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12: R2 Condensed Consolidated Balance Sheets HTML 130K
13: R3 Condensed Consolidated Balance Sheets HTML 27K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 99K
15: R5 Condensed Consolidated Statements of Comprehensive HTML 39K
Income
16: R6 Condensed Consolidated Statements of Cash Flows HTML 109K
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Stockholders? Equity
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28: R18 Income Taxes HTML 24K
29: R19 Business Segment Information HTML 107K
30: R20 Commitments and Contingencies HTML 23K
31: R21 Earnings Per Share HTML 42K
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(Exact name of registrant as specified in its Charter)
iDelaware
(State or Other Jurisdiction of
i13-3607383
(I.R.S.
Employer
Incorporation or Organization)
Identification Number)
i5901 Silverado Trail, iNapa, iCalifornia
(Address
of Principal Executive Offices)
i94558
(Zip Code)
(i800) i486-0503
(Registrant’s
Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
______________________
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
iYes
X
No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes
X
No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
iNon-accelerated
filer☒
Smaller reporting company i☒
Emerging growth company i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
iX
On
August 5, 2022 there were i22,360,558 outstanding shares of the Registrant’s Common Stock, par value $0.01 per share.
Current
portion of long-term debt, net of unamortized loan fees
i1,128
i1,128
Total
current liabilities
i10,509
i14,665
Long-term
debt, net of current portion and unamortized loan fees
i18,235
i18,799
Deferred
tax liability, net
i798
i748
Other
non-current liabilities
i9
i9
Total
non-current liabilities
i19,042
i19,556
Total
liabilities
i29,551
i34,221
Commitments
and contingencies (Note 13)
i
i
Stockholders’ Equity
Common
shares, par value $ii0.01/ per share, authorized ii150,000,000/
shares; ii22,389,463/ and ii22,524,185/
shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
i224
i225
Additional
paid-in capital
i277,877
i277,719
Accumulated
other comprehensive (loss) income
(i23)
i2
Accumulated
deficit
(i86,197)
(i85,343)
Total
stockholders’ equity
i191,881
i192,603
Total
liabilities and stockholders’ equity
$
i221,432
$
i226,824
See
accompanying notes to unaudited interim condensed consolidated financial statements.
Crimson Wine Group, Ltd. and its subsidiaries (collectively, “Crimson” or the “Company”) is a Delaware corporation that has been conducting business
since 1991. Crimson is in the business of producing and selling luxury wines (i.e., wines that retail for over $i16 per 750ml bottle). Crimson is headquartered in Napa, California and through its subsidiaries owns iseven primary
wine estates and brands: Pine Ridge Vineyards, Archery Summit, Chamisal Vineyards, Seghesio Family Vineyards, Double Canyon, Seven Hills Winery and Malene Wines.
iFinancial Statement Preparation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and pursuant to the
rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited consolidated financial statements for the year ended December 31, 2021, as filed with the SEC on Form 10-K (the “2021 Report”). Results of operations for interim periods are not necessarily indicative of annual results of operations. The unaudited condensed consolidated balance
sheet at December 31, 2021 was extracted from the audited annual consolidated financial statements and does not include all disclosures required by GAAP for annual financial statements.
Significant Accounting Policies
There were no changes to the Company’s significant accounting policies during the six months ended June 30, 2022. See Note 2 of the 2021 Report for a description of the Company’s significant accounting policies.
i
Recent
Accounting Pronouncements
Subsequent to the filing of the 2021 Report, the Company evaluated Accounting Standards Update (“ASU”) 2022-01 through 2022-03 issued by the Financial Accounting Standards Board (“FASB”) and concluded none of the accounting pronouncements would have a material effect or are applicable to Crimson’s unaudited interim condensed consolidated financial statements.
2.iRevenue
Revenue
Recognition
Revenue is recognized once performance obligations under the terms of the Company’s contracts with its customers have been satisfied; this occurs at a point in time when control of the promised product or service is transferred to customers. Generally, the majority of the Company’s contracts with its customers have a single performance obligation and are short term in nature. Revenue is measured in an amount that reflects the consideration the
Company expects to receive in exchange for those products or services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company accounts for shipping and handling activities as costs to fulfill its promise to transfer the associated products. Accordingly, the Company records amounts billed for shipping and handling costs as a component of net sales, and classifies such costs as a component of cost of sales. The Company’s products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been material to the
Company.
The Company sells its wine to wholesale distributors under purchase orders. The Company transfers control and recognizes revenue for these orders upon shipment of the wine from the Company’s third-party warehouse facilities. Payment terms to wholesale
distributors typically range from i30 to i120 days. The Company pays depletion allowances to its wholesale distributors based on their sales to their customers. The
Company estimates these depletion allowances and records such estimates in the same period the related revenue is recognized, resulting in a reduction of wholesale product revenue and the establishment of a current liability. Subsequently, wholesale distributors will bill the Company for actual depletions, which may be different from the Company’s estimate. Any such differences are recognized in sales when the bill is received. The Company has historically been able to estimate depletion allowances without significant differences between actual and estimated expense.
Direct to Consumer Segment
The
Company sells its wine and other merchandise directly to consumers through wine club memberships, at the wineries’ tasting rooms and through its website (http://www.crimsonwinegroup.com), third-party websites, direct phone calls, and other online sales (“Ecommerce”).
Wine club membership sales are made under contracts with customers, which specify the quantity and timing of future wine shipments. Customer credit cards are charged
in advance of quarterly wine shipments in accordance with each contract. The Company transfers control and recognizes revenue for these contracts upon shipment of the wine to the customer.
Tasting room and Ecommerce wine sales are paid for at the time of sale. The Company transfers control and recognizes revenue for this wine when the product is either received by the customer (on-site tasting room sales) or upon shipment to the customer (“Ecommerce sales”).
Other
From
time to time, the Company sells grapes or bulk wine because the grapes or wine do not meet the quality standards for the Company’s products, market conditions have changed resulting in reduced demand for certain products, or because the Company may have produced more of a particular varietal than it can use. Grape and bulk sales are made under contracts with customers which include product specification requirements, pricing and payment terms. Payment terms under grape contracts are generally structured around the timing of the harvest
of the grapes and are generally due 30 days from the time the grapes are delivered. Payment terms under bulk wine contracts are generally i30 days from the date of shipment and may include an upfront payment upon signing of the sales agreement. The Company transfers control and recognizes revenue for grape sales when product specification has been met and title to the grapes has transferred, which is generally on the date the grapes are harvested, weighed and shipped. The
Company transfers control and recognizes revenue for bulk wine contracts upon shipment.
