DUCKHORN PORTFOLIO, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to those statements included elsewhere in this Quarterly Report on
Form 10-Q. In addition to historical financial information, the following
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. See "Cautionary note regarding forward-looking
statements" included in this Quarterly Report on Form 10-Q. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including those discussed in Part I "Item 1A. Risk
factors" included in our Annual Report on Form 10-K for Fiscal 2021.

Overview

The Duckhorn Portfolio is the premier scaled producer of luxury wines in North
America. We have delighted millions of consumers with authentic, high-quality,
approachable wines for over four decades. We champion a curated and
comprehensive portfolio of highly acclaimed luxury wines across multiple
varietals, appellations, brands and price points. Our portfolio is focused
exclusively on the desirable luxury segment, which we define as wines sold for
$15 or higher per 750ml bottle.

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

We sell our wines to distributors outside California and directly to retail
accounts in California, which together comprise our wholesale channel. We also
sell directly to consumers through our DTC channel, which made up approximately
14% of our net sales for the first six months of Fiscal 2022. Our powerful
omni-channel sales model drives strong margins by leveraging long-standing
relationships developed over the past forty years. We believe our iconic winery
brands together with our scaled, quality-focused production, omni-channel
distribution and dedicated employees, set the standard for North American luxury
wine.

Key financial metrics

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

                                            Three months ended January 31,            Six months ended January 31,
(in thousands)                                 2022                2021                  2022                  2021
Net sales                                  $   98,736          $  83,657          $       202,917          $ 175,295
Gross profit                               $   49,477          $  41,757          $       101,887          $  86,032
Net income attributable to The Duckhorn
Portfolio, Inc.                            $   17,932          $  22,003          $        39,205          $  39,526
Adjusted EBITDA                            $   34,310          $  32,178          $        72,400          $  65,900


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The following table represents the reconciliation of adjusted EBITDA and net earnings attributable to The Duckhorn, Inc. wallet:

                                               Three months ended January 31,            Six months ended January 31,
(in thousands)                                    2022                2021                  2022                  2021
Net income attributable to The Duckhorn
Portfolio, Inc.                               $   17,932          $  22,003          $        39,205          $  39,526
Interest expense                                   1,636              3,612                    3,242              7,192
Income tax expense                                 6,407              7,935                   13,784             14,071
Depreciation and amortization expense              6,280              5,765                   11,109             10,881
EBITDA                                            32,255             39,315                   67,340             71,670
Purchase accounting adjustments(a)                    99                762                      292              1,323
Transaction expenses(b)                            1,024                  -                    2,770                  -

Change in fair value of derivatives(c)              (515)            (1,279)                    (957)            (2,827)
Equity-based compensation(d)                       1,416                288                    2,875                576
Casualty gain, net(e)                                  -             (7,832)                       -             (7,832)

Loss on debt extinguishment(f)                         -                  -                        -                272
IPO preparation costs(g)                               -                210                        -                405
Wildfire costs(h)                                     31                 62                       80              1,617
COVID-19 costs(i)                                      -                652                        -                696
Adjusted EBITDA                               $   34,310          $  32,178          $        72,400          $  65,900

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(a) Purchase accounting adjustments relate to the impacts of prior business
combination accounting for our acquisition by TSG in Fiscal 2017, our subsequent
acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019,
respectively, and certain other transactions consummated prior to our
acquisition by TSG, which resulted in fair value adjustments to inventory and
long-lived assets.
(b) Transaction expenses include legal and professional fees and change of
control payments incurred in connection with our IPO in March 2021. Also
included are expenses incurred for abandoned transactions and the secondary
offering completed in October 2021. These expenses were directly related to such
transactions and were incremental to our normal operating expenses.
(c) See Note 9 (Derivative instruments) to our Condensed Consolidated Financial
Statements for additional information.
(d) See Note 12 (Equity-based compensation) to our Condensed Consolidated
Financial Statements for additional information.
(e) Casualty gain, net in adjusted EBITDA pertains to the flood event at one of
our wineries in Fiscal 2019, and was primarily comprised of insurance proceeds
received pursuant to our claim, offset by flood damage and remediation costs.
The proceeds received, offset by costs incurred, are reported on the casualty
loss (gain), net line in the Condensed Consolidated Statements of Operations.
See Note 13 (Casualty loss) to our Condensed Consolidated Financial Statements
for additional information.
(f) Loss on debt extinguishment includes charges for unamortized deferred
financing fees we recognized in connection with amendments to our Credit
Facility.
(g) IPO preparation costs include professional fees incurred for outside
consultants to advise us on legal, accounting and tax matters related to our
preparation for becoming a public company, which were not directly attributable
to an offering.
(h) Wildfire costs include the cost of unharvested fruit that was damaged and
rendered useless, charges we incurred to respond to imminent wildfire threat
with fire-fighting crews to protect our assets, clean-up and smoke remediation
expenses to restore operations at our tasting rooms after the fires, testing
fees to evaluate our fruit for possible smoke damage, and washing or other grape
processing costs prior to vinification to reduce the risk of smoke in finished
wine.These costs are reported on the casualty loss (gain), net line in the
Condensed Consolidated Statements of Operations. See Note 13 (Casualty loss) to
our Condensed Consolidated Financial Statements for additional information.
While we expect the potential for wildfires to be an ongoing risk to running an
agricultural business in California, we believe the wildfires and related costs
we experienced are not indicative of our core operating performance.
(i) COVID-19 costs include certain incremental expenses incurred during the
outbreak of the COVID-19 pandemic and the short-term closure mandates imposed by
government officials in the jurisdictions in which we operate. These costs
include tasting room expenses incurred during a period of mandatory closure and
reduced capacity, salaries and severance expenses for certain employees and
other immaterial costs to transfer inventory.

