified could be significant, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service, negative publicity, and other harm to our business and our competitive position, including transaction errors, supply chain or manufacturing interruptions, processing inefficiencies, data loss or the loss of or damage to intellectual property or other proprietary information. We could be required to fundamentally change our business activities and practices in response to a security breach or related regulatory actions or litigation, which could have an adverse effect on our business.
We may have contractual and other legal obligations to notify relevant stakeholders of any security breaches. Most jurisdictions have enacted laws requiring companies to notify individuals, regulatory and government authorities, supervisory bodies, the media and others of security breaches involving certain types of data. In addition, our agreements with certain consumers and third parties may require us to notify them in the event of a security breach. Such mandatory disclosures are costly, could lead to negative publicity, may cause our consumers to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach, and may cause us to breach consumer or ecommerce or retail consumer contracts.
 
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Our agreements with certain consumers or ecommerce or retail consumers, our representations, or industry standards, may require us to use industry-standard or reasonable measures to safeguard sensitive personal information or confidential information. A security breach or compromise affecting us, our service providers, vendors, any strategic partners, other contractors, consultants, or our industry, whether real or perceived, could lead to claims by our consumers or ecommerce or retail consumers, or other relevant stakeholders that we have failed to comply with such legal or contractual obligations and could harm our reputation, erode confidence in the effectiveness of our security measures and lead to regulatory scrutiny. As a result, we could be subject to legal action or we also could be subject to actions or investigations by regulatory authorities which could potentially result in regulatory penalties, fines and significant legal liability, or our consumers or ecommerce or retail consumers could end their relationships with us. There can be no assurance that any limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages.
We may not have adequate insurance coverage for security incidents or breaches, including fines, judgments, settlements, penalties, costs, attorney fees and other impacts that arise out of incidents or breaches. If the impacts of a security incident or breach, or the successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), it could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage, cyber coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to all or part of any future claim or loss. Our risks are likely to increase as we continue to expand, grow our consumer base, and Process increasingly large amounts of proprietary and sensitive data. Any of the following could have a material adverse effect on our business, financial condition, results of operations and prospects.
The use of “open source” software in our products and services may expose us to additional risks and harm our intellectual property.
Certain of our platforms and technologies utilize and incorporate “open source” software. Open source software is generally freely accessible, usable and modifiable, however certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. The use and distribution of open source software may entail greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Additionally, certain open source software licenses require the user of such software to make any derivative works of the open-source code available to others on terms that are unfavorable to such user or at no cost. This can effectively render what was previously proprietary software to be open source software. Open source license terms are often ambiguous, and there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses.
While we try to ensure that no open source software is used in such a way as to require us to disclose the source code to our related proprietary software, such use could inadvertently occur. Additionally, a third-party software provider may incorporate, inadvertently or not, certain types of open source software into software that we license from such third party for our proprietary software. If any of the foregoing occurs, we could, under certain circumstances, be required to disclose the source code to our proprietary software, which could enable third parties to compete with us using such software. This could harm our intellectual property position and have a material adverse effect on our business, results of operations and financial condition.
We are subject to stringent and changing laws, rules, regulations, industry standards, information security policies, self-regulatory schemes and contractual obligations related to data privacy, protection and security, marketing, advertising and consumer protection. Any actual or perceived failure by us, our consumers, partners or vendors to comply with such laws, rules, regulations, industry standards, information security policies, self-regulatory schemes and contractual obligations could have an adverse effect on our business, financial condition, results of operations and prospects.
We Process, and our vendors Process on our behalf, personal information, confidential information and other information necessary to provide and deliver our brands through our DTC channel to operate our business, for legal and marketing purposes, and for other business-related purposes.
 
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Data privacy and information security has become a significant issue in the United States, countries in Europe, and in many other countries in which we operate and where we offer our brands and services. The legal and regulatory framework for privacy and security issues is rapidly evolving and is expected to increase our compliance costs and exposure to liability. There are numerous federal, state, local, and international laws, orders, codes, regulations and regulatory guidance regarding privacy, information security and Processing (which we collectively refer to as Data Protection Laws), the number and scope of which is changing, subject to differing applications and interpretations, and which may be inconsistent among jurisdictions, or in conflict with other rules and laws. Data Protection Laws and data protection worldwide are, and are likely to remain, uncertain for the foreseeable future, and our actual or perceived failure to address or comply with these laws could have an adverse effect on our business, financial condition, results of operations and prospects. We are or may also be subject to the terms of our external and internal privacy and security policies, codes, representations, certifications, industry standards, publications and frameworks (which we collectively refer to as Privacy Policies), and contractual obligations to third parties related to privacy, information security and Processing, including contractual obligations to indemnify and hold harmless third parties from the costs or consequences of non-compliance with Data Protection Laws or other obligations (which we collectively refer to as Data Protection Obligations). We expect that there will continue to be new Data Protection Laws and Data Protection Obligations, and we cannot yet determine the impact such future Data Protection Laws may have on our business. Any significant change to Data Protection Laws and Data Protection Obligations, including without limitation, regarding the manner in which the express or implied consent of consumers for Processing is obtained, could increase our costs and require us to modify our operations, possibly in a material manner, which we may be unable to complete and may limit our ability to store and otherwise Process consumer data and operate our business. We strive to comply with applicable Data Protection Laws, Privacy Policies and Data Protection Obligations to the extent possible, but we may at times fail to do so, or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees, partners, if any, or vendors do not comply with applicable Data Protection Laws, Privacy Policies and Data Protection Obligations. If we or our vendors fail or are perceived to have failed to comply with applicable Data Protection Laws, Privacy Policies and Data Protection Obligations, or if our Privacy Policies are, in whole or part, found to be inaccurate, incomplete, deceptive, unfair, or misrepresentative of our actual practices, our business, financial condition, results of operations and prospects could be adversely affected.
In the United States, relevant Data Protection Laws include rules and regulations promulgated under the authority of the FTC, the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the California Consumer Privacy Act, or CCPA, and other state and federal laws relating to privacy and data security. The CCPA requires companies that Process information of California residents to make new disclosures to consumers about their data collection, use and sharing practices, allows California residents to opt out of certain sharing of personal information with third parties gives California residents the right to access and request deletion of their information, and provides a private right of action and statutory damages for certain data breaches that result in the loss of personal information. The CCPA may increase our compliance costs and potential liability and risks associated with data breach litigation. In addition, California voters recently approved the California Privacy Rights Act of 2020, or CPRA, which goes into effect in most material respects on January 1, 2023. The CPRA significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations additional rights to California residents to limit the use of their sensitive information, providing for penalties for CPRA violations concerning California residents under the age of 16, and establishing a new California Privacy Protection Agency to implement and enforce the law. The enactment of the CCPA is prompting a wave of similar legislative developments in other states in the United States, which creates the potential for a patchwork of overlapping but different state laws and could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business, results of operations, and financial condition. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, or CDPA, a comprehensive privacy statute that becomes effective on January 1, 2023 and shares similarities with the CCPA, the CPRA, and legislation proposed in other states. Laws in all 50 states already require businesses to provide notice under certain circumstances to consumers whose personal information has been disclosed as a result of a data breach. Each of these Data Protection Laws and any other such changes or new Data Protection Laws could impose significant limitations, require changes to our business, or restrict our collection, use, storage or Processing
 
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of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively or even prevent us from providing certain offerings in jurisdictions in which we currently operate and in which we may operate in the future or incur potential liability in an effort to comply with such legislation, which, in turn, could adversely affect our business, brands, financial condition, and results of operations.
We rely on a variety of marketing techniques and practices, including email and social media marketing, online targeted advertising, cookie-based Processing, and postal mail to sell our brands and services and to attract new consumers, and we, and our vendors, are subject to various current and future Data Protection Laws and Data Protection Obligations that govern marketing and advertising practices. Governmental authorities continue to evaluate the privacy implications inherent in the use of proprietary or third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices, web browsers and application stores have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, require additional consents from users for certain activities, or limit the ability to track user activity, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. We may have to develop alternative systems to determine our consumers’ behavior, customize their online experience, or efficiently market to them if consumers block cookies or regulations introduce additional barriers to collecting cookie data and there is no guarantee that such development efforts will be successful or worth the expense. Laws and regulations regarding the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new consumers on cost-effective terms, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and prospects.
In Europe, the European Union General Data Protection Regulation, or GDPR, went into effect in May 2018 and imposes strict requirements for Processing the personal data of individuals within the European Economic Area, or EEA. While we do not believe we are currently subject to the GDPR, we have plans of expanding internationally and have trademark registrations in jurisdictions in the EEA. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the European Union, or the EU, and the United States remains uncertain. For example, in 2016, the EU and United States agreed to a transfer framework for data transferred from the EU to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union. Further, from January 1, 2021, companies have to comply with the GDPR and also the United Kingdom GDPR, or the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, i.e., fines up to the greater of €20 million (£17.5 million) or 4% of global turnover. The relationship between the United Kingdom and the EU in relation to certain aspects of data protection law remains unclear, and it is unclear how United Kingdom data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. These changes will lead to additional costs and increase our overall risk exposure.
In addition to government regulation and laws, we are subject to self-regulatory standards and industry certifications that may legally or contractually apply to us, including the Payment Card Industry Data Security Standards, or PCI-DSS. In the event we fail to comply with the PCI-DSS, we could be in breach of our obligations under consumer and other contracts, fines and other penalties could result, and we may suffer reputational harm and damage to our business. Further, our clients may expect us to comply with more stringent privacy and data security requirements than those imposed by laws, regulations or self-regulatory
 
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requirements, and we may be obligated contractually to comply with additional Data Protection Obligations or different standards relating to our handling or protection of data.
Although we work to comply with applicable Data Protection Laws, our Privacy Policies, and any Data Protection Obligations, data protection requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, partners, vendors or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business, financial condition, results of operations and prospects.
Risks Related to the Alcohol and the Wine Industry
Adverse public opinion about alcohol may harm our business.
Certain research studies have concluded or suggest that alcohol consumption has no health benefits and may increase the risk of stroke, cancer and other illnesses. An unfavorable report on the health effects of alcohol consumption could significantly reduce the demand for wine, which could harm our business by reducing sales and increasing expenses. Additionally, in recent years, activist groups have used advertising and other methods to inform the public about the societal harms associated with the consumption of Alcoholic Beverages. These groups have also sought, and continue to seek, legislation to reduce the availability of Alcoholic Beverages, to increase the penalties associated with the misuse of Alcoholic Beverages, or to increase the costs associated with the production of Alcoholic Beverages. Over time, these efforts could cause a reduction in the consumption of Alcoholic Beverages generally, which could harm our business by reducing sales and increasing expenses.
Consumer demand for wine could decline for a variety of reasons. Reduced demand could harm our results of operations, financial condition and prospects.
There have been periods in the past in which there were substantial declines in the overall per capita consumption of wine. A limited or general decline in consumption in one or more of our brand categories could occur in the future for a variety of reasons, including a general decline in economic conditions, changes in the spending habits of consumers generally (or of groups of consumers, such as millennials), prohibition, increased concern about the health consequences of consuming Alcoholic Beverages and about drinking and driving, a trend toward a healthier diet, including lighter, lower-calorie beverages such as diet soft drinks, juices and water, the increased activity of anti-alcohol consumer group; and increased federal, state or foreign excise and other taxes on Alcoholic Beverages. Reduced demand for wine could harm our results of operations, financial condition and prospects.
Due to the three-tier alcohol beverage distribution system in the United States, we are heavily reliant on wholesale distributors and government agencies that resell Alcoholic Beverages in all states. A significant reduction in wholesale distributor demand for our wines would materially and adversely affect our sales and profitability.
Due to regulatory requirements in the United States, we sell a significant portion of our wines to wholesale distributors for resale to retail accounts, and in some states, directly to government agencies for resale. Additionally, a small percentage of our wines are sold by wholesale distributors to retail accounts outside of the United States. Decreased demand for our wines in any of our sales channels would negatively affect our sales and profitability materially. A change in the relationship with any of our significant wholesale distributors could harm our business and reduce our sales. The laws and regulations of several states prohibit changes of wholesale distributors, except under certain limited circumstances, making it difficult to terminate or otherwise cease working with a wholesale distributor for poor performance without reasonable justification, as defined by applicable statutes. Any difficulty or inability to replace wholesale distributors, poor performance of our major wholesale distributors or our inability to collect accounts receivable from our major wholesale distributors could harm our business. In addition, an expansion of the laws and regulations limiting the sale of our wine would materially and adversely affect our relationships
 
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with wholesale distributors and government agencies. There can be no assurance that the wholesale distributors and government agencies to which we sell our wines will continue to purchase our wines or provide our wines with adequate levels of promotional support, which could increase competitive pressure to increase sales and market spending and could materially and adversely affect our business, results of operations and financial results.
A decrease in wine score ratings by important rating organizations could have a negative impact on our ability to create demand for and sell our wines. Sustained negative scores could reduce the prominence of our winery brands and carry negative association across our portfolio which could materially and adversely affect our sales and profitability.
Our brands’ individual labels are issued ratings or scores by wine rating organizations, and higher scores often drive greater demand and, in some cases, higher pricing. Many of our brands have consistently ranked among the top U.S. premium wine brands and have generally received positive reviews across multiple appellations, varietals, varieties, styles and price points from many of the industry’s top critics and publications. These positive third-party reviews have been important to maintaining and expanding our reputation as a premium wine producer. However, we have no control over ratings issued by third parties or the methodology they use to evaluate our wines, which may not continue to be favorable to us in the future. If our new or existing brands are assigned significantly lower ratings, if our brands consistently receive lower ratings over an extended period of time or if any of our competitors’ new or existing brands are assigned comparatively higher ratings, our consumers’ perception of our brands and demand for our wines could be negatively impacted, which could materially and adversely affect our sales and profitability.
We rely on independent certification for a number of our brands.
We rely on independent third-party certification, such as certifications of some of our brands or ingredients as “organic” to differentiate them from others. We must comply with the requirements of independent organizations or certification authorities in order to label our brands as certified organic, such as the California Certified Organic Farmers and Quality Assurance International. We may lose our certifications if we use unapproved raw materials or incorrectly use a certification on brand labels or in marketing materials. The loss of any independent certification could adversely affect our market position and brand reputation as a maker of clean brands, and our business, financial condition, results of operations and prospects could be adversely affected.
From time to time, we may become subject to litigation specifically directed at the Alcoholic Beverages industry, as well as litigation arising in the ordinary course of business.
We and other companies operating in the Alcoholic Beverages industry are, from time to time, exposed to class action or other private or governmental litigation and claims relating to product liability, alcohol marketing, advertising or distribution practices, alcohol abuse problems or other health consequences arising from the excessive consumption of or other misuse of alcohol, including underage drinking. Various groups have, from time to time, publicly expressed concern over problems related to harmful use of alcohol, including drinking and driving, underage drinking and health consequences from the misuse of alcohol. These campaigns could result in an increased risk of litigation against us and our industry. Lawsuits have been brought against beverage alcohol companies alleging problems related to alcohol abuse, negative health consequences from drinking, problems from alleged marketing or sales practices and underage drinking. While these lawsuits have been largely unsuccessful in the past, others may succeed in the future.
From time to time, we may also be party to other litigation in the ordinary course of our operations, including in connection with commercial disputes, enforcement or other regulatory actions by tax, customs, competition, environmental, anti-corruption and other relevant regulatory authorities, or, following this offering, securities-related class action lawsuits, particularly following any significant decline in the price of our securities. Any such litigation or other actions may be expensive to defend and result in damages, penalties or fines as well as reputational damage to our company and our winery brands and may impact the ability of management to focus on other business matters. Furthermore, any adverse judgments may result in an increase in future insurance premiums, and any judgements for which we are not fully insured may result in a significant financial loss and may materially and adversely affect our business, results of operations and financial results.
 
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Risks Related to Government Regulation
Health and safety incidents or advertising inaccuracies or product mislabeling may have an adverse effect on our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing our operating costs and reducing demand for our brand offerings.
Selling wine and other Alcoholic Beverages involves inherent legal and other risks, and there is increasing governmental scrutiny of and public awareness regarding product safety. Illness, injury or death related to allergens, illnesses, foreign material contamination or other product safety incidents caused by our brands, or involving our suppliers, could result in the disruption or discontinuance of sales of these brands or our relationships with such suppliers, or otherwise result in increased operating costs, regulatory enforcement actions or harm to our reputation.
Shipment of adulterated or misbranded products, even if inadvertent, can result in criminal or civil liability. Such incidents could also expose us to product liability, negligence or other lawsuits, including consumer class action lawsuits. Any claims brought against us may exceed or be outside the scope of our existing or future insurance policy coverage or limits. Any judgment against us that is more than our policy limits or not covered by our policies or not subject to insurance would have to be paid from our cash reserves, which would reduce our capital resources.
The occurrence of adverse reactions or other safety incidents could also adversely affect the price and availability of affected brands, resulting in higher costs, disruptions in supply and a reduction in our sales. Furthermore, any instances of contamination, defects, or regulatory noncompliance, whether or not caused by our actions, could compel us, our suppliers or our retail or wholesale distributors, depending on the circumstances, to conduct a recall in accordance with the Alcohol and Tobacco Tax and Trade Bureau, or TTB, FDA, California Department of Alcohol Beverage Control, or ABC, the Consumer Product Safety Commission, or CPSC, the USDA, the U.S. Environmental Protection Agency, or EPA, or other federal regulations and policies, and comparable state laws, regulations and policies. Product recalls could result in significant losses due to their costs, the destruction of product inventory, lost sales due to the unavailability of the product for a period of time and potential loss of existing retailers or consumers and a potential negative impact on our ability to attract new consumers due to negative consumer experiences or because of an adverse impact on our brand and reputation. The costs of a recall could be outside the scope of our existing or future insurance policy coverage or limits.
In addition, companies that sell wine and other Alcoholic Beverages products have been subject to targeted, large-scale tampering as well as to opportunistic, individual product tampering, and we, like any such company, could be a target for product tampering. Forms of tampering could include the introduction of foreign material, chemical contaminants and pathological organisms into products, as well as product substitution. Governmental regulations require companies like us to analyze, prepare and implement mitigation strategies specifically to address tampering designed to inflict widespread public health harm. If we or our suppliers do not adequately address the possibility, or any actual instance, of product tampering, we could face possible seizure or recall of our products and the imposition of civil or criminal sanctions, which could have an adverse effect on our business, financial condition, results of operations and prospects.
Further, many brands that we sell are advertised with claims as to their origin, ingredients or environmental benefits, including, by way of example, the use of the term “natural”, “organic”, or “sustainable”, or similar synonyms or implied statements relating to such benefits. Although the TTB, FDA and the USDA each has issued statements regarding the appropriate use of the word “natural,” there is no single, U.S. government regulated definition of the term “natural” for use in the Alcoholic Beverages industry, which is true for many other adjectives common in the beverage industry. The resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against several companies that market “natural” products or ingredients, asserting false, misleading and deceptive advertising and labeling claims, including claims related to genetically modified ingredients and the use of synthetic ingredients, including synthetic forms of otherwise natural ingredients.
Should we become subject to similar claims, the resulting adverse publicity about these matters may discourage consumers from buying our brands, even if the basis for the claim is unfounded. The cost of defending against any such claims could be significant. Any loss of confidence on the part of consumers
 
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in the truthfulness of our labeling, advertising or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our sales, which could have an adverse effect on our business, financial condition, results of operations and prospects.
Furthermore, the USDA enforces federal standards for organic production and use of the term “organic” on product labeling. These laws prohibit a company from selling or labeling products as organic unless they are produced and handled in accordance with the applicable federal law. Failure to comply with these requirements may subject us or our suppliers to liability or regulatory enforcement. Consumers may also pursue state law claims against us or our suppliers challenging use of the organic label as being intentionally mislabeled or misleading or deceptive to consumers.
In addition, certain of the brands we sell require approval from and registration with the EPA prior to sale. Products that expressly or impliedly claim to control microorganisms that pose a threat to human health may be subject by additional regulatory scrutiny and need to be supported by additional efficacy data. Should we advertise or market these EPA regulated products with claims that are not permitted by the terms of their registration or are otherwise false or misleading, the EPA may be authorized to take enforcement action to prevent the sale or distribution of disinfectant products. False or misleading marketing claims concerning a product’s EPA registration or its efficacy may also create the risk for challenges under state law at the consumer level.
If any of the above actions or factors were to impact our products, this could adversely affect our reputation, business, financial condition, results of operations and prospects.
We are subject to extensive governmental regulation and we may incur material liabilities under, or costs in order to comply with, existing or future laws and regulation, and our failure to comply may result in enforcements, recalls, and other adverse actions.
We and the suppliers and manufacturers we work with are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public and worker health and safety, natural resources, the environment and consumers. Our operations are subject to regulation by the TTB, ABC, Occupational Safety and Health Administration, or OSHA, the FDA, the CPSC, the USDA, the FTC, EPA, and by various other federal, state, local and foreign authorities regarding the manufacture, processing, packaging, storage, sale, order fulfillment, advertising, labeling, import and export of our brands. Certain of the brands we sell may require EPA registration and approval prior to sale.
In addition, we, our co-manufacturers and our third-party contractors are subject to additional regulatory requirements, including environmental, health and safety laws and regulations administered by the EPA, state, local and foreign environmental, health and safety legislative and regulatory authorities and the National Labor Relations Board, covering such areas as discharges and emissions to air and water, the use, management, disposal and remediation of, and human exposure to, hazardous materials and wastes, and public and worker health and safety. Violations of or liability under any of these laws and regulations may result in administrative, civil or criminal fines, penalties or sanctions against us, revocation or modification of applicable permits, licenses or authorizations, environmental, health and safety investigations or remedial activities, voluntary or involuntary product recalls, warning or untitled letters or cease and desist orders against operations that are not in compliance, among other things. Such laws and regulations generally have become more stringent over time and may become more so in the future, and we may incur (directly, or indirectly through our co-manufacturers and third-party contractors) material costs to comply with current or future laws and regulations or in any required product recalls. Liabilities under, and/or costs of compliance, and the impacts on us of any non-compliance, with any such laws and regulations could have an adverse effect on our business, financial condition, results of operations and prospects. In addition, changes in the laws and regulations to which we are subject, or in the prevailing interpretations of such laws and regulations by courts and enforcement authorities, could impose significant limitations and require changes to our business, which may increase our compliance expenses, make our business more costly and less efficient to conduct, and compromise our growth strategy, which could have an adverse effect on our business, financial condition, results of operations and prospects.
 
