Winc, Inc.

Greetings and welcome to the Wink First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Thielen. Thank you, Matt. You may begin.

Thank you, and welcome to Wink's first quarter 2022 earnings conference call. Joining me on today's call are Jeffrey McFarland, our CEO, Brian Smith, our president and chairman, and Carol Brault, our chief financial officer. In a moment, you will hear brief remarks from all three, followed by a Q&A session. By now, everyone should have access to the earnings release for the first quarter ended on March 31st, 2022, that went out earlier this afternoon. The earnings release is also accessible on the company's website at ir.winc.com. And shortly after the conclusion of today's call, our webcast will be archived on the website for the next 30 days. Today's call will contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A, of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include statements concerning our total addressable market, liquidity and capital resources, financial and business trends, the impacts of COVID-19 on our business and global economic conditions, our ability to obtain adequate financing and continue as a going concern, and our expected future business and financial performance, and can be identified by such words as believe, may, will, estimate, continue, anticipate, intend, expect, could, would, project, plan, potentially, preliminary, likely, and similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or achievements reflected in forward-looking statements will be achieved or will occur. Any forward-looking statements made herein speak only as of today's date, and you should not rely on forward-looking statements as predictions of future events. Except as required by applicable law, we undertake no obligation to update any of these forward-looking statements for any reason after the date of this call or to conform these statements to actual results or revised expectations. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's earnings release, our annual report form 10-K filed with the SEC on March 30, 2022, and our other periodic filings with the SEC. During the call, we will also discuss certain financial measures that are not prepared in accordance with generally accepted accounting principles. For more information on the use of these non-GAAP financial measures, including a reconciliation of each to its nearest GAAP equivalent, please refer to our earnings release. Further, throughout this call, we provide a number of key performance indicators used by our management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our earnings release. With that, I will turn the call over to Jack.

Thank you, Matt, and good afternoon.

It is my pleasure to speak with you today to discuss our first quarter results. Following my opening remarks, I will turn things over to Brian, who will give an update on our core brand portfolio. Then Carol will discuss our Q1 financial results in greater detail before we open the call for questions. Our latest results demonstrate solid execution against our core strategies for driving top line growth and improving profitability. We continue to experience strong demand in the first quarter, and our year-over-year net revenue growth accelerated sequentially to 5.7%, underscoring the power of our unique omnichannel model. Wholesale remained the leading factor in our continued growth, with revenues increasing 75.1% to $5 million, driven by expanding distribution, shelf placement, and retail velocities. We ended the quarter with 9,348 accounts, reflecting year-over-year growth of 62.2%, with on-premise opening up nationally and continued growth at major national retailers like PLCB, Target, and Whole Foods accounting for most of the gains. Importantly, we believe we still have meaningful headroom for further wholesale channel growth relative to our target of 50,000 retail account price splints over the next several years. Summerwater saw the number of accounts increase by more than 70% compared to the first quarter 2021. And with an all commodity volume of just 3.1%, we believe it has significant runway for future growth. In DTC, revenues were down 6.7%, which was unsurprising as we continued to compare against major increases in the prior year period, driven by COVID-related impact on the consumer demand. Importantly, underlying metrics in direct-to-consumer remained very strong, including an 11% increase in average order value and an increase to 5.4 bottles per order. Moreover, we demonstrated significant progress optimizing our promotional activities and customer acquisition efficiency as first quarter marketing spend was down 36% versus last year. A shift in product mix towards imported wines in the wholesale channel as well as excise tax timing and higher logistics-related expenses for the DTC channel adversely impacted margins in the first quarter. Despite these challenges, we delivered a consolidated gross margin of about 40%. a level that we believe supports long-term profitability metrics as our business continues to scale. We remain diligent in managing inflationary factors and aim to improve margin as 2022 unfolds. Finally, we've made significant strides on our path to profitability and remain confident that our current trajectory will allow us to achieve adjusted EBITDA breakeven in the next several years if we are able to maintain our current growth levels and limit operating cost increases. Our adjusted EBITDA loss improved performance 47% sequentially over Q4 2021 to $3.1 million in the first quarter, and net cash used in operating activities improved by 34% on a sequential basis. We've made major investments in inventory over the past several months, which we believe we can leverage to provide operating liquidity. Plus, we are negotiating additional credit facilities to provide capital to meet our liquidity needs, including repayment of our existing debt. From a margin perspective, we believe we have ample opportunity to expand margin through pricing at our top wholesale brands, our fast-growing consumer categories like Rosé and Organic Prosecco, and we expect to see price increases in these categories as a whole. Specifically, our summer water business has important competitive advantages related to international peers who are facing large freight pressures. Summer water also is picked early in the harvest season, has a rapid fermentation cycle, and an early release in the season providing the opportunity for a fast return on invested capital. All of these factors support our confidence in the potential for growth and profitability, and we believe our existing inventory levels and potential access to debt financing can finance our organic growth. Now, I will turn it over to Brian Smith to discuss our core brand portfolio, wholesale growth, and some things to look forward to in the coming quarters.