The Company provides custom winemaking services at Double Canyon, Chamisal, and Pine Ridge’s winemaking facilities. Custom winemaking services are made under contracts with customers which include specific protocols, pricing, and payment terms and generally have a duration of less than one year. The customer retains title and control of the wine during the winemaking process. The Company recognizes revenue when contract
specific performance obligations are met.
Estates hold various public and private events for customers and their wine club members. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. The balance of payments are due on the date of the event. The Company recognizes event revenue on the date the event is held.
Other revenue also includes tasting fees and retail merchandise sales, which are paid for and received or consumed at the time of sale. The Company
transfers control and recognizes revenue at the time of sale.
Refer to Note 12, “Business Segment Information,” for revenue by sales channel amounts for the three and six months ended June 30, 2022 and 2021.
When the Company receives payments from customers prior to transferring goods or services under the terms of a contract, the
Company records deferred revenue, which it classifies as customer deposits on its unaudited condensed consolidated balance sheets, and represents a contract liability. Customer deposits are liquidated when revenue is recognized. Revenue that was included in the contract liability balance at the beginning of each of the 2022 and 2021 years consisted primarily of wine club
revenue, grape and bulk sales and event fees. Changes in the contract
liability balance during the six-month periods ended June 30, 2022 and 2021, were not materially impacted by any other factors.
The outstanding contract liability balance was $i0.6 million at June 30, 2022 and $i0.4 million
at December 31, 2021. Of the amounts included in the opening contract liability balances at the beginning of each period, approximately $i0.3 million and $i0.2 million
were recognized as revenue during the six month periods ended June 30, 2022 and 2021, respectively.
Accounts Receivable
Accounts receivable are reported at net realizable value. Credit is extended based on an evaluation of the customer’s financial condition. Accounts are charged against the allowance for bad debt as they are deemed uncollectible based on a periodic review of the accounts. In evaluating the collectability of individual receivable balances, the Company considers several factors, including the age of the balance, the customer’s historical payment history, its current credit worthiness and current economic
trends. The Company’s accounts receivable balance is net of an allowance for doubtful accounts of $ii0.2/
million at both June 30, 2022 and December 31, 2021.
(1)
Reported within other current assets of the unaudited interim condensed consolidated balance sheets
(2) Reported within other non-current assets of the unaudited interim condensed consolidated balance sheets
/
In June 2021, the Company closed on the sale of i36 acres of
fallow apple orchards located in Umatilla County, Oregon for an aggregate sale price of $i0.6 million. Per the sales agreement, approximately $i0.1 million
was paid in cash at the closing of the asset sale with the Company financing the remainder of the purchase price in the form of a promissory note in the aggregate principal amount of $i0.5 million. The note earns interest at a rate per annum of i5.00%
with monthly principal and interest payments commencing July 2021. The note contains an arrangement for itwo balloon payments with the first balloon payment paid to the Company in December 2021 and the final balloon payment due to the Company on or before June 1, 2024.
In
June 2021, per the Company’s leasing agreement of its restaurant space in Walla Walla, Washington, the Company agreed to finance the incoming tenant’s purchase of restaurant equipment from the prior tenant. Therefore, a promissory note in the aggregate principal amount of approximately $i0.1 million was issued to the Company. The note is
due in June 2026 and earns interest at a rate per annum of i5.00% with annual principal and interest payments commencing on September 1, 2021.
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 Company’s estimates of net realizable value are based on analyses and assumptions including, but not limited to, historical usage, projected future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of sales. If future demand and/or profitability for the Company’s products are less than previously estimated, then the carrying value of the inventories may be required to be reduced, resulting in additional expense and reduced profitability. The
Company's inventory write-downs may consist of reductions to bottled or bulk wine inventory as well as crop insurance proceeds from farming losses recorded as offsets against previously recognized write-downs.
Inventory write-downs of $i0.2 million and $i0.1
million were recorded during the three month periods ended June 30, 2022 and 2021, respectively. Inventory write-downs of $i0.9 million and $i0.7
million were recorded during the six month periods ended June 30, 2022 and 2021, respectively. The Company’s inventory balances are presented at the lower of cost or net realizable value.
5.iProperty
and Equipment
i
A summary of property and equipment at June 30, 2022 and December 31, 2021, and depreciation and amortization for the three and six months ended June 30, 2022 and 2021, is as follows (in thousands):
The Company’s material financial instruments include cash and cash equivalents, investments classified as available for sale, and short-term and long-term debt. Investments classified
as available for sale are the only assets or liabilities that are measured at fair value on a recurring basis.
All of the Company’s investments mature within itwo years or less. iThe
par value, amortized cost, gross unrealized gains and losses, and estimated fair value of investments classified as available for sale as of June 30, 2022 and December 31, 2021 are as follows (in thousands):
Gross
unrealized losses on available for sale securities were less than $i0.1 million as of June 30, 2022. The Company believes the gross unrealized losses are temporary as it does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these
securities before the recovery of their amortized cost basis.
As of June 30, 2022 and December 31, 2021, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis. For cash and cash equivalents, the carrying amounts of such financial instruments approximate their fair values. For short-term debt, the carrying amounts of such financial instruments approximate their fair values. As of June 30, 2022, the Company has estimated the fair value of its outstanding debt to be approximately $i16.7
million compared to its carrying value of $i19.5 million, based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. Level 3 inputs include market rates obtained from American AgCredit, FLCA (“Lender”) as of
June 30, 2022 of i6.78% and i6.68% for the 2015 Term Loan and 2017 Term Loan, respectively, as further discussed in Note
9, “Debt.”
The Company does not invest in any derivatives or engage in any hedging activities.
A summary of intangible and other non-current assets at June 30, 2022 and December 31, 2021, and amortization expense for the three and six months ended June 30, 2022 and 2021, is as follows (in thousands):
(1) The
Revolving Credit Facility is comprised of a revolving loan facility (the “Revolving Loan”) and a term revolving loan facility (the “Term Revolving Loan”), which together are secured by substantially all of Crimson’s assets. The Revolving Loan is for up to $i10.0 million of availability in the aggregate for a ifive
year term, and the Term Revolving Loan is for up to $i50.0 million in the aggregate for a fifteen year term. In addition to unused line fees ranging from i0.15% to i0.25%,
rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the London Interbank Offered Rate.