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Our brands are also subject to state laws and regulations, such as California’s Proposition 65, or Prop 65, which requires a specific warning on any product that contains a substance listed by the State of California as having been found to cause cancer or birth defects, unless the level of such substance in the product is below a safe harbor level. We have in the past been subject to lawsuits brought under Prop 65, and if we fail to comply with Prop 65 in the future, it may result in lawsuits and regulatory enforcement that could have a material adverse effect on our reputation, business, financial condition, results of operations and prospects. Further, the inclusion of warnings on our brands to comply with Prop 65 could also reduce overall consumption of our brands or leave consumers with the perception (whether or not valid) that our brands do not meet their health and wellness needs, all of which could adversely affect our reputation, business, financial condition, results of operations and prospects.
These developments, depending on the outcome, could have an adverse effect on our reputation, business, financial condition, results of operations and prospects.
Changes in existing marketing and advertising laws or regulations or related official guidance, or the adoption of new laws or regulations or guidance for these areas, may increase our costs and otherwise adversely affect our business, financial condition, results of operations and prospects.
The manufacture and marketing of Alcoholic Beverages is highly regulated. In connection with the marketing and advertisement of our brands, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states.
The advertising regulatory environment in which we operate has changed in the past could change significantly and adversely in the future. For example, in December 2009, the FTC substantially revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or “Endorsement Guides,” to eliminate a safe harbor principle that formerly recognized that advertisers could publish consumer testimonials that conveyed truthful but extraordinary results from using the advertiser’s product as long as the advertiser clearly and conspicuously disclosed that the endorser’s results were not typical. Although we strive to adapt our marketing efforts to evolving regulatory requirements and related guidance, we may not always anticipate or timely identify changes in regulation or official guidance that could impact our business, with the result that we could be subjected to litigation and enforcement actions that could adversely affect our business, financial condition, results of operations and prospects. Future changes in regulations and related official guidance, including the Endorsement Guides and Green Guides, could also introduce new restrictions that impair our ability to market our brands effectively and place us at a competitive disadvantage with competitors who depend less than we do on environmental marketing claims and social media influencer relationships.
Moreover, any change in marketing for our brands may lead to an increase in costs or interruptions in sales, either of which could adversely affect our business, financial condition, results of operations and prospects. New or revised government laws, regulations or guidelines could result in additional compliance costs and, in the event of non-compliance, civil remedies, including fines, injunctions, withdrawals, recalls or seizures and confiscations, as well as potential criminal sanctions, any of which could have an adverse effect on our business, financial condition, results of operations and prospects.
Failure by our network of retailers, suppliers or manufacturers to comply with product safety, environmental or other laws and regulations, or with the specifications and requirements of our brands, may disrupt our supply of products and adversely affect our business.
If our network of retailers, suppliers or manufacturers fail to comply with environmental, health and safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted and our reputation could be harmed. Additionally, our retailers, suppliers and manufacturers are required to maintain the quality of our products and to comply with our standards and specifications. In the event of actual or alleged non-compliance, we might be forced to find alternative retailers, suppliers or manufacturers and we may be subject to lawsuits and/or regulatory enforcement actions related to such non-compliance by the suppliers and manufacturers. As a result, our supply of Alcoholic Beverages could be disrupted or our costs could increase, which could adversely affect our business, financial condition, results of operations and prospects. The failure of any partner or manufacturer to produce products that conform to our standards could adversely affect our reputation in the marketplace and result in product recalls, product
 
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liability claims, government or third-party actions and economic loss. Additionally, actions we may take to mitigate the impact of any disruption or potential disruption in our supply of materials or finished inventory, including increasing inventory in anticipation of a potential supply or production interruption, could have an adverse effect on our business, financial condition, results of operations and prospects.
Class action litigation, other legal claims and regulatory enforcement actions and the lack of adequate or sufficient insurance coverage could subject us to liability for damages, civil and criminal penalties and other monetary and non-monetary liability and could otherwise adversely affect our reputation, business, financial condition, results of operations and prospects.
We operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to a heightened risk of consumer class action litigation, other legal claims, government investigations or other regulatory enforcement actions. The product marketing and labeling practices of companies operating in the Alcoholic Beverages industry receive close scrutiny from the private plaintiff’s class action bar and from public consumer protection agencies. Accordingly, there is risk that consumers will bring class action lawsuits and that the FTC and/or state attorneys general or other consumer protection law enforcement authorities will bring legal actions concerning the truth and accuracy of our product marketing and labeling claims. Examples of causes of action that may be asserted in a consumer class action lawsuit include fraud, false advertising, unfair and deceptive practices, negligent misrepresentation and breach of state consumer protection statutes. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, consultants, independent contractors, suppliers, manufacturers or retailers will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims, government investigations or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties and liabilities that could adversely affect our brand sales, reputation, financial condition and operating results. These liabilities could include obligations to reformulate brands or remove them from the marketplace, as well as obligations to disgorge revenue and to accept burdensome injunctions that limit our freedom to market our brands. In addition, the costs and other effects of defending potential and pending litigation and administrative actions against us may be difficult to determine and could adversely affect our reputation, business, brand image, financial condition, results of operations and prospects.
Furthermore, although we believe that the extent of our insurance coverage is consistent with industry practice, any claim under our insurance policies may be subject to certain exceptions, may not be honored fully, in a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities, as a result of civil or criminal penalties or otherwise, or if our business operations were interrupted for a substantial period of time, we could incur costs and suffer losses. Such liabilities, including inventory and business interruption losses, may not be covered by our insurance policies. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations. Additionally, in the future, insurance coverage may not be available to us at commercially acceptable premiums, or at all.
Government regulation of the Internet and ecommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could have an adverse effect on our business, financial condition, results of operations and prospects.
We are subject to governmental laws as well as regulations and laws specifically governing the Internet and ecommerce. Existing and future regulations and laws could impede the growth of the Internet, ecommerce or mobile commerce, which could in turn adversely affect our growth. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts
 
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and communications, consumer protection, sales practices and Internet neutrality. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or ecommerce. It is possible that general business regulations and laws, or those specifically governing the Internet or ecommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities, consumers, suppliers or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our website and mobile applications by consumers and suppliers and may result in the imposition of monetary liabilities and burdensome injunctions. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. As a result, adverse developments with respect to these laws and regulations could have an adverse effect on our business, financial condition, results of operations and prospects.
Developments in labor and employment law and any unionizing efforts by employees could have an adverse effect on our business, financial condition, results of operations and prospects.
We face the risk that Congress, federal agencies or one or more states could approve legislation or regulations significantly affecting our businesses and our relationship with our employees and other individuals providing valuable services to us, such as our social media influencers. For example, the previously proposed federal legislation referred to as the Employee Free Choice Act would have substantially liberalized the procedures for union organization. None of our employees are currently covered by a collective bargaining agreement, but any attempt by our employees to organize a labor union could result in increased legal and other associated costs. Additionally, given the National Labor Relations Board’s “speedy election” rule, our ability to timely and effectively address any unionizing efforts would be difficult. If we enter into a collective bargaining agreement with our employees, the terms could have an adverse effect on our costs, efficiency and ability to generate acceptable returns on the affected operations.
Federal and state wage and hour rules establish minimum salary requirements for employees to be exempt from overtime payments. For example, among other requirements, California law requires employers to pay employees who are classified as exempt from overtime a minimum salary of at least twice the minimum wage, which is currently $58,240 per year for executive, administrative and professional employees with employers that have 26 or more employees. Minimum salary requirements impact the way we classify certain employees, increases our payment of overtime wages and provision of meal or rest breaks, and increases the overall salaries we are required to pay to currently exempt employees to maintain their exempt status. As such, these requirements could have an adverse effect on our business, financial condition, results of operations and prospects.
As a producer of Alcoholic Beverages, we are regularly the subject of regulatory reviews, proceedings and audits by governmental entities, any of which could result in an adverse ruling or conclusion, and which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are subject to extensive regulatory review, proceedings and audits in the United States pursuant to federal, state and local laws regulating the production, distribution and sale of consumable food items, and specifically Alcoholic Beverages, including by the TTB and the FDA. These and other regulatory agencies impose a number of product safety, labeling and other requirements on our operations and sales. In California, we are subject to alcohol-related licensing and regulations by many authorities, including the ABC, which investigates applications for licenses to sell Alcoholic Beverages, reports on the moral character and fitness of alcohol license applicants and the suitability of premises where sales are to be conducted. Any governmental litigation, fines or restrictions on our operations resulting from the enforcement of these existing regulations or any new legislation or regulations could have a material adverse effect on our business, results of operations and financial results. Any government intervention challenging the production, marketing, promotion, distribution or sale of beverage alcohol or specific brands could affect our ability
 
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to sell our wines. Because litigation and other legal proceedings can be costly to defend, even actions that are ultimately decided in our favor could have a negative impact on our business, results of operations or financial results. Adverse developments in major lawsuits concerning these or other matters could result in management distraction and have a material adverse effect on our business. Furthermore, changes to the interpretation or approach to enforcement of regulations may require changes to our business practices or the business practices of our suppliers, wholesale distributors or consumers. The penalties associated with any violations or infractions may vary in severity and could result in a significant impediment to our business operations, and could cause us to have to suspend sales of our wines in a jurisdiction for a period of time.
Changes in laws and government regulations to which we are currently subject, including changes to the method or approach of enforcement of these government rules and regulations, may increase our costs or limit our ability to sell our wines into certain markets, which could materially and adversely affect our business, results of operations and financial condition.
The wine industry is subject to extensive regulation by a number of foreign and domestic agencies, state liquor authorities and local authorities. These regulations and laws dictate such matters as licensing requirements, land use, production methods, trade and pricing practices, permitted distribution channels, permitted and required labeling, advertising, sequestration of classes of wine and relations with wholesale distributors and retailers. Changes to existing laws and regulations may result in increased production and sales costs, including an increase on the applicable tax in various state, federal and foreign jurisdictions in which we do business. The amount of wine that we can sell directly to consumers in certain jurisdictions is regulated, and in certain states we are not allowed to sell wines directly to consumers at all. Changes in these laws and regulations that tighten current rules could have an adverse impact on sales or increase costs to produce, market, package or sell wine. Changes in regulation that require significant additional source data for registration and sale, in the labeling or warning requirements, or limitations on the permissibility of any component, condition or ingredient, in the places in which our wines can be sold could inhibit sales of affected products in those markets. From time to time, states also consider proposals to increase state alcohol excise taxes, which could adversely affect our profit margins. New or updated regulations, requirements or licenses, particularly changes that impact our ability to sell, or new or increased excise taxes, income taxes, property and sales taxes or international tariffs, could affect our financial condition or results of operations.
The wine industry is subject to extensive regulation by a number of foreign and domestic agencies, state liquor authorities and local authorities. These regulations and laws dictate such matters as licensing requirements, land use, production methods, trade and pricing practices, permitted distribution channels, permitted and required labeling, advertising, sequestration of classes of wine and relations with wholesale distributors and retailers. Any expansion of our existing facilities may be limited by present and future zoning ordinances, use permit terms, environmental restrictions and other legal requirements. In addition, new or updated regulations, requirements or licenses, particularly changes that impact our ability to sell DTC and/or retail accounts in California, or new or increased excise taxes, income taxes, property and sales taxes or international tariffs, could affect our financial condition or results of operations. From time to time, states consider proposals to increase state alcohol excise taxes. New or revised regulations or increased licensing fees, requirements or taxes could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to This Offering and Ownership of Our Common Stock
Our quarterly operating results may fluctuate, which could cause our stock price to decline.
Our quarterly operating results may fluctuate for a variety of reasons, many of which are beyond our control, including:

fluctuations in revenue, including as a result of adverse market conditions due to the COVID-19 pandemic and the opening of retail and travel opportunities as the pandemic abates, the seasonality of market transactions and fluctuations in sales through our retail and ecommerce channels;

the amount and timing of our operating expenses;
 
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our success in attracting and maintaining relationships with wholesale distributors and retailers;

our success in executing on our strategy and the impact of any changes in our strategy;

the timing and success of brand launches, including new products in beverage categories beyond wine that we may introduce;

the timing and success of our marketing efforts;

adverse economic and market conditions, such as those related to the current COVID-19 pandemic and other adverse domestic or global events;

disruptions or defects in our technology platform, such as privacy or data security breaches, errors in our software or other incidents that impact the availability, reliability or performance of our platform;

disruptions in our supply chain, such as the ability of our third-party suppliers to produce grapes or wine, the ability of wholesale distributors to distribute our brands, or in our shipping arrangements or other relationships with third-party vendors;

the impact of competitive developments and our response to those developments;

fluctuations in inventory and working capital;

our ability to manage our business and future growth; and

our ability to recruit and maintain employees.
Fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by and the unprecedented nature of the current COVID-19 pandemic, consumer spending patterns and the impacts of the gradual reopening of the offline economy and lessening of restrictions on movement and travel as the COVID-19 pandemic abates. Fluctuations in our quarterly operating results may cause those results to fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our common stock to decline. Fluctuations in our results could also cause other problems, including, for example, analysts or investors changing their models for valuing our common stock, particularly post-pandemic. We could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish, and other unanticipated issues may arise.
We believe that our quarterly operating results may vary in the future and that period-to-period comparisons of our operating results may not be meaningful. For example, our overall historical growth rate and the impacts of the COVID-19 pandemic may have overshadowed the effect of seasonal variations on our historical operating results. Any seasonal effects may change or become more pronounced over time, which could also cause our operating results to fluctuate. You should not rely on the results of any given quarter as an indication of future performance.
Our common stock has never been publicly traded, and we expect that the price of our common stock will fluctuate substantially.
Before this initial public offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary substantially from the market price of our common stock following this offering. An active public trading market may not develop after completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other products, technologies or businesses using our shares as consideration. Furthermore, although we intend to apply to list our common stock on the NYSE, even if listed, there can be no guarantee that we will continue to satisfy the continued listing standards of the NYSE. If we fail to satisfy the continued listing standards, we could be de-listed, which would have a negative effect on the price of our common stock.
 
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Following this offering, the market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, including:

changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates;

quarterly variations in our or our competitors’ results of operations;

periodic fluctuations in our revenue, which could be due in part to the way in which we recognize revenue;

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

future sales of our common stock or other securities, by us or our stockholders, as well as the anticipation of lock-up releases or lock-up waivers;

the trading volume of our common stock;

general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;

changes in operating performance and stock market valuations of other companies in our industry or related industries;

actual or anticipated changes in regulatory oversight of our operations;

the loss of key personnel, including changes in our board of directors and management;

lawsuits threatened or filed against us, including litigation by current or former employees alleging wrongful termination, sexual harassment, whistleblower or other claims;

the announcement of new or enhanced services by us or our competitors;

announced or completed acquisitions of businesses or technologies by us or our competitors;

developments or disputes concerning our intellectual property or other proprietary rights; and

developments in our industry.
In addition, the trading prices for common stock of many companies have been highly volatile as a result of the COVID-19 pandemic. The COVID-19 outbreak continues to rapidly evolve. The extent to which the outbreak may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our common stock shortly following this offering. If the market price of shares of our common stock after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.
In addition, in the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and harm our business, results of operations, financial condition and reputation. These factors may materially and adversely affect the market price of our common stock.
The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in this prospectus, including those we have generated ourselves or commissioned, are subject to significant uncertainty and are based on
 
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assumptions and estimates that may not prove to be accurate, particularly in light of the ongoing COVID-19 pandemic and the related economic impact. The variables that go into the calculation of our market opportunity across the markets are subject to change over time, and there is no guarantee that any particular number or percentage of consumers covered by our market opportunity estimates will purchase our brands at all or generate any particular level of revenue for us. Any expansion in each market depends on a number of factors, including the cost and perceived value associated with our brand offerings and those of our competitors. Even if the markets in which we compete meet the size estimates and growth forecast in this prospectus, our business could fail to grow at the rate we anticipate, if at all, which could adversely affect our business, financial condition, results of operations and prospects. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth. For more information regarding the estimates of market opportunity and forecasts of market growth included in this prospectus, see the section titled “Industry, Market, and Other Data.”
Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline.
Our stock price and trading volume may be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business, or publish negative reports about our business, regardless of accuracy, our common stock price and trading volume could decline.
If a trading market for our common stock develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may lead to forecasts that differ significantly from our own.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. In connection with our adoption and implementation of the new revenue accounting standard, management made judgments and assumptions based on our interpretation of the new standard. The new revenue standard is principles based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice and guidance involving estimates and assumptions may evolve or change over time. If our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
 
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If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.
Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the pro forma as adjusted net tangible book value per share. As a result, investors purchasing common stock in this offering will incur immediate dilution of $      per share (or $      per share if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and our pro forma as adjusted net tangible book value per share as of June 30, 2021. For more information on the dilution you may suffer as a result of investing in this offering, see the section of this prospectus entitled “Dilution.” If outstanding options or warrants are exercised in the future, you will experience additional dilution.
This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell their shares, could result in a decrease in the market price of our common stock. Immediately after this offering, we will have                 shares of common stock outstanding based on the number of shares outstanding as of June 30, 2021. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares,                 shares are currently restricted as a result of securities laws or 180-day lock-up agreements (which may be waived, with or without notice, by BofA Securities, Inc.) but will be able to be sold after the offering as described in the section of this prospectus entitled “Shares Eligible for Future Sale.”
Moreover, after this offering, holders of an aggregate of up to                 shares of our common stock, including shares of our common stock issuable upon the conversion of the shares of our convertible preferred stock that will be outstanding immediately prior to the consummation of this offering, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders as described in the section of this prospectus entitled “Description of Capital Stock—Registration Rights.” We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market, subject to volume limitations applicable to affiliates and the lock-up agreements described in the section of this prospectus entitled “Underwriting.”
Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.
After this offering, our directors, officers and principal stockholders each holding more than 5% of our common stock will collectively control approximately    % of our outstanding common stock (assuming no exercise of the underwriters’ option to purchase additional shares of common stock). As a result, these stockholders, if they act together, will be able to exert significant influence over the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might adversely affect the market price of our common stock and may not be in the best interests of our other stockholders.
Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this initial public offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies
 
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that deviate from the interests of other stockholders. The foregoing discussion does not reflect any potential purchases by our existing principal stockholders or their affiliated entities of shares of our common stock in this offering.
We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds.” Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment, and the failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected results, which could cause our stock price to decline.
Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest more difficult, limit attempts by our stockholders to replace or remove our current management and depress the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us or tender offer that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:

Our board of directors has the exclusive right to expand the size of our board of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

Our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

Our stockholders may not act by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

A special meeting of stockholders may be called only by the chair of the board of directors, the chief executive officer, the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

Our amended and restated certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

Our board of directors may alter our bylaws without obtaining stockholder approval;

The required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and restated bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
 
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Stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and

Our board of directors is authorized to issue shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters and the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our amended and restated certificate of incorporation will provide that, unless we otherwise consent in writing, (A) (i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or stockholder of ours to the us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws (as either may be amended or restated) or as to which the Delaware General Corporation Law confers exclusive jurisdiction on the Court of Chancery of the State of Delaware or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware; and (B) the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act; however, there is uncertainty as to whether a court would enforce such provision, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder. Notwithstanding the foregoing, the exclusive forum provision shall not apply to claims seeking to enforce any liability or duty created by the Exchange Act. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not expect to declare or pay any dividends in the foreseeable future. Moreover, the terms of our existing Credit Agreements restrict our ability to pay dividends, and any additional debt we may incur in the future may include similar restrictions. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our stockholders for the foreseeable future.
 
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General Risk Factors
We will incur significant additional costs as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
Upon completion of this offering, we expect to incur costs associated with corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Exchange Act, as well as the rules of the NYSE. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time-consuming. We expect such expenses will further increase after we cease to qualify as an emerging growth company and smaller reporting company. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Furthermore, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition and results of operations.
We may also become subject to more stringent state law requirements, including requirements to have a minimum number of females or individuals from underrepresented populations on our board of directors.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon the closing of this initial public offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our second annual report after the completion of this offering, provide a management report on the internal control over financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be implementing the process and documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion.
During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, our management will be unable to conclude that our internal control over financial reporting is effective. Moreover, when we are no longer an emerging growth company or smaller reporting company, our independent registered public accounting firm will be required to issue an attestation report on the effectiveness of our internal control over financial reporting. Even if our
 
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management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.
If we are unable to conclude that our internal control over financial reporting is effective, or, when we are no longer an emerging growth company or smaller reporting company, if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Internal control deficiencies could also result in a restatement of our financial results in the future.
Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from growing.
In the future, we could be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. We may sell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors in our common stock may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock. Debt financing, if available, may involve restrictive covenants and could reduce our operational flexibility or ability to achieve or maintain profitability. If we cannot raise funds on acceptable terms, we may be forced to raise funds on undesirable terms, or our business may contract or we may be unable to grow our business or respond to competitive pressures, any of which could have an adverse effect on our business, financial condition, results of operations and prospects.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause the price of our common stock to decline.
We may issue additional securities following the closing of this offering. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities, and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our common stock.
Litigation or legal proceedings could expose us to significant liabilities and have a negative impact on our reputation or business.
We are, and may in the future become, party to various claims and litigation proceedings. We evaluate these claims and litigation proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we may establish reserves, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our assessments and estimates. We are not currently party to any material litigation.
Even when not merited, the defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. The results of litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements in some of these legal disputes may result in adverse monetary damages, penalties or injunctive relief against us, which could have an adverse effect on our business, financial condition, results of operations and prospects. Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.
Furthermore, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to various exclusions as well as caps on
 
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amounts recoverable. Even if we believe a claim is covered by insurance, insurers may dispute our entitlement to recovery for a variety of potential reasons, which may affect the timing and, if the insurers prevail, the amount of our recovery.
Employee litigation or other unfavorable publicity could negatively affect our future business.
Our employees have in the past, and may in the future, bring employment-related lawsuits against us, including regarding injuries, a hostile workplace, discrimination, wage and hour disputes, sexual harassment, or other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims generally. Coupled with the expansion of social media platforms, employer review websites and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Certain companies that have faced employment- or harassment-related claims have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their business, including their ability to attract and hire top talent. If we were to face any employment- or harassment-related claims, our business could be negatively affected in similar or other ways.
We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies and a smaller reporting companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we expect to take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies. In particular, while we are an emerging growth company: we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; we will be exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved.
In addition, while we are an emerging growth company we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period and, as a result, our operating results and financial statements may not be comparable to the operating results and financial statements of companies who have adopted the new or revised accounting standards.
We may remain an emerging growth company until as late as December 31, 2026, the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an emerging growth company earlier under certain circumstances, including if (i) we have more than $1.07 billion in annual revenue in any fiscal year, (ii) the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 or (iii) we issue more than $1.0 billion of non-convertible debt over a three-year period.
Even after we no longer qualify as an emerging growth company, we may still qualify as a smaller reporting company, which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including, among other things, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, presenting only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements.
Investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile.
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical facts, including statements regarding our business strategy, plans, market growth and our objectives for future operations, are forward-looking statements. The words “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words.
Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

estimates of our total addressable market, future results of operations, financial position, research and development costs, capital requirements and our needs for additional financing;

our expectations about market trends and our ability to capitalize on these trends;

the impact on our business, financial condition and results of operation from the ongoing and global COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide;

our ability to effectively and efficiently develop new brands of wines and introduce products in beverage categories beyond wine;

our ability to efficiently increase online consumer acquisition;

our ability to increase awareness of our portfolio of brands in order to successfully compete with other companies;

our ability to maintain and improve our technology platform supporting our Winc digital platform;

our ability to maintain and expand our relationship with wholesale distributors and retailers;

our ability to continue to operate in a heavily regulated environment;

our ability to establish and maintain intellectual property protection or avoid claims of infringement;

our ability to hire and retain qualified personnel;

our ability to obtain adequate financing in this or future offerings;

the volatility of the trading price of our common stock; and

our expectations regarding the use of proceeds from this offering.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.
The forward-looking statements in this prospectus are only predictions and are based largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of known and unknown risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
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Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon these forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations, except as required by law.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission, or SEC, as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
 
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INDUSTRY, MARKET AND OTHER DATA
This prospectus contains estimates and information concerning our industry, including market size and growth of the markets in which we participate, that are based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. This data involves a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates.
The content of these third-party sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein.
Certain monetary amounts, percentages, and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
 
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USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be approximately $      million (or approximately $      million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares of common stock offered would increase (decrease) the net proceeds to us from this offering by approximately $      million, assuming the assumed initial public offering price stays the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. We currently intend to use the net proceeds we receive from this offering for general corporate purposes. These purposes may include operating expenses, working capital and capital expenditures for future growth, including marketing and DTC advertising investments, innovation and adjacent product category expansion, international growth investment and organizational capabilities investments. We may also use a portion of the proceeds for the acquisition of, or investment in, assets, technologies, solutions, or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time.
The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions, which could change in the future as or plans and business conditions evolve. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application and specific allocations of the net proceeds of this offering. Pending the uses described above, we intend to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments or other securities.
 
