The consolidated financial statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated VIE of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation.

The preparation of consolidated financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of long-lived assets, inventory obsolescence and reserves, capitalized indirect inventory costs, allowance for doubtful accounts receivable, calculation of accrued liabilities, customer incentive reserves, uncertain tax positions, contingent liabilities, fair value of assets and liabilities acquired in connection with business combinations, equity-based compensation and deferred revenues. Actual results could differ from those estimates.

The Company recognizes revenue when control of the promised good is transferred to the customer in an amount that reflects the consideration for which the Company is expected to be entitled to receive in exchange for those products. Each contract includes a single performance obligation to transfer control of the product to the customer. Control is transferred when the product is either shipped or delivered, depending on the shipping terms, at which point the Company recognizes the transaction price for the product as revenue. The Company has elected to account for shipping and handling as a fulfillment activity, with amounts billed to customers for shipping and handling included in net sales. The Company has elected to record excise taxes as a reduction to revenue, which are recognized in the Consolidated Statements of Operations when the related product sale is recognized.

The transaction price includes reductions attributable to consideration given to customers through various incentive programs, including depletion-based incentives paid to distributors, volume discounts and pricing discounts on single transactions. This variable consideration is recognized as a reduction to the transaction price based on the expected amounts at the time revenue for the corresponding product is recognized. The determination of the reduction of the transaction price for variable consideration requires certain estimates and judgements that affect the amounts of revenue recognized and if a change to an estimate occurs in a future period, it is recorded as identified. The Company estimates this variable consideration using the expected value method by taking into account factors such as the nature of the incentive program, historical information, current consumer product trends and availability of actual results. Due to the nature of the arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. Consideration given to customers totaled $63.8 million, $44.5 million and $33.4 million for the years ended July 31, 2021, 2020 and 2019, respectively, and there were no material constraints on estimates for the periods then ended.

•The Company pays depletion-based incentives to its distributors for meeting specific depletion targets and reviews the allowances using a portfolio approach, grouping contracts with similar attributes, which does not result in a materially different outcome than would be obtained by applying assumptions to each individual contract within the portfolio. The allowances are reassessed at each reporting date to reflect changes in facts and circumstances that could impact allowance estimates.

Products are sold for cash or on credit terms. Credit terms are established in accordance with local and industry practices, and typically require payment within 30-90 days of delivery or shipment, as dictated by the terms of each agreement. The Company has elected the practical expedient to not account for significant financing components as its payment terms are less than one year, and the Company determines the terms at contract inception. The Company’s sales terms do not allow for the right of return except for matters related to manufacturing defects, which are not material.

When the Company receives payment from a customer prior to transferring the product under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company’s deferred revenue is primarily comprised of cash collected from DTC members for purchases ahead of the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance obligation is met.

Cost of sales includes all bulk wine production costs, winemaking, bottling, packaging, warehousing, and shipping and handling costs. Costs associated with the Company’s leased vineyards or owned estates include annual farming costs and amortization of vineyard development expenditures. Costs incurred for wines that age longer than one year prior to sale, including winemaking and processing costs, continue to be capitalized into inventory until the wine is bottled and available for sale.

Accounts receivable consists of amounts owed to the Company for sales of the Company’s products on credit and are reported at net realizable value. Interest is accrued on past-due amounts when required by trade laws in a given jurisdiction. The Company maintains an allowance for doubtful accounts receivable for estimated losses resulting from the inability of its customers to make required payments. The Company determines this allowance based on review of the level of gross receivables, the aging of accounts receivable at the date of the consolidated financial statements, the financial condition of the Company's customers and the economic risks for certain customers.

The allowance for doubtful accounts as of July 31, 2021 and 2020 was $0.8 million and $0.3 million, respectively. The increase in the Fiscal 2021 is shown as a charge to bad debt expense included in selling, general and administrative expenses on the Consolidated Statements of Operation and is partially driven by uncertainties related to COVID-19 which has increased the risk of uncollectible accounts. Additionally, growth in export sales where customer credit information differs from what is available for domestic companies and potentially more challenging collection processes in the event of past-due receivables has further increased the overall allowance balance as compared to historical years. The Company writes-off uncollectible customer accounts receivable balances following a systematic investigation of delinquent accounts and Management review of accounts.