Net sales

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

Gross profit

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

Adjusted EBITDA

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

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

Main operating parameters

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

Percentage of net sales by channel

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

                                               Three months ended January 31,                 Six months ended January 31,
                                                 2022                   2021                   2022                   2021
Wholesale - distributors                            67.2  %                60.2  %                67.9  %                66.9  %
Wholesale - California direct to retail             19.8  %                19.6  %                18.1  %                16.9  %
DTC                                                 13.0  %                20.2  %                14.0  %                16.2  %


The composition of our net sales, expressed in percentages by channel for the
three months and six months ended January 31, 2022 and 2021, continued to move
toward historical trends along with the signs of ongoing recovery from COVID-19
disruption across major markets. While notable gains in on-premise activity
continued the shift back toward pre-pandemic levels, off-premise activity
remained a key strength in our results as we held onto share gains across our
broader wholesale channel.

Net sales for the DTC channel were bolstered by higher visitor center sales
overall as compared to the prior year period for the three months and six months
ended, although comparability to prior year was impacted by earlier member
shipment timing pulling a portion of net sales from the second quarter into the
first quarter of Fiscal 2022.

We expect the sales channel mix to continue to normalize towards historic levels in correlation with the return of consumer shopping habits and the reopening of on-premises outlets in future periods.

Contribution to net sales growth

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

                                                        Three months ended January 31,                 Six months ended January 31,
                                                          2022                   2021                   2022                   2021
Net sales growth                                             18.0  %                 8.7  %                15.8  %                17.1  %
Volume contribution                                          24.8  %                11.4  %                15.3  %                25.4  %
Price / mix contribution                                     (6.8) %                (2.8) %                 0.5  %                (8.3) %


For the six months ended January 31, 2022, growth in net sales was mainly
attributable to continued strong sales volume growth and a neutral price / mix
contribution demonstrating the shift back toward pre-COVID-19 trends with the
growth in our on-premise sales. Generally, on-premise growth also drives
increased sales in our ultra-luxury brands that sell at higher average sales
prices and positively impact price / mix contribution. In the prior year period,
we saw immense growth primarily driven by off-premise sales of our luxury winery
brands that drove a negative price / mix contribution. Our consistent use of
distributor and retail sales discounts and promotions in our wholesale channel
to gain market share has historically and may continue to put downward pressure
on price / mix contribution given an increase in net sales.

For the three months ended January 31, 2022, negative price mix contribution was
impacted by the outsized volume growth of the wholesale channel, aided by
continued on-premise resurgence and further pressured by DTC shipment timing
moving out of the second quarter of Fiscal 2022 into the first quarter of the
same fiscal year.

We expect price / mix contribution will continue to move toward historical
levels as consumer purchasing and consumption habits return to normal following
the COVID-19 pandemic. We expect that volume contribution will continue to be
the primary driver of changes in our net sales in future periods. To the extent
our growth is fueled by sales of lower-priced luxury winery brands, we may see
lower or negative price / mix contribution in the future, with potential for
favorable impacts to price / mix due to brand velocity at varying price points.

Components of operating results and key factors affecting our performance

Net sales

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

We refer to the volume of wine we sell in terms of cases, each of which
represents a standard 12 bottle case of wine (in which each bottle has a volume
of 750 milliliters). Cases sold represent wine sales through our wholesale and
DTC channels. Depletions, in turn, represent sell-through from our distributors,
including our California wholesale sales channel, to retail accounts nationally.