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DIVIDEND POLICY
We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, business prospects and other factors our board of directors deems relevant, and subject to the restrictions contained in any future financing instruments. In addition, our ability to pay cash dividends is currently restricted by the terms of our Credit Agreements. Our ability to pay cash dividends on our capital stock in the future may also be limited by the terms of any preferred securities we may issue or agreements governing any additional indebtedness we may incur.
 
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CAPITALIZATION
The following table sets forth our cash and capitalization as of June 30, 2021:

on an actual basis;

on a pro forma basis to give effect to (i) the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 67,092,839 shares of common stock prior to the completion of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation in connection with the closing of this offering; and

on a pro forma as adjusted basis to give further effect to (i) the pro forma adjustments described above and (ii) the issuance and sale of                 shares of common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The pro forma and pro forma as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at the pricing of this offering. You should read the information in this table together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the sections titled “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
As of June 30, 2021
(unaudited)
ActualPro forma
Pro forma as
adjusted(1)
(in thousands, except share and per share amounts)
Cash$2,396$2,396$     
Current portion of long-term debt1,5901,590
Line of credit1,0001,000
Redeemable convertible preferred stock (Series Seed, A, B, B-1, C, D, E, F), $0.0001 par value; 80,083,782 shares authorized, 67,092,839 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma adjusted$68,896$$
Stockholders’ equity (deficit)
Common stock, $0.0001 par value, 115,490,000 shares authorized, 24,441,049 shares issued and outstanding, actual;      shares authorized, pro forma and pro forma as adjusted; 91,533,888 shares issued and outstanding, pro forma;       shares authorized,       shares issued and outstanding, pro forma as adjusted29
Preferred stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; and      shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted
Employee promissory notes(3,453)(3,453)
Treasury stock(7)(7)
Additional paid-in capital4,03372,922
Accumulated deficit(60,409)(60,409)
Total stockholders’ equity (deficit)(59,834)9,062
Total capitalization$11,652$11,652
 
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(1)
Each $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, total stockholders’ equity (deficit) and total capitalization by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, total stockholders’ equity (deficit) and total capitalization by $      million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The number of shares of our common stock in the table above is based on 91,533,888 shares of our common stock outstanding (which includes 6,543,818 shares of common stock that remain subject to vesting and forfeiture) as of June 30, 2021, after giving effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 67,092,839 shares of our common stock immediately prior to the completion of this offering, and excludes:

4,488,527 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock under our 2013 Plan outstanding as of June 30, 2021, at a weighted-average exercise price of $0.48 per share;

       shares of our common stock reserved for future issuance under the 2013 Plan, which shares will cease to be available for issuance at the time the 2021 Plan becomes effective and will be added to, and become available for issuance under, the 2021 Plan;

       shares of our common stock issuable upon the exercise of options to purchase shares of our common stock under our 2013 Plan granted after June 30, 2021, at a weighted-average exercise price of $      per share;

3,229,683 shares of our common stock issuable upon the exercise of warrants to purchase our redeemable convertible preferred stock that were outstanding as of June 30, 2021, at a weighted-average exercise price of $1.60 per share, which warrants will convert into warrants to purchase our common stock immediately prior to the closing of this offering;

       shares of our common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with the completion of this offering; and

       shares of our common stock reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering.
 
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DILUTION
If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.
Our historical net tangible book value (deficit) as of June 30, 2021 was $(70.3) million, or $(2.87) per share of our common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities and the carrying values of our redeemable convertible preferred stock, which is not included within stockholders’ equity (deficit). Historical net tangible book value (deficit) excludes intangible assets and capitalized deferred offering costs. Our historical net tangible book value (deficit) per share represents historical net tangible book value (deficit) divided by the 24,441,049 shares of our common stock outstanding as of June 30, 2021.
Our pro forma net tangible book value (deficit) as of June 30, 2021 would have been $(1.4) million, or $(0.01) per share of our common stock. Pro forma net tangible book value (deficit) represents the amount of our total tangible assets less our total liabilities, after giving effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 67,092,839 shares of our common stock as if such conversion had occurred on June 30, 2021. Pro forma net tangible book value (deficit) per share represents pro forma net tangible book value (deficit) divided by the total number of shares outstanding as of June 30, 2021, after giving effect to the pro forma adjustments described above.
After giving further effect to our issuance and sale of                 shares of our common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2021 would have been $      million, or $      per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value per share of $      to our existing stockholders and immediate dilution of $      in pro forma as adjusted net tangible book value per share to new investors purchasing common stock in this offering.
Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis (without giving effect to any exercise by the underwriters of their option to purchase additional shares):
Assumed initial public offering price per share      $     
Historical net tangible book value (deficit) per share as of June 30, 2021$(2.87)
Increase per share attributable to the pro forma adjustments described above2.86
Pro forma net tangible book value (deficit) per share as of June 30, 2021 attributable
to the conversion of preferred stock
(0.01)
Increase in pro forma as adjusted net tangible book value per share attributable to new investors participating in this offering
Pro forma as adjusted net tangible book value per share after this offering
Dilution per share to new investors purchasing common stock in this offering
The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $      and dilution per share to new investors purchasing common stock in this offering by $      , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase our
 
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pro forma as adjusted net tangible book value per share after this offering by $      and decrease dilution per share to new investors purchasing common stock in this offering by $      , assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each decrease of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease our pro forma as adjusted net tangible book value per share after this offering by $      and increase dilution per share to new investors purchasing common stock in this offering by $      , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional shares in full, our pro forma as adjusted net tangible book value per share after this offering would be $      , representing an immediate increase in pro forma as adjusted net tangible book value per share of $      to existing stockholders and immediate dilution in pro forma as adjusted net tangible book value per share of $      to new investors purchasing common stock in this offering, based on the assumed initial public offering price of $      per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
The following table summarizes on the pro forma as adjusted basis described above, the total number of shares of common stock purchased from us on an as converted to common stock basis, the total consideration paid or to be paid, and the average price per share paid or to be paid by existing stockholders and by new investors in this offering at an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing common stock in this offering will pay an average price per share substantially higher than our existing stockholders paid.
Shares PurchasedTotal Consideration
Average Price
Per Share
NumberPercentageAmountPercentage
Existing stockholders91,533,888$81,622,576$0.89
New investors
Total      
100%
      
100%
      
The table above assumes no exercise of the underwriters’ option to purchase additional shares in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders would be reduced to    % of the total number of shares of our common stock outstanding after this offering, and the number of shares of common stock held by new investors purchasing common stock in this offering would be increased to    % of the total number of shares of our common stock outstanding after this offering.
The discussion and tables above are based on 91,533,888 shares of our common stock outstanding (which includes 6,543,818 shares of common stock that remain subject to vesting and forfeiture) as of June 30, 2021, after giving effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 67,092,839 shares of our common stock immediately prior to the completion of this offering, and excludes:

4,488,527 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock under our 2013 Plan outstanding as of June 30, 2021, at a weighted-average exercise price of $0.48 per share;

       shares of our common stock reserved for future issuance under the 2013 Plan, which shares will cease to be available for issuance at the time the 2021 Plan becomes effective and will be added to, and become available for issuance under, the 2021 Plan;

       shares of our common stock issuable upon the exercise of options to purchase shares of our common stock under our 2013 Plan granted after June 30, 2021, at a weighted-average exercise price of $      per share;

3,229,683 shares of our common stock issuable upon the exercise of warrants to purchase our redeemable convertible preferred stock that were outstanding as of June 30, 2021, at a
 
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weighted-average exercise price of $1.60 per share, which warrants will convert into warrants to purchase our common stock immediately prior to the closing of this offering;

       shares of our common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with the completion of this offering; and

       shares of our common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or the 2021 ESPP, which will become effective in connection with this offering.
To the extent that new stock options are issued or any outstanding options are exercised, or we issue additional shares of common stock in the future, there will be further dilution to new investors. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Winc: We Bring Everyone to the Table
We are one of the fastest growing at scale wineries in the United States. Over the past two years we have grown by approximately 80% in case volume sold, with sales of over 430,000 cases in 2020. Our growth is fueled by the joint capabilities of our data-driven brand development strategy paired with a true omni-channel distribution network. Since March 2020, we have experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much of the United States in response to the COVID-19 pandemic. Industry research and steady consumer demand lead management to believe that this is a permanent shift in consumer behavior. For example, a 2021 Sovos report assessing DTC wine shipment data concluded that the boosts in DTC wine purchasing relating to the impacts of COVID-19 will continue once the pandemic ends and may drive continued growth. Though we cannot guarantee that our historical growth rates will be indicative of future growth, we believe our balanced platform is well-suited to gain share and drive meaningful long-term growth in the approximately $400 billion Alcoholic Beverages market.
As product innovators focused on building durable brands that consumers love, we have developed a proprietary process, called Ideate, Launch and Amplify, that has allowed us to consistently produce quality wine brands in a capital-efficient fashion. We believe this process is unique within the Alcoholic Beverages industry incorporating the “Best of the New” and “Best of the Old” aspects of Alcoholic Beverages brand creation in a truly omni-channel fashion. The “Best of the New” is highlighted by our data-rich DTC relationships via the Winc digital platform. This data is a critical competitive advantage that we use to help shape the ideation and development of our brands. Our digitally native roots also provide us with a strong core competency in digital marketing and data analytics that allows us to interact in a more targeted and direct fashion with end-consumers and Amplify brands in ways the legacy Alcoholic Beverages companies have yet to consistently utilize. As our brand portfolio expands over time, we believe our DTC channel will become more desirable to existing and potential members who will have an increasing number of highly rated and more recognizable products to choose from each month. Our “Best of the Old” strategy is encompassed by our appreciation of the value creation potential and durable power of proprietary brand development, as well as the scale benefits that can be achieved by leveraging the legacy wholesale distribution channel, where the vast majority of wine is still purchased.
We generate net revenues by building durable brands that consumers love. We offer high-quality products in all 50 states either through our DTC channel or the national distribution network in our wholesale channel. Our omni-channel approach allows us to create compelling order economics, differentiated product offerings, consumer-led brands, and a loyal consumer following. We seek to meet consumers however they want to shop, balancing deep consumer connection with broad convenience and accessibility. We believe this distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products. Our integrated omni-channel presence provides meaningful benefits to our consumer which we believe is not easily replicated by our competitors.
As we have executed on our omni-channel strategy, we have demonstrated success by significantly growing net revenues, continuing to improve our online operational metrics, expanding our wholesale
 
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distribution, and increasing the efficiency of our brand development process. The following financial and operational results were achieved during the year ended December 31, 2020 and 2019 and six months ended June 30, 2021 and 2020:

we grew net revenues by 77.5% from $36.4 million for the year ended December 31, 2019 to $64.7 million for the year ended December 31, 2020 and by 20.4% from $29.2 million for the six months ended June 30, 2020 to $35.1 million for the six months ended June 30, 2021;

we generated approximately 23.8% and 28.9% of our net revenues from our five core brands for the year ended December 31, 2020 and six months ended June 30, 2021, respectively;

we increased net revenues for our core brands by 53.2% from $10.1 million for the year ended December 31, 2019 to $15.4 million for the year ended December 31, 2020 and by 14.2% from $8.9 million for the six months ended June 30, 2020 to $10.2 million for the six months ended June 30, 2021;

we expanded our retail accounts by 63.6% from 4,809 for the year ended December 31, 2019 to 7,869 for the year ended December 31, 2020 and by 52.3% from 5,148 for the six months ended June 30, 2020 to 7,838 for the six months ended June 30, 2021;

we generated a net loss of $7.0 million for the year ended December 31, 2020, an improvement from a net loss of $8.0 million for the year ended December 31, 2019, and a net loss of $3.3 million for the six months ended June 30, 2021, an improvement from a net loss of $3.8 million for the six months ended June 30, 2020; and

we generated Adjusted EBITDA losses of $5.7 million, $5.1 million, $2.6 million and $2.9 million for the years ended December 31, 2019 and 2020 and the six months ended June 30, 2020 and 2021, respectively.
Impact of COVID-19
In March 2020, the World Health Organization declared the spread of COVID-19 a pandemic. Shortly thereafter, we closed our headquarters, supported our employees and contractors to work remotely, and implemented travel restrictions. We qualified as an essential business, as defined by state regulations, and therefore continued to operate our Pennsylvania fulfillment centers with reduced occupancy to maintain social distancing requirements. The reduced manpower in warehouses, together with increased DTC orders, led to minor delivery delays in some instances, but we have not experienced any significant disruptions in our supply chain or any carrier interruptions or delays. As of June 2021, we have returned to full capacity in our fulfillment centers.
The COVID-19 pandemic has also significantly accelerated consumer adoption of a wide variety of at-home delivery services, including in the Alcoholic Beverages sector. Since March 2020, we have experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much of the United States in response to the COVID-19 pandemic. Industry research and steady consumer demand lead management to believe that this is a permanent shift in consumer behavior. For example, a 2021 Sovos report assessing DTC wine shipment data concluded that the boosts in DTC wine purchasing relating to the impacts of COVID-19 will continue once the pandemic ends and may drive continued growth. The dramatic growth in new consumer acquisition resulted in a corresponding increase in “new consumer discount” costs in 2020, resulting in lower DTC gross margins in 2020.
Our wholesale net revenues declined in April and May of 2020 as a result of the pandemic and government measures to slow the spread of the COVID-19 pandemic. These restrictions included limited operating hours, reduced capacity at dining and other venues and decreased consumer interest in frequenting public gathering spaces. While it’s difficult to quantify the full impact the COVID-19 pandemic had on the wholesale channel as a whole, management believes these developments resulted in an approximately $1.2 million decrease in on-premise wholesale net revenues during the year ended 2020 as compared to 2019 by comparing wholesale net revenues recieved from restaurants and bars during the year ended 2020 to the year ended 2019. While our total wholesale net revenues increased in 2020 by 20.8% compared to 2019, we believe the rate of growth for our wholesale net revenues from 2019 to 2020 was slightly impaired due to the
 
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restrictions noted above, specifically with respect to on-premise sales at venues like restaurants and bars. We do not believe that the COVID-19 pandemic materially impacted our growth in wholesale net revenues for the six months ended June 30, 2021 as compared to June 30, 2020.
Although the global economy has begun to recover and the widespread availability of vaccines has encouraged greater economic activity, we are continuing to monitor the situation and we cannot predict for how long, or the ultimate extent to which, the pandemic may impact our operations. The COVID-19 pandemic has been a highly disruptive economic and societal event that has had a significant impact on consumer shopping behavior.
Moreover, the duration and severity of the COVID-19 pandemic, including the length of stay-at-home and restaurant restriction orders, developments involving variants of COVID-19 and the state of economic and operating conditions, will continue to impact the markets in which we operate and make future demand difficult to forecast.
Key Factors Affecting Our Performance and Growth
At approximately $400 billion in sales within the United States in 2018, the Alcoholic Beverages market represents one of the largest total addressable market opportunities in the CPG landscape. Within the Alcoholic Beverages market, the wine industry is a sizable market, topping over $70 billion in the United States in 2018. We believe we are one of the few wine companies that is connecting with the next generation of consumers who prefer to shop online, and we expect that connection will lead to a significant and expanding market opportunity. With a strong portfolio of brands and driven sales and performance marketing teams, we believe we have the potential to seize a larger portion of the U.S. Alcoholic Beverages market.
Our primary goal is to grow by building a portfolio of durable brands that consumers love. As we strengthen our portfolio of brands and increase our brand awareness, we believe that it will become easier to acquire DTC consumers and grow our wholesale business. From 2019 to 2020, our DTC channel net revenues grew 85.1%, representing 84.8% of our 2020 total net revenues, and our wholesale channel net revenues grew 20.8%, representing 12.7% of our 2020 total net revenues. From June 2020 to June 2021, our DTC channel net revenues grew 8.2%, representing 76.5% of our total net revenues for the six months ended June 30, 2021, and our wholesale channel grew 90.0%, representing 21.7% of our total net revenues for the six months ended June 30, 2021.
This level of growth is significantly greater than our historical rates of revenue growth in prior periods. For our DTC channel, we believe the significant growth between 2019 and 2020 was fueled by the COVID-19 pandemic and social and governmental responses to it. For our Wholesale channel, we believe the significant growth between June 2020 and June 2021 was fueled primarily by increased retail accounts. While we believe that a broad shift in consumer interest in DTC offerings is not transient, we do believe growth in our DTC channel will slow going forward as COVID-19 restrictions are eased or lifted. Management believes Wholesale net revenues will continue to grow significantly but not at levels consistent with the growth for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
We believe the following factors and trends in our business have driven our growth over the past two fiscal years and are expected to be key drivers of our growth for the foreseeable future:
Brand Awareness and Loyalty
Our ability to promote and maintain brand awareness and loyalty is critical to our success. Consumer appreciation of our brands is reflected in the increase of Winc.com members in our DTC channel and the additional retail accounts in our wholesale channel. We believe we have a significant opportunity to continue to grow our brand awareness and loyalty through word of mouth, brand marketing and performance marketing. We have made significant investments to strengthen our brand and generate awareness of our products through our marketing strategy, which includes brand marketing campaigns across various platforms, including email, digital, display, site, direct-mail, commercials, and social media, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid
 
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social media advertisements, search engine optimization, personalized email and mobile push notifications through our mobile application. We plan to continue to invest in our brand and performance marketing to help drive our future growth.
Innovation
Ideation, development and innovation are core elements underpinning our growth strategy. The improvement of existing products and the introduction of new products have been, and continue to be, integral to our growth. While we launched an aggregate of 7 innovation brands in the last two years, we have made significant investments in our product development capabilities and plan to increase the number of launches in the future. We aim to launch 8 - 10 innovation brands a year on the digital platform. Our continued focus on brand innovation will be central to attracting and retaining consumers in the future. Our ability to successfully Ideate, Launch and Amplify new products will depend on a variety of factors, including our continued investment in innovation, integrated business planning processes and capabilities.
Execution of Omni-channel Strategy
The continued execution of our omni-channel strategy impacts our financial performance. We intend to continue leveraging our marketing strategy to grow our DTC channel by driving increased consumer traffic to our digital platform. We believe our digital platform is a valuable tool for creating direct connections with our consumers, influencing brand experience and understanding consumer preference and behavior. Our wholesale channel is focused on relationships with leading national distributors and retailers that have broadened our consumer reach, raised our brand awareness and allowed us to achieve additional scale. We aim to strengthen these relationships to further increase their benefit. Our ability to execute this strategy will depend on a number of factors, such as distributors’ and retailers’ satisfaction with the sales our products, our ability to develop high-quality and culturally relevant brands and our introduction of innovative products.
Key Financial and Operating Metrics
In addition to the measures presented in our financial statements, we use the following key financial and operational metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions:
Year ended December 31,
Six months ended June 30,
(unaudited)
2020201920212020
(dollars in thousands, except average order value)
Core brand net revenues$15,409$10,061$10,158$8,895
Consolidated
Adjusted EBITDA(1)
$(5,104)$(5,678)$(2,919)$(2,600)
Adjusted EBITDA margin(1)
(7.9)%(15.6)%(8.3)%(8.9)%
DTC
DTC net revenues(2)
$54,854$29,628$26,852$24,823
DTC gross profit(2)
$23,055$12,967$11,496$9,421
Average order value$63.04$60.56$69.20$58.96
Average monthly consumer retention rate89.7%92.2%91.8%88.7%
Wholesale
Wholesale net revenues(2)
$8,237$6,819$7,624$4,023
Wholesale gross profit(2)
$2,393$2,442$3,301$1,338
Retail accounts7,8694,8097,8395,148
(1)
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are presented for
 
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supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. See the section titled “Prospectus Summary — Summary Consolidated Financial and Operating Data — Key Financial and Operating Metrics” for additional information and a reconciliation of net loss to Adjusted EBITDA and net loss margin to Adjusted EBITDA margin.
(2)
For a description of DTC net revenues, DTC gross profit, wholesale net revenues, and wholesale gross profit see “— Components of Results of Operations.”
Number of Core Brands
After we launch a new brand and our data indicates that the brand is resonating with consumers, we begin to Amplify those brands in both DTC and wholesale. We call these brands our core brands and currently have five in our portfolio. Our in-house winemakers and brand teams are continually innovating and launching new products in an effort to find additional core brands. Each of our current core brands has individually generated more than $1.0 million in net revenues through the DTC channel in the last 12 months. Once a brand has demonstrated consumer traction by achieving this threshold, we believe we can leverage our sales channels to rapidly grow and continue to scale the brand. Each of our current core brands has generated more than $0.5 million through the wholesale channel in the last 12 months, and we believe has the potential to continue to grow sales through the wholesale channel.
Core Brand Net Revenues
Core brand net revenues refers to the amount of total net revenues generated by our core brands in any specific period. Historically, we have seen continued growth in net revenues of our core brands and believe they are a key component of future financial success.
Average Order Value
We believe the continued growth of our average order value demonstrates both our increasing value proposition for our consumer base and their increasing affinity for our premium brands. We define average order value as the sum of DTC net revenues, divided by the total orders placed in that period. Total orders are the summation of all completed individual purchase transactions in a given period. Average order value may fluctuate as we expand into and increase our presence in additional product categories.
The following graph indicates the growth in our average order value from the quarter ended December 31, 2019 to the quarter ended December 31, 2020. Over this period, our AOV increased approximately 15.1%. For the quarter ended June 30, 2021, our AOV increased further to $71.40.
[MISSING IMAGE: tm2120816d2-lc_aov4clr.jpg]
 
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Average Monthly Consumer Retention Rate
Average monthly consumer retention rate represents the average active member balance during the month less monthly cancellations, divided by the average monthly active members.
Retail Accounts
Retail account growth is a key metric for our continued growth in wholesale as it is a measure of how widely our products are distributed. The metric represents the number of retail accounts in which we sold our products in a given period.
Components of Results of Operations
We evaluate our business and allocate resources among our reportable business segments: (i) DTC and (ii) Wholesale.
Net Revenues
We generate net revenues from the following revenue streams:
DTC — We define DTC net revenues as net revenues generated from consumers through our monthly membership or individual orders on our digital platform. Members are charged a monthly membership and are awarded credits in the same monetary value. Members can then utilize their credits to purchase our brand wines at their discretion. Members have the option to skip monthly charges, accumulate credits or use credits when purchased so that the membership is tailored to everyone’s preference and lifestyle. Additionally, we have dedicated brand websites that generate orders and net revenues for our core brands. Breakage income related to prepaid credits and gift cards is reported in DTC net revenues.
Breakage revenue is recognized based on historical redemption rates of payments received in advance of performance. We determined that a percentage of prepaid credits goes unredeemed. We recognize breakage proportionally with credit redemptions in net revenues, or when redemption is remote.
Wholesale — We define wholesale net revenues as net revenues generated from wholesale distributors, state-operated licensees and directly to retail accounts. Our wholesale channel success is based on long-standing relationships with a highly developed network of distributors in all U.S. states. We work closely with wholesale distributors to increase the volume of our wines and number of products that are sold by the retail accounts in their respective territories. One wholesale distributor accounted for approximately 14% and 10% of wholesale net revenues during the year ended December 31, 2020 and 2019, respectively, and 13% and 14% of wholesale net revenues during the six months ended June 30, 2021 and 2020, respectively.
Other Non-Reportable — We also generate an immaterial amount of net revenues from a non-reportable segment that is comprised of a small business line focused on testing new products to determine if they have long-term viability prior to integration into the DTC and/or wholesale distribution channels.
Cost of Revenues
Cost of revenues consists of:

wine-related inputs, such as grapes and semi-finished bulk wine;

bottling materials (bottles, corks, and labeling materials);

boxes/packaging;

fulfillment costs (costs attributable to receiving, inspecting and warehousing inventories, picking, packaging, and preparing orders for shipment, including the variable costs of employing hourly employees and temporary staff provided by agencies at our fulfillment centers);

credit card fees related to DTC transactions;

inbound and outbound freight;
 
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storage; and

barrel depreciation.
Gross Profit and Gross Margin
We define gross profit as net revenues less cost of revenues as discussed above. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our DTC and wholesale channels, and our ability to reduce costs, in any given period.
DTC Gross Profit
We define DTC gross profit as DTC net revenues less DTC cost of revenues. DTC gross margin is DTC gross profit expressed as a percentage of DTC net revenues. DTC gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our DTC channels, and our ability to reduce costs, in any given period.
Wholesale Gross Profit
We define wholesale gross profit as wholesale net revenues less wholesale cost of revenues. Wholesale gross margin is gross profit expressed as a percentage of wholesale net revenues. Wholesale gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, the timing and mix of sales through our wholesale network, and our ability to reduce costs, in any given period.
Operating Expenses
Operating expenses primarily consist of marketing, personnel, and general and administrative expenses.