(2) Pine Ridge Winery, LLC, a wholly-owned subsidiary of Crimson, is party to a senior secured term loan agreement due on October 1, 2040 (the “2015 Term Loan”). Principal and interest are payable in quarterly installments.
(3) Double Canyon Vineyards, LLC, a wholly-owned subsidiary of Crimson, is party to a senior secured term loan agreement due on July 1, 2037 (the “2017 Term Loan”). Principal and interest are payable in quarterly installments.
/
Debt covenants include
the maintenance of specified debt and equity ratios, a specified debt service coverage ratio, and certain customary affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, limitations on dividends and other distributions to shareholders and restrictions on certain investments, certain mergers, consolidations and sales of assets. The Company was in compliance with all existing debt covenants as of June 30, 2022.
i
A
summary of debt maturities as of June 30, 2022 is as follows (in thousands):
Principal due the remainder of 2022
$
i570
Principal
due in 2023
i1,140
Principal due in 2024
i1,140
Principal
due in 2025
i1,140
Principal due in 2026
i1,140
Principal
due thereafter
i14,335
Total
$
i19,465
/
10.iStockholders' Equity and Stock-Based Compensation
Share Repurchase
On May 24, 2021, with the unanimous written consent of the Board of Directors, the Company repurchased an aggregate of i719,291
shares of its common stock at a purchase price of $i8.65 per share for an aggregate purchase price of $i6.2 million. The
Company’s repurchase was funded through cash on hand, and the shares were retired.
In March 2022, the Company commenced a share repurchase program (the “2022 Repurchase Program”) that provided for the repurchase of up to $i4.0 million of outstanding common stock. Under the 2022 Repurchase Program, any repurchased shares are constructively retired. During the six months
ended June 30, 2022, the Company repurchased i134,722 shares of its common stock at an average purchase price of $i7.52
per share for an aggregate purchase price of $i1.0 million.
In February 2013, the
Company adopted the 2013 Omnibus Incentive Plan (the "2013 Plan"), which provides for the granting of up to i1,000,000 stock options or other common stock-based awards. In July 2022, upon the approval of the Company's Board of Directors and shareholders, the Company
adopted the 2022 Omnibus Incentive Plan ("the 2022 Plan") to supersede and replace the 2013 Plan. The 2022 Plan provides for the granting of up to i678,000 stock options or other common stock-based awards. The terms of awards that may be granted, including vesting and performance criteria, if any, will be determined by the Company’s Board of Directors.
In
December 2019, under the Company’s 2013 Omnibus Incentive Plan, option grants for i89,000 shares were issued. The options vest annually over ifive
years and expire iseven years from the date of grant. In July 2021, stock option awards for an additional i233,000
shares were issued to certain members of management. Subject to the terms of the respective option award agreements, the options vest in ifour equal increments on each of January 4, 2022, January 4, 2023, January 4, 2024 and January 4, 2025, and
the options will expire iseven years from the date of grant. In March 2022, stock option awards for an additional i500,000
shares were issued. The options for the aggregate of i500,000 shares are divided into ifour
tranches, subject to both performance-based vesting requirements and time-based vesting requirements and expire iten years from the date of grant. The performance-based vesting requirements are tied to annual or cumulative Adjusted EBITDA targets, as defined within the underlying option award agreement. The Company believes it will achieve these targets and has recorded the related stock-based compensation expense for the three and six months ended
June 30, 2022. The exercise price for all respective options was the closing price on the date of grant.
Estimates of stock-based compensation expense require a number of complex and subjective assumptions, including the selection of an option pricing model. iThe
Company determined the grant date fair value of the awards using the Black-Scholes-Merton option-pricing valuation model, with the following assumptions and values:
December 2019 Grants
July 2021 Grants
March 2022 Grants
Shares
issued
i89,000
i233,000
i500,000
Expected
term
i5.00 years
i4.75
years
i6.90 - i8.40
years
Expected dividend yield
i—
%
i—
%
i—
%
Risk-free
interest rate
i1.60
%
i0.76
%
i2.01
%
Expected
stock price volatility
i22
%
i31
%
i27
- i28%
Stock price
$
i6.90
$
i8.88
$
i7.50
Weighted-average
grant date fair value
$
i1.58
$
i2.47
$ i2.54
- i2.73
Grant date fair value (in thousands)
$
i141
$
i575
$
i1,331
As
of June 30, 2022, options in respect of all i822,000 shares remained outstanding with ino
stock option exercises or expirations during the quarter. The stock-based compensation expense for these grants is based on the grant date fair value, which will be recorded over the vesting period. $i102 thousand and $i159
thousand were recorded as stock-based compensation expense for the three and six months ended June 30, 2022, respectively. $i7 thousand and $i14
thousand were recorded as stock-based compensation expense for the three and six months ended June 30, 2021, respectively. Stock-based compensation expense was recorded to general and administrative expense in the unaudited interim condensed consolidated statements of operations.
11.iIncome Taxes
The
consolidated income tax expense for the three and six months ended June 30, 2022 and 2021, was determined based upon the Company’s estimated consolidated effective income tax rates calculated without discrete items for the years ending December 31, 2022 and 2021, respectively.
The Company’s effective tax rates for the three months ended June 30, 2022 and 2021 were i28.9%
and i10.2%, respectively. The increase in the effective tax rate for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the three months ended June 30, 2021. The Company’s effective tax rates for the
six months ended June 30, 2022 and 2021 were i29.1% and i7.6%,
respectively. The increase in the effective tax rate for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the six months ended June 30, 2021.
The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three and six months ended June 30, 2022 was primarily attributable to state income taxes and other permanent items.
The Company has identified itwo
operating segments, Wholesale net sales and Direct to Consumer net sales, which are reportable segments for financial statement reporting purposes, based upon their different distribution channels, margins and selling strategies. Wholesale net sales include all sales through a third party where prices are given at a wholesale rate, whereas Direct to Consumer net sales include retail sales in tasting rooms, remote sites and on-site events, wine club sales, direct phone sales, Ecommerce sales, and other sales made directly to the consumer without the use of an intermediary.