Inventory primarily includes bulk and bottled wine and is carried at the lower of cost (calculated using the first-in-first-out method) or net realizable value. On an ongoing basis, the Company evaluates the estimate and assumptions. As required, the Company reduces the carrying value of inventories that are obsolete or in excess of estimated usage to estimated net realizable value. The cost basis for inventory includes the costs related to winemaking. Consistent with industry practices, the Company classifies inventory as a current asset, although a substantial portion of inventory may be aged for periods longer than one year prior to being sold due to the specific aging requirements for a given wine varietal and vintage. Aging inventory, prior to bottling, is classified as work in process.

The Company reduces the carrying value of inventories that are obsolete or for which market conditions indicate cost will not be recovered to estimated net realizable value. The Company’s estimate of net realizable value is based on analysis and assumptions including, but not limited to, historical experience, future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of sales in the period Management determines the conditions first arise which indicate the cost may not be recoverable.

Inventory also includes deferred crop costs, which consist of vineyard and related farming costs incurred each harvest season. Such costs begin aggregating when one harvest is completed and end at the completion of the next harvest, spanning a period that can range from November to October of the subsequent calendar year, but may vary due to the variable nature of agriculture, including weather and other events.

Property and equipment are reported at cost and are depreciated using the straight-line method over the expected useful lives of the assets, with the exception of leasehold improvements, which are depreciated over the term of the lease. Expenditures for major repairs and maintenance which extend the useful lives of property and equipment are capitalized. All other maintenance expenditures, including planned major maintenance activities, are expensed as incurred. Gains or losses from property disposals are included in income or loss from operations.

The Company capitalizes vineyard development costs when developing new vineyards or improving existing vineyards, whether owned or leased. These costs principally consist of the costs of the vines and expenditures related to labor and materials to prepare the vineyard and construct vine trellises. Amortization of such costs is recorded on a straight-line basis over the estimated economic useful life of the vineyard, which can range from 15 to 25 years. Interest is capitalized during the active construction period for major capital projects. The Company evaluates the recoverability of capitalized costs and records impairment charges if conditions or events indicate that such costs will not be recovered. No such impairment charges were required to be recorded during the years ended July 31, 2021, 2020 or 2019.

Goodwill arising from business combinations is determined as the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in an acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets determined to have an indefinite useful life are not amortized but are tested for impairment at least annually or as events and circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Management may elect not to perform the qualitative assessment and perform only a quantitative impairment test as of the measurement date. The Company selected June 30 of each fiscal year as the date to perform annual impairment testing. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

Intangible assets outside of goodwill include trade names, customer relationships, leasehold interests and lane rights. The Company determined that trade names and lane rights have indefinite useful lives. The Company believes that trade names provide value from the utility of the brands for the foreseeable future. Lane rights represent the Company's rights to storage capacity at the Wine Service Cooperative for the life of the facility at

For the fiscal year ended July 31, 2020, the Company recognized a non-cash impairment charge for certain trade name intangible assets as described in Note 7 (Goodwill and other intangible assets). The charges were primarily the result of market impacts associated with the COVID-19 pandemic. The charges were determined in connection with the Company’s annual impairment test. No other impairments were identified through July 31, 2020, nor were any impairments identified related to goodwill or other intangible assets for the year ended July 31, 2021 or 2019.

Long-lived assets deemed to have definite lives, which principally consist of property and equipment and certain intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The assessment of impairment is based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the asset. If the undiscounted future cash flows of an asset are less than the carrying value, a write-down will be recorded, measured by the amount of the difference between the carrying value and the fair value of the asset. No impairments were identified related to definite-lived assets for the years ended July 31, 2021, 2020 or 2019.

The Company capitalizes, within other assets, certain legal, accounting, underwriting fees and other third-party fees that are directly related to in-process equity financings until such financings are consummated. Upon closing, these costs are recorded as a reduction of the proceeds received from the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately recognized in operating expenses. Upon completion of the offering in March 2021, the Company charged deferred offering costs totaling $6.7 million to stockholders' equity. There were no deferred offering costs as of July 31, 2020 or 2019.

The Company incurred debt issuance costs associated with the debt facilities, including the revolving line of credit, further described in Note 9 (Debt). The Company treats the revolving line of credit debt issuance costs consistent with its term debt facilities as it does not intend to repay the revolving line of credit in full prior to its maturity. Debt issuance costs are presented as a reduction from the corresponding liability. These costs are amortized to interest expense over the life of the loan to maturity using the straight-line method, which is not materially different from the effective interest method.