Our marketing expenses consist primarily of costs incurred to acquire new consumers, retain existing consumers, build our brand awareness through various offline and online paid advertising channels, including television, digital and social media, direct mail, radio and podcasts, email, brand activations, and strategic brand partnerships.

Our personnel expenses consist primarily of payroll and related expenses, including stock-based compensation.

Our general and administrative expenses consist of: (i) costs associated with general corporate functions, such as depreciation expense and rent relating to facilities and equipment and insurance expense; (ii) professional fees and other general corporate costs; (iii) travel-related expenses; and (iv) customer services costs, such as third-party staffing to respond to inquiries from consumers.
We expect our operating expenses to increase substantially for the foreseeable future as we continue to increase our headcount to support our existing business, increase our member count, and grow our business. We will also incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, additional director and officer insurance expenses, investor relations activities, and other administrative and professional services.
Contract Liability
Contract liabilities, also referred to as deferred revenues, arise as a result of the Winc.com subscription model. Deferred revenues represent payments received from consumers in advance of ordering goods and are referred to as “credits”. Winc.com members are charged a monthly fee and are awarded credits equivalent to the monetary value. Members are then able to utilize member credits at their leisure to place an order on our website. Revenue is recognized when the member takes control of the ordered goods, at
 
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delivery. Credits do not expire or lose value over periods of inactivity. We are not required by law to escheat the value of unredeemed credits.
Other Income and Expense
Other income and expense consist primarily of interest expense associated with our credit facilities, rental income from sublease agreements, and changes in fair value of warrants that were issued in connection with past financing transactions. See “ —  Liquidity and Capital Resources — Credit Facilities.”
Results of Operations
The following table summarize the results of operations for our DTC reportable segment for the years ended December 31, 2020 and 2019 and six months ended June 30, 2021 and 2020 (in thousands):
Year ended December 31,
Six months ended June 30,
(unaudited)
2020201920212020
DTC Net revenues$54,854$29,628$26,852$24,823
DTC Cost of revenues31,79916,66115,35615,402
DTC Gross profit$23,055$12,967$11,496$9,421
The following table summarize the results of operations for our wholesale reportable segment for the years ended December 31, 2020 and 2019 and the six months ended June 30, 2021 and 2020 (in thousands):
Year ended December 31,
Six months ended June 30,
(unaudited)
2020201920212020
Wholesale Net revenues$8,237$6,819$7,624$4,023
Wholesale Cost of revenues5,8444,3774,3232,685
Wholesale Gross profit$2,393$2,442$3,301$1,338
The following table summarize the results of operations for our other non-reportable segments for the years ended December 31, 2020 and 2019 and the six months ended June 30, 2021 and 2020 (in thousands):
Fiscal year ended December 31,
Six months ended June 30,
(unaudited)
2020201920212020
Other Net revenues$1,616$$640$320
Other Cost of revenues709274137
Other Gross profit$907   —$366$183
Comparison of the Six Months Ended June 30, 2021 and 2020
DTC Net Revenues
DTC net revenues for the six months ended June 30, 2021 was $26.9 million, compared to $24.8 million for the six months ended June 30, 2020, an increase of $2.1 million or 8.5%. Of this increase, $3.9 million was driven by an increase in AOV of approximately 17%, partially offset by $1.8 million due to decreases in order volume of approximately 8%. During the six months ended June 30, 2021, we had a 57.0% decrease in first time orders, but increased core orders by 20.0%, which contributed to the increased AOV due to first orders containing significant discounts. The substantial increase in first time orders during the six months ended June 30, 2020 was caused by accelerated customer adoption of the DTC model.
DTC Cost of Revenues
DTC cost of revenues was $15.4 million for both the six months ended June 30, 2021 and 2020. DTC cost of revenues remained relatively consistent period-over-period. However, DTC cost of revenues as
 
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a percentage of DTC net revenues decreased approximately 4.9%, resulting in increased margin. This change was primarily related to a $3.0 million decrease period-over-period in discounts related to first orders.
DTC Gross Profit
Changes in DTC gross profit are a function of the changes in DTC net revenues and DTC cost of revenues discussed above. DTC gross profit for the six months ended June 30, 2021 was $11.5 million, compared to $9.4 million for the six months ended June 30, 2020, an increase of $2.1 million or 22.3%.
Wholesale Net Revenues
Wholesale net revenues for the six months ended June 30, 2021 was $7.6 million, compared to $4.0 million for the six months ended June 30, 2020, an increase of $3.6 million or 90.0%. Growth in wholesale net revenues was primarily attributable to the growth in retail accounts through distributor relationships, which resulted in a $3.4 million increase.
Wholesale Cost of Revenues
Wholesale cost of revenues for the six months ended June 30, 2021 was $4.3 million, compared to $2.7 million for the six months ended June 30, 2020, an increase of $1.6 million or 59.3%. The increase in wholesale cost of revenues was partially attributable to the increase in wholesale net revenues for the period. This increase was partially offset by a lower average cost per case, resulting in a $0.7 million decrease in wholesale cost of revenues for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Average cost per case decreased from $57.93 for the six months ended June 30, 2020 to $50.18 for the six months ended June 30, 2021, which was primarily due to lower costs related to glass sourcing, bottling facilities and international juice sourcing. Increased demand due to the COVID-19 pandemic during the six months ended June 30, 2020 did not allow for strategic sourcing, which resulted in higher costs during that period.
Wholesale Gross Profit
Changes in wholesale gross profit are a function of the changes in wholesale net revenues and wholesale cost of revenues discussed above. Wholesale gross profit for the six months ended June 30, 2021 was $3.3 million compared to $1.3 million for the six months ended June 30, 2020, an increase of $2.0 million or 153.9%.
Other Net Revenues
Other non-reportable net revenues for the six months ended June 30, 2021 was $0.6 million, compared to $0.3 million for the six months ended June 30, 2020, an increase of $0.3 million or 100.0%. Growth in other non-reportable net revenues was entirely driven by the increase in the number of products being tested for potential future growth.
Other Cost of Revenues
Other non-reportable cost of revenues for the six months ended June 30, 2021 was $0.3 million, compared to $0.1 million for the six months ended June 30, 2020, an increase of $0.2 million or 100.0%. Growth in other non-reportable cost of revenues was entirely driven by the increase in other non-reportable net revenues discussed above.
Other Gross Profit
Changes in other non-reportable gross profit are a function of the changes in other non-reportable net revenues and other non-reportable cost of revenues discussed above. Other non-reportable gross profit for the six months ended June 30, 2021 was $0.4 million compared to $0.2 million for the six months ended June 30, 2020, a slight decrease of $0.2 million or 100.0%.
 
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Comparison of the Years Ended December 31, 2020 and 2019
DTC Net Revenues
DTC net revenues for the year ended December 31, 2020 was $54.9 million, compared to $29.6 million for the year ended December 31, 2019, an increase of $25.3 million or 85.1%. Of this increase, $24.0 million was attributable to new subscribers and $1.3 million was attributable to an increase in AOV. Order volumes began to increase substantially starting in March 2020 as states and localities imposed shelter-in-place orders in connection with the COVID-19 pandemic.
DTC Cost of Revenues
DTC cost of revenues for the year ended December 31, 2020 was $31.8 million, compared to $16.7 million for the year ended December 31, 2019, an increase of $15.1 million or 90.9%. The increase in DTC cost of revenues was primarily related to the increase in DTC net revenues described above, as well as a $1.4 million increase in fulfillment costs as we had to hire temporary staff to support sales volumes and incurred additional costs to institute safety measures to comply with federal, state, and local COVID-19 guidelines at our fulfillment centers.
DTC Gross Profit
Changes in DTC gross profit are a function of the changes in DTC net revenues and DTC cost of revenues discussed above. DTC gross profit for the year ended December 31, 2020 was $23.1 million, compared to $13.0 million for the year ended December 31, 2019, an increase of $10.1 million or 77.8%.
Wholesale Net Revenues
Wholesale net revenues for the year ended December 31, 2020 was $8.2 million, compared to $6.8 million for the year ended December 31, 2019, an increase of $1.4 million or 20.8%. Of this increase, $2.6 million was attributable to the growth in number of retail accounts, partially offset by a $1.2 million decrease in orders from restaurants due to COVID-19 pandemic restrictions. Additionally, during the years ended December 31, 2020 and 2019, 92.5% and 61.8% of wholesale net revenues were due to sales to distributors through the traditional three-tier distribution model. This transition to increased sales through the traditional three-tier distribution model resulted in approximately 17% lower wholesale net revenues.
Wholesale Cost of Revenues
Wholesale cost of revenues for the year ended December 31, 2020 was $5.8 million, compared to $4.4 million for the year ended December 31, 2019, an increase of $1.4 million or 33.5%. The increase in wholesale cost of revenues is partially attributable to the increase in wholesale net revenues for the period. The average cost per case remained relatively constant between the years ended December 31, 2020 and 2019. As such, the primary driver that caused wholesale cost of revenues to increase at a higher percentage than wholesale net revenues was due to the transition to the traditional three-tier distribution model, which constricted revenue growth while the cost of revenues per case was remaining constant.
Wholesale Gross Profit
Changes in wholesale gross profit are a function of the changes in wholesale net revenues and wholesale cost of revenues discussed above. Wholesale gross profit for the year ended December 31, 2020 was $2.4 million compared to $2.4 million for the year ended December 31, 2019, a slight decrease of 2.0%.
Other Non-Reportable Segments
We did not have other non-reportable operations during the year ended December 31, 2019. As such, the increases in net revenues, costs of revenues, and gross profit were the result of establishing operations focused on testing new products during 2020.
 
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Operating Expenses
The following table identifies our operating expenses and other income and expense items for the periods presented.
Year ended December 31,
Six months ended June 30,
(unaudited)
Other Income and Expense Items2020201920212020
(in thousands)
Marketing$17,388$8,578$7,979$6,948
Personnel7,5826,3285,3873,466
General and administrative7,5457,3305,5673,373
Production and operations169885489
Creative development8317715654
Total operating expenses32,76722,50119,14313,930
Interest expense8341,364420531
Change in fair value of warrants208137894229
Other income(523)(559)(1,972)(9)
Total other expense, net519(942)658751
Income tax expense$27$15$15$7
Comparison of the Six Months Ended June 30, 2021 and 2020
Marketing Expenses
Marketing expenses increased $1.0 million or 14.8% to $8.0 million for the six months ended June 30, 2021, from $7.0 million for the six months ended June 30, 2020. The increase in market expense was primarily driven by an $1.0 million increase in advertising costs as we continued to invest in digital media to attract new customers.
Personnel Expenses
Personnel expenses increased $1.9 million or 55.4%, to $5.4 million in during the six months ended June 30, 2021, from $3.5 million during the six months ended June 30, 2020. This increase was primarily attributable to a $1.0 million increase due to increased headcount to support corporate functions as we grow our business and a $0.9 million increase related to investment in our brand/creative, engineering and growth teams.
General and Administrative Expenses
General and administrative expenses increased $2.2 million or 65.0%, to $5.6 million during the six months ended June 30, 2021, from $3.4 million during the six months ended June 30, 2020. This increase was primarily attributable to $0.8 million related to increased professional services fees, specifically accounting, legal, recruiting and consulting, as well as $0.5 million related to increased rental expense and $0.9 million related to other various internal expenses, specifically software and licenses and travel-related expenses.
Interest Expense
Interest expense decreased $0.1 million or 20.9%, to $0.4 million for the six months ended June 30, 2021, from $0.5 million for the six months ended June 30, 2020. The decrease is attributable to paying down and terminating previously outstanding debt.
Change in Fair Value of Warrants
The increase in the loss from the change in fair value of warrants is primarily due to an increase in the fair value of preferred stock. Refer to Note 10 in our consolidated financial statements as of and for the six months ended June 30, 2021 in this prospectus for further information.
 
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Income Tax Expense
Income tax expense increased 114.3% primarily due to increased state return filing requirements during the six months ended June 30, 2021.
Comparison of the Years Ended December 31, 2020 and 2019
Marketing Expenses
Marketing expenses increased $8.8 million or 102.7% to $17.4 million for the year ended December 31, 2020, from $8.6 million for the year ended December 31, 2019. The increase in market expense was primarily driven by an $8.6 million increase in advertising costs as we continued to invest in digital media to attract new customers.
Personnel Expenses
Personnel expenses increased $1.3 million or 19.8%, to $7.6 million in during the year ended December 31, 2020, from $6.3 million during the year ended December 31, 2019. This increase was primarily attributable to $0.9 million related to payroll and bonus expenses for general and administrative employees as well as $0.4 million for additional hires to support the wholesale channel.
General and Administrative Expenses
General and administrative expenses increased $0.2 million or 2.9%, to $7.5 million during the year ended December 31, 2020, from $7.3 million during the year ended December 31, 2019. This increase was primarily attributable to a $0.6 million total increase in rental-related costs, insurance premiums and professional services fees. This increase was partially offset by a $0.4 million decrease in travel-related costs as a result of travel restrictions from the COVID-19 pandemic.
Interest Expense
Interest expense decreased $0.5 million or 38.9%, to $0.8 million for the year ended December 31, 2020, from $1.4 million for the year ended December 31, 2019. The decrease was attributable to paying down and terminating previously outstanding debt during the year ended December 31, 2020.
Change in Fair Value of Warrants
The increase in the loss from the change in fair value of warrants was primarily due to an increase in the fair value of preferred stock and a decrease in the risk-free interest rate. Refer to Note 9 in our audited consolidated financial statements in this prospectus for further information.
Income Tax Expense
Income tax expense increased 80.0% primarily due to increased state return filing requirements during the year ended December 31, 2020.
Liquidity and Capital Resources
Our operations have been financed to date by a combination of issuances and sales of preferred stock, borrowings under our credit facilities and cash generated from operations. Our primary cash needs have been to fund working capital requirements, debt service payments, and operating expenses (primarily marketing to increase growth and inventory to support that growth). As of June 30, 2021, we had cash on hand of $2.4 million, inventory of $22.3 million, and total current liabilities of $27.2 million. As of June 30, 2021, $6.0 million of our $7.0 million line of credit also remains undrawn. We expect that our liquidity needs for the next twelve months will be met by our cash on hand and future debt or equity raises, as necessary. We believe that we will be able to continue to operate our business for the foreseeable future.
Issuances of Preferred Stock
During the years ended December 31, 2020 and 2019, we raised total net proceeds of $15.4 million through the issuances and sales of Series C redeemable convertible preferred stock and Series D redeemable
 
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convertible preferred stock. During the six months ended June 30, 2021, we raised total net proceeds of $13.3 million from the issuances and sales of Series E redeemable convertible preferred stock and Series F redeemable convertible preferred stock.
In August 2020, we commenced an offering, pursuant to which we offered to sell shares of our Series E redeemable convertible preferred stock at a price of $1.75 per share. As of December 31, 2020, we had issued 1,603,681 shares of Series E redeemable convertible preferred stock and received net proceeds of $1.6 million in connection with the 2020 Offering. We terminated the offering on January 5, 2021 and raised net proceeds of $5.7 million through the sale of Series E redeemable convertible preferred stock.
In April 2021, we raised net proceeds of $9.1 million through the sale of Series F redeemable convertible preferred stock in a private placement (inclusive of proceeds allocated to warrants to purchase additional shares of Series F redeemable convertible preferred stock issued in connection with the Series F offering). In May 2021, the proceeds, along with additional consideration in the form of Series F redeemable convertible preferred stock, were used to finance the purchase of certain assets from Natural Merchants, Inc.
Credit Facilities
Western Alliance Bank
In October 2015, we entered into a loan and security agreement with Western Alliance Bank, which provided us with a revolving line of credit for up to $12 million, or the WAB Line of Credit. The maturity was subsequently extended to May 2020 and the WAB Line of Credit was reduced to $7.0 million. As of December 31, 2019, $6.0 million remained outstanding under the WAB Line of Credit. The amount outstanding was fully repaid during the year ended December 31, 2020, at which time the agreement was terminated. Accordingly, there was no outstanding balance as of or subsequent to December 31, 2020.
Pacific Mercantile Bank
In December 2020, we entered into a credit agreement, or the PMB Credit Agreement, with Pacific Mercantile Bank for a new $7.0 million line of credit, or the PMB Line of Credit. The PMB Line of Credit bears interest at a variable annual rate equal to 1.25% plus the Prime Rate. We had an outstanding balance of $1 million and zero under the PMB Line of Credit as of June 30, 2021 and December 31, 2020, respectively.
Multiplier Capital
In December 2017, we entered into a loan and security agreement, or the Multiplier LSA, with Multiplier Capital II, LP, or Multiplier, for a term loan of $5.0 million, all of which was disbursed to us at the time of execution. The loan matures in June 2022 and bears interest at a variable annual rate equal to the greater of 6.25% above the Prime Rate (as defined in the loan and security agreement), with a minimum interest rate of 11.5% per annum and a maximum interest rate of 14.0% per annum. In connection with the loan and security agreement, we granted Multiplier warrants to purchase shares of our Series B-1 Preferred Stock. As of June 30, 2021 and December 31, 2020, $1.7 million and $2.5 million was outstanding under the Multiplier Capital loan, respectively. The loan is secured by all of our assets. We refer to the PMB Credit Agreement and the Multiplier LSA collectively as our Credit Agreements.
Paycheck Protection Program Loan
We applied for loans being administered by the Small Business Administration under the Coronavirus Aid, Relief, and Economic Recovery Act of 2020, or the CARES Act, to assist in maintaining payroll and operations through the period impacted by the COVID-19 pandemic. On April 20, 2020, we received a $1.4 million loan from Western Alliance Bank under the Paycheck Protection Program, or PPP. We applied for and were granted loan forgiveness in March 2021 by utilizing the funds in accordance with defined loan forgiveness guidance issued by the government.
 
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Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Year ended December 31,
Six months ended June 30,
(unaudited)
Cash Flow Activity2020201920212020
Net cash provided by (used in):
Operating activities$419$(5,972)$(9,149)$1,509
Investing activities(375)(294)(9,009)(175)
Financing activities54610,78113,546(136)
Net increase (decrease) in cash and cash equivalents$590$4,515$(4,612)$1,198
Operating cash flow is derived by adjusting our net loss for non-cash operating items, such as depreciation and amortization, provision for doubtful accounts, deferred income tax benefits or expenses, and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.
Net cash provided by (used in) operating activities decreased by $10.7 million to a net cash outflow of $9.1 million for the six months ended June 30, 2021. Changes in operating assets and liabilities accounted for outflows of $5.9 million for the six months ended June 30, 2021 compared to inflows of $4.5 million for the six months ended June 30, 2020. This decrease was primarily driven by an increase in cash spent on inventory to meet demand, partially offset by timing of settling accounts payable and accrued liabilities.
Net cash provided by (used in) operating activities increased by $6.4 million to a net cash inflow of $0.4 million for the year ended December 31, 2020. The increase was primarily due to an increase in our contract liabilities (unearned revenue) and the timing of settling accrued liabilities during the year ended December 31, 2020. This was in line with our membership growth and an increase in fulfillment of wholesale orders during the year ended December 31, 2019.
Cash Flows from Investing Activities
Net cash used in investing activities of $9.0 million for the six months ended June 30, 2021 consisted entirely of purchases of property and equipment and the acquisition of intangible assets through the acquisition of certain assets from Natural Merchants, Inc.
Net cash used in investing activities of $0.2 million for the six months ended June 30, 2020 primarily consisted of purchases of property and equipment.
Net cash used in investing activities of $0.4 million for the year ended December 31, 2020 consisted almost entirely of purchases of property and equipment.
Net cash used in investing activities of $0.3 million for the year ended December 31, 2019 consisted of $0.4 million of purchases of property and equipment, partially offset by $0.1 million in payments received on employee advances.
Cash Flows from Financing Activities
Net cash provided by financing activities of $13.6 million for six months ended June 30, 2021 consisted of $13.3 million in proceeds from the issuance of preferred stock, net of issuance costs, and $1.0 million from borrowings on our line of credit, partially offset by $0.8 million of repayments of long-term debt.
Net cash used in financing activities of $0.1 million for the year ended June 30, 2020 consisted of $6.0 million used to repay the previously outstanding balance on our line of credit and $0.8 million of repayments of long-term debt, partially offset by $5.3 million in proceeds from the issuance of preferred stock, net of issuance costs, and $1.4 million of proceeds from the Paycheck Protection Program note payable.
 
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Net cash provided by financing activities of $0.5 million for the year ended December 31, 2020 consisted of $6.8 million in proceeds from the issuance of preferred stock, net of issuance costs, and $1.4 million of proceeds from the Paycheck Protection Program note payable, partially offset by $6.0 million of payments on the previously outstanding line of credit and $1.7 million for repayments of long-term debt.
Net cash provided by financing activities of $10.8 million for year ended December 31, 2019 consisted of $10.1 million in proceeds from the issuance of preferred stock, net of issuance costs, and $1.6 million from borrowings on the previously outstanding line of credit, partially offset by $0.8 million of payments on notes payable and $0.1 million used to repurchase of common stock.
Emerging Growth Company and Smaller Reporting Company Status
We are an “emerging growth company” as defined in the JOBS Act. For as long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
In addition, 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 utilize 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. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of (i) December 31, 2026, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700 million as of the last business day of the second fiscal quarter of such year or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates, regulatory, and inflation.
 