The itwo
segments reflect how the Company’s operations are evaluated by senior management and the structure of its internal financial reporting. The Company evaluates performance based on the gross profit of the respective business segments. Selling expenses that can be directly attributable to the segment are allocated accordingly. However, centralized selling expenses and general and administrative expenses are not allocated between operating segments. Therefore, net income information for the respective segments is not available. Based on the nature of the Company’s business, revenue generating assets are utilized across segments. Therefore, discrete financial information related to segment assets and other balance sheet
data is not available and that information continues to be aggregated.
i
The following tables outline the net sales, cost of sales, gross profit (loss), directly attributable selling expenses and operating income (loss) for the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021, and also
includes a reconciliation of consolidated income (loss) from operations. Other/Non-allocable net sales and gross profit include bulk wine and grape sales, event fees, tasting fees and non-wine retail sales. Other/Non-allocable expenses include centralized corporate expenses not specific to an identified reporting segment. Sales figures are net of related excise taxes.
Three
Months Ended June 30,
Wholesale
Direct to Consumer
Other/Non-Allocable
Total
(in thousands)
2022
2021
2022
2021
2022
2021
2022
2021
Net
sales
$
i9,423
$
i9,727
$
i7,494
$
i6,635
$
i1,165
$
i1,029
$
i18,082
$
i17,391
Cost
of sales
i6,194
i5,844
i2,630
i2,440
i905
i767
i9,729
i9,051
Gross
profit
i3,229
i3,883
i4,864
i4,195
i260
i262
i8,353
i8,340
Operating
expenses:
Sales and marketing
i1,465
i1,142
i1,965
i1,530
i1,113
i1,078
i4,543
i3,750
General
and administrative
i—
i—
i—
i—
i3,263
i3,256
i3,263
i3,256
Total
operating expenses
i1,465
i1,142
i1,965
i1,530
i4,376
i4,334
i7,806
i7,006
Net
loss (gain) on disposal of property and equipment
i—
i—
i—
i—
i107
(i31)
i107
(i31)
Income
(loss) from operations
$
i1,764
$
i2,741
$
i2,899
$
i2,665
$
(i4,223)
$
(i4,041)
$
i440
$
i1,365
Six
Months Ended June 30,
Wholesale
Direct to Consumer
Other/Non-Allocable
Total
(in thousands)
2022
2021
2022
2021
2022
2021
2022
2021
Net
sales
$
i20,973
$
i17,917
$
i13,721
$
i12,602
$
i2,011
$
i1,453
$
i36,705
$
i31,972
Cost
of sales
i14,107
i11,153
i4,735
i4,791
i2,415
i2,047
i21,257
i17,991
Gross
profit (loss)
i6,866
i6,764
i8,986
i7,811
(i404)
(i594)
i15,448
i13,981
Operating
expenses:
Sales and marketing
i2,806
i2,264
i3,648
i2,854
i1,828
i1,677
i8,282
i6,795
General
and administrative
i—
i—
i—
i—
i6,561
i6,714
i6,561
i6,714
Total
operating expenses
i2,806
i2,264
i3,648
i2,854
i8,389
i8,391
i14,843
i13,509
Net
loss (gain) on disposal of property and equipment
The Company and its subsidiaries may become parties to legal proceedings that are considered to be either ordinary,
routine litigation incidental to their business or not significant to the Company’s consolidated financial position or liquidity. The Company does not believe that there is any pending litigation that could have a significant adverse impact on its consolidated financial position, liquidity or results of operations.
2017 and 2020 Wildfires
In October 2017, significant wildfires impacted the Company's operations and damaged its inventory. The Company has settled on several insurance claims since
the time of the wildfires but anticipates additional settlements for insurance proceeds for amounts that cannot be reasonably estimated at this time.
In August and September 2020, a series of major wildfires broke out in regions across the Western United States, including Napa and Sonoma counties in California, as well as Umatilla and Yamhill Counties in Oregon. The wildfires and ensuing smoke caused damage to grapes at the vineyard properties and traffic reduction at the Company’s tasting rooms. Some of the inventory losses and smoke damage to grapes were partially covered under existing crop insurance policies. During 2021, the Company settled and recognized a total of $i0.8
million from crop insurance proceeds related to loss claims for the 2020 wildfires and recorded the proceeds as an offset against inventory losses, which are reductions to cost of sales.
14.iEarnings Per Share
i
The
following table reconciles the weighted-average common shares outstanding used in the calculations of the Company's basic and diluted earnings per share:
Three Months Ended June 30,
Six Months Ended June 30,
($
and shares in thousands, except per share amounts)
2022
2021
2022
2021
Net income
$
i318
$
i4,718
$
i161
$
i3,871
Common
shares:
Weighted-average number of common shares outstanding - basic
i22,450
i22,943
i22,486
i23,092
Dilutive
effect of stock options outstanding
i—
i4
i1
i—
Weighted-average
number of common shares outstanding - diluted
i22,450
i22,947
i22,487
i23,092
Earnings
per share:
Basic
$
i0.01
$
i0.21
$
i0.01
$
i0.17
Diluted
$
i0.01
$
i0.21
$
i0.01
$
i0.17
Antidilutive
stock options (1)
i822
i—
i540
i89
__________________________________________
(1)
Amounts represent stock options that are excluded from the diluted earnings per share calculations because the options are antidilutive.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Interim Operations.
Statements included in this Report may contain forward-looking
statements. See “Cautionary Statement for Forward-Looking Information” below. The following should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the Company’s audited consolidated financial statements for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the “2021 Report”).
Quantities or results referred to as “current quarter” and “current three and six-month period” refer to the three and six months ended June 30, 2022.
Cautionary
Statement for Forward-Looking Information
This MD&A and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited interim condensed consolidated financial statements, that include results of Crimson Wine Group, Ltd. and all of its subsidiaries further collectively known as “we”, “Crimson”, “our”, “us”, or “the Company”, have been prepared in accordance with GAAP for interim financial information and with the general instruction for quarterly reports filed on Form
10-Q and Article 8 of Regulation S-X. All statements, other than statements of historical fact, regarding the Company's strategy, future operations, financial position, prospects, plans, opportunities, and objectives constitute “forward-looking statements.” The words “may,”“will,”“expect,”“plan,”“anticipate,”“believe,”“estimate,”“potential,” or “continue” and similar types of expressions identify such statements, although not all forward-looking statements contain these identifying words. Forward-looking statements include those relating to the Company's financial condition, results of operations, plans, objectives, future performance and business. These statements are based upon information that is currently available to
the Company and its management’s current expectations speak only as of the date hereof and are subject to risks and uncertainties. The Company expressly disclaims any obligation, except as required by federal securities laws, or undertaking to update or revise any forward-looking statements contained herein to reflect any change or expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based, in whole or in part. The Company's actual results may differ materially from the results discussed in or implied by such forward-looking statements.
