Q3 2020 Financial Results

Diamond Estates Wines & Spirits Reports Q3 2020 Financial Results

Strong performance in grocery and licensee channels offset by ongoing softness in export sales

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February 25, 2020, Niagara-on-the-Lake, Ontario – Diamond Estates Wines & Spirits Inc. (“Diamond Estates” or “the Company”) (DWS-TSX Venture) today announced its financial results for the three and nine-month periods ended December 31, 2019 (“Q3 2020” and “YTD 2020” respectively).

Q3 2020 Summary:

• Revenue was $6.9 million, a decline of 7% from $7.4 million in the prior-year period (“Q3 2019”). The decrease was primarily related to continued softness in winery sales to the Company's main Chinese export customer, which offset growth in the contract and licensee channels. The agency division accounted for the remainder of the decline, mainly due to a shift from Buy/Sell to commission by a major supplier as well as Q3 2019 revenue from suppliers that the Company no longer represents;
• Gross margin of $3.0 million was essentially flat on a year-over-year basis. Gross margin percentage increased to 43.5% from 40.8% last year, driven primarily by the impact of a sales mix shift from the export channel to the higher margin retail, licensee and contract channels, as well as timing pertaining to the receipt of the Ontario VQA rebate programme payment;
• EBITDA was negative $0.4 million compared to negative $0.2 million in Q3 2019, with the reduction attributable to higher SG&A expenses that resulted from promotional expenditures in support of expansion of the Ontario grocery channel and one-time accrual reversals in the year-earlier period;
• Net loss was $1.3 million, compared to a net loss of $1.1 million in Q3 2019, reflecting the factors affecting EBITDA;
• Cash flow from operating activities for YTD 2020, before changes in non-cash working capital items, was ($0.9) million, compared to $0.1 million last year, reflecting lower YTD net income;
• Working capital was $18.1 million as at December 31, 2019, an increase of $3.2 million from $14.9 million at March 31, 2019, primarily reflecting higher bulk wine inventory levels resulting from the annual harvest;
• On October 30, 2019, the Company closed a private placement offering of 12.2 million common shares at a price of $0.19 per common share for total gross proceeds of $2.3 million. This followed the previously announced private placement in Q2 2020, under which Lassonde Industries Inc. acquired 36.9 million common shares at $0.19 per share, for gross proceeds of $7 million;
• The Company maintained its strong position in the emerging Ontario grocery channel amongst VQA wines with 20Bees and EastDell brands representing five of the top 10 selling stock keeping units, and with the former holding four of the top ten positions overall. Josh Cellars Cabernet Sauvignon is the top selling imported red wine over $15 in that channel;
• The Company continues to leverage its national footprint as a result of the Backyard Vineyards acquisition through new business wins in the high margin licensee channel, bringing expanded distribution with domestic and partner brands across British Columbia, Alberta and Ontario; and
• The 2019 harvest was completed in Q2 2020 with the Company’s wineries taking in a combined 2,800 tonnes of grapes yielding 2.2 million litres of bulk wine. This is an increase of 500 tonnes from the 2018 harvest, and positions the company well to compete in the expanding Ontario grocery channel.

“Our financial performance in Q3 2020 continued to reflect the impact of reduced sales to our major Chinese distributor,” said Murray Souter, President and CEO. “This is masking improved performance both in other winery sales channels and in the agency division, where we continued to experience solid progress during the third quarter. In the winery division, we maintained our strong position in the Ontario grocery channel, while also generating growth in licensee and contract sales, which resulted in improved gross margins. In the agency division, we offset supplier losses through continued organic growth in existing suppliers along with strong western region performance resulting from channel expansion.”

“Looking ahead, export sales are expected to remain slow into fiscal 2021. However, Chinese demand for Canadian wine remains strong and we expect sales to resume an upward trajectory when our main customer has reduced inventories to an appropriate level. Domestically, we are focused on a few key growth strategies. We are dedicating significant marketing resources towards maintaining and improving our leadership position in the key grocery channel in Ontario, our agency business is winning new business under renewed leadership and we’re advancing our exciting Lakeview winery project in British Columbia’s Okanagan Valley. As these initiatives continue to gain traction, we are positioned to generate strong growth in sales and earnings.”

About Diamond Estates Wines and Spirits Inc.

Diamond Estates Wines and Spirits Inc. is a producer of high quality wines and a sales agent for over 120 beverage alcohol brands across Canada. The Company operates two wineries, one in Ontario and one in British Columbia, that produce predominantly VQA wines under such well-known brand names as 20 Bees, EastDell, Lakeview Cellars, Dan Aykroyd, Fresh, McMichael Collection, Benchmark, Seasons, Serenity, and Backyard Vineyards. Through its wholly owned subsidiary, Trajectory Beverage Partners, the Company is the sales agent for many leading international brands in all regions of the country as well as being a distributor in the western provinces. These recognizable brands include Josh wines from California, Fat Bastard and Andre Lurton wines from France, Kaiken wines from Argentina, Anciano wines from Spain, Blue Nun wines from Germany, Francois Lurton wines from France and Argentina, Waterloo Brewing and Amsterdam Brewery, both from Canada, Landshark Lager from the USA, Marston's beers from England, Social Lite vodka sodas from Canada, Edinburgh Gin from Scotland, Tamdhu, Glengoyne and Smokehead single‑malt Scotch whiskies, Barcelo Rum from the Dominican Republic, Five Farms Irish Cream from County Cork Ireland, Tequila Rose Liqueur from McCormick Distilling in the USA, Charles Mondavi & Family wines including Charles Krug from Napa, Bols Vodka from Amsterdam, Brokers Gin from the UK, Koyle Family Wines from Chile, Pearse Lyons whiskies and gins from Ireland, Niagara Craft Distillers’ beverages from Ontario, Octavia Vodka from British Columbia, Fontana di Papa wines from Italy, and Castoro de Oro wines from British Columbia.

Forward Looking Statements

This press release contains forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “estimates”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved.  Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Diamond Estates Wines and Spirits Inc. to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this press release.  Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to: the economy generally; consumer interest in the services and products of the Company; financing; competition; and anticipated and unanticipated costs. While the Company acknowledges that subsequent events and developments may cause its views to change, the Company specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing the views of the Company as of any date subsequent to the date of this press release. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

Non IFRS Financial Measure

Management uses net income (loss) and comprehensive income (loss) as presented in the unaudited interim condensed consolidated statements of net income (loss) and comprehensive income (loss) as well as "EBITDA" as a measure to assess performance of the Company. EBITDA is another financial measure and is reconciled to net income (loss) and comprehensive income (loss) under "Results of Operations" in the Company’s MD&A.

EBITDA is a supplemental financial measure to further assist readers in assessing the Company’s ability to generate income from operations before taking into account the Company's financing decisions, depreciation of property, plant and equipment and amortization of intangible assets. EBITDA comprises gross margin less operating costs before financial expenses, depreciation and amortization, non-cash expenses such as share based compensation, one time and other unusual items, and income tax. Gross margin is defined as gross profit excluding depreciation on property, plant and equipment used in production. Operating expenses excludes interest, depreciation on property, plant and equipment used in selling and administration, and amortization of intangible assets.

EBITDA does not represent the actual cash provided by the operating activities nor is it a recognized measure of financial performance under IFRS. Readers are cautioned that this measure should not be considered as a replacement for those as per the unaudited interim condensed consolidated financial statements prepared under IFRS. The Company's definitions of this non IFRS financial measure may differ from those used by other companies.