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Interest Rate Risk
Our PMB Line of Credit and term loan with Multiplier bear interest at variable rates. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions, and other factors.
We monitor our cost of borrowing under our long-term debt, taking into account our funding requirements, and our expectations for short-term rates in the future. We had a balance of $1.0 million and zero on our PMB Line of Credit as of June 30, 2021 and December 31, 2020, respectively. We had a principal balance of $1.7 million and $2.5 million on our term loan with Multiplier as of June 30, 2021 and December 31, 2020, respectively. A hypothetical 10% change in the interest rates on our line of credit and term loan for the year ended December 31, 2020 and six months ended June 30, 2021 would not have a material impact on our consolidated financial statements.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and operating results.
Recent Accounting Pronouncements
See Note 2 in our annual consolidated financial statements included elsewhere in this prospectus for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this prospectus.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses incurred during the reporting periods. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our estimates including those related to revenue recognition, fair value of financial instruments, and stock-based compensation. These judgments are based on our historical experience, terms of our existing contracts, our evaluation of trends in the industry, and information available from outside sources as appropriate. Our actual results may differ from those estimates. While our significant accounting policies are described in the notes to our annual consolidated financial statements, also included in this registration statement, we believe these critical accounting policies are the most important to understanding when evaluating our reported financial results.
Revenue Recognition
Revenue-generating activities are directly related to the sale of our wine. We recognize revenue upon completion of our performance obligation, which generally occurs when control is transferred to the customer. This occurs when the consumer either receives the wine from their online purchase or when the customer picks up the wine from one of our distribution points. We derive the majority of our revenues from monthly subscription fees from our DTC sales channel. We also recognize income on unredeemed gift cards and prepaid credits, referred to as “breakage.” Breakage is recognized proportionately using a time-based attribution method from issuance of the gift card or credit to the time when it can be determined that the likelihood of the gift card or credit being redeemed is remote and that there is no legal obligation to remit unredeemed gift cards or credits to relevant jurisdictions. The breakage rate is based on historical redemption patterns.
 
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Fair Value of Financial Instruments
Our financial instruments include cash, accounts receivable, employee advances, accounts payable, accrued liabilities, line of credit, notes payable, and warrants. The carrying amounts of our cash and cash equivalents approximate fair value due to their high liquidity in actively quoted trading markets and their short maturities. Our accounts receivable, employee advances, accounts payable, and accrued liabilities approximate fair value due to their short maturities. The carrying value of our line of credit and notes payable is considered to approximate the fair value of such debt as of December 31, 2020 and 2019 and June 30, 2021 and 2020, based upon the interest rates that we believe we can currently obtain for similar debt. The inputs used to measure the fair value of these assets are primarily observable inputs and, as such, considered Level 1 and 2 fair value measurements. Our warrant liabilities are based primarily on unobservable inputs and are therefore considered Level 3 fair value measurements. We measure the fair value of these financial instruments using the three levels of inputs described by ASC 820.
Stock-Based Compensation
We account for stock-based compensation by estimating the fair value of stock-based payment awards at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period.
During the period covered by the financial statements included in this prospectus, we were a privately held company with no active public market for our common stock. Accordingly, the fair value of the common stock underlying our stock-based awards has historically been determined by our Board of Directors, with input from management and corroboration from contemporaneous third-party valuations. We believe that our Board of Directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date.
The Black-Scholes option pricing model utilized inputs which are highly subjective assumptions and generally require significant judgment. These assumptions include:

Fair Value of Common Stock:     See the subsection titled “Common Stock Valuations” below.

Risk-Free Interest Rate:     The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

Expected Volatility:     Because we have been privately held and do not have any trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

Expected Term:     The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term.

Expected Dividend Yield:     We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
See Note 11 to our consolidated financial statements as of and for the year ended December 31, 2020 and Note 12 to our condensed consolidated financial statements as of and for the six months ended June 30, 2021 included elsewhere in this prospectus for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the year ended December 31, 2020 and six months ended June 30, 2021.
 
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Some of these assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Common Stock Valuation
Prior to this offering, there has been no public market for our common stock, and, as a result, the fair value of the shares of common stock underlying our stock-based awards was estimated on each grant date by our Board of Directors. Our board of directors intended all stock options granted to have an exercise price per share not less than the per share fair value of our common stock on the date of grant. To determine the fair value of our common stock underlying option grants, our Board of Directors with input from management, considered, among other things, valuations of our common stock, which were prepared by an independent third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. Additionally, our Board of Directors’ performed an assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant. These factors included, but were not limited to:

our results of operations and financial position, including our levels of available capital resources;

our stage of development and material risks related to our business;

our business conditions and projections;

the valuation of publicly traded companies in wine retail sectors and subscription services, as well as recently completed mergers and acquisitions of peer companies;

the lack of marketability of our common stock as a private company;

the prices at which we sold shares of our common stock to outside investors in arms-length transactions;

the likelihood of achieving a liquidity event for our security holders, such as an initial public offering, given prevailing market conditions;

trends and developments in our industry; and

external market conditions affecting the wine or retail industry sectors.
Following the closing of this offering, our Board of Directors will determine the fair market value of our common stock based on the closing price of our common stock as reported on the date of grant.
 
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LETTER FROM OUR FOUNDERS
Winc is rooted in a love of hospitality. It is an unshakable desire to improve people’s lives by enhancing those moments when people come together. As founders, we came to this mutual appreciation on completely different paths. For Geoff, it was passion that was central to his father’s life, reinforced through a lifetime of sharing experiences and mentorship. For Brian, it was the discovery of the joy of seeing someone’s face light up when they discovered a new sensation or story in a great bottle of wine.
This passion has been further crystalized by a love of adventure, a willingness to face challenges and chart new paths of discovery. Today, we have created a flexible and dynamic model in one of the oldest consumer categories, anchored in a diverse and talented team of growers, makers, business leaders and founders that share our vision.
We didn’t grow up in the wine business, we didn’t grow up on a vineyard, but our passion for the joy that a great bottle of wine can bring is central to our work, our lives, and our vision for the future. It is this passion that has driven us to continually innovate and to reimagine how consumers connect with these celebratory beverages, and what products and experiences can further enhance these shared moments.
Winc is a versatile platform designed to address today’s consumer at every point in their journey, to meet them where they are and where they will be, all in an effort to improve the experience. It is a platform designed for both the consumer as they exist now and for the future consumer.
We love what we do and we are so grateful, proud and amazed to have served over 21.6 million lifetime bottles of wine, but we are just getting started. So, please join us as we raise our glasses to passion, innovation and all of the moments that lay ahead.
Geoffrey McFarlaneBrian Smith
Geoffrey McFarlane
Founder, Chief Executive Officer and Director
Brian Smith
Founder, President and Chairperson of the Board
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BUSINESS
Winc: We Bring Everyone to the Table
We are one of the fastest growing at scale wineries in the United States. Over the past two years we have grown by approximately 80% in case volume sold, with the sale of over 430,000 cases in 2020. Our growth is fueled by the joint capabilities of our data-driven brand development strategy paired with a true omni-channel distribution network. Since March 2020, we have experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and other restrictions placed on consumers throughout much of the United States in response to the COVID-19 pandemic. Industry research and steady consumer demand lead management to believe that this is a permanent shift in consumer behavior. For example, a 2021 Sovos report assessing DTC wine shipment data concluded that the boosts in DTC wine purchasing relating to the impacts of COVID-19 will continue once the pandemic ends and may drive continued growth. Though we cannot guarantee that our historical growth rates will be indicative of future growth, we believe our balanced platform is well-suited to gain market share and drive meaningful long-term growth in the approximately $400 billion Alcoholic Beverages market. Winc’s mission is to become the leading brand builder within the alcoholic beverages industry through an omni-channel growth platform.
As product innovators focused on building durable brands that consumers love, we have developed a proprietary process, called Ideate, Launch and Amplify, that has allowed us to consistently produce quality wine brands in a capital-efficient fashion. We believe this process is unique within the Alcoholic Beverages industry. The key components of our brand building strategy are as follows:
Ideate:    The Winc digital platform is the starting point for our brand ideation process. Ongoing analysis of consumer data and ordering habits of our growing member base that consisted of approximately 120,000 members as of June 30, 2021 provides near real-time insights into shifting and emerging consumer preferences. For years we have been learning and constantly refining our understanding of the key signals coming from our consumer data that we believe have the greatest predictive power. We then combine those signals with an extensive review of industry data trends and qualitative inputs from our winemakers, sommeliers and creative team to discern the most compelling product opportunities for our development team to begin the brand-building process.
Launch:    After our team has delivered a target product from the Ideate process, we then design the brand and associated beverage formulation. With our asset-light outsourced production model, we produce initial inventories and prepare to launch the product on the Winc digital platform directly into our consumer base. We were able to take the last ten innovation projects launched into the DTC channel from initial bottling to receiving consumer feedback in under two months on average, compared to what our management believes is typically a feedback cycle of 6 to 12 months for traditional winemakers. Once our products begin to be sold on the Winc digital platform, we can quickly identify brands that are demonstrating strong initial traction using a variety of key data points, such as click-through metrics, consumer ratings and social listening and re-order rates. We aim to launch 8-10 innovation brands a year on the digital platform. For those brands showing breakout potential, we further test, refine and iterate in a rapid and capital-efficient manner before ultimately Amplifying the most promising brands to broader distribution.
Amplify:    With validation from consumers and proprietary sell-through data from our Winc digital platform, we aim to take one or two of the best performing new brands each year and Amplify them by scaling the new products across our high-volume omni-channel distribution platform. Our proprietary data enables us to better predict and validate demand prior to a broad wholesale launch, supported by extensive digital marketing. This both lowers the launch-related risk of our brands and allows for superior targeting capabilities, which we believe increases the attractiveness of our brands to wholesale distributors and retailers, both of whom are eager to add predictably high-velocity and profitable brands to their offerings.
 
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We believe our Ideate, Launch and Amplify brand development process incorporates the “Best of the New” and “Best of the Old” aspects of Alcoholic Beverages brand creation in a truly omni-channel fashion. The “Best of the New” is highlighted by our data-rich DTC relationships via the Winc digital platform. This data is a critical competitive advantage that we use to help shape the ideation and development of our brands. Our digitally native roots also provide us with a strong core competency in digital marketing and data analytics that allows us to interact in a more targeted and direct fashion with end-consumers and Amplify brands in ways the legacy Alcoholic Beverages companies have yet to consistently utilize. Our “Best of the Old” strategy is encompassed by our appreciation of the value creation potential and durable power of proprietary brand development, as well as the scale benefits that can be achieved by leveraging the legacy wholesale distribution channel. Today, more than 90% of wine is still purchased according to the legacy three-tier system, which mandates a supply chain through which alcohol suppliers may sell only to wholesale distributors, wholesale distributors to retailers and retailers to consumers, unless selling through direct-to-consumer licenses.
The symbiotic relationship of “Best of the New” and “Best of the Old” is highlighted in the graphic below: The “Best of the New”, represented in yellow, highlights our ability to generate a direct connection with consumers that effectively pulls brands into retailers and wholesale distributors, while the “Best of the Old”, represented in black, highlights our ability to effectively partner with wholesale distributors and retailers to push and ultimately scale promising brands to consumers.
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We view our omni-channel platform as highly complementary because it creates a positive feedback loop where incremental scale on either side of our platform begets scale and success on the other. This “Scale Begets Scale” dynamic allows the online and offline businesses to be self-reinforcing rather than
 
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competing. As our brand portfolio expands over time, we believe our DTC channel will become more desirable to existing and potential members who will have an increasing number of highly rated and more recognizable products to choose from each month. We believe over time this will lower our consumer acquisition cost, or CAC, improve retention rates and increase average order value, or AOV, thereby allowing us to take a larger share of our consumer’s wine-buying wallet. We expect the resulting growth in our DTC channel to provide us with increased scale and selling, general and administrative expense, or SG&A, leverage that will be used to reinvest in strengthening and better powering our data set, which we consider to be critical to driving innovation and effectively launching successful new core products into the wholesale channel. In turn, we expect this brand portfolio to further solidify our relationship with wholesale distributors, resulting in an expansion of retail accounts and shelf space with retailers and greater brand recognition on the part of consumers, which then strengthens our subscription offering, and the cycle continues. We believe that this increasingly powerful “Scale Begets Scale” dynamic provides us with a highly differentiated and strong competitive position within the rapidly evolving Alcoholic Beverages marketplace.
At one time, this omni-channel approach might have created the perception of a potential for “channel conflict” between us and wholesale distributors and retailers. However, we believe that our partners within the wholesale channel recognize that our Winc digital platform allows us to provide them with key data to help de-risk brand launches and increase the odds that our brands will become high performers on store shelves. Rather than disrupt the traditional wholesale distribution network, we consider our relationships with wholesale distributors and retailers to be more like strategic partnerships as we help them address the next generation of wine buyers with unique branding, digital marketing capabilities and de-risked brand launches.
Our Market Opportunity
At approximately $400 billion in sales within the United States in 2018, the Alcoholic Beverages category represents one of the largest total addressable market opportunities, or TAMs, in the entire consumer product goods, or CPG, landscape, far bigger than other leading sub-sectors, such as salty snacks, soft drinks, coffee and pet food. The attractiveness of the Alcoholic Beverages market is further enhanced by the highly recurring and frequent nature of product usage by consumers. A Wine Market Council survey of U.S. adults found that 54% consume wine at least once a week. Finally, leading Alcoholic Beverages companies have consistently reported among the highest profit margins within the broader CPG space. We believe this combination of market size, frequency of consumption and strong profitability makes the Alcoholic Beverages market a very attractive backdrop for us to pursue our open-ended platform development opportunity across other beverage verticals.
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Source: Statista, 2018.
 
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The wine market can be further delineated into three distinct price point ranges: $9.99 or lower retail price per bottle, $10.00—$29.99 retail price per bottle and $30.00 or higher retail price per bottle. We call these three price bands Value, Premium and Luxury, respectively. In 2020, the Premium price band represented 262 million cases of wine, which was nearly 70% of the overall U.S. wine market and the fastest growing price point range from 2015 through 2020. Value, on the other hand, declined over the same period. While we plan to offer products across several price points over time, we have historically achieved our greatest success by focusing on the larger and more attractive Premium category. We believe this is due to consumer preferences for a well-regarded flavor profile, a strong brand and a reasonable price point. In our view, the Premium category is where we believe that meaningful scale can be achieved by a winemaker and it is also where we intend the vast majority of our wines will be positioned going forward.
U.S. Wine Volume Market Share by Price Band
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Source: International Wine and Spirits Record (IWSR), 2020. Includes still, sparkling, fortified, light, aperitif and other wines.
In addition to our broad exposure to the highly attractive Premium segment of the wine category, we believe we are well positioned to benefit from two additional important trends that are currently re-shaping the Alcoholic Beverages industry:
First, from a demographic perspective, we believe the rise of Millennials and Gen-Z drinkers, whom we call “Next-Gen” consumers, has the potential to create a large shift in market-share across the entire Alcoholic Beverages industry, as demonstrated in the wine industry. Over the last 30 years, Baby Boomers and Gen X have driven wine consumption, with approximately 73% market share in 2020. Over the next five years, the demographics of wine drinkers are expected to continue to shift to Millennial and Gen-Z consumers who are developing new taste preferences, discovery patterns, consumption frequencies and price points. With 76% of our Winc.com members aged 44 or younger, and a branding strategy that strongly resonates with these younger consumers, we believe we are well positioned to capitalize on the rapidly evolving demographic shift taking place within the wine industry.
 
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Source: Silicon Valley Bank : State of Wine Report, 2016.
Second, like many other sectors, the Alcoholic Beverages industry is experiencing a meaningful shift to online purchasing. This shift was accelerated by the COVID-19 pandemic, which drove increases in e-commerce spending within the Alcoholic Beverages category, one that has traditionally been slow to adopt change. As a result, online sales accelerated dramatically over the past eighteen months. The size of the DTC wine market in the U.S. as of the end of 2020 was measured by a 2021 Sovos report as $3.7 billion. However, we believe that the go-forward opportunity remains even greater, as Alcoholic Beverages remain meaningfully under-indexed relative to other CPG categories in-terms of overall e-commerce penetration. According to Information Resources, Inc., or IRI, and the International Wines and Spirits Record, or IWSR, in 2020, alcohol online penetration was only 1.6%, while CPG online penetration reached 7.8%. By 2024, it is forecasted that alcohol online penetration will reach 7.0%. While online alcohol penetration is low in comparison to CPG online penetration, the online penetration figure for alcohol in 2024 is significant because it supports our belief that alcohol will increase towards the penetration levels realized by CPG. Due to our digitally native roots and large current online presence, we believe we are well-positioned to capitalize on these shifting channel dynamics, as more and more consumers routinely discover and order their Alcoholic Beverages products online. Additionally, we believe the biggest winners in the industry will be those that most effectively create a highly synergistic omni-channel purchasing experience for their consumers.
 
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Alcohol vs. CPG Online Penetration
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Source: IRI, International Wine and Spirits Record (IWSR), 2020.
The Competitive Landscape
By incorporating the “Best of the New” and “Best of the Old” into our business model, we currently maintain a highly differentiated competitive position within the Alcoholic Beverages industry, as we sit squarely between the legacy shelf-focused brand developers and the newer breed of DTC online-focused wineries.
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Legacy shelf-focused brand aggregators have historically built and consolidated brands over the course of many years with significant capital investments in physical assets, traditional brand marketing and M&A to create the scale necessary to become preferred partners to wholesale distributors, which in turn, has allowed them to maintain a dominant share of shelf space throughout the wholesale channel.
We firmly believe a true brand builder in the Alcoholic Beverages industry must become a scaled partner to wholesale distributors and retailers, and our aspiration is to become a Top-10 partner to the major wholesale distributors. However, we plan to accomplish this in a manner that is meaningfully different from legacy brand aggregators. First, we believe our unique and modern branding resonates particularly well with the faster-growing and younger generation of wine consumers, which are becoming an increasingly important demographic to the industry. Second, we believe the combination of data generated from the Winc digital platform, our direct relationship with consumers and our digital marketing expertise materially de-risks wholesale brand launches and enables more effective targeting than more traditional branding and marketing techniques. Third, our asset-light production model is far more capital-efficient and dramatically reduces time to market for potential break-out brands, as compared to legacy shelf-focused brand aggregators. Finally, we have found that wholesale distributors and retailers greatly value the additional
 
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insights we bring them from our broader data set, which allows them to better understand emerging trends in the rapidly evolving Alcoholic Beverages market.
In stark contrast to our efforts to become a critical partner to wholesale distributors and retail chains that are seeking to effectively reach the next generation of wine consumers, many online-only wineries with a DTC subscription model have made a strategic decision to completely bypass and disintermediate the traditional wholesale distribution channel. We believe this is a less scalable business model with a substantially smaller TAM.
Our goal is to serve all Alcoholic Beverages consumers across all available distribution channels, whether they choose to purchase product in a store, in a restaurant or online. We believe this is best accomplished by building a large portfolio of durable brands that successfully scales through a true omni-channel distribution platform.
Competitive Strengths
Highly Innovative, Differentiated and Repeatable Brand Development Strategy—We have demonstrated a consistent ability to use our Ideate, Launch and Amplify framework to launch multiple brands that resonate with consumers and remain on strong upward growth trajectories. Since January 1, 2016, we have released five brands that, based on their success in both the DTC and wholesale channels, we consider to be part of our core brand offering today, with two of those being released in the past three years. These five core brands have been Amplified in the wholesale channel, representing approximately 24 % of our net revenues for the fiscal year ended December 31, 2020 and 53 % year over year core brand net revenues growth from 2019 to 2020. Each of our current core brands has individually generated more than $1.0 million in net revenues through the DTC channel and more than $0.5 million through the wholesale channel in the last 12 months, and we believe has the potential to continue to grow sales through the wholesale channel. We aim to Amplify one or two additional brands each year with similar revenue and growth profiles in both channels from 8-10 innovation launches, which we believe is achievable based on our track record of success. As our digital consumer base continues to grow and our processes and data analytics capabilities are further refined, we anticipate building a larger portfolio of brands that will be marketed broadly both throughout the wholesale channel, as well as on the Winc digital platform. We believe this proven ability to successfully launch brands in a repeatable and predictable fashion is a core competency for us and a durable competitive advantage.
Barrier to Entry Created by Extensive Portfolio of Owned Brands—We have successfully launched and grown multiple highly rated and award-winning wines. Summer Water, Lost Poet, Wonderful Wine Co., Chop Shop and Folly of the Beast form the focus of our portfolio, comprised of a strong and diverse collection of wine brands, our net revenues from our core brands grew by approximately 53% from 2019 to 2020. Collectively, we have won multiple awards, including Summer Water as #56 on the Top 100 wines of 2020 by Wine Enthusiast.
As evidenced in the table below, once a wine brand achieves scale, it generally maintains or grows market share for an extended period time. Therefore, we believe, in aggregate, a growing portfolio of core brands can provide us with a highly recurring revenue stream and SG&A leverage from our cost structure to enable continual reinvestment in our brand development strategy and distribution expansion. A large portfolio of successful wine brands also provides us with critical scale advantages that we believe will strengthen our relationships with wholesale distributors and retail chains. Finally, we expect that a large and increasingly well-recognized portfolio of top wine brands will enhance the Winc digital experience, thereby strengthening multiple key performance indicators, or KPIs, for our online business. Scale begets scale and it all starts with a strong core portfolio of owned brands.
 
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Low Turnover in Top 15 Wine Brands in the US 2015 and 2019
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Source: 2020 Wine Handbook, Beverage Information Group.
Attractive Return on New Product Development—We believe our brand development framework allows us to Ideate and Launch brands in a rapid and capital-efficient fashion. In 2019 and 2020, we spent an average of approximately $270,000 per brand to develop and launch new brands. On average,the brand level gross profit from new brands has typically exceeded this initial brand investment in eight months, regardless of whether it is eventually Amplified into the wholesale channel and becomes a core component of our ongoing portfolio. We believe this ability to quickly recoup initial investments by selling newer brands through the Winc.com subscription site helps minimize financial risk associated with new product launches. Moreover, when a potentially higher performing brand is identified, we believe it has the opportunity to become a core brand in our portfolio, with appeal across both DTC and wholesale channels, and represent greater long-term return on invested capital. Each of our core brands currently generate between $1.0 million and $10.0 million in annualized revenues, and in 2020 collectively generated approximately $15.4 million in net revenues, with gross margins averaging approximately 40%.
For the year ended December 31, 2020, our five core brands generated gross profits there were on average 4.6 times greater than the average per-brand development cost of $270,000. Our largest brand, Summer Water, generated a gross profit that was 9.9 times greater than the average per brand development cost of $270,000, and a cumulative gross profit since its launch in 2016 through the end of 2020 that was 32.1 times greater than the average per brand development cost. Even our weakest innovation brand in 2020 still generated a gross profit that was 1.3 times greater than the average development cost of $270,000.
 