Risks
that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or that may materially and adversely affect the Company's actual results include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors in the 2021 Report. Readers should carefully review the risk factors described in the 2021 Report and in other documents that the Company files from time to time with the SEC.
Overview of Business
The Company generates revenues from sales of wine to wholesalers and direct to consumers,
sales of bulk wine and grapes, custom winemaking services, special event fees, tasting fees and non-wine retail sales.
The Company's wines are primarily sold to wholesale distributors, who then sell to retailers and restaurants. As permitted under federal and local regulations, the Company has also been placing increased emphasis on generating revenue from direct sales to consumers which occur through wine clubs, at the wineries’ tasting rooms and through the Ecommerce channel. Direct sales to consumers are more profitable for the Company as it is able to sell its products at a price closer to retail prices rather than the wholesale
price sold to distributors. From time to time, the Company may sell grapes or bulk wine because the grapes or wine do not meet the quality standards for its products, market conditions have changed resulting in reduced demand for certain products, or because it may have produced more of a particular varietal than can be used. When these sales occur, they may result in a loss.
Cost of sales includes grape and bulk wine costs, whether purchased or produced from the Company’s controlled vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs. For the Company-controlled
vineyard-produced grapes, grape costs include annual farming labor costs, harvest costs and depreciation of vineyard assets. For wines that age longer than one year, winemaking and processing costs continue to be incurred and capitalized to the cost of wine, which can range from 3 to 36 months. Reductions to the carrying value of inventories are also included in cost of sales.
As of June 30, 2022, wine inventory includes approximately 0.4 million cases of bottled and bulk wine in various stages of the aging process. Cased wine is expected to be sold over the next 12 to 36 months and generally before the release date of the next vintage.
In March 2020, in response to the coronavirus disease ("COVID-19") outbreak, the Company temporarily closed all of its tasting rooms, which are located in California, Oregon, and Washington, in compliance with shelter-in-place orders issued by local government offices. During 2020, the Company was challenged with several months of temporary closures and intermittent government restrictions impacting both operational capacities and steadiness throughout the year. All of the Company’s tasting rooms were allowed to reopen in late
January 2021 with varying impacts created by the guidelines, restrictions, and tiered structures of each respective state in which the Company operates. The intermittent updates for each state and county caused operating capacity at each tasting room to fluctuate for most of 2021. Although capacity restrictions within the Company's tasting rooms were lifted in the second half of June 2021, the Company continues to maintain a set of operating guidelines to protect the safety of all employees and guests, which may affect capacity and will vary based on estate experience and parameters.
All of the
Company’s tasting rooms have been impacted by government orders and restrictions to significant and varying degrees at times. Management and staff at all estate locations have taken the appropriate steps to ensure a safe and enjoyable experience for all guests and staff. In addition to limiting the number of guests and encouraging reservations, the Company has implemented various measures to prevent the spread of the virus including using available forms of personal protective equipment ("PPE"), screening employees and vendors before they enter facilities, practicing social distancing, implementing COVID-19 protocols and travel guidelines, and advising employees of Center for Disease Control ("CDC") guidelines and recommendations.
The
Company has experienced port shipping delays within its export shipments but does not anticipate significant impact or disruptions to its supply chain network. In order to mitigate against potential logistical challenges, the Company has effectively managed distributor inventory levels for its domestic wholesale business, which accounts for the majority of the Company's total wholesale shipments.
The Company has experienced both reductions and increases in consumer demand in various channels due to the ongoing COVID-19 pandemic in the three and six months ended June 30, 2022 and 2021
with a lesser impact to the current period as the world continues its efforts against the pandemic.
The Direct to Consumer segment includes retail sales in the tasting rooms, remote sites and on-site events, wine club sales, direct phone sales, Ecommerce sales, and other sales made directly to the consumer without the use of an intermediary. Tasting room sales have been negatively impacted during periods of closures and operating limitations. As restrictions were gradually lifted throughout 2021 and the early part of 2022, the Company experienced a rebound in visitor counts to its tasting rooms. Ecommerce sales were initially favorably impacted as consumers sought to purchase wines through an online platform to minimize human contact. As restrictions eased throughout 2021 and the early part of 2022,
Ecommerce sales remained elevated over pre-pandemic levels but declined from the highs of 2020 with consumers returning to traditional channels, including tasting rooms, bars, restaurants, and other hospitality locations.
The Wholesale segment includes all sales through a third party where prices are given at a wholesale rate. The Company sells wine (through distributors and directly) to restaurants, bars, and other hospitality locations (“On-Premise”). In 2020, demand for wines at On-Premise locations was reduced due to COVID-19 containment measures restricting consumers from visiting, as well as in many cases both the temporary and permanent closures of On-Premise venues. However, as restrictions continued to be lifted throughout 2021 and the early part of 2022, demand for wines at On-Premise locations
started to rebound. The Company also sells wine (through distributors and directly) to supermarkets, grocery stores, liquor stores, and other chains, third-party Ecommerce and independent stores (“Off-Premise”). Demand for premium wines at Off-Premise locations has increased due to their classification as essential businesses that remained open during government imposed closings and/or restrictions due to COVID-19, as well as premiumization of at-home wine consumption. As On-Premise demand continues to recover, other than sales made through third-party Ecommerce, the Company has not observed a reversing trend in Off-Premise demand.
Additionally, the
Company received loan proceeds of approximately $3.8 million under the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and amended by the Paycheck Protection Program Flexibility Act of 2020. The Company requested loan forgiveness in April 2021 and on June 14, 2021, the forgiveness application to the U.S. Small Business Administration (“SBA”) was approved for the full principal amount including interest.For additional information about the loan, see “Liquidity and Capital Resources—Term Loans”.
The extent of COVID-19’s impact on the Company's financials and results of operations is currently unknown and will depend on future developments, including, but not limited to, the length of time that the pandemic continues, the emergence and severity of new variants, the effect of governmental regulations imposed in response to the pandemic, the availability of vaccines and potential hesitancy to utilize them, the effect on the demand for its products and its supply chain, and how quickly and to what extent normal economic and operation conditions can resume. The Company cannot at this time predict the full impact of COVID-19 on its financial and operational results. Accordingly, the
Company's current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to the section entitled “Risk Factors” in the 2021 Report for additional risks the Company faces due to the COVID-19 pandemic.