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

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

•Insightful and targeted portfolio evolution. Our curated portfolio and
historical growth result from long-term dedication to continuous evolution and
alignment with the luxury wine consumer. We believe we can drive additional
sales through our wholesale and DTC channels. As we continue to scale, we
believe our growth mindset, coupled with our differentiated production and
distribution platform, will enable us to adapt and remain at the forefront of
our industry.

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

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

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

The primary market for our wines is United States, which has historically represented approximately 95% of our net sales. Accordingly, our operating results are primarily dependent on we discretionary consumer spending.

Sales channels

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

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

•DTC channel. Wines sold through our DTC channels are generally sold at suggested retail prices. Our DTC channel continues to grow due to a number of factors, including a shift towards increased consumption and home business engagement.

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

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

Our sales mix within our wholesale channel has reflected disproportional
benefits to off-premise sales in certain periods, while on-premise sales have
experienced variability, directly related to the COVID-19 pandemic, which began
impacting our sales in March 2020. Our responses to periods of historical
disruption in the wholesale channel have focused on strengthening relationships
with our accounts and distributors, introducing new products
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and maintain and strengthen our wine brand commitment. We believe this approach has allowed us to strengthen our portfolio and increase our market share against our competitors during periods of market disruption.

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

In the DTC channel, our holistic approach to consumer engagement both online and
offline is supported by an integrated e-commerce platform and portfolio wine
shop, seven distinctive tasting room experiences located throughout Northern
California and Washington, and several award-winning wine clubs, all of which
enable us to cross-sell wines within our portfolio. These strategies are
designed to maximize each winery brand and property while driving awareness for
the Company's other world-class wines and properties, resulting in more and
deeper customer connections. We strive to evolve our offerings, experiences and
communication to match the generational shifts in wine engagement preferences
and related purchasing decisions. In addition, we anticipate that our holistic
consumer engagement approach will help our DTC sales remain strong through the
near-term impact of the COVID-19 pandemic on consumer purchasing behaviors.

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

Seasonality

Our net sales are typically highest in the first half of our fiscal year, mostly
due to increased consumer demand around major holidays. Net sales seasonality
differs for wholesale and DTC channels, resulting in quarterly seasonality in
our net sales that depends on the channel mix for that period. We typically
experience a higher concentration of sales through our wholesale channel during
our first and second fiscal quarters due to increased purchasing by distributors
in anticipation of higher consumer demand during the holiday season, which has
the effect of lowering average selling prices as a result of the use of
distributor and retail sales discounts and promotions in our wholesale channel.
See "-Key operating metrics." In Fiscal 2021, our net sales in the first,
second, third and fourth fiscal quarters represented approximately 27%, 25%, 27%
and 21%, respectively, of our total net sales for the year.

Gross profit

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

As we continue to grow our business in the future, we expect gross profit to
increase as our sales grow and as we effectively manage our cost of sales,
subject to any future unexpected volatility in the grape and bulk wine markets,
increased seasonal labor costs and, to a lesser extent inflationary impact from
commodity costs such as dry goods. Additionally, we expect gross profit as a
percentage of net sales to remain consistent with historical levels or to
improve to the extent we observe a return toward normalized consumer spending
behavior across the industry and within our business, particularly with respect
to on-premise sales in the wholesale channel, which would favorably influence
our gross profit margins on net sales.
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Agribusiness

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

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

Selling, general and administrative expenses

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

Other expenses

Other expenses consist primarily of interest expense we incur on outstanding balances under our credit facility and unrealized gains or losses on our derivative instruments.

income tax expense

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

Inventory Lifecycle

Viticulture on our estate vines

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

Harvest-to-release

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

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

Other factors affecting the comparability of our results of operations

Impacts of COVID-19

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

The comparability of our results of operations have been significantly impacted
by the effects of the COVID-19 pandemic on our business, industry, customer
behavior, key markets where we operate and as a result of macroeconomic factors.
Accordingly, certain period-over-period comparisons have been and may continue
to be influenced by disruption due to the COVID-19 pandemic.