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As evidenced by our return on our core brands to date, we believe our brand development framework and portfolio management strategy represents a repeatable process that allows us to generate attractive returns on successful brand launches while minimizing the financial risk associated with new product launches. We believe we have the opportunity to continue to improve on these returns on investments in new products as our omni-channel distribution platform continues to scale with a growing number of Winc.com members and on account of a larger physical retail account presence in the wholesale channel.
Uniquely Scaled Data and Analytics Capabilities—We collect a wealth of proprietary data from the approximately 120,000 monthly members, as of June 30, 2021, on Winc.com providing over 4.3 million ratings of our wines. We use this data, which includes click-through rates, re-order frequency, consumer feedback and additional metrics to help shape our brand development process, optimize the Winc.com consumer experience and collaborate effectively with wholesale distributors.
However, it is not the data alone that provides us with such a differentiated competitive position, but rather the seven plus years of experience our team has had to optimize the key signal values coming from all this data. It has been a constant learning process that has increasingly deepened our understanding of how to best translate the raw data coming from Winc.com into effective brand development strategies and eventually success in the wholesale channel. We believe that the difficulty of replicating years of constant learning, iteration and improving analytic processes around this accumulating data set, along with the actual data itself, reflects the source of our data-based competitive advantage.
Global Access to Raw Materials and Dynamic Supply Chain—Due to our outsourced production model, we are not reliant on any one vineyard or geographic region to source raw material for our brands. As a scale producer, we are able to procure high quality grapes and raw materials from an ever-growing list of sources and create a supply chain that is both deep and diversified. The depth of our raw material procurement abilities has allowed our winemakers to be very creative in their winemaking formulation and enabled our top brands to scale without significant constraint. Finally, it allows us to manage inventory in a highly capital-efficient fashion. We believe this dynamism represents a meaningful strength in comparison to a more traditional asset-heavy winery built around a finite set of vineyards in one geographic region.
Rapidly Expanding Omni-channel Distribution Network—With approximately 120,000 Winc.com members, as of June 30, 2021, and a rapidly growing wholesale presence that serviced over 7,700 retail accounts in 2020, we have established a resilient and differentiated omni-channel distribution network. Our plan is to continue to grow both the Winc.com member base and expand our wholesale presence to at least 50,000 retail accounts in the next five years.
In our view, a key driver of success in our industry is an ability to synergistically pair proprietary brands that excite consumers with extensive omni-channel distribution. While there are thousands of small wineries in the United States, the vast majority lack the necessary distribution to achieve broad recognition of their brands through the wholesale channel. A lack of extensive distribution is the key barrier to scale for any small or emerging wine brand.
We are now well down the path of building a fully scaled omni-channel distribution network that will allow us to fully Amplify our brands, both online and offline, to maximize their financial impact, reach
 
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more consumers and maximize brand awareness. As described in our “Scale Begets Scale” strategy, as our DTC channel expands, we expect that we will have increased opportunities to innovate and market new products. Likewise, as our wholesale business scales, we believe that when we launch brands validated through our DTC channel, the brands will scale much more quickly in the wholesale channel. We view this self-reinforcing relationship as an enormous competitive differentiator in the highly fragmented wine industry, where many producers are destined to remain sub-scale due to a lack of distribution in both channels.
Self-Reinforcing Benefits from Omni-Channel Strategy
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Growing Scale with Key Wholesale Distributors and Retailers—Historically, there has been little turnover of top suppliers to the industry’s key wholesale distributors, as scaled brand aggregators and the largest wholesale distributors tend to become entrenched partners. To become a key partner to these critical wholesale distributors and fully capitalize on the growth opportunity presented by the legacy distribution system, we intend to continue presenting key wholesale distributors and retailers with a broad portfolio of differentiated brands that we believe will resonate strongly with consumers based on extensive testing and data analysis through the Winc.com site. We believe our wines are attractive to wholesale distributors due to: (1) the uniqueness of our branding, which resonates strongly with the increasingly important younger average wine drinker; (2) the data-backed evidence of demand for our wines; and (3) superior targeting capabilities due to our data analytic and digital marketing expertise. As sales grow and we expand our portfolio of brands with success across both DTC and wholesale channels, we would expect our relationship with key wholesale distributors to also grow and expand. Once we reach our goal of becoming a top ten wine supplier to the wholesale distributors, these critical relationships become a strong differentiator and large competitive moat for us by helping us grow and maintain shelf space throughout the entire retail landscape.
Attractive Financial Profile Enables Reinvestment to Drive Growth—We believe the recurring nature of our subscription driven DTC revenues, relatively high gross margins and our asset-light business model provide us with sustainable competitive advantages to reinvest in brand building, marketing, consumer acquisition and distribution expansion. Our view is that a strong underlying financial profile that produces SG&A leverage to invest in building scale is critical to our long-term success. Key differentiators of our financial model are as follows:
 
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Recurring Nature of Revenues—We believe the stickiness of wine brands that achieve scale, high frequency usage patterns of Alcoholic Beverages consumers, recurring subscription-based revenues at Winc.com, as well as durable relationships with key wholesale distributors and retailers will enable us to grow steadily over time.

Attractive Gross Margins within the CPG Industry—Alcoholic Beverage gross margins tend to be well above average when compared to the broader CPG industry. Industry constituents we surveyed had gross margins of 47.0% and 42.3% for the years ended December 31, 2020 and 2019, respectively, and our gross margins were 40.7% and 42.3% for those same periods. In comparison, the S&P 500 Consumer Staples Index had gross margins of 29.5% for the years ended December 31, 2020 and 2019, according to S&P Capital IQ. This allows us to disproportionately invest in growth over the near and intermediate-terms, which we believe will increase our operating margins through SG&A leverage as we continue to scale.

Asset-Light Business Model and Flexible Supply Chain—Our dynamic supply chain and outsourced production model allow us to use SG&A leverage to invest Gross Profit dollars into building brands. It also allows us to satisfy inventory needs in a more predictable and lower-risk fashion than more asset-heavy legacy wineries.
First-Class Management Team and Organizational Structure Built for Brand Innovation—Our management team consists of brand-building specialists and operators with broad experience across the CPG industry, experienced winemakers and proven marketing professionals. Over the past several years, this team has demonstrated an ability to develop a high-growth DTC subscription platform and successfully launch a strong portfolio of wine brands into the wholesale channel with speed and scale in a repeatable fashion.
While we believe these factors will contribute to further growth and success, we cannot assure you that the market or demand for our products will continue to grow as we anticipate or that we will be able to achieve or maintain profitability in the future. For example, beginning in March 2020, we saw an increase in DTC demand, primarily, we believe, as a result of purchases arising from more consumers working remotely during the COVID-19 pandemic and thus, spending more time at home and the unavailability of public venues. If remote work conditions end, more public venues reopen and consumers spend less time at home, our members may elect to purchase fewer products or may elect to purchase products from traditional brick and mortar stores rather than from our website, which could materially and adversely affect our business and results of operations.
If we are unable to accomplish these goals or grow our presence in both DTC and wholesale channels, our business could suffer. We have historically been dependent on a combination of debt and equity financing to fund our operations, we have incurred net losses each year since our inception and we may not be able to achieve or maintain profitability in the future.
Growth Strategies
New Brand Development and Portfolio Optimization—The primary driver of our long-term growth strategy is our ability to consistently and predictably build innovative new products that, in aggregate, become a leading portfolio of owned brands in the Alcoholic Beverages industry. The expansion and optimization of this portfolio remains a key enabler of all our other growth strategies.
Drive Efficient Online Consumer Acquisition at Winc.com—Winc.com is unique in that our leading wine subscription platform is not only designed to delight consumers, but also bring critical information that delivers strategic value to our brand-building efforts. As a result, Winc.com is a key pillar in our broader omni-channel distribution strategy but because online consumer acquisition is not our primary driver of long-term growth, we plan to remain highly disciplined in managing our online marketing initiatives, as demonstrated through CAC. We believe this strategy allows for high returns on consumer acquisition and short payback periods. Our disciplined approach has allowed us to achieve an average LTV/CAC ratio of in excess of 3.0x when observing the 2014-2016 cohorts, which provides data to calculate this on a 5-year historical basis. Furthermore, on a nearly 5-year historical basis, our 2017 cohort has demonstrated an LTV/CAC ratio in excess of 4.0x to date, as of May 1, 2021. More recently, consumers in our 2020 cohort have
 
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already demonstrated a return of 2.3x LTV/CAC in the first year since consumer acquisition and 2.6x on a fully-aged basis, as of May 1, 2021. By increasing wholesale penetration and continuing to provide new products, we also aim to improve the retention rates and AOVs through a variety of digital analytic and marketing strategies. However, our core belief is that over time, the best and most sustainable way to retain members, and expand their purchases on our site, is to develop the strongest possible core portfolio of widely recognized, differentiated and well-loved brands and make them available on Winc.com. We believe this strategy will result in improved CACs and AOVs as well-recognized brands will draw consumers to the Winc.com site in a more organic fashion, improve the likelihood that they will remain members and increase AOVs as we take a larger share of their Alcoholic Beverages buying wallet.
Multiple Levers for Wholesale Expansion—We believe our opportunity to expand in wholesale is multi-faceted, with several key levers to drive outsized growth:

Wholesale Retail Account Expansion: Our goal is to leverage our relationship with national and regional wholesale distributors to meaningfully expand our retail accounts from 7,700 retail accounts serviced in 2020 to over 50,000 retail accounts in the next five years. Recent wins with shelf-space at large chains, such as Target, Walmart, Total Wine and Spirits, Kroger and HEB, as well as strengthening relationships with key wholesale distributors has increased our confidence in an accelerated path to our retail account growth targets.

New Brands Drive SKU Growth: We plan to capitalize on our ability to develop brands that consumers love in an effort to capture more shelf space with additional stock keeping units, or SKUs, at each retail location, which should grow revenues per retail account.

Increase Shelf Velocity: We plan to continually Amplify and market our core brand portfolio on an ongoing basis to drive sell-through and increase shelf velocity. Additionally, we expect relationships with last-mile delivery providers such as Amazon Prime, GoPuff, Instacart and Drizly will help to continue to increase wholesale channel velocity.
Adjacent Category Expansion—We plan to expand our TAM by creating new innovative products that are closely adjacent to our current wine product offerings, such as Saké, Prosecco and ready to drink wine cocktails. We also believe that our unique, omni-channel platform could be applied to entirely new categories, such as spirits, beer and non-alcoholic celebratory beverages, significantly increasing our addressable market. Our goal is to create the broadest possible portfolio to maximize our exposure to the approximately $400 billion U.S. Alcoholic Beverages market. We believe our Ideate, Launch and Amplify brand development process can be leveraged into these other targeted categories in a seamless fashion.
Growth through Acquisitions in Highly Fragmented Markets—In addition to organic growth of our brand portfolio and distribution scale, we believe we will have opportunity to grow through acquisitions. Per the SVB 2020 State of the U.S. Wine Industry report, more than half of all small wineries have expressed an interest in engaging in M&A over the next several years as an exit opportunity. While our growth and success are not contingent upon future acquisitions, we are constantly evaluating acquisition opportunities and believe our organization is positioned to Amplify any brands we acquire by providing digital marketing expertise and a national wholesale distribution network to accelerate growth and improve a potential target’s existing business.
In May 2021, we purchased certain assets of Natural Merchants, Inc., an international wine importer and leading purveyor of natural, organic, biodynamic and vegan wines from around the world. Initial consideration for the transaction consisted of $8.3 million in cash and 571,428 shares of our Series F redeemable convertible preferred stock. The purchase agreement also provides that the seller may receive additional consideration, if earned, in the form of performance earn-out amounts in the aggregate of up to $4.0 million in cash contingent upon achieving certain performance targets during 2021 and 2022 (up to $2.0 million of additional consideration in each year).
Despite our confidence in our products and growth strategy, we cannot guarantee that our historical success will be indicative of future growth. For example, the COVID-19 pandemic has significantly accelerated consumer adoption of a wide variety of at-home delivery services, including in the Alcoholic Beverages sector. Since March 2020, we have experienced a significant increase in DTC demand due to changes to consumer behaviors resulting from the various stay-at-home and restaurant restriction orders and
 
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other restrictions placed on consumers through out much of the United States in response to the COVID-19 pandemic. Industry research and steady consumer demand lead management to believe that this is a permanent shift in consumer behavior. For example, a 2021 Sovos report assessing DTC wine shipment data concluded that the boosts in DTC wine purchasing relating to the impacts of COVID-19 will continue once the pandemic ends and may drive continued growth.
Our Products
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Our Portfolio of Core Brands
Summer Water, or SW—Launched first as a DTC product, Summer Water gained national acclaim without presence in the legacy wholesale channel. Since launching in the wholesale channel, it has continued to scale by achieving high velocity and becoming the #7 best-selling pure play rosé brand in the United States. Cases of Summer Water sold increased from approximately 29,000 in 2019 to approximately 45,000 in 2020, representing year-over-year growth of 55%. As the brand has scaled, quality continues to improve as new vintages achieve higher ratings by our members. SW is a nationally recognized brand, ranking #56 on Wine Enthusiast’s top 100 Wines of the Year in 2020 and reaching 75,000 cases of production in 2020 with a single SKU. SW generated approximately $4.3 million in net revenue in the six months ended June 30, 2021. New line extensions include a chilled red “Keep it Chill”, 187 milliliter single serve “Droplets” and “Bubbly” a sparkling rosé.
Wonderful Wine Company, or WWC—Despite being launched during a challenging COVID-19-impacted market, WWC achieved immediate traction with consumers and sold approximately 17,000 cases in 2020. A digital-first strategy built brand awareness rapidly and gained the interest of national retailers, such as Walmart, where the brand launched in the second quarter of 2021 and generated approximately $1.9 million in net revenue during the six months ended June 30, 2021. The brand was the result of proprietary data and insights from our DTC consumers. We expect this “better for you, better for the world” brand platform will see additional releases in environmentally sound Tetra and three-liter box formats this year.
Lost Poet, or LP—The raw material (wine) in LP is our highest-rated red blend with nearly 105,000 ratings in addition to being rated in the top 3% of the world by Vivino in 2017 and has seen increasing ratings ever since. While the high quality of the wine was validated by our DTC consumers, we did not have a scalable brand. To reach a key shopper profile for our retailers, we crafted a brand and marketing strategy to target younger female consumers by partnering with Atticus, a best-selling author and Instagram poet. The highly successful re-launch quickly achieved national press, influencer pick-up and a placement with Target. Our digital approach creates unique opportunities to develop best-in-class products and become a strategic partner in expanding the wine category with their high-value consumers. Cases of Lost Poet sold increased from approximately 5,000 in 2019 to approximately 14,000 in 2020, a 170% year-on-year growth and the brand generated approximately $0.6 million in net revenue in the six months ended June 30, 2021.
Folly of the Beast, or Folly—Our award-winning winemaker Ryan Zotovich, applied his luxury winemaking experience to create uncompromising value in this under $20.00 Pinot Noir. Folly delivers a fresh and bright style favored by younger consumers, having been ordered by approximately 147,000 distinct users. In addition to receiving 93 points from Tasting Panel, Folly is our best-selling and highest rated Pinot Noir that continues to scale in wholesale. The brand includes small-lot single vineyard bottlings from some of the top Pinot Noir vineyards in California and a recently launched Chardonnay. Folly generated approximately $2.0 million in net revenue in the six months ended June 30, 2021.
 
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Chop Shop, or Chop—We positioned Chop as the perfect pairing for America’s favorite culinary past time, BBQ. A favorite of our consumers with a 4.14 rating out of 5.00 and over 145,000 reviews, Chop continues to scale across channels generating approximately $1.4 million in net revenue in the six months ended June 30, 2021.
Case Volume Growth by Brand
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Our Portfolio of Non-Core Brands
Cherries and Rainbows—Low-sulfur winemaking has historically been an attribute of the small and fragmented natural wine scene. Our product team worked diligently to perfect high-quality, low-sulfur winemaking at scale before launching. The delicious flavor, low-sulfur and contemporary branding have contributed to this brand’s rapid rise first with Whole Foods and now with HEB. Initially launched as a red wine, the brand’s success led to our extension of the line to include a white wine. The use of our DTC channel to test consumer receptiveness to the white wine extension exemplifies our Ideate, Launch, Amplify brand building strategy. The consumer feedback we have received from our DTC channel and early wholesale channel traction lead us to believe that Cherries and Rainbows will become a core brand over the coming years.
Organic and Sustainable Wines—Internal data indicates that organic and sustainable wines are of growing importance to younger consumers. While the global organic wine market is in its infancy, it is projected by TechSci Research to grow at a compound annual growth rate, or CAGR, of 12% through 2025. This emerging preference is confirmed with the success of our brands, such as WWC and Cherries and Rainbows. Additionally, through the purchase of certain assets of Natural Merchants, Inc., we have introduced an organic Top-100 Wine Enthusiast brand into our portfolio and established supplier relationships with prominent family-owned organic specialists. We believe that our digitally native model will help us increase our access to organic suppliers, providing data-driven insights to create healthier beverages for the future.
Anchor Portfolio—Our asset light production model allows for continual optimization around our consumers tastes and preferences. Each year our wine team seeks to improve our DTC experience through a globally diverse and constantly improving selection of over 100 wines.
New Products
Our innovation pipeline broadens the platform and expands on its already large total addressable market. The primary focuses for our product expansion are collaborations, line extensions, new categories, and new formats. Each new launch allows for targeted marketing and provides potential incremental value to both the online and offline channels.
Line extensions—Leveraging the brand equity and consumer base of our core brands creates an opportunity for increase in share and growth.
 
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New brands—The fast-to-market and capital-efficient elements of our platform creates an opportunity to continually innovate within traditional categories to assess breakout potential.
Saké—We are planning for our first launch into an adjacent category to be with saké, a category that is extremely fragmented. We believe market opportunity exists for a category leader in the U.S. market. We intend to test and iterate in the DTC channel on blends, styles and brand identities in the fourth quarter of 2021 with the data and feedback from our consumers influencing the final product.
Ready to Drink Cocktails—Our innovation pipeline includes formulations and brands to address this rapidly expanding market opportunity with our unique omni-channel strategy and capabilities.
Alternative Packaging Formats—Younger consumers are driving packaging innovation in the wine space. Portability, convenience and environmental impact are key drivers in this innovation. Cans, Tetra, Box, Bag and PET (polyethylene terephthalate) are currently in development.
Spirits and Beer—As the digital landscape continues to evolve and younger consumers purchase across categories and the digital landscape, we are uniquely positioned to successfully expand into other categories within the Alcoholic Beverages industry.
Non-Alcoholic Celebratory Beverages—Our first non-alcoholic wine launched in 2021 and we see expansion opportunities existing in non-alcoholic and functional beverages.
Despite the success and growth of our brands we have experienced to date, we will need to continue to convince consumers and wholesalers of the quality of our products in order to reach our growth potential and achieve and sustain profitability. If more public venues reopen and consumers spend less time at home, we may face increased challenges in expanding our DTC channel, which could materially and adversely affect our growth potential. If we fail to achieve adequate growth or establish adequate brand recognition, and our business could suffer.
Company History
Winc (formerly Club W) launched in 2011 with the goal of making discovering great wine easy. The company’s founders set out to create a model that catered to a broad audience to curate and personalize the process of buying and enjoying wine. Under the guidance of winemaker, sommelier and Co-Founder Brian Smith, Club W transitioned to producing fully proprietary products in 2014. Club W rebranded as Winc in 2016. The rebrand was not only a reflection of the company’s past transition into fully proprietary products, but the company’s expansion beyond its successful online membership. As consumers were beginning to foreshadow our most successful products through their proprietary data, our wholesale channel was launched in late 2015. Over the past six years, we have continued to focus on building its portfolio of brands that are helping to scale both the DTC and wholesale channels.
 
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Omni-Channel Platform
DTC Subscription
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Winc.com is our online platform that provides an authentic brand experience for our consumers while driving engagement and also providing feedback for future product development. We had 138,599 members as of December 31, 2020, up 94% from 71,370 the year prior. We acquire consumers through a mix of paid and non-paid advertising. Our paid advertising may include search engine marketing, display, paid social media and product placement and traditional advertising, such as direct mail, television, radio and magazine advertising. Our non-paid advertising efforts include search engine optimization, non-paid social media, e-mail and SMS marketing.
Our online process helps guide consumers towards a discounted first purchase, typically consisting of a four-bottle order and then encourages consumers to sign up for a Winc.com membership. Our membership is a subscription where members are charged a set monthly amount and then given credits, which can be used at any time to purchase products on Winc.com. Unused credits roll over each month and never expire. This credit model allows us to collect predictable revenue monthly from our consumers, while allowing our consumers the flexibility of ordering wines they want when they need them.
In addition to being the main revenue driver for the company today, we believe our DTC platform provides strategic benefit to our entire ecosystem. Through the Winc.com shopping experience, members have the option of selecting from our curated recommendations or purchasing products of their choice. After each purchase, members are encouraged to rate their wines in order to improve their recommendations in the future—this direct consumer connection allows us to collect data on our products and unlock unique consumer insights that then help to improve our ability to market and sell through alternative channels. It also allows for an improved experience for our consumers, helping to increase the value of our offerings to them through personalized recommendations.
 
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Wholesale
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In the United States, the sale of wines and alcoholic beverages is regulated by the Alcohol and Tobacco Tax and Trade Bureau (TTB) and is either subject to the government-mandated three-tier system or can be sold directly to consumers through our DTC channel, subject to other Alcoholic Beverages rules and regulations. We historically have sold through our DTC channel, but increasingly we are selling through the three-tier system, which establishes three categories of licensees: the producer (the party that makes the wine), the wholesale distributor (the party that buys the wine from the producer and then sells to the retailer) and the retailer (the party that sells the wine to the end consumer). In this framework, we act as the producer in our wholesale channel, selling our products to distributors who in turn contract directly with retailers. We assess our wholesale breadth by looking at locations sold, velocity and total SKUs per retail account.

As a result of our relationship with wholesale distributors, in 2020 we are able to distribute across all 50 states and have serviced over 7,700 retail accounts and seven countries.

Wholesale distributor accounts are split between on-premise and off-premise retailers. Of the over 7,700 retail accounts serviced in 2020, over 5,000 were for off-premise consumption (grocery stores, wine shops and liquor stores) and over 2,500 were on-premise consumption (restaurants, bars and other venues).

In 2020, we sold approximately 100,000 cases of wine through our wholesale channel to these collective off-premise and on-premise retailers, and as of June 30, 2021, we have already sold           cases of wine for the year to date.

Our largest retail accounts through distributors on a trailing 12-month basis as of June 30, 2021 are Whole Foods, the Pennsylvania Liquor Control Board, or PLCB, the Liquor Control Board of Ontario, or LCBO, Albertsons, Fresh Market, Target, Binny’s and HEB. Under the three-tier system, our retail accounts are managed through our distributors, and we do not maintain any direct contractual relationships with those retailers.
Our typical agreements with distributors generally have a term of approximately five years and can be terminated by the distributor for any reason upon advance notice or by either party if the other party is in breach, though the laws and regulations of several states prohibit changes of wholesale distributors except under certain limited circumstances, which makes it difficult to terminate a wholesale distributor for poor performance without reasonable cause as defined by applicable statutes. Distributors purchase products from us at prevailing prices in the applicable territory.
As a result of the COVID-19 pandemic that took place during the majority of 2020, on-premise wine sales for the wine industry in the United States decreased according to International Wine and Spirits Record, going from 20.4% of total sales in 2019 to 7.1% in 2020. Off-premise, on the other hand, increased from 79.6% of total sales in 2019 to 92.9% in 2020 as a result of quarantining and restaurant shut-downs.
 