Thank you, Jeff. We are pleased with our progress in the first quarter, which reflected broad-based growth across our portfolio. Our core brands, which we define as having individually generated more than $1 million in net revenues through the direct consumer channel and more than half a million through the wholesale channel in the last 12 months, collectively grew in case volumes sold by 42.6% versus the same period last year. We currently have five core brands, Summerwater, Folly of the Beast, Wonderful Wine Co., rebranding as Wonders, Chop Shop, and Lost Poet, all developed internally and which helped fuel our wholesale channel growth with retailers across the country. Retail expansion is the primary growth driver for wholesale, and we added 3,584 new accounts in the first quarter, an increase of 62.2% versus last year. We're excited to announce recent retail placements of our top brands with total wine sales and more, and BevMo, along with deepening relationships in the form of additional shelf placements at the likes of Whole Foods, HEB, Publix, Harris Teeter, and Giant Foods. Organic remains a major area of focus as we seek to capitalize on the tremendous growth in this burgeoning category that closely aligns with our core demographic of millennial and Gen X consumers. During the past year, we've tripled our organic brands offering, including top brands such as Cherries and Rainbows, Pizzolatto, Biocult, and La Zota Lagarde. Pizzolatto, our organic Prosecco brand, grew to 9,747 cases sold in Q1, up 40.8% from 6,922 cases sold in Q3, the first full quarter following Wink's acquisition of the importation rights to the brand. As we hit the heart of rosé season, we have some exciting activations to drive awareness and digitally influence sales of our top brands at Retail Partners. In addition to digital activations and live events across the country, we're proud to announce that Summer Water will be the official wine of the iconic Hollywood Bowl. In addition, Summer Water Society, our Rosé subscription, will be launching this month. As a part of this launch, we're pleased to announce the release of Summer Water Orange. Orange wine is an increasingly popular category for consumers, with sales increasing 2,583 in 2020 versus the prior year, according to Drizzly BevAlc Insights. The brand will be initially launched on summerwater.com as a web exclusive. Finally, we continue to invest in innovation to drive growth and leverage the strength of our omnichannel platform. Our innovations target many of the largest trends in the space, such as Better For You, Organic, Nowhere Low Alc, and alternative formats. We recently announced the launch of WondersLine, a no-sugar-added, organic, and sustainable wine, acting as a pillar of Wink's core brand portfolio. The initial release will include red, white, and rosé varietals, and the brand will be available on Wink.com this year, followed soon after at retail locations. Overall, Better For You wines nearly doubled in volume in 2020 and are expected to accelerate further and approach 3 million cases in the U.S. by year-end, according to Impact Data Bank. In Q4 of this year, we expect to release Good Twin, an organic non-alkaline brand. This is an emerging category with younger consumers, and while we will launch and direct consumer first, we're already receiving interest from key national retailers. Now, I will turn it over to Carol Brault to discuss our Q1 financial results in greater detail.