Seasonality
As discussed in the 2021 Report, the wine industry in general historically experiences seasonal fluctuations in revenues and net income. The Company typically has lower sales and net income during the first quarter and higher sales and net income during the fourth quarter due to seasonal holiday buying as well as wine club shipment timing. The
Company anticipates similar trends in the future.
Climate Conditions and Extreme Weather Events
Winemaking and grape growing are subject to a variety of agricultural risks. Various diseases, pests, natural disasters and certain climate conditions can materially and adversely affect the quality and quantity of grapes available to Crimson thereby materially and adversely affecting the supply of Crimson’s products and its profitability. Given the risks presented by climate conditions and extreme weather, Crimson regularly evaluates impacts of climate conditions and weather on its business. Along with various insurance policies currently in place, Crimson has made investments to improve its climate resilience and strives to effectively manage grape sourcing to help mitigate the impact of climate change and unforeseen
natural disasters. During 2021, Crimson completed upgrades to its facilities to improve water resilience and fire mitigation measures with plans to advance these initiatives through improvements of irrigation and water systems over the next several years.
Following a historic wildfire season across California, Oregon, and Washington in 2020, the 2021 harvest was impacted by drought resulting in lower yields than historical averages. Compounded with the losses on the 2020 vintage, the lower yields of the 2021 vintage may cause upward pricing pressure on the bulk wine market in addition to increased costs for grapes produced by the Company. Depending on the wine, the production cycle from harvest to bottled sales is anywhere from one to three years.
Inflation
and Market Conditions
As the Company continues to grow sales, it expects gross profit to remain steady or increase if it is able to effectively manage cost of sales and operating expenses, subject to any volatility in the bulk wine markets, increased labor costs, and increased commodity costs, including dry goods and packaging materials. The Company continues to monitor the impact of inflation in an attempt to minimize its effects through pricing strategies and cost reductions. If, however, the Company's operations are impacted by significant inflationary pressures, it may not be able to completely offset increased costs through
price increases on its products, negotiations with suppliers, cost reductions or production improvements.
Wholesale
net sales decreased $0.3 million, or 3%, in the current quarter as compared to the same quarter in 2021, with a decrease in domestic wine sales of $1.0 million partially offset by an increase in export wine sales of $0.7 million. The quarter-over-quarter decrease in domestic wine sales is primarily related to timing of inventory fulfillment to distributors following large shipments in the first quarter. This timing impact to the current quarter is evident in the discussion of the Company's year-over-year growth for the six months ended June 30, 2022 financial results discussed in the next section. The increase in export wine sales was driven by several large shipments to Europe and Canada as the Company continues to grow this channel.
Direct
to Consumer net sales increased $0.9 million, or 13%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher sales through the wine clubs and in the tasting rooms as compared to the same quarter in 2021. Sales for wine clubs increased in the current quarter driven by price increases and sales mix. The Company's elevated tasting experiences drove higher tasting room sales through increased visitors and higher spend per guest. Ecommerce sales increased due to timing of marketing campaigns in the current quarter as compared to the same quarter in 2021. Ecommerce's sales growth continues to face challenges from the shift in consumer purchasing behaviors towards other sales channels.
Other net sales, which include bulk wine and grape sales, custom winemaking
services, event fees, tasting fees and non-wine retail sales, increased $0.1 million, or 13%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher tasting and event fee revenues partially offset by lower bulk wine sales. Higher tasting and event fee revenues were driven by the Company's premiumization of the wine tasting experiences and increased tasting room traffic and private events.
Wholesale gross profit decreased $0.7 million, or 17%, in the current quarter as compared to the same quarter in 2021 primarily driven by a shift in sales mix towards wines with a higher cost vintage and lower volumes, partially offset by price increases. Compounded with the wildfire losses on the 2020 vintage, the lower yields of the 2021 vintage resulted in higher cost vintages on certain wines sold in the current period. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage
of wholesale net sales, decreased 565 basis points primarily driven by a shift in sales mix towards wines with a higher cost vintage partially offset by price increases when compared to the same quarter in 2021.
Direct to Consumer gross profit increased $0.7 million, or 16%, in the current quarter as compared to the same quarter in 2021. Gross margin percentage increased 168 basis points in the current quarter compared to the same quarter in 2021. Both increases were driven by higher wine club and tasting rooms sales compared to the same quarter of 2021.
“Other” includes a gross profit on bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales. Other gross profit was flat in the current quarter as compared to the same quarter in 2021 and is primarily
driven by higher tasting and event fee revenues due to increased traffic at tasting rooms, mostly offset by nonrecurring insurance proceeds for smoke taint affected inventory received in the prior year quarter and higher inventory write-downs in the current quarter.
Operating Expenses
Three
Months Ended June 30,
(in thousands, except percentages)
2022
2021
Increase (Decrease)
% change
Sales and marketing
$
4,543
$
3,750
$
793
21%
General
and administrative
3,263
3,256
7
—%
Total operating expenses
$
7,806
$
7,006
$
800
11%
Sales
and marketing expenses increased $0.8 million, or 21%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher compensation, travel expenses, and hospitality operational expenses related to increased events compared to the same quarter in 2021. Increased compensation is driven by hospitality staffing related to increased traffic and volume, open positions in the prior year quarter, and increased accrued bonuses related to company performance.
General and administrative expenses were flat in the current quarter as compared to the same quarter in 2021 due to offsetting drivers. A decrease in expenses related to nonrecurring costs of the prior year quarter related to the amended 2019 Annual Report on Form 10-K and amended 2020 Quarterly Reports on Form 10-Q was offset by increased compensation expenses related to stock grants, increased
costs under software as a service (SaaS) model, and reinstatement of previously voluntarily waived Board of Director fees when compared to the same quarter in 2021.
Interest
expense, net, decreased less than $0.1 million, or 48%, in the current quarter compared to the same quarter in 2021. The decrease was primarily driven by timing of patronage dividend received by the Company and lower interest expense on declining principal balances on the 2015 and 2017 Term Loans.
Gain on extinguishment of debt was recognized for $3.9 million in the previous year during the three months ended June 30, 2021. The gain on extinguishment of debt was related to the PPP loan forgiveness approved by the SBA on June 14, 2021.
Other income, net, decreased less than $0.1 million, or 52%, in the current quarter compared
to the same quarter in 2021. The decrease was primarily driven by a nonrecurring gain on lease modification recognized in the prior year quarter upon the Company's early termination agreement of the leased space previously used as the Company's corporate headquarters.