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Further expanding our potential for wholesale, as well as our DTC sales, is the potential for M&A in the highly fragmented winery industry. As of January 2021, per Wine Vine Analytics, the number of wineries in the United States reached 11,053, a 4.9% CAGR since 2015. Wines Vines Analytics estimates that 97% of those wineries are small wineries (defined as less than 50,000 cases per year). Additionally, per the SVB 2020 State of the U.S. Wine Industry report, more than half of all small wineries have expressed an interest in engaging in M&A over the next several years as an exit opportunity, representing a tremendous opportunity for consolidation of brands that have market fit, but who lack the relationships in wholesale to scale effectively. We believe this opens up attractive acquisition opportunities for us in the future.
Retail Accounts
Retail account growth is a key metric for our continued growth in wholesale as it is a measure of how widely our products are distributed. We began building our business with independents and have expanded to find increasing success in regional and national retail accounts. From 2019 to 2020 we grew from over 4,700 to over 7,700 retail accounts delivering a 63% increase. This is still a relatively small footprint when considering the universe of potential retail accounts which leaves a large addressable market. Continued investment in the wholesale sales team will strengthen our ability to service a growing retail account base. Lastly we believe future growth will be accelerated by new core brands and acquired brands with existing significant retail account bases.
Average Sales Velocity
Sales velocity, which we define as sales per point of distribution, is an important metric that measures how well our products sell when on the shelf. In 2020 our average sales velocity in the channel was 4.27 cases per retail account per year per SKU. We believe that the trial, storytelling and digital marketing in the DTC channel creates awareness for our brands even in early stages of distribution. This awareness along with eye catching brands and highly rated wines at high velocity price points all contribute to velocity.
Stock Keep Unit or SKUs per Retail Account
High velocity brands with an expanding retail account base create future opportunities for additional SKUs to find shelf space within each existing retail account. We believe that continuing to expanding our core portfolio and increasing the number of SKUs carried by each retail account will allow us to increase wholesale revenue over time.
Sales & Marketing Strategy
DTC Consumer Metrics
Throughout our history, we have maintained a disciplined, data-driven and returns-based focus on the deployment of marketing dollars to grow our consumer base and acquire new members. We have a well-diversified mix of consumer acquisition channels that has allowed us to scale while acquiring consumers at a profitable rate. We also offer a strong value proposition through our portfolio of brands and digital experience that drives consumer loyalty, retention, and consumer lifetime value. Management targets a 3.0x LTV/CAC ratio over five years and 1.0x return on CAC within the first twelve months following consumer acquisition. Our disciplined approach has allowed us to achieve these targets over the past five years. We believe we are well-positioned to expand our DTC business and continue to drive sustainable growth by executing on the following consumer acquisition and retention strategies:
Consumer Acquisition
Our business performance depends, in part, on our continued ability to cost-effectively acquire new consumers within our DTC channel. We define consumer acquisition cost, or CAC, as performance and marketing expense attributable to consumer acquisition less the gross profit from gift card sales, divided by the number of new members that have signed up to participate in the Winc.com membership program for that same period.
 
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Loyalty & Retention
We intend to drive continued revenue growth on the Winc.com platform by enhancing our consumer value proposition and increasing loyalty and consumer retention. Our consumers have shown they love to explore new products and as we introduce additional brands to our platform, we believe the value proposition will increase and further drive retention. Continued improvement of our digital product and use of data science to draw insights from our millions of website data points will allow us to eliminate friction in the shopping experience, improve our personalized product recommendations, and build on our portfolio of brands that our members know and love. We have observed historical success in these strategies that have led to increases in consumer lifetime value and average order values over the last several years, and we believe those trends will continue with further product innovation and enhancement of the digital product.
Our continued success depends in part on our ability to retain, and drive repeat purchases from, our existing consumers. We monitor retention across our entire DTC consumer base. Our goal is to attract and convert visitors into active consumers and foster relationships that drive repeat purchases. Newly acquired consumers frequently make one or more repeat purchase in the same year, which is supplemented by the embedded growth from prior-year cohorts’ consumers who continue to purchase from us. We expect the percentage of net revenues from repeat consumers to increase in the coming years as we look to maintain our high month over month retention rate. In 2020, we exhibited an 89.6% average monthly consumer retention rate, defined as consumers who bought in one month and made a subsequent purchase in the following month, which we believe reflects our ability to retain our consumers through differentiated product offerings and a customized consumer experience. We believe that the development of differentiated product offerings, community-driven brands and customized digital consumer experience leads to higher retention rates among repeat users.
Consumer Lifetime Revenue
We define consumer lifetime revenue, or LTR, for any member or group of members as of any date, as the total revenue generated from each member or group of members as of such date on the Winc digital platform. Revenue is generated through purchases of product from the digital platform as well as unused membership credits. We have been able to increase subscription LTR with continued investment in our brand portfolio and overall shopping experience, with 2019 and 2020 outperforming earlier year’s cohorts in their respective periods. The general trend of Cohort LTRs has been up over the past five years.
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Consumer Lifetime Value
We define consumer lifetime value, or LTV, as the total gross profit generated from each member on the Winc digital platform on a 5-year historical basis, adjusted for any unused credit breakages. To determine the total gross profit generated from each member, we reduce our revenue for any unused credit breakages, multiply each month of revenue by the associated average gross margin percentage generated in
 
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2020, then sum the dollar values on a cumulative basis. To properly account for gross margin differences between the discounted initial purchase and subsequent months, we multiply the average 2020 gross margin percentage from initial discounted purchases to the first month of revenues and the average 2020 gross margin percentages from such segment purchases to the revenues from all subsequent months. This means our DTC gross margin percentage in our segment analysis, which does not distinguish between first purchases and subsequent purchases, may not correspond directly with the gross margin percentages used here.
Consumer Lifetime Value / Consumer Acquisition Cost (LTV/CAC)
Our disciplined approach has allowed us to achieve an average LTV/CAC ratio of in excess of 3.0x when observing the 2014-2016 cohorts, which provides data to calculate this on a 5-year historical basis. Furthermore, on a nearly 5-year historical basis, our 2017 cohort has demonstrated an LTV/CAC ratio in excess of 4.0x to date, as of May 1, 2021. More recently, consumers in our 2020 cohort have already demonstrated a return of 2.3x LTV/CAC in the first year since consumer acquisition and 2.6x on a fully-aged basis, as of May 1, 2021. We aim to target a 3.0x LTV/CAC ratio on a 5-year historical basis for future performance. Despite this track-record of recent success, we aim to target a 3.0x LTV/CAC ratio for future performance.
DTC Strategic Summary
Because the Winc.com DTC segment is but one segment of our overall growth and brand-building strategy that should also benefit from strong wholesale growth, we have made the strategic decision to be very disciplined around consumer acquisition cost and maintain a strong returns-based focus for our DTC segment versus an overly aggressive growth-based focus, regardless of cost. This will be particularly important during periods when industrywide consumer acquisition costs are rising rapidly. We also believe our ability to build a broad portfolio of core brands, that benefit from substantial brand recognition and consumer loyalty due to their extensive retail shelf presence, will organically support, if not enhance several key DTC success metrics over time. This disciplined capital allocation philosophy is a key differentiator for us versus many DTC-only competitors in the Alcoholic Beverages industry.
Wholesale Sales growth
Our wholesale sales force is composed of team members across the United States focused on expanding our retail account base and increasing our sales velocity in chain, on-premise and off premise retail accounts. Our wholesale portfolio is sold in all 50 states and countries. In 2020, we sold to over 7,700 retail accounts, more than 63% growth from 2019. With an addressable market of more than 500,000 licensed retail accounts within the United States alone, there is ample opportunity for further expansion.
In addition to expanding the overall number of our retail accounts, we also expect to be able to increase the number of cases we sell per brand in our existing retail accounts given success we have had to date selling through wholesale distributors and retailers. Growth in wholesale is furthered by the expansion of SKUs that we will be able to offer to wholesale distributors and retailers. With each subsequent brand that demonstrates traction in both our wholesale and DTC channels, we believe we will continue to acquire shelf space share in these retailers. The opportunity to scale our SKU count will occur as we find brands that complement our current core brands—Summer Water, Folly of the Beast, Lost Poet, Wonderful Wine Co. and Chop Shop. We will launch new innovative brands through our Ideate, Launch and Amplify framework, but will also look to acquire brands that are ripe for wholesale expansion.
 
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Winemaking
With the vast majority of work happening in the vineyard, we have a long-term focus on investing in sustainable and organic farming and winemaking practices. Because at the heart of all great wine is great raw material, we are champions of minimal intervention winemaking practices, which allows us to respect the raw product, shape award winning wines and leave vineyards in a healthy state for future harvests. We seek low sugar, low sulfite, vegan wines, which we believe deliver the most natural expression of quality.
We source from exceptional vineyards and partner with exceptional winemakers from around the world. Our relationships with independent winemakers and growers allow us to deliver even greater quality and diversity. The hundreds of unique wines we have bottled from around the globe range from classic blends to obscure, single vineyard fringe projects. We feel an obligation to showcase the best that every region, varietal and style has to offer, at the best value possible.
By deploying a multipronged sourcing strategy on a global basis, we are able to adapt to changing consumer market dynamics, opportunistic sourcing and shifting consumer demand. We believe our strategy across categories allows us the flexibility and scope to source the best possible product in a more capital-efficient fashion than most wineries at scale whose product decisions are driven by significant assets or holdings.
Brand Case Studies: Summer Water and Lost Poet
The following case studies help illustrate the effectiveness of our innovation platform at developing successful brands at scale by both improving wine quality based on early brand success and developing a culturally relevant brand to match a quality wine, as validated by our DTC consumers.
Summer Water—Summer Water is an example of our Ideate, Launch, Amplify strategy. Launched with only 300 cases of spot market rosé, we received immediate feedback from our DTC consumers that the brand was resonating. This allowed us to quickly iterate on the product to match the potential for the brand. The wine team changed the blend and style to Grenache and Syrah, respectively, and created a scaleable sourcing strategy. A national DTC footprint allowed us to Amplify in a way that many start up brands with regional distribution cannot, due to limited product availability for consumers. Our Amplification strategy included rich storytelling, influencer campaigns, performance marketing and a focus on non-wine
 
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consumer press, knowing that anyone engaging with the content could ultimately purchase the wine even with no shelf presence. With a belief that our brands need to be present at all consumer touch points, we launched into wholesale in California and immediately saw the value of our digital marketing strategy as the brand gained traction with prestigious restaurant and retail accounts. The brand was picked up by Whole Foods in Southern California and quickly became their best-selling rosé. This success propelled the brand into more retail accounts and ultimately set the stage for national wholesale expansion where it has continued to find success, most recently in Walmart and other national chains. Today, Summer Water is the #7 best-selling pure play rosé brand in the United States. From a winemaking perspective, Summer Water proves our ability to improve quality even when rapidly scaling. The 2020 vintage was awarded 92 points and #56 on the top 100 wines of 2020 by Wine Enthusiast. Brand extensions in sparkling, single serve, and a chillable red set the stage for long term durable growth and scale.
Lost Poet—Lost Poet is a case study in the power and flexibility of our platform to innovate. In this case our team matched a proven blend with a next generation Amplification strategy. Based on our proprietary data and over 70,000 consumer ratings at an average of rating 4.14 out of 5.00, we knew that this raw material had a flavor profile and style that was resonating with our community. What we didn’t have was a brand concept that could match the growth potential of this wine that had been validated by our younger consumers. With the goal of engaging a very important shopper profile for retailers we partnered with Atticus, a best-selling author and Instagram poet with a younger female audience. We employed a next-gen brand and Amplification strategy including influencer partnerships, digital marketing and trial in DTC. Once Amplified we presented the brand and the associated data set to the buying team at Target. In the first quarter of 2021, Lost Poet launched into 347 Target stores. We believe that with early success and an evergreen marketing strategy we can achieve national distribution soon, as the velocity of growth has exceeded our expectations and we feel the stage is set for national expansion. We believe that not only can we deliver culturally relevant and high-velocity brands to our collaborators through our unique marketing capabilities, but, as seen through our proprietary data, insights and ability to innovate, we can become a valued partner in expanding future sales with younger consumers.
Supply Chain Overview
We have developed a highly efficient supply chain that minimizes capital investment and provides a broad range of supply and production alternatives.
Use of co-manufacturers
We operate using an asset-light model by leveraging a network of co-manufactures in California to accomplish our various production and bottling needs; a relationship known in the wine industry as Alternating Proprietor agreements. This model allows us to lower the up-front capital expenditures necessary to manufacture wines and reduce the personnel costs related to manufacturing. We dictate to the co-manufacturing facility all workflows, and the co-manufacturing facility, in turn, carries out the winery production. Under our direction, we have the ability to work with our co-manufacturers to maintain high standards, oversight and ensure compliance with all requirements while utilizing the co-manufacturers’ facility and staff on our behalf.
Inventory management
We aim to curate a diverse and balanced selection of wines to our members. Inventory is managed by the constant evaluation of consumer data and channel performance, allowing us to embrace omni-channel inventory balancing. As a result, we have never experienced dead stock or back vintage, which we believe is very unique in the traditional winery landscape. Through data-driven models, we have been able to predict and anticipate demand for our products. For example, we analyzed ratings and site behavior for the 2019 Cabernet Sauvignon varietal of our Porter & Plot brand to launch the same wine as a limited exclusive in our wholesale channel. Our product planning strategy takes into account many factors, including but not limited to price points, varietals, countries of origin, wine style and brands. Our proprietary DTC data enables us to understand buying behaviors, product preferences, read SKU velocities and evaluate consumer ratings to inform our overall product breath and volume needs. Traditional wineries do not have access to this real time indication on performance and thus wait for third-party data, which is often significantly lagging
 
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to current volume, to make decisions on a go forward plan. As a result, traditional wineries invest in product, even new vintages, before they have a sense of performance. We believe our data-driven production plan is incredibly nimble and, thus, our inventory can flex up or down based on the demands of our DTC and wholesale channels. Additionally, balancing inventory between channels with our biggest brands means we can release new vintages and wines in-line with consumer and wholesale buyer expectations.
Sourcing
Our sourcing is approached under two main channels; grape to glass and contract wines. There are two categories of contract wines; contract and spot market sourcing. By deploying a multipronged sourcing strategy on a global basis, our team has the ability to adapt to changing consumer market dynamics, opportunistic sourcing and shifting consumer demand. We believe our strategy across categories allows us the flexibility and scope to source the best possible product in a capital-efficient fashion not typically employed with more vertically-integrated traditional wineries.
Grape to glass
We utilize our direct grower relationships and broker network to secure grapes for these programs. We deploy a grape to glass strategy for projects that require a very distinct style. Summer Water is a great example of this strategy. The grapes and winemaking for this project are very specific to achieve the quality and style that has made it so successful; our primary suppliers for this project are Coastal Vineyard Care, and Santa Barbara Highlands Vineyard. We believe thoughtful sourcing, farming, winemaking are integral to achieving this level of quality even as we continue to scale.
Contract wine
Contract wine is wine that is purchased from a third party to make on our behalf. Generally, the third party is vertically-integrated and we can leverage that integration by signing a bulk wine agreement to get high quality to price ratio and can still be made under the direction of our winemaking team. Contract wine holds four main benefits; securing hard to find and in demand varietals, securing long term growth hedging against any possible short supply, establishing a consistent price point and quality for a component of a blend or brand, and cash flow efficiency. We are only required to put a deposit on wine, as opposed to realizing all costs and then holding in tank until it matures and is ready for bottle (a process typically ranging from six to twelve months). These contracts are anywhere from one to three years. Our winemaking team works in collaboration with these third parties to shape the wines and pursue optimization and improvements on quality with each new vintage. Our primary contract wine suppliers include Lange Twins, Central Coast Wine Services and O'Neill Wines.
Spot market
Components of blends or wines purchased outside of contract are classified as spot market purchases. While we have a trusted network of growers and collaborators, global supply and demand of high-quality wine is rarely in balance. We believe we are in a position to take advantage of these conditions when it ultimately benefits our consumers with respect to price and eventual wine quality. This represents the most capital efficient part of the supply chain as it is just in time sourcing. While not our core, this strategy has been very helpful in efficiently scaling production to meet high growth and allows for low risk testing of new collaborators and styles.
Bottling
We have partnered with seven different bottling facilities, utilizing an Alternating Proprietor agreement, within the state of California. Each facility possesses its own niche strengths and capabilities, including but not limited to: organically certified, cost and scale flexibility as well as formulation and packaging competencies. Our dedicated and experience winemaking and product operations team manage the planning, production and supply chain to ensure bottling timelines, budgets, and the needs of our sales channels are met.
 
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Labeling
We have in-house branding and compliance teams that work hand-in-hand to create visually appealing labels for our consumers in accordance with TTB requirements. Labels are printed by various vendors in the United States and shipped to our bottling facilities in accordance with production timelines. We work with several different vendors to ensure optimal pricing as well as access to the latest printing capabilities and technology.
Warehousing and product distribution
Finished inventory is freighted to our two warehouse and fulfillment centers located in Santa Maria, California and Garnet Valley, Pennsylvania. These bi-coastal locations allow delivery of 80% of orders within two days, using ground shipping. Our investment in these Winc-operated warehouses differentiates us from competitors who often use third party logistics. By comparison, we custom pack and ship finished products to our DTC consumers across the United States as well as house inventory for wholesale pick-up.
Inventory levels are tracked and maintained through our warehouse management system. We regularly evaluate our distribution infrastructure and capacity to ensure that we are able to meet our anticipated needs and support our continued growth across all sales channels.
As a result of our direct involvement in warehousing and product distribution we believe we have greater flexibility on multi-channel fulfillment. In fact, we have even been previously engaged by direct competitors to fulfill and ship orders due to our high-level performance and product expertise.
Shipping and Delivery
Inventory to fulfill our DTC orders is stored between two Winc-operated fulfillment centers. Inventory is balanced between these two warehouses to pick, pack and ship orders based on best-cost-routing to ensure the shortest delivery times and lowest shipping cost. We have negotiated proprietary contracts with the largest national shippers, with FedEx shipping the majority of our DTC orders. Final delivery to consumers through FedEx requires age verification and signature.
Environmental, Social and Governance, or ESG, Practices
We are committed to making wines that not only taste good today, but also contribute to good for tomorrow. Environment sustainability is a key focus across all parts of our business from the farms and vineyards we partner with to the bottles and boxes our consumers receive. Additionally, we strive to operate a socially impactful company that considers the well-being of all persons involved in our process to deliver great products to our consumers. Lastly, we are focused on strict governance standards for running our company in a fair and open manner.
Environmental
We have been actively involved in environmentally sustainable and organic wine-making, and expect to continue our growth into this important area. Our Wonderful Wine Co. brand features all sustainably farmed and pesticide-free grapes, and lightweight glass that requires less energy and less water to produce than the glass we previously used. The industry is growing towards more of a market share for sustainable and organic wines, and our goal is to experience similar growth in sustainable and organic wines.
The vineyard and winery
Sustainability is a winemaking philosophy that encourages mindfulness in three categories: social (livable wages, benefits, safe working environment, continued education and career growth), ecological (stewardship of the land i.e., safe usage of agrichemicals, water usage, vineyard health through cover crops, preservation of local flora and fauna), and economic (a viable business model that ensures company health and longevity). Our sustainable wine follows the philosophy outlined above and is all Sustainable (Certified through Third Party Agencies—Lodi Rules, SIP, CSWGA). Certified Sustainable means the vineyard and
 
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wine have passed rigid non-negotiable standards as outlined by the governing agency. Over 50 requirements and practices must be implemented and tracked through independent records and on-site inspections.
Organic international sourcing
The majority of our international sourcing from France, Spain, Argentina, and Italy is currently certified organic. Grapes are certified organic by a third party (NOP, ECCOCERT, USDA or CCOF). These certifiers work together to enforce the standards, ensuring a level playing field and protecting consumer confidence. In order to label any domestic or international wines as organic all certification has to then be verified by the TTB. In addition, our purchase of certain assets of Natural Merchants, Inc., an international wine importer in May 2021 gives us core capabilities and access to organic farmed grapes that will be used across our products to increase the amount of sustainably and organic farmed grapes we use in our wines.
Environmentally-Friendly Logistics and Manufacturing
By using flexi-tanks to ship our wines and bottling closer to the point of sale, we can ship more than twice as much wine per container, reducing our carbon footprint on shipping. When we transfer our wines over road, we do not use refrigerated trucks, which emit CO2 and increase vehicle fuel demand, instead opting for reusable insulated blankets and truck liners. The boxes our consumers receive are made from 70% post-consumer materials and are 100% recyclable. They have been designed to use the least amount of corrugate possible while keeping our members’ wine secure for delivery to their doorstep. Additionally, we expect to switch to Vinc Neo Corks in the majority of our future SKU production, which is expected to have a negative carbon footprint. These corks are 100% plant based, 100% sustainable and made from discarded materials in an effort to eliminate as much waste as possible. We have also removed foils from most of our bottles to further reduce waste. Most of our foils are now made from polylaminate, more easily recyclable than aluminum counterparts. We also expect to incorporate light weight glass into our production. Light weight glass takes less energy and less water to manufacture than the average weight bottle.
Human Capital
We are building a team that shares our goals of creating products that help to enhance our consumer’s everyday celebrations. We are driven and committed to building a high performance team that is driven to build a great company and continue to improve themselves. We are believers in challenging the status quo in an industry that has been mostly unchanged for 100 years and are motivated to find increasingly better ways to bring everyone to the table. We are led by Geoff McFarlane and Brian Smith’s combined leadership in CPG brand-building and wine-making over the last 20 years. They are joined on the executive team by Matt Thelen, with more than ten years of strategy experience in highly-regulated sectors; Carol Brault, boasting more than 30 years of finance experience in the CPG space; and Erin Green, responsible for startup operations for over a decade. However, without the awesome individuals who work at Winc, our leadership team would not have been able to execute on our success to date.
We are growing fast and recognize that the awesome individuals who work at Winc are at the center of our success. We are investing into improving our community and employee development and continue to be hungry. As of June 30, 2021, we had a total of 97 full-time employees, as well as a limited number of temporary employees and consultants. In building our high-performing teams, we have invested in leadership, marketing, digital and technology capabilities. Embedded in our culture are core values that honor diversity and inclusion, which allow us to attract and retain valuable talent. We offer a competitive compensation and benefits program and opportunities for our employees to grow and develop personally and professionally. Our corporate social responsibility efforts provide opportunities for employees to give back to communities in need through volunteerism, donation matching and paid volunteer time off. We foster an environment of community and support within our organization. We maintain a strong relationship with our employees and have never experienced a labor-related work stoppage.
IT Systems
Winc.com is a platform that has been built by our internal team in order to execute on our membership-based subscription model and deliver on a best-in-class member experience through unique & proprietary features. Through this platform, we are able to operationalize our credits-based membership model
 