Thanks, Brian, and good afternoon, everyone. Let me run through our Q1 financials. Total net revenues for the first quarter were $18.5 million, an increase of approximately $1 million or 5.7% compared to the first quarter of 2021. Wholesale net revenues increased 75.1% to $5 million as we continue to expand our retail accounts, increase the number of products sold through each retail partner, and the rate at which the products are sold. CTC net revenues decreased 6.7% to 13.3 million, reflecting lower order volumes as COVID-19 restrictions were lifted, partially offset by increased average order value, which was up 11.7% from the same period in 2021. Gross profit was 7.4 million, a 5.1% decline compared to the prior year period. On a consolidated basis, gross margin was 40.3% compared to 44.9% in the prior year period. Gross margin in our DTC segment was 42.4%, representing a 300 basis point decline as compared to the first quarter of 2021. The decrease is primarily due to increased excise tax costs period over period, as credits were utilized for the three months ended March 31st, 2021, as well as increased logistics related expenses. We continue to strive to minimize the impact of global supply chain constraints and inflation by focusing on operating efficiencies and driving growth of our high margin core brand portfolio. In wholesale, gross margin was 35.1%, a decline from the 40.7% gross margin in the first quarter of 2021 due to a shift in product mix to an increased percentage of sales of imported wines with higher freight costs and overall lower margins. Total operating expenses increased by 3.2 million or 36.2% to 11.9 million. Most of this increase was attributable to growth related initiatives and cost of operating as a public company. Marketing expenses decreased 1.5 million or 35.6% versus last year, reflecting decreased digital advertising expenses in the quarter. Personnel expenses rose 1.8 million or 74.2% to 4.2 million, primarily attributable to a 0.8 million increase in stock-based compensation expense and the 0.9 million increase of expenses related to increased headcount to support growth of the business. We expect personnel expenses to stabilize during the remainder of 2022, and we believe we have sufficient personnel to support public company operations and continue to scale our business. Net loss for the first quarter of 2022 was 4.2 million or 32 cents per share, compared to a net income of 0.6 million or 6 cents per fully diluted share in the first quarter of 2021. Adjusted EBITDA loss for the quarter was 3.1 million versus a loss of 0.4 million in the prior year period and 5.9 million in the fourth quarter of 2021, a 47% improvement on a sequential quarterly basis. The company incurred stock-based comp expense of 0.8 million. This decline in adjusted EBITDA of 2.7 million was primarily attributable to a decrease in gross profit and increase in personnel and other GNA charges related to building our team for high growth and supporting public company operations. At the end of March 2022, we had cash and cash equivalents of 4.3 million and 3 million of borrowings under our line of credit, which matures on June 30th, 2022. While we believe we will be able to extend the maturity of our line of credit and obtain alternative debt financing, if we are unable to do so, there are no assurances we will be able to repay our outstanding borrowings at maturity and continue as a going concern. However, assuming we are successful in extending our current credit facility or obtaining adequate alternative financing, we believe we will have sufficient capital from leveraging existing inventory reserves and potential access to additional debt financing to finance our organic growth and repay our existing debt obligations. Now, I'll turn the call back to Jeff for closing comments.

Thanks, Cheryl. We remain focused on building our portfolio of brands, leveraging our investments in the DTC and wholesale channels, and optimizing operational performance as we continue to scale our business. We aim to deliver products from our robust innovation pipeline to consumers in order to support the ongoing demand for exciting new products from today's younger consumers and believe that our existing portfolio of core brands has significant room for growth over the coming years. We believe our technology platform and deep relationships with wholesale and retail partners uniquely differentiate us within the industry and support our long-term growth expectations. Finally, With our current balance sheet position and assuming we are able to secure adequate additional financing, we believe we have sufficient liquidity to continue executing on our goal to scale to profitability.

With that, we are ready to open the call to your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Thank you. Our first question comes from Bobby Burleson with Canaccord. Please proceed with your question.