Assets acquired and liabilities assumed in a business combination are recorded at their acquisition date fair values, in accordance with ASC Topic 805, Business Combinations. The amount of consideration transferred in excess of the acquisition date fair value of net assets acquired is recognized as goodwill. The Company, with the assistance of third-party valuation experts, applies estimates and assumptions based on the information available to estimate the fair value of net assets acquired. Some of these estimates can be uncertain and subject to refinement during the measurement period, which generally ends on the earlier of one year following the transaction date or when all information is available to complete the fair value measurement. Adjustments made during the measurement period are typically reflected in goodwill, while subsequent adjustments are recognized in the post-acquisition Consolidated Statements of Operations. Transaction costs directly associated with a business combination are expensed as incurred.

The Company recognizes derivative instruments as assets or liabilities on the Consolidated Statements of Financial Position and measures these instruments at fair value. The Company enters into derivative instruments to manage exposure to changes in interest rates and foreign currency fluctuations. The Company has certain derivative instruments subject to master netting agreements that provide for net-settlement of amounts payable or receivable related to multiple derivative transactions with the same counterparty. The Company presents all derivatives on a gross basis in the Consolidated Statements of Financial Position. Collateral is generally not required of the Company or of the counterparties to the master netting agreements, and no cash collateral was received or pledged under such agreements as of July 31, 2021 and 2020. Management has neither designated these instruments as cash-flow hedges nor elected hedge accounting. Changes in the consolidated fair value of these financial instruments are recognized in current period income from operations, see Note 10 (Derivative instruments) and Note 11 (Fair value measurements). The Company does not enter into derivative agreements for trading or speculative purposes.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial instruments are measured in the financial statements in accordance with an established fair value hierarchy, which emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. See Note 11 (Fair value measurements) for the valuation methodologies used for instruments measured at fair value.

Income taxes are recognized using enacted tax rates and are accounted for based on the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement and tax bases of assets and liabilities at the applicable statutory tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

Tax benefits from uncertain tax positions are recognized if it is more likely than not the tax positions will be sustained on examination by the applicable taxing authorities based on the technical merits of the position. The tax benefit is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest related to income tax matters is recognized in interest expense and penalties are reported in operating expenses. See Note 12 (Income taxes) for further discussion.

The Company has contractual leases for certain vineyards, production or administrative facilities and equipment. Rent expense is recognized on a straight-line basis over the term of the lease, beginning on the earlier of the lease commencement date or the date the Company takes possession of the leased property. When operating leases contain renewal options, predetermined escalation clauses, rent holidays, or other features which cause the straight-line expense to differ from the amounts paid under the lease, the differences between the straight-line expense and amounts paid under the lease are recorded as deferred rent and are included in current assets or liabilities (for payments due within one year) or shown as long-term assets or liabilities (for payments exceeding one year) as presented on the face of the Consolidated Statements of Financial Position. When the Company receives tenant incentives or allowances upon entering or renewing leases, these transactions are recorded as liabilities and amortized on a straight-line basis as a reduction of rent expense over the lease term. Some of the operating leases have contingent rental payments that trigger rental increases based

On March 9, 2021, the Company's Board of Managers approved a 1,017,134.6-for-1 stock split to the Company's common stock, which was immediately effective. All share and per share data included in these consolidated financial statements give effect to the stock split and have been retroactively adjusted for all periods presented.

In accordance with ASC Topic 260, Earnings Per Share, net income per share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period, excluding forfeitures. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock option and upon the vesting of restricted stock

The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASC Topic 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements.

For the years ended July 31, 2021 and 2020, the Company determined that Bootlegger's Hill, which was acquired as part of the Kosta Browne acquisition, is a VIE and that the Company is the primary beneficiary of that VIE. This conclusion considers the Company's ownership percentage, which entitles the Company to receive most of the benefits and absorb most of the risk, as well as the ability to exercise significant influence over the operating and financial decisions of the VIE. The Company recorded the fair value of acquired net assets of the VIE during purchase accounting for the Kosta Browne acquisition, pursuant to ASC Topic 805, Business Combinations. At July 31, 2021 and 2020, the Company's ownership percentage of the sole identified VIE was 76.2%. The total net assets of the VIE included on the Consolidated Statements of Financial Position were $2.2 million at both July 31, 2021 and 2020. The assets and liabilities, which may only be used to settle its own obligations, are primarily related to property, equipment and working capital accounts, which generally represent the amounts owed by or to the Company for the goods under current contracts.