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and have a full suite of customization opportunities on the website, something that DTC businesses built on out-of-the-box platforms may not have. Additionally, our homegrown digital product experimentation platform allows us to rapidly test new ideas to improve consumer acquisition efficiency, gather consumer feedback and data, increase average order value, and improve the member experience.
Competition
The Alcoholic Beverages industry generally, and the wine industry in particular, is intensely competitive. We compete with online DTC wine retailers, such as Naked Wines, Firstleaf and Bright Cellars, which curate wines based on consumers’ preferences, and online wine clubs. However, unlike us, none of these companies function as fully-integrated wineries with nationally distributed brands. We believe our brands attract member loyalty and give us a competitive advantage.
In addition to online wine retailers, we also compete with other wineries that ship directly to consumers and distribute their wines through third parties to restaurants and brick-and-mortar retailers, such as Constellation Brands, E & J Gallo Winery and Duckhorn Vineyards. The wines we produce and distribute compete with domestic and foreign wines in the premium, super-premium and ultra-premium wine market segments. Our wines also compete with other alcoholic and, to a lesser degree, non-Alcoholic Beverages, for shelf space in retail stores and for marketing focus by independent wholesale distributors, many of which carry extensive brand portfolios.
We believe our ability to compete effectively in our industry is primarily on the basis of developing a portfolio of high-quality and culturally relevant brands and innovative products that resonate with our consumers.
Intellectual Property
Our ability to compete in our industry depends in part on our ability to obtain, maintain, establish, protect and enforce our intellectual property rights. We protect our intellectual property rights through a combination of trademark and trade secret protection, and other intellectual property protections under applicable law. We register domain names, trademarks, and service marks in the United States and abroad. We also seek to protect and avoid disclosure of our intellectual property through confidentiality, non-disclosure and invention assignment agreements with our employees, and through appropriate agreements with our suppliers and others. Our intellectual property is an important component of our business, and we believe that our know-how and continued innovation are important to developing and maintaining our competitive position. We also believe having distinctive marks that are readily identifiable on our products is an important factor in continuing to build our brand and distinguish our products. We consider the WINC logo trademarks to be among our most valuable intellectual property assets. In addition, we have registered the trademarks for many of our wines and product names, and have also obtained trademark protection for several of our tag lines. Several of our wine brands, services and accessories are under registered U.S. trademarks. Each registration is renewable indefinitely so long as the Company is making a bona fide usage of the trademark. As of December 31, 2020, between the United States and foreign jurisdictions, we own approximately 95 registered trademarks and 10 pending trademarks, including registrations for “WINC” and “SUMMER WATER”. We do not currently own any patents or registered copyrights and primarily rely on trademarks and trade secret protection.
While there is no active litigation involving any of our trademarks or other intellectual property rights, and we have not received any notices of trademark or other intellectual property infringement, we may be required to enforce or defend our intellectual property rights against third parties in the future. See “Risk Factors—Risks Related to Intellectual Property and Data Privacy” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us.
Government Regulation
Regulatory framework
We, along with our contract growers, producers, manufacturers, wholesale distributors, retail accounts and ingredients and packaging suppliers, are subject to extensive regulations in the United States
 
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and abroad by federal, state and local government authorities with respect to registration, production processes, product attributes, packaging, labeling, storage, shipping and distribution of wine.
We are also subject to state and local tax requirements in all states where our wine is sold. We and our third-party providers monitor the requirements of relevant jurisdictions to maintain compliance with tax liability and reporting matters.
Alcohol-related regulation
We are subject to extensive alcohol-related regulation in the United States by federal, state and local laws regulating the production, distribution and sale of Alcoholic Beverages, including by the TTB and the FDA. The TTB is primarily responsible for overseeing alcohol production records supporting tax obligations, issuing wine labeling guidelines, including grape source and bottle fill requirements, as well as reviewing and issuing certificates of label approval, which are required for the sale of wine through interstate commerce. We carefully monitor compliance with TTB rules and regulations, as well the state law of each state in which we sell our wines. In California, we are subject to alcohol-related licensing and regulations by many authorities, including the ABC. ABC agents and representatives investigate applications for licenses to sell Alcoholic Beverages, report on the moral character and fitness of alcohol license applicants and the suitability of premises where sales are to be conducted and enforce California Alcoholic Beverages laws. We are also subject to municipal authorities with respect to aspects of our operations, including applicable land use laws and the terms of our use permits.
Employee and occupational safety regulation
We are subject to certain state and federal employee safety and employment practices regulations, including regulations issued pursuant to OSHA and regulations governing prohibited workplace discriminatory practices and conditions, including those regulations relating to COVID-19 virus transmission mitigation practices. These regulations require us to comply with manufacturing safety standards, including protecting our employees from accidents, providing our employees with a safe and non-hostile work environment and being an equal opportunity employer.
Environmental regulation
As a result of our agricultural and wine production activities, we and certain third parties with which we work are subject to federal, state and local environmental laws and regulations. Federal regulations govern, among other things, air emissions, wastewater and storm water discharges, and the treatment, handling and storage and disposal of materials and wastes. State environmental regulations and authorities intended to address and oversee environmental issues are largely state-level analogs to federal regulations and authorities intended to perform the similar purposes. In California, we are also subject to state-specific rules, such as those contained in the California Environmental Quality Act, California Air Resources Act, Porter-Cologne Water Quality Control Act, California Water Code sections 13300-13999 and Title 23 of the California Administrative Code and various sections of the Health and Safety Code. We are also subject to municipal environmental regulations that address a number of elements of our wine production process, including air quality, the handling of hazardous waste, recycling, water use and discharge, emissions and traffic impacts.
Labeling regulation
Many of our wines are identified by their appellation of origin, which are among the most highly regarded wine growing regions in the world. An appellation may be present on a wine label only if it meets the requirements of applicable state and federal regulations that seek to ensure the consistency and quality of wines from a specific territory. These appellations designate the specific geographic origin of most or all (depending on the appellation) of the wine’s grapes, and can be a political subdivision (e.g., a country, state or county) or a designated viticultural area. The rules for vineyard designation are similar. Most of our labels maintain the same appellation of origin from year to year. From time to time, our winemakers choose to change the appellation of one of our wines to take advantage of high-quality grapes in other areas or to change the profile of a wine.
 
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Privacy and security regulation
Our Company collects personal information from individuals. Accordingly, we are or may become subject to numerous data privacy and security related regulations, including but not limited to: U.S. state privacy, security and breach notification laws. Certain U.S. states have adopted robust data privacy and security laws and regulations and others are considering doing so. For example, the CCPA, which took effect in 2020, imposes obligations and restrictions on businesses regarding their collection, use, and sharing of personal information and provides new and enhanced data privacy rights to California residents, such as affording them the right to access and delete their personal information and to opt out of certain sharing of personal information. Further, the CPRA was recently voted into law by California residents. The CPRA significantly amends the CCPA, and imposes additional data protection obligations on covered companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency specifically tasked with enforcing the law, which will likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. In addition, the FTC and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the online collection, use, dissemination and security of information about individuals. As we expand our business in the future, we may increasingly become subject to data privacy and security laws in foreign jurisdictions. In response to the data privacy laws and regulations discussed above and those in other countries in which we do business, we have implemented several technological safeguards, processes, contractual third-parties provisions, and employee trainings to help ensure that we handle information about our employees and consumers in a compliant manner. We maintain a privacy policy and related procedures, and train our workforce to understand and comply with applicable privacy laws. See “Risk Factors — Risks Related to Intellectual Property and Data Privacy” for additional information regarding the risks related to compliance with data privacy and security laws and their potential effect on us.
Facilities
Following the outbreak of COVID-19, we have implemented various social distancing measures, including implementing a virtual-first employment model in an effort to provide a safe work environment. We currently do not occupy and have two non-cancelable sublease agreements for our former corporate headquarters located at 5340 Alla Road Suite 105 Los Angeles, California, consisting of approximately 18,920 square feet of office space, pursuant to sublease agreements that expire in 2023. This lease expires in 2023 and provides us with an option to extend it for five years. We entered a lease for additional office space located at 1751 Berkeley St., Studio 3, Santa Monica, CA 90404, consisting of approximately 3,822 rentable square feet, on September 21, 2021. The lease expires in 2024. As of December 31, 2020, we also had two non-cancelable operating leases for warehouse facilities located in Santa Maria, California and Garnet Valley, Pennsylvania where we occupy approximately 60,548 and 53,040 square feet, respectively. The Santa Maria warehouse lease expires in 2023, with an option to extend the lease for one year, while the Garnet Valley warehouse lease expires in 2022, with two options to extend the lease for five years. In total, we have over approximately 113,000 square feet of facility space that can be leveraged to fulfill DTC and retail orders. We believe that our current facilities are suitable and adequate to meet our current needs.
Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although the outcome of these and other claims cannot be predicted with certainty, we do not believe the ultimate resolution of the current matters will have a material adverse effect on our business, financial condition, results of operations or prospects.
 
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information for our executive officers and directors as of June 30, 2021.
NameAgeCurrent Position
Executive Officers
Geoffrey McFarlane38Chief Executive Officer, Founder and Director
Brian Smith47President, Founder and Chairperson of the Board of Directors
Matthew Thelen35General Counsel and Chief Strategy Officer
Carol Brault57Chief Financial Officer
Erin Green37Chief Operating Officer
Non-Employee Directors
Laura Joukovski(2) (3)
47Director
Xiangwei Weng(3)
52Director
Patrick DeLong(1)
56Director
Alesia Pinney(1) (2)
58Director
Mary Pat Thompson(1) (2) (3)
58Director
(1)
Member of the audit committee.
(2)
Member of the compensation committee.
(3)
Member of the nominating and corporate governance committee.
Executive Officers
Geoffrey McFarlane has served as our Chief Executive Officer since May 2018 and as a director since August 2011, building Winc into a vertically integrated winery. As a serial entrepreneur, Mr. McFarlane has a versatile background as a founder, executive and advisor for a wide variety of companies. In 2011, Mr. McFarlane co-founded Winc and served as the company’s chief operating officer from August 2011 to January 2018 before becoming the chief executive officer. Prior to Winc, he was founder and chief executive officer of a restaurant and hotel group, Pizza Republica and the Jet Hotel, with seven locations and over 200 employees, from May 2004 until April 2012. Mr. McFarlane also serves as a director of several private companies, including Amass Brands Inc., a botanical beverage and personal care product company, since January 2017, Voyage SMS Inc., an ecommerce mobile messaging platform, since February 2018 and Westbound and Down Inc., a Colorado brewpub, since December 2015. In 2013, Mr. McFarlane filed a voluntary petition for personal bankruptcy under Chapter 7 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of Colorado. The resulting case was closed in 2016. We believe Mr. McFarlane is qualified to serve on our board of directors due to his integral knowledge of the company, industry expertise and extensive experience developing and growing consumer-oriented beverage businesses.
Brian Smith has served as our President since May 2018 and as Chairperson of the Board of Directors since June 2020. Mr. Smith combines his years of experience as a sommelier, winemaker, brand builder, and entrepreneur to oversee what we believe is the world’s most innovative and culturally relevant wine program. Prior to Winc, Mr. Smith founded Jolie Folle, a millennial focused wine brand, which he sold the company in 2017. Before that, he served as Wine Director of Clo Wine Bar. Mr. Smith began his career in finance at Man Group PLC and founded his first company, Meritage Group, a Virgin Islands based commodities brokerage that catered to hedge funds and commodity traders, in 2004. Mr. Smith graduated from the University of Vermont with a bachelor’s degree in Cultural Anthropology. We believe Mr. Smith is qualified to serve on our board of directors due to his central knowledge of the company as a co-founder and years of experience creating and growing wine-focused hospitality concepts.
 
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Matthew Thelen has served as our General Counsel since October 2014 and Chief Strategy Officer since April 2021. He leads the Company’s corporate strategy and financing initiatives and any special projects that fall outside the typical business remit. As General Counsel, he oversees all Winc legal matters, including beverage regulatory compliance, corporate, commercial transactional, intellectual property, consumer protection, employment, litigation and privacy practice areas. Previously, Mr. Thelen was an intellectual property strategy and valuation professional for Ocean Tomo, a San Francisco based merchant bank, and an attorney at Collins, Collins, Muir & Stewart. He received a Bachelor of Economics from the University of San Diego and a Juris Doctorate and Masters of Business Administration from the University of Notre Dame.
Carol Brault has served as our Chief Financial Officer since April 2021. Previously, Ms. Brault served as our Vice President of Finance from February 2018 to April 2021. Before joining Winc, Ms. Brault was Accounting Director at The Honest Company, a consumer products company that supplies baby, personal, beauty and home products for ethical consumerism. Prior to that, she served as Controller for Bare Escentuals from 2013 until 2016 and held leadership roles in several prominent multi-national companies, including Bath & Body Works, LBrands, The Longaberger Company and Honda of America Manufacturing, Inc. Additionally, her extensive career includes consulting on financial and organization guidance for various companies ranging from start-up and mid-size businesses to multimillion-dollar organizations. Ms. Brault has a Bachelor of Science in Business Administration/Accounting from The Ohio State University Fisher College of Business.
Erin Green has served as our Chief Operating Officer since April 2021, and is responsible for all operational functions of the business and the strategic vision of Winc’s national wholesale team. Ms. Green previously served as our Vice President of Operations from December 2018 until April 2021 where she built our wholesale distribution channel and scaled our sales team in addition to overseeing all day-to-day operations and the winemaking team. Prior to that she held the Director of Operations role from January 2015 until November 2017 focused on primarily on optimization of our warehousing, logistics, shipping and packaging. Previous to Winc, Erin worked at LivingSocial overseeing all deal operations and ran point on the Amazon partnership. Ms. Green has a bachelor’s degree in Fine Arts from Indiana University.
Non-Employee Directors
Laura Joukovski has served on our board of directors since July 2019. Ms. Joukovski is the CEO of Global Fashion Brands with TechStyle Fashion Group. TechStyle is a portfolio of digital fashion brands in Los Angeles. Ms. Joukovski leads the Global Fashion Brands, including JustFab, ShoeDazzle and FabKids. She was a founding team member of FabKids, and has built out the eco-system of TechStyle businesses across a variety of executive roles since the FabKids acquisition in 2013. We believe Ms. Joukovski is qualified to serve on our board of directors due to industry expertise and extensive experience developing and growing consumer-oriented businesses.
Xiangwei Weng has served on our board of directors since June 2015. Mr. Weng is the founder of Shining Capital Management and has an extensive experience in investment banking and private equity investment. Before founding Shining Capital in 2008, Mr. Weng served as an Executive Director at the Corporate Finance Department and Head of Mergers & Acquisitions for China at Goldman Sachs (Asia) L.L.C. From 2005 to 2007, he served as General Manager and In Charge of Corporate Operations at Gome Electrical Appliances Holding Limited. He also worked at Morgan Stanley from 1998 to 2005, where he was a Vice President in the M&A and Restructuring Group. Mr. Weng received a bachelor’s degree in Physics from Peking University and a Ph.D. degree in Biophysics from University of California at Berkeley. We believe Mr. Weng is qualified to serve on our board of directors due to his industry, investment banking and private equity finance expertise.
Patrick DeLong has served on our board of directors since December 2019. Mr. DeLong is the Founder and Principal of Azur Associates, a leading fine beverage consultancy that was founded in 2019. Mr. DeLong has over 30 years of experience working with leading consumer brands across private and public companies. Prior to founding Azur, Mr. DeLong was an executive for 12 years at Crimson Wine Group, where he served as President and Chief Executive Officer from 2014 to June 2019 and as Chief Operating & Financial Officer from 2007 to 2014. Before that, Mr. DeLong served as the Senior Vice President & CFO of Icon Estates, a fine wine division of Constellation Brands, Inc., from 2004 to 2006 and consulting Chief
 
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Operating Officer for the Francis Ford Coppola companies from 2006 to 2007. From 1998 to 2004, Mr. DeLong was at the Robert Mondavi Corporation in a variety of executive leadership roles, including Senior Vice President of Finance & Planning. Earlier in his career, Mr. DeLong worked in operating management with Carnival Corporation and began his career with Deloitte working in both audit and consulting and was a certified public accountant. Mr. DeLong holds a bachelor’s degree in business administration from California Polytechnic State University, San Luis Obispo and conducted post-graduate master’s studies in applied economics at Seattle University. We believe Mr. DeLong is qualified to serve on our board of directors due to his finance and industry expertise and extensive experience developing and growing consumer-oriented beverage businesses.
Alesia Pinney has served on our board of directors since April 2021. Ms. Pinney has served as the Executive Vice President and Chief Legal Officer at Avalara, Inc., a publicly traded company that provides cloud-based compliance solutions for transaction taxes, since April 2013 and has almost 30 years of experience in legal, advisory and operational leadership roles. Ms. Pinney has served as a member of the board of directors for various entities, including the Washington State Trust for Public Land, and is a director at Sharkbite Games, Inc. Ms. Pinney has a Bachelor’s Degree in Accounting from Seattle University, a Master’s of Taxation from the University of Denver and Juris Doctor from Seattle University’s School of Law. We believe Ms. Pinney is qualified to serve on our board of directors due to her extensive finance and legal experience.
Mary Pat Thompson has served on our board of directors since May 2021. Ms. Thompson has served as a consultant for Bruckmann, Rosser, Sherril & Co., a private equity firm focused on growth capital investments in the consumer products, specialty retail and restaurant sectors, since January 2019; as the President of Titan Technologies, Inc., a leading regional technology solutions provider, since October 2003; as a director for H&E Equipment Services, Inc., an equipment rental company, since September, 2019; and as Chief Financial Officer of Taronis Fuels, Inc., a clean fuel technology company, since April, 2021. She is also a licensed CPA in the State of Idaho. Previously, she served as Senior Vice President of Finance of Animal Health at AmerisourceBergen, a provider of drug distribution and consulting services related to medical business operations and patient services, from February 2015 until October 2018, and has over 30 years of experience in accounting and advisory leadership roles. Prior to her tenure at AmerisourceBergen, Ms. Thompson served as the Chief Financial Officer, Senior Vice President of Finance and Corporate Secretary of MWI Veterinary Supply Inc., an international animal health products supplier, from 2005 to 2015. Ms. Thompson also serves as a member of the board of directors for various entities, including Organika Inc., AAA Oregon/Idaho and Regence BlueShield of Idaho. Ms. Thompson has a bachelor’s degree in Business Accounting from the University of Idaho. We believe Ms. Thompson is qualified to serve on our board of directors due to her extensive private equity and finance experience.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Board Composition
In accordance with our amended and restated certificate of incorporation, which will be in effect upon the closing of this offering, our board of directors will be divided into three classes of directors. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the class whose terms are then expiring, to serve from the time of election and qualification until the third annual meeting following their election or until their earlier death, resignation or removal. Upon the closing of this offering, our directors will be divided among the three classes as follows:
The Class I directors will be Xiangwei Weng and Patrick DeLong, and their terms will expire at our first annual meeting of stockholders following this offering.
The Class II directors will be Mary Pat Thompson and Laura Joukovski, and their terms will expire at our second annual meeting of stockholders following this offering.
The Class III directors will be Geoffrey McFarlane, Brian Smith and Alesia Pinney, and their terms will expire at our third annual meeting of stockholders following this offering.
 
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Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control. See the section of this prospectus captioned “Description of Capital Stock—Anti-Takeover Provisions” for a discussion of these and other anti-takeover provisions found in our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective immediately prior to the closing of this offering.
Director Independence
We intend to apply to have our common stock listed on the NYSE. Under the rules of the NYSE, independent directors must comprise a majority of a listed company’s board of directors within a specified period of the completion of this offering. In addition, rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and corporate governance committees be independent. Under these rules, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries. We intend to satisfy the audit committee independence requirements of Rule 10A-3 as of the closing of this offering.
In connection with this offering, our board of directors has undertaken a review of the independence of each director and considered whether each director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, our board of directors determined that Laura Joukovski, Xiangwei Weng, Patrick DeLong, Alesia Pinney and Mary Pat Thompson are “independent directors” as defined under the applicable rules and regulations of the SEC and the listing requirements and rules of the NYSE, representing five of our seven directors. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and current and prior relationships as they may relate to us and our management, including the beneficial ownership of our capital stock by each non-employee director and any transactions involving them described in the section titled “Certain Relationships and Related Party Transactions.”
Board Committees
Upon the closing of this offering, our board of directors will have an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and the responsibilities described below. In addition, from time to time, special committees may be established under the direction of our board of directors when necessary to address specific issues.
Each of the audit committee, the compensation committee and the nominating and corporate governance committee will operate under a written charter that will be approved by our board of directors in connection with the closing of this offering. A copy of each of the audit committee, compensation committee and nominating and corporate governance committee charters will be available on our website. The reference to our website in this prospectus does not include or incorporate by reference the information on or available through our website into this prospectus.
Audit Committee
Our audit committee oversees our corporate accounting and financial reporting process and assists our board of directors in monitoring our financial systems. Our audit committee will be responsible for, among other things:
 
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appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm;

discussing with our independent registered public accounting firm their independence from management;

reviewing with our independent registered public accounting firm the scope and results of their audit;

approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm;

overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC;

reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements; and

establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters.
Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, our audit committee will consist of Mary Pat Thompson, Alesia Pinney and Patrick DeLong, with Mary Pat Thompson serving as chair. Our board of directors has affirmatively determined that Mary Pat Thompson, Alesia Pinney and Patrick DeLong meet the requirements for independence under the current NYSE rules and the additional independence standards applicable to audit committee members established pursuant to Rule 10A-3 under the Exchange Act. In addition, our board of directors has determined that Mary Pat Thompson is an “audit committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated under the Securities Act. Each member of our audit committee is financially literate.
Compensation Committee
Our compensation committee oversees our compensation policies, plans and benefits programs. Our compensation committee will be responsible for, among other things:

reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluating our Chief Executive Officer’s performance in light of these goals and objectives and setting compensation;

reviewing and setting or making recommendations to our board of directors regarding the compensation of our other executive officers;

reviewing and approving or making recommendations to our board of directors regarding our incentive compensation and equity-based plans and arrangements; and

appointing and overseeing any executive compensation consultants.
Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, our compensation committee will consist of Alesia Pinney, Mary Pat Thompson and Laura Joukovski, with Alesia Pinney serving as chair. The composition of our compensation committee meets the requirements for independence under the current NYSE listing standards and SEC rules and regulations.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee oversees and assists our board of directors in reviewing and recommending nominees for election as directors. Our nominating and corporate governance committee will be responsible for, among other things:

identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors;
 
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recommending to our board of directors the nominees for election to our board of directors at annual meetings of our stockholders;

evaluating the overall effectiveness of our board of directors; and

developing and recommending to our board of directors a set of corporate governance guidelines and principles.
Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, our nominating and corporate governance committee will consist of Laura Joukovski, Xiangwei Weng and Mary Pat Thompson, with Laura Joukovski serving as chair. The composition of our nominating, governance, and corporate responsibility committee meets the requirements for independence under the current NYSE listing standards and SEC rules and regulations.
Role of the Board in Risk Oversight
Our board of directors has an active role, as a whole and also at the committee level, in overseeing the management of our risks. Our board of directors is responsible for general oversight of risks and regular review of information regarding our risks, including credit risks, liquidity risks and operati