Hey, good afternoon. Thanks for taking my question.

So probably like the first one would be just on the EBITDA break-even comment you guys are now talking about. I think the quote was the next several years. I'm curious how that, if you can just remind us what the earlier color was on that. I thought you guys were potentially pulling that in a little bit. Did something change?

No, nothing there, Bobby. Thanks for the question. You know, I think we are, you know, we're targeting improvement quarter over quarter and just, you know, as you know, we haven't provided specific guidance on revenue or EBITDA, so not providing specific guidance on that. But as you saw, the sequential improvement from Q4 of 21 to Q1 of 22, we expect to continue to improve quarter over quarter and aiming – for it to be as soon as possible here and still feel like we've got a very clear path to that, you know, in a very reasonable timeframe. And then we've got the balance sheet to do that with the right refinancing of our debt.

Okay. And then with the refinancing of your debt, what does the right refinancing look like and what, you know, how much do you need to bring in? and how are those negotiations going? I know you're working on that.

Yeah, absolutely. Bank of California was a good partner for us. It was really originally with Pacific Mercantile Bank, but then Bank of California acquired them, and so they really changed the way in which they're viewing their lending, and so they've become not the right partner for us, but they've been great in extending it. We're extending it to June 30th, and then We've had some really positive conversations with them and expect to continue an extension there while we find another partner for us. Looking for $5 to $10 million of AR and inventory debt, really an asset-based line of credit, and have a number of term sheets that we're reviewing today that span a bunch of different ways to look at it. So we're really just working on trying to find you know, the most efficient cost of capital and good long-term solution for the bank or the right, sorry, for the company with the right partner and have a number of options. So just, you know, making sure that we find the right option that reduces or that finds us the least expensive cost of capital.

Okay. And then just on the mix shift, the product mix shift, the gross margin kind of headwind there. Is there, is there a, Is that kind of a moving target in terms of the margins you're seeing for that import business, or is it stabilized somewhat? Yes.

Great question. So that really is a – I mean, it's more of a Q4, Q1 factor. You know, the product mix goes up in our import business as, you know, it's not summer water season, basically. So in Q2 and Q3, the product mix goes back in our favor and provides us some nice tailwinds on margin. And then, but the great news is that that import portfolio, you know, the natural merchant acquisition has been performing great and growing really nicely and provides, you know, solid working capital dynamics in comparison to summer water where we produce the product. So, you know, we can turn that inventory a lot more each year. We definitely saw in Q4 and Q1 significant increases in freight in bringing those products into the U.S., And that was a headwind. But because we're in the organic, you know, space and one of the leaders there, it's provided us with some more pricing ability and elasticity to adjust pricing. And so we've done that. And so we feel really good that the margins are stabilizing. The product mix is improving as Summer Water has, you know, higher gross margins. than the import portfolio, but the import portfolio is providing great growth, as we've seen in the wholesale side, and should provide stabilizing markets. We're excited about what the potential of the rest of this year could bring.

The natural merchants business, as you open doors, retail accounts with that, are you able to sell through additional core products? How wide-ranging does the relationship become, you know, because it sounds like you guys have something that's, you know, besides Summer Water, which opens a lot of doors, are you able to open up accounts on the natural merchants and then sell through some other products?

Yeah, absolutely. I mean, there's a product called Pizzolatto Muse that's been growing extremely quickly. It's a Prosecco that's got a rosé and a brute that is just growing extremely rapidly. and it is opening a lot of doors for us. And ultimately, you know, Summerwater benefits the natural merchants portfolio and the natural merchants portfolio is benefiting the rest of our core brands. And so, you know, we're seeing really positive metrics in each of the areas of growth that you'd look for in wholesale. And that's, you know, points of distribution is a great leading indicator of future growth, but we're also seeing growth in the velocity of our SKUs as well as just the number of SKUs at each point of district or at each, sort of retail door. So we're seeing positive results in each of the three key factors that really show growth in the wholesale side.