The Company’s five largest customers, which are each wholesale customers, represented in total approximately 48%, 43% and 40% of net sales for the years ended July 31, 2021, 2020 and 2019, respectively. There were no significant concentrations of revenue or credit risk related to DTC sales.

Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of bank demand deposits in excess of Federal Deposit Insurance Corporation limits, as well as trade receivables. The majority of the Company’s wine sales are made through distributors. Receivables associated with such sales are not collateralized. The Company monitors credit risk associated with its customers on a regular basis and management is of the opinion that any risk of significant loss is reduced due to the diversity of our customers and geographic sales area.

The same three wholesale customers, shown in the net sales table above, represent 10% or more of the Company's trade accounts receivable balance for the periods presented. The percentages for each of these significant customers as of the periods presented are as follows:

Equity awards issued in exchange for services rendered by the Company's employees, officers or directors are accounted for pursuant to ASC Topic 718, Compensation-Stock Compensation. The Company measures equity awards at fair value at their grant date. Compensation cost is recognized in selling, general and administrative expenses or is capitalized into inventory over the requisite service period (generally the vesting period), net of actual forfeitures as incurred. For awards with performance-based conditions impacting the timing or number of awards vesting, compensation cost is recognized when a performance condition is probable of being met. If a performance condition is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company estimates the fair value of certain awards using a Black-Scholes option pricing model. The Company's policy for shares purchased under the ESPP is to value the shares using a Black-Scholes option valuation model. See Note 15 (Equity-based compensation) for further discussion.

As an “emerging growth company” as established by the JOBS Act, the Company is permitted to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates available to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The objective of the standard was to reduce complexity and diversity in practice by simplifying the methodology for calculating interim taxes, as well as by simplifying aspects of recognition of enacted changes in tax laws, accounting for acquisitions, and accounting for changes in ownership of certain entities or investments.

Early adoption is permitted. The Company early adopted this standard as of the third quarter of the current fiscal year, which is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. There were no material impacts to the financial statements or disclosures as a result of the early adoption of this ASU.

In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The Company adopted this standard in the current fiscal year. There were no material impacts to the financial statements or disclosures as a result of the adoption of this ASU.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and several amendments, codified as ASC 842, which supersedes prior guidance on accounting for leases under FASB ASC 840, Leases. ASU No. 2016-02, among other provisions, (i) requires lessees to classify leases as either finance or operating leases, (ii) generally requires all leases to be recorded on the Consolidated Statements of Financial Position through the recognition of right-of-use assets and corresponding lease liabilities and (iii) expands mandatory qualitative and quantitative disclosures regarding leasing activities. The FASB issued ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective dates for certain entities”, which extends the effective date for all other entities, for annual reporting periods beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. The amended standard is effective for the Company beginning with the year ended July 31, 2023. Early adoption is permitted. The Company’s assessment of the lease standard’s impact on the consolidated financial statements is ongoing, and is expected to result in the recognition of right of use assets and lease liabilities related to the Company’s operating leases.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and also issued subsequent amendments to the initial guidance, collectively, ASC 326, to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that requires the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. For many entities with financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which may result in the earlier recognition of credit losses on financial instruments. This guidance will be effective for the Company beginning with the year ended July 31, 2024, with early adoption permitted. The Company is currently evaluating the impact this standard could have on the consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and further issued subsequent amendments to the initial guidance. In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The standard is effective immediately and may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact of reference rate reform and the optional expedients provided by this standard on its contracts.

In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Entity (Subtopic 815-40), to clarify the accounting for modifications or exchanges of equity-classified warrants. This amendment applies to freestanding stock options, which the Company granted in Fiscal 2021. In accordance with the ASU, if there is a modification and the option is still determined to be classified as equity, the modification should be accounted for as an exchange of the original option for a new option. This guidance will be effective for the Company beginning with the year ended July 31, 2023, with early adoption permitted. The Company is currently evaluating the impact of this update and will