At the outset of the COVID-19 pandemic in the third quarter of Fiscal 2020, we
experienced a significant decrease in sales of ultra-luxury wines sold through
our on-premise wholesale sales channel and a significant increase of sales of
ultra-luxury and luxury wines sold at off-premise retailers. Historically, our
ultra-luxury winery brands have delivered higher gross profit margins, and
generally sell in larger volumes on-premise than our luxury winery brands, which
typically see higher sales volumes off-premise. This shift in sales channel mix
continued through the majority of Fiscal 2021. As we observe continued signs of
reopening across the domestic consumer product markets and reversion toward
consumer consumption and purchasing habits which we believe to be more in line
with trends observable before the COVID-19 pandemic, we expect on-premise sales
to continue to increase from their pandemic lows, resulting in higher sales of
our ultra-luxury winery brands. At the same time, the significant growth in
off-premise sales that we have experienced during the pandemic may be tempered,
and the rate of growth may marginally slow at off-premise retailers. Although we
have observed strong customer demand during periods impacted by pervasive
stay-at-home restrictions, and cannot predict the future impact on consumer
spending as these restrictions continue to lessen, we believe that the diverse
offerings of The Duckhorn Portfolio, which include a broad spectrum of price
points, mitigates some of the risk to our future operations in periods in which
the on- and off-premise relative mix fluctuates.

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

Impact of forest fires

During the first quarter of Fiscal 2021, several wildfires occurred in Northern
California. These fires have adversely affected industry grape supplies, though
the full extent is not yet known. Other than smoke exposure to grapes that had
not been harvested, our own vineyards did not sustain damage during the fires.
However, smoke and fire damage to vineyards in the primary regions and markets
where we source fruit rendered some of the available grapes unacceptable for the
Company's production needs. In response, we took steps to obtain alternative
sources of supply that we believe substantially mitigates the impact of the
fires on our supply. Based
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on our internal analysis of the impacts of the wildfires, we believe the
potential future impact on our operational results to be immaterial. We intend
to continue monitoring the ongoing effects on our business for any material
changes to that conclusion. Wildfires and smoke damage to grape yields have
resulted in disruption and could continue to disrupt the overall grape supply
market, introduce changes to our production plan, impact the quantity or release
timing of expected case sales in our sales forecast, or result in changes to
future gross profit margins as compared to prior periods.

We continue to improve our wildfire response plan and mitigate the supply risk associated with fires by:

•our diversified sourcing strategy, with a mix of our owned or leased Estate
properties and high-quality grower contracts, covers a wide geographic footprint
across California and Washington; and
•we have assembled a team of winemakers and operational leadership with deep
industry experience, enabling us to respond effectively to supply disruption in
our active grape sourcing markets or to expand into new sourcing markets if
needed.

Impacts of accounting for purchases due to prior acquisitions

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

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

                                               Three months ended January 31,         Six months ended January 31,
(in thousands)                                    2022                2021               2022               2021

Purchase accounting adjustments to cost of
sales                                         $       99          $     762          $     292          $   1,323
Impact of purchase accounting on gross profit        (99)              (762)              (292)            (1,323)
Amortization of customer relationships and
other intangible assets                            1,921              1,921              3,842              3,842
Impact of purchase accounting on selling,
general and administrative expenses                1,921              1,921              3,842              3,842
Impacts of purchase accounting on income
before income taxes                           $   (2,020)         $  (2,683)         $  (4,134)         $  (5,165)


Results of operations

The following table sets forth our results of operations for the periods presented and expresses the relationship of each line item presented as a percentage of net sales for the periods indicated. The table below should be read in conjunction with the corresponding discussion and our annual audited consolidated financial statements.

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financial statements, our unaudited condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q:

                                                      Three months ended January 31,                                                Six months ended January 31,
(in thousands, except percentages)                2022                                  2021                                  2022                                  2021
Net sales                          $       98,736            100.0  %       $ 83,657            100.0  %       $      202,917            100.0  %       $ 175,295            100.0  %
Cost of sales                              49,259             49.9            41,900             50.1                 101,030             49.8             89,263             50.9
Gross profit                               49,477             50.1            41,757             49.9                 101,887             50.2             86,032             49.1
Selling, general, and
administrative expenses                    23,814             24.1            17,471             20.9                  46,972             23.1             34,276             19.6

Casualty loss (gain), net                      31                -            (7,770)            (9.3)                     80                -             (6,215)            (3.5)
Income from operations                     25,632             26.0            32,056             38.3                  54,835             27.0             57,971             33.1
Interest expense                            1,636              1.7             3,612              4.3                   3,242              1.6              7,192              4.1
Other income, net                            (338)            (0.3)           (1,491)            (1.8)                 (1,431)            (0.7)            (2,814)            (1.6)
Total other expenses                        1,298              1.3             2,121              2.5                   1,811              0.9              4,378              2.5
Income before income taxes                 24,334             24.6            29,935             35.8                  53,024             26.1             53,593             30.6
Income tax expense                          6,407              6.5             7,935              9.5                  13,784              6.8             14,071              8.0
Net income                                 17,927             18.2            22,000             26.3                  39,240             19.3             39,522             22.5
Less: Net loss (income)
attributable to non-controlling
interest                                        5                -                 3                -                     (35)               -                  4                -
Net income attributable to The
Duckhorn Portfolio, Inc.           $       17,932             18.2  %       $ 22,003             26.3  %       $       39,205             19.3  %       $  39,526             22.5  %