Income Tax Expense
The Company’s effective tax rates for the three months ended June 30, 2022 and 2021 were 28.9% and 10.2%, respectively. The increase in the effective tax rate for
the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the three months ended June 30, 2021.
Wholesale net sales increased $3.1 million, or 17%, in the current six month period as compared to the same period in 2021, with increases in both domestic and export wine sales. The increase in domestic wine sales was driven by a combination of the Company's execution of its growth strategies with the year-over-year
recovery of On-Premise sales. These factors drove an increased rate of sales of the Company's core wines, continued growth in new points of distributions, and timing of inventory fulfillment to distributors following strong distributor sales at the end of 2021. The increase in export wine sales was driven by several large shipments to Europe and Canada as the Company continues to grow this channel.
Direct to Consumer net sales increased $1.1 million, or 9%, in the current six month period as compared to the same period in 2021. The increase was primarily driven by higher sales through the wine clubs and in the tasting rooms as compared to the same period in 2021. The increase in wine club and tasting room sales was
partially offset by lower Ecommerce sales in the current period. Sales for wine clubs increased in the current period driven by price increases and sales mix. An increase in visitors and higher spend per guest driven by the Company's elevated tasting experiences combined to drive higher tasting room sales. Ecommerce sales decreased in the current period as compared to the same period in 2021 as consumers continued to shift purchasing behaviors with the reopening of tasting rooms, retail and restaurants.
Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales, increased $0.6 million, or 38%, in the current six month period as compared to the same period in 2021. The increase was primarily driven by higher tasting and event
fee revenues partially offset by lower bulk wine sales. Higher tasting and event fee revenues were driven by the Company's premiumization of the wine tasting experiences and increased tasting room traffic and private events.
Wholesale gross profit increased $0.1 million, or 2%, in the current six month period as compared to the same period in 2021 primarily driven by overall volume increase in wine sales and price increases, mostly offset by a shift in sales mix towards wines with a higher cost vintage. Compounded with the wildfire losses on the 2020 vintage, the lower yields of the 2021 vintage resulted in higher cost vintages on certain wines sold in the current period. Wholesale gross margin percentage, which is defined as wholesale
gross profit as a percentage of wholesale net sales, decreased 501 basis points primarily driven by a shift in sales mix towards wines with a higher cost vintage compared to the same period in 2021.
Direct to Consumer gross profit increased $1.2 million, or 15%, in the current six month period as compared to the same period in 2021. The increase was a result of higher wine clubs and tasting rooms sales when compared to the same period in 2021. Direct to Consumer gross margin percentage increased 351 basis points in the current period compared to the same period in 2021. The increase was primarily driven by price increases and a shift in sales channel mix driven by higher wine clubs and tasting rooms sales as compared to the same period of 2021.
“Other” includes a gross loss on bulk wine and grape
sales, custom winemaking services, event fees, tasting fees and non-wine retail sales. Other gross loss decreased $0.2 million, or 32%, in the current six month period as compared to the same period in 2021 primarily driven by higher tasting and event fee revenues due to increased traffic at tasting rooms and improved margins on custom winemaking services, partially offset by nonrecurring insurance proceeds for smoke taint affected inventory received in the prior year period and higher inventory write-downs in the current period.
Operating Expenses
Six
Months Ended June 30,
(in thousands, except percentages)
2022
2021
Increase (Decrease)
% change
Sales and marketing
$
8,282
$
6,795
$
1,487
22%
General
and administrative
6,561
6,714
(153)
(2)%
Total operating expenses
$
14,843
$
13,509
$
1,334
10%
Sales
and marketing expenses increased $1.5 million, or 22%, in the current six month period as compared to the same period in 2021. The increase was primarily driven by higher compensation, advertising and promotional, and travel expenses compared to the same period in 2021. Increased compensation is driven by hospitality staffing related to increased traffic and volume, open positions in the prior year, and increased accrued bonuses related to company performance.
General and administrative expenses decreased $0.2 million, or 2%, in the current six month period as compared to the same period in 2021 primarily due to nonrecurring costs of the prior year period related to the amended 2019 Annual Report on Form 10-K and amended 2020 Quarterly Reports on Form 10-Q, partially offset by increased compensation expenses related to stock
grants and open positions
in the prior year, increased costs under software as a service (SaaS) model, and reinstatement of previously voluntarily waived Board of Director fees when compared to the same period in 2021.
Interest
expense, net, decreased less than $0.1 million, or 13%, in the current six month period compared to the same period in 2021. The decrease was primarily driven by lower interest expense on declining principal balances on the 2015 and 2017 Term Loans.
Gain on extinguishment of debt was recognized for $3.9 million in the previous year during the six month period ended June 30, 2021. The gain on extinguishment of debt was related to the PPP loan forgiveness approved by the SBA on June 14, 2021.
Other income, net, decreased $0.1 million, or 51%, in the current six month period compared to the same period in 2021. The decrease was primarily driven by a nonrecurring gain on lease modification recognized in the
prior year six month period upon the Company's early termination agreement of the leased space previously used as the Company's corporate headquarters.
Income Tax Expense
The Company’s effective tax rates for the six months ended June 30, 2022 and 2021 were 29.1% and 7.6%, respectively. The increase in the effective tax rate for the six months ended June 30, 2022 as compared to the six months ended
June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the six months ended June 30, 2021.
The Company’s principal sources of liquidity are its available cash and cash
equivalents, investments in available for sale securities, funds generated from operations and bank borrowings. The Company’s primary cash needs are to fund working capital requirements and capital expenditures. Despite the negative effects of COVID-19 on its business, the Company has maintained adequate liquidity to meet working capital requirements, fund capital expenditures, meet payroll, and repay scheduled principal and interest payments on debt.
In response to the current macro-economic environment, the Company protected its financial position and liquidity as evidenced by the following items: the
Company managed both operating expense and capital expenditure increases closely, limited discretionary spending, and actively managed its working capital, including supporting its business partners most impacted by the pandemic through extended terms and closely monitoring its customers’ solvency and its ability to collect from them.As a result, the Company believes that cash flows generated from operations and its cash, cash equivalents, and marketable securities balances, as well as its borrowing arrangements, will be sufficient to meet its presently anticipated cash requirements for capital expenditures, working capital, debt obligations and other commitments during the next twelve months.