Great. Thank you. Thank you.

Our next question comes from Barry Sign with Spartan Capital. Please proceed with your question.

Hey, good afternoon. Thank you. A couple questions for you, if you don't mind. First of all, marketing expenditures were down year over year. Was that strategic? Was it seasonal? Or was that more of a cash management decision to reduce the marketing spend?

Yeah. Yeah, so, I mean, we're certainly – it's a little bit of each. So it's not seasonal. You know, what we're seeing is, you know, that we can – we're finding more efficiency with our marketing, which is a good thing, and that, you know, lowering the cost to acquire a customer, which allows us to spend less. So that's a positive for us. At the same time, we certainly realize that profitability is extremely important in this market, and so we are making strategic decisions to grow a little less quickly and to move the business more quickly towards profitability. So it's a factor of each of those pieces that's driving the lower marketing expenses, but ultimately it means more efficiency out of the business, which is a good thing.

Okay. On DTC, obviously that was down year over year. Obviously a year ago was benefited by the pandemic. In the earnings release, you talk about there's four things that you're going to be doing in the coming quarter to boost that, to get that back to growth again. I wonder if you could elaborate on each of those four items. What specifically are you doing? Give us a little more color on, you know, how you're going to get that DTC growing again.

Yeah, you know, it's,

I mean, it's really a multitude of factors. I mean, I think, you know, what we're doing is balancing the business towards, you know, towards profitability and, you know, and being less focused on top line growth in the DTC channel where we've got, you know, significant scale and really just focusing on, you know, faster payback on customers. What we're really focused on, you know, is driving growth you know, happier customers. So continue to focus on overall user experience and the products that we're offering. Continue to improve the technology and the customer experience. You know, continuing to improve the marketing mix, as we mentioned, which is really, as I mentioned, you know, finding more efficient marketing. And then one second, just pulling up the, making sure I cover each of the four topics. that we talked about here. And then, you know, the last thing that we're really focused on is it's marketing efficiency. It is, you know, it's customer experience. And then it's really opening up new opportunities like the summerwater.com website to bring customers through additional funnels. Like that is, those are the three areas that are really going to focus on driving growth for us.

Okay, and my last question, I want to get a picture so we can better understand the liquidity over the next several quarters. This is several factors I'm looking at. Obviously, you ended with $4.3 million in cash. You took down another $2 million on the credit line. I think you've got two more left to go. You've just said you'll probably get an extension on that before you announce a new credit line. The other factor that I'm wondering about is if I look at your inventory, obviously summer water is your biggest selling product. That's a seasonal product, so you can probably convert some of that inventory. I assume you've got a lot of cases of summer water in the two warehouses. So if you could talk us through what should investors expect on cash flow and liquidity and that balance sheet over the next, let's say, two quarters as we go through the summer water selling season.

Yeah, absolutely. Great question. So, you know, that's exactly, I mean, good framing of exactly what we're doing. So, you know, number one, getting the extension on the debt and feel like, you know, that's in a good place as well as lining up additional partners that will be long-term partners for us, you know, 24 months on those deadlines. So that's number one priority and we feel like we're making great progress there and moving there. And then on the operations of the business, Your point is exactly right. You know, we ended Q1 with $23 million of inventory, almost an additional $4 million in prepaid inventory on the balance sheet. So, you know, when you add those two up, $27 million in inventory, that will be a source of cash for the business in the second half of the year. That, along with our expectations, or we believe will be reducing costs losses in each subsequent quarter. So you've got the extension of debt and then inventory as a cash source. And so, you know, we expect to be lowering our debt using inventory as a source of cash as well as, you know, progressing this towards profitability. And with each of those factors, you know, in the budgeting process that we've done, we believe, you know, we won't need to raise additional equity costs with the plan as long as we can find the right debt partners.

Okay, that was fantastic. Thank you very much.

Thank you. There are no further questions at this time. This does conclude today's conference.

You may disconnect your lines at this time. Thank you for your participation.