Comparison of three and six months ended January 31, 2022 and 2021

Net sales
                            Three months ended January 31,                  Change                      Six months ended January 31,                       Change
(in thousands, except
percentages)                    2022              2021                $                %                   2022                  2021                $                %
Net sales                   $  98,736          $ 83,657          $ 15,079  

18.0% $202,917 $175,295 $27,622

             15.8  %


Net sales for the three months ended January 31, 2022 increased $15.1 million,
or 18.0%, to $98.7 million compared to $83.7 million for the three months ended
January 31, 2021. The increase in net sales for the three months ended January
31, 2022 is driven by increased volume growth and partially offset by a negative
price/mix contribution due to channel mix. Additionally, we saw a significant
increase in our Wholesale to Distributor channel.

Net sales for the six months ended January 31, 2022 increased $27.6 million, or
15.8%, to $202.9 million compared to $175.3 million for the six months ended
January 31, 2021. The increase in net sales for the six months ended January 31,
2022 is primarily driven by volume growth and a neutral price/mix contribution,
driven by both volume and mix improvements in the wholesale channel as well as
growth in the DTC channel from higher tasting room sales. There were no material
pricing changes for the periods presented.

Cost of sales
                            Three months ended January 31,                 Change                   Six months ended January 31,                    Change
(in thousands, except
percentages)                    2022              2021               $                %                2022               2021                $                %
Cost of sales               $  49,259          $ 41,900          $ 7,359             17.6  %       $  101,030          $ 89,263          $ 11,767             13.2  %


Cost of sales increased by $7.4 million, or 17.6%, to $49.3 million for the
three months ended January 31, 2022 compared to $41.9 million for the three
months ended January 31, 2021. Cost of sales increased by $11.8 million, or
13.2%, to $101.0 million for the six months ended January 31, 2022 compared to
$89.3 million for the six months ended January 31, 2021.The increases in both
periods were mainly driven by higher sales, partially offset by diminishing
impacts of step-up cost of wine due to purchase accounting adjustments from
prior acquisitions. For additional information see "-Other factors impacting the
comparability of our results of operations".
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Gross profit
                            Three months ended January 31,                 Change                   Six months ended January 31,                    Change
(in thousands, except
percentages)                    2022              2021               $                %                2022               2021                $                %
Gross profit                $  49,477          $ 41,757          $ 7,720             18.5  %       $  101,887          $ 86,032          $ 15,855             18.4  %


Gross profit increased $7.7 million, or 18.5%, to $49.5 million for the three
months ended January 31, 2022 compared to $41.8 million for the three months
ended January 31, 2021. Gross profit increased $15.9 million, or 18.4%, to
$101.9 million for the six months ended January 31, 2022 compared to $86.0
million for the six months ended January 31, 2021. The changes in gross profit
were primarily the result of:

•higher sales volume;

• changes in the mix of brands and net channels favorable to the gross margin; and

• a reduction in the progressive cost of wine sold for the half-year ended January 31, 2022 compared to the same period last year, due to lower remaining inventory balances with a related increase in the recognition of purchases in prior periods.

Gross profit margin was 50.1% for the three months ended January 31, 2022
compared to 49.9% for the three months ended January 31, 2021. Gross profit
margin was 50.2% for the six months ended January 31, 2022 compared to 49.1% for
the six months ended January 31, 2021. The increases in both periods depict the
shift in sales mix in favor of luxury wines sold in the Wholesale to Distributor
channel in the current periods, with additional margin lift due to lower step-up
from purchase accounting impacting cost of sales than in previous periods. The
gross profit margin increases, primarily due to movement towards historical
trends in consumer spending patterns with the continued recovery of on-premise
sales locations, also depict a shift in sales mix slightly in favor of
ultra-luxury wines sold through all sales channels. These shifts are especially
prevalent in our Wholesale California and DTC channels in the current period. As
our luxury winery brands contribute to outsized volume growth in the future, we
may expect downward pressure on gross profit margins in future periods, with
brand mix potentially introducing favorable gross profit margin impacts based on
brand velocity at different price points.