Revolving Credit Facility
In
March 2013, Crimson and its subsidiaries entered into a $60.0 million revolving credit facility (the “Revolving Credit Facility”) with American AgCredit, FLCA, as agent for the lenders. The Revolving Credit Facility is comprised of a revolving loan facility (the “Revolving Loan”) and a term revolving loan facility (the “Term Revolving Loan”), which together are secured by substantially all of Crimson’s assets. The Revolving Loan is for up to $10.0 million of availability in the aggregate for a five year term, and the Term Revolving Loan is for up to $50.0 million in the aggregate for a fifteen year term. In addition to unused line fees ranging from 0.15% to 0.25%, rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the London Interbank Offered Rate. The Revolving Credit Facility can be used to fund acquisitions,
capital projects and other general corporate purposes. Covenants include the maintenance of specified debt and equity ratios, limitations on the incurrence of additional indebtedness, limitations on dividends and other distributions to shareholders and restrictions on certain mergers, consolidations and sales of assets. No amounts have been borrowed under the Revolving Credit Facility to date.
Term Loans
The Company's term loans consist of the following:
(i) On November 10, 2015, Pine Ridge Winery, LLC (“PRW Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior
secured term loan agreement (the “2015 Term Loan”) with American AgCredit, FLCA (“Lender”) for an aggregate principal amount of $16.0 million. Amounts outstanding under the 2015 Term Loan bear a fixed interest rate of 5.24% per annum. The 2015 Term Loan will mature on October 1, 2040. The term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of June 30, 2022, $11.8 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were less than $0.1 million.
(ii) On June 29, 2017, Double Canyon Vineyards, LLC (the “DCV Borrower” and, individually and collectively with the PRW Borrower, “Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2017
Term Loan”) with the Lender for an aggregate principal amount of $10.0 million. Amounts outstanding under the 2017 Term Loan bear a fixed interest rate of 5.39% per annum. The 2017 Term Loan will mature on July 1, 2037. The term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of June 30, 2022, $7.6 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were less than $0.1 million.
Borrower’s obligations under the 2015 Term Loan and 2017 Term Loan are guaranteed by the Company. All obligations of Borrower under the 2015 Term Loan and 2017 Term Loan are collateralized by certain real property of the
Company. Borrower’s covenants include the maintenance of a specified debt service coverage ratio and certain customary affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, limitations on distributions to shareholders, and restrictions on certain investments, the sale of assets, and merging or consolidating with other entities. Borrower was in compliance with all debt covenants as of June 30, 2022.
The
following table summarizes the Company's cash flow activities for the six months ended June 30, 2022 and 2021 (in thousands):
Cash provided by (used in):
2022
2021
Operating activities
$
6,210
$
9,433
Investing
activities
1,840
(2,376)
Financing activities
(1,586)
(6,525)
Cash provided by operating activities
Net cash provided by operating activities was $6.2 million for the six months ended June 30, 2022, consisting primarily of $0.2 million of net income adjusted for $4.9 million of non-cash items and $1.1 million net cash inflow related
to changes in operating assets and liabilities. Adjustments for non-cash items primarily consist of depreciation, loss on the write-down of inventory, and amortization. The change in operating assets and liabilities was primarily due to a decrease in inventory and accounts receivable and increase in customer deposits and other payables, partially offset by a decrease in accounts payable and accrued liabilities and increase in other current assets.
Net cash provided by operating activities was $9.4 million for the six months ended June 30, 2021, consisting primarily of $3.9 million of net income adjusted for $1.0 million of non-cash items and $4.5 million net cash inflow related to changes in operating assets and liabilities. Adjustments for non-cash items primarily consist of depreciation, loss on the write-down of inventory, and amortization,
partially offset by the gain on extinguishment of debt. The change in operating assets and liabilities was primarily due to a decrease in inventory, accounts receivable, and other current assets and increase in customer deposits and other payables, partially offset by a decrease in accounts payable and accrued liabilities and other non-current liabilities.
Cash provided by (used in) investingactivities
Net cash provided by investing activities was $1.8 million for the six months ended June 30, 2022, consisting primarily of the net redemptions of available for sale investments of $3.5 million, partially offset by capital expenditures of $1.7 million.
Net
cash used in investing activities was $2.4 million for the six months ended June 30, 2021, consisting primarily of the net purchases of available for sale investments of $1.2 million and capital expenditures of $1.3 million, partially offset by proceeds from sale of the fallow apple orchards in Umatilla County, Oregon totaling $0.1 million which represents the down payment with the remaining balance of $0.5 million financed by the Company.
Cashused in financingactivities
Net cash used in financing activities for the six months ended June 30,
2022 was $1.6 million, consisting primarily of the repurchase of shares of the Company's common stock at an aggregate purchase price of $1.0 million and the principal payments on the 2015 and 2017 Term Loans of $0.6 million.
Net cash used in financing activities for the six months ended June 30, 2021 was $6.5 million, consisting primarily of the repurchase of shares of the Company's common stock at an aggregate purchase price of $6.2 million and the principal payments on the 2015 and 2017 Term Loans of $0.3 million.
Share Repurchases
On
May 24, 2021, with the unanimous written consent of the Board of Directors, the Company repurchased an aggregate of 719,291 shares of its common stock at a purchase price of $8.65 per share for an aggregate purchase price of $6.2 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.
In March 2022, the Company commenced a share repurchase program (the “2022 Repurchase Program”) that provided for the repurchase of up to $4.0 million of outstanding common stock. Under the 2022 Repurchase Program, any repurchased shares are constructively
retired. During the six months ended June 30, 2022, the Company repurchased 134,722 shares at an aggregate purchase price of $1.0 million.
There
have been no material changes to the critical accounting policies and estimates previously disclosed in the 2021 Report.
Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk.
Not required.
Item 4. Controls and Procedures.
The Company’s management evaluated, with the participation of the
Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2022. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
There has been no change in the
Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
From time to time, Crimson may be involved in legal proceedings in the ordinary course of its business. Crimson is not currently involved in any legal or administrative proceedings individually or together that it believes are likely to have a significant adverse effect on its business, results of operations or financial condition.
Item 1A. Risk Factors.
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company's 2021
Report, which could materially affect its business, results of operations or financial condition. The risks described in the Company's 2021 Report are not the only risks it faces. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may eventually prove to materially adversely affect its business, results of operations or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Share repurchase activity under the
Company’s share repurchase program on a trade date basis, for the three months ended June 30, 2022 was as follows:
Fiscal Period
Total Number of Shares Purchased
Average
Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans (millions)
Unaudited financial
statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended June 30, 2022, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Interim Condensed Consolidated Financial Statements.
104**
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included as Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.