Operating expenses
Selling, general and administrative expenses
                             Three months ended January 31,                 Change                   Six months ended January 31,                   Change
(in thousands, except
percentages)                     2022              2021               $                %                2022              2021                $                %
Selling expenses             $  10,971          $  8,403          $ 2,568             30.6  %       $  21,369          $ 16,727          $  4,642             27.8  %
Marketing expenses               2,887             2,178              709             32.6              5,059             3,925             1,134             28.9
General and administrative
expenses                         9,956             6,890            3,066             44.5             20,544            13,624             6,920       

50.8

Total selling, general and
administrative expenses      $  23,814          $ 17,471          $ 6,343   

36.3% $46,972 $34,276 $12,696

37.0%


Selling, general and administrative expenses increased $6.3 million, or 36.3%,
to $23.8 million for the three months ended January 31, 2022, compared to $17.5
million for the three months ended January 31, 2021. Selling, general and
administrative expenses increased $12.7 million, or 37.0%, to $47.0 million for
the six months ended January 31, 2022 compared to $34.3 million for the six
months ended January 31, 2021. The increase for both the three months and six
months ended January 31, 2022 was largely attributable to compensation costs due
to our expanded workforce, higher equity-based compensation as a public company
as compared to the prior year period, transaction expenses incurred for the
secondary offering (see Note 1 (Description of business) for additional
information related to the offering), higher general and administrative costs
related to being a public company and higher selling expenses in support of
revenue-generating activities as travel restrictions lessened versus the
comparative prior year period.

General and administrative expenses were higher for the three months and six
months ended January 31, 2022 compared to the respective prior year periods,
primarily due to equity-based compensation costs and public company costs that
we had not incurred in the prior year period shown. Selling expenses were higher
for the three months and six months ended January 31, 2022 due to equity-based
and other compensation costs along with the impacts of increased sales
activities to support sales growth, including higher levels of business travel
than in
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prior periods constrained due to COVID-19 restrictions in key markets where we
operate. Marketing expenses increased by $0.7 million and $1.1 million for the
three months and six months ended January 31, 2022, respectively, versus the
comparative period due primarily to increases in equity-based compensation and
other compensation costs, further increased due to the prior year period showing
reductions in marketing and promotional events as a result of the ongoing
pandemic.

Loss (gain), net

                             Three months ended January 31,                   Change                   Six months ended January 31,                    Change
(in thousands, except
percentages)                     2022               2021               $                 %                2022               2021               $                 %

Loss (gain), net $31 ($7,770) $7,801

(100.4)% $80 ($6,215) $6,295

(101.3)%


Casualty loss (gain), net increased by $7.8 million, or 100.4%, for the three
months ended January 31, 2022 compared to the three months ended January 31,
2021. Casualty loss (gain), net increased by $6.3 million, or 101.3%, for the
six months ended January 31, 2022 compared to the six months ended January 31,
2021. The change between the current and prior year is primarily due to
insurance proceeds received in Fiscal 2021 related to a flood at one of our
wineries in a previous fiscal year that did not reoccur in the current fiscal
year. See Note 13 (Casualty loss) to our Condensed Consolidated Financial
Statements for further information.

Other expenses
                            Three months ended January
                                        31,                               Change                   Six months ended January 31,                  Change
(in thousands, except
percentages)                   2022              2021               $                 %               2022              2021               $                %
Interest expense               1,636            3,612          $ (1,976)            (54.7) %       $  3,242          $ 7,192          $ (3,950)           (54.9) %
Other income, net               (338)          (1,491)            1,153             (77.3) %         (1,431)          (2,814)            1,383            (49.1) %
Total other expenses       $   1,298          $ 2,121          $   (823)    

(38.8)% $1,811 $4,378 ($2,567)

(58.6)%


Other expenses decreased by $0.8 million, or 38.8%, to $1.3 million for the
three months ended January 31, 2022 compared to $2.1 million for the three
months ended January 31, 2021. Other expenses decreased by $2.6 million, or
58.6%, to $1.8 million for the six months ended January 31, 2022 compared to
$4.4 million for the six months ended January 31, 2021. Our interest expense was
reduced year over year due to lower debt balances outstanding for the period, in
conjunction with lower average interest rates on our variable-rate debt. The
change in our other income, net was primarily driven by downward pressure on
LIBOR and a lower overall swap notional balance. Both of these factors
contributed to a net gain for the three months and six months ended January 31,
2022 and a change in overall position to an asset on our Condensed Consolidated
Statements of Financial Position. In addition, see "-Liquidity and capital
resources" for discussion of our Credit Facility.

Income tax expense
                            Three months ended January
                                        31,                               Change                    Six months ended January 31,                  Change
(in thousands, except
percentages)                   2022              2021               $                 %                2022              2021               $               %
Income tax expense         $   6,407          $ 7,935          $ (1,528)            (19.3) %       $  13,784          $ 14,071          $ (287)            (2.0) %


Income tax expense decreased $1.5 million, or 19.3%, to $6.4 million for the
three months ended January 31, 2022 compared to $7.9 million for the three
months ended January 31, 2021. Income tax expense decreased $0.3 million, or
2.0%, to $13.8 million for the six months ended January 31, 2022 compared to
$14.1 million for the six months ended January 31, 2021. The change in our
income tax expense was primarily due to decreased pre-tax income in the current
period, as the effective tax rate remained largely consistent year over year.

Cash and capital resources

Sources of liquidity

Our primary cash needs are for working capital purposes, such as producing or
purchasing inventory and funding operating and capital expenditures. We fund our
operational cash requirements with cash flows from operating activities and
borrowings under our Credit Facility. As of January 31, 2022, we had $4.8
million in cash and $290.0 million available in undrawn capacity on our
revolving line of credit, subject to the terms of our Credit Facility.
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In response to the COVID-19 pandemic, we assessed the risks related to our inventory and cash management, which we determined to be sufficiently mitigated, subject to reassessment in the future in response to impacts related to the pandemic as they occur. The full impact of COVID-19 on our future operations remains uncertain and will be determined by the duration and severity of pandemic-related disruptions. Accordingly, unforeseen future events could adversely affect our business, results of operations, cash flow and liquidity.

Due to the seasonal nature of our operations, our cash needs are generally
greatest during harvest, a period which can span from August to November based
on agricultural conditions and other factors outside our control. We believe
that our expected operating cash flows, cash on hand and borrowing capacity on
our revolving line of credit, will be adequate to meet our cash needs for the
next 12 months. However, changes in our business growth plan, planned capital
expenditures or responses to the impacts of the global pandemic or to an
ever-changing and highly competitive industry landscape may result in changes to
our cash requirements.

If our cash needs change in the future, we may seek alternative or incremental
funding sources to respond to changes in our business. To the extent required,
we may seek to fund additional liquidity through debt or equity financing,
although we can provide no assurance that such forms of capital will be
available when needed, if at all, or available on terms that are acceptable.

Cash flow

The following table presents the main components of free cash flow.

                                           Six months ended January 31,
(in thousands)                                  2022                    

2021

Cash flows provided by (used in):
Operating activities                $        18,828                  $ 26,141
Investing activities                        (23,336)                   (9,748)
Financing activities                          5,034                   (13,371)
Net increase in cash                $           526                  $  3,022


Operating activities

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

For the six months ended January 31, 2022, net cash provided by operating
activities was $18.8 million compared to $26.1 million for the six months ended
January 31, 2021, a decrease of $7.3 million. The decrease in cash provided by
operating activities was driven by the following factors:

•Net income after adjusting for non-monetary items increased operating cash flow by $3.7 million;

•Increases in prepaid expenses for the six months ended January 31, 2022 that
were less than the higher prepaid expenses in the prior year period due to
increased professional fees and insurance, partially offset by timing impacts in
bulk and bottled wine supply management to support increases in demand, in
aggregate resulted in an increase to operating cash flow of $4.0 million;

•Our wholesale sales channel, generally subject to credit terms, saw an increase
in net sales, which drove a corresponding increase in accounts receivable and
resulted in a $6.5 million decrease in operating cash flow;

• Changes in accounts payable and accrued liabilities increased cash flow from operations
$1.6 million mainly due to the timing of adjustments and payments of invoices, mainly related to purchases by winegrowers during the annual harvest period;

• Decrease in accumulated compensation of $4.1 million based on the timing of certain compensation-related payments resulted in a corresponding decrease in operating cash flow; and

• Deferred revenue decreased operating cash flow by $6.0 million mainly due to the shipping schedule for DTC list member sales.

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Investing activities

For the six months ended January 31, 2022, net cash used in investing activities
was $23.3 million compared to $9.7 million for the six months ended January 31,
2021, an increase of $13.6 million, primarily due to vineyard acquisitions
completed during the current fiscal quarter, see Note 5 (Property and
equipment). Capital expenditures were $23.4 million for the six months ended
January 31, 2022 and $9.8 million for six months ended January 31, 2021. From
time to time, we evaluate wineries, vineyards and production facilities for
potential opportunities to make strategic acquisitions to support our growth.
Any such transactions may require us to make additional investments and capital
expenditures in the future.

Financing activities

For the six months ended January 31, 2022, net cash provided by financing
activities was $5.0 million as compared to net cash used in financing activities
of $13.4 million for the six months ended January 31, 2021, an increase of $18.4
million of net cash provided by financing activities. The increase in cash
provided by financing activities was primarily the result of an increase in net
borrowings on our revolving line of credit totaling $11.0 million for the six
months ended January 31, 2022 in comparison to $6.0 million in net revolving
line of credit paydowns for the six months ended January 31, 2021. Additionally,
payments made on long-term debt decreased by $1.5 million, thereby increasing
cash provided by financing activities.

Capital resources

Credit facility

On October 14, 2016, we entered into the Credit Facility with a syndicated group
of lenders. The Credit Facility provides a combination of term and revolving
line of credit features. The term and revolving line of credit borrowings have
variable interest rates, based primarily on LIBOR plus an applicable margin as
defined in the First Lien Loan Agreement. Interest is paid monthly or quarterly
based on loan type. Our debt is collateralized by substantially all of our cash,
trade accounts receivable, real and personal property. Pursuant to the terms and
conditions of the First Lien Loan Agreement, we have issued the instruments
discussed below.

As of January 31, 2022, outstanding principal balances on the debt instruments
were $135.0 million for the revolving line of credit, $6.9 million for the
capital expenditure loan, $100.1 million for the term loan (tranche one) and
$13.8 million for term loan (tranche two).

The Senior Loan Agreement contains customary positive covenants, including the delivery of audited financial statements and customary negative covenants which, among other things, limit our ability to incur additional indebtedness or grant certain privileges. From January 31, 2022we have not breached any covenant.

Revolving line of credit

The revolving line of credit allows us to borrow up to a principal amount of
$425.0 million (including a letter of credit sub-facility of the revolving loan
facility in the aggregate of $15.0 million and a swingline sub-facility of the
revolving loan facility in the aggregate of $15.0 million), with an incremental
seasonal borrowing amount for harvest costs increasing the total amount to a
maximum of $455.0 million. The revolving line of credit matures on August 1,
2023. The interest rate ranges from LIBOR plus 125 basis points to LIBOR plus
175 basis points depending on the average availability of the revolving line of
credit.

Capital expenditure loan

The capital expenditure loan has a maximum, non-revolving draw-down limit of
$25.0 million with quarterly principal payments and the remaining unpaid
principal and interest due upon maturity on August 1, 2023. As of January 31,
2022, the $25.0 million limit was fully drawn. This instrument has an interest
rate of LIBOR plus 190 basis points.

Term loans

The first tranche of term loans was issued in 2016 for a principal balance of
$135.0 million with quarterly principal payments and the remaining unpaid
principal and interest due upon maturity on August 1, 2023. This tranche of the
term loans has an interest rate of LIBOR plus 190 basis points.
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The second tranche of term loans, issued in August 2018, allowed for a principal
balance up to $25.0 million with quarterly principal payments and the remaining
unpaid principal and interest due upon maturity on August 1, 2023. We drew $16.4
million of the second tranche of the term loan in November 2018. This tranche of
the term loans has an interest rate of LIBOR plus 163 basis points.

Off-balance sheet arrangements

As of January 31, 2022, we did not have any off-balance sheet arrangements that
had, or are reasonably likely to have in the future, a material effect on our
financial condition, results of operations, liquidity, capital expenditures or
capital resources.

Significant Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results
of operations are based on our Condensed Consolidated Financial Statements,
which are prepared in accordance with U.S. GAAP. The preparation of these
Condensed Consolidated Financial Statements requires the application of
appropriate technical accounting rules and guidance, as well as the use of
estimates. The application of these policies requires judgments regarding future
events. These estimates and judgments could materially impact the Condensed
Consolidated Financial Statements and disclosures based on varying assumptions,
as future events rarely develop exactly as forecasted, and even the best
estimates routinely require adjustment.

There have been no material changes in our critical accounting policies during
the six months ended January 31, 2022, as compared to those disclosed in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for
Fiscal 2021.

Recent accounting statements

See Note 2 (Basis of presentation and significant accounting policies) to our
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
Report for additional information regarding recent accounting pronouncements.

Emerging Growth Business Status

We are an emerging growth company, as defined in the JOBS Act. Section 107 of
the JOBS Act provides that an "emerging growth company" can take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities
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. Section 107 of
the JOBS Act provides that any decision to opt out of the extended transition
period for complying with new or revised accounting standards is irrevocable. We
have elected to use this extended transition period for complying with new or
revised accounting standards that have different effective dates for public and
private companies. 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. Based on the Company's aggregate worldwide
market value of voting and non-voting common equity held by non-affiliates as of
January 31, 2022, the Company will become a "large accelerated filer" and lose
emerging growth company status beginning with its Annual Report on Form 10-K for
the year ending July 31, 2022.

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