CWGL 10-Q
Crimson Wine Group, Ltd (CWGL)
10-Q
2023-11-09
For: 2023-09-30
View Original
Added on
April 06, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2023
OR
| For the transition period from | to | ||||||||||
Commission File Number 000-54866
(Exact name of registrant as specified in its Charter)
(State or Other Jurisdiction of | (I.R.S. Employer | ||||
| Incorporation or Organization) | Identification Number) | ||||
(Address of Principal Executive Offices) | (Zip Code) | ||||
(800 ) 486-0503
(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.
| 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).
| 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 ☐ | |||||||
Smaller reporting company | ||||||||
Emerging growth company | ||||||||
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 | |||||||||||||||||||
On November 3, 2023 there were 21,109,523 outstanding shares of the registrant’s Common Stock, par value $0.01 per share.
CRIMSON WINE GROUP, LTD.
TABLE OF CONTENTS
| Page Number | ||||||||
| PART I. FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
(Unaudited)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investments available for sale | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible and other non-current assets, net | |||||||||||
| Total non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||
| Customer deposits | |||||||||||
| Current portion of long-term debt, net of unamortized loan fees | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion and unamortized loan fees | |||||||||||
| Deferred tax liability, net | |||||||||||
| Other non-current liabilities | |||||||||||
| Total non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Contingencies (Note 12) | |||||||||||
| Stockholders’ Equity | |||||||||||
Common shares, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
1
CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Net loss on disposal of property and equipment | |||||||||||||||||||||||
| Income (loss) from operations | ( | ||||||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Total other income (expense), net | ( | ( | |||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Basic and fully diluted weighted-average shares outstanding | |||||||||||||||||||||||
| Basic and fully diluted earnings (loss) per share | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
2
CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net unrealized holding gains (losses) on investments arising during the period, net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
3
CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash from operations: | |||||||||||
| Depreciation and amortization of property and equipment | |||||||||||
| Amortization of intangible assets | |||||||||||
| Loss on write-down of inventory | |||||||||||
| Provision for credit losses | |||||||||||
| Net loss on disposal of property and equipment | |||||||||||
| Provision (benefit) for deferred income taxes | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Net change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Other current assets | ( | ( | |||||||||
| Other non-current assets | ( | ||||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Customer deposits | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Net cash flows from investing activities: | |||||||||||
| Purchase of investments available for sale | ( | ( | |||||||||
| Redemptions of investments available for sale | |||||||||||
| Acquisition of property and equipment | ( | ( | |||||||||
| Principal payments received on notes receivable | |||||||||||
| Proceeds from disposals of property and equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Net cash flows from financing activities: | |||||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents - beginning of period | |||||||||||
| Cash and cash equivalents - end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of capitalized interest | $ | $ | |||||||||
| Non-cash investing and financing activity: | |||||||||||
| Unrealized holding gains (losses) on investments, net of tax | $ | $ | ( | ||||||||
| Acquisition of property and equipment accrued but not yet paid | $ | $ | |||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
4
CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
| Accumulated | |||||||||||||||||||||||||||||||||||
| Additional | Other | ||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
5
CRIMSON WINE GROUP, LTD.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1. Background and Basis of Presentation
Background
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 $15 per 750ml bottle). Crimson is headquartered in Napa, California and through its subsidiaries owns seven primary wine estates and brands: Pine Ridge Vineyards, Archery Summit, Chamisal Vineyards, Seghesio Family Vineyards, Double Canyon, Seven Hills Winery and Malene Wines.
Significant Accounting Policies
There were no changes to the Company’s significant accounting policies during the nine months ended September 30, 2023. See Note 2, “Significant Accounting Policies,” of the 2022 Report for a description of the Company’s significant accounting policies.
Recent Accounting Pronouncements
Subsequent to the filing of the 2022 Report, the Company evaluated Accounting Standards Update (“ASU”) 2023-01 through 2023-06 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.Revenue
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.
6
Wholesale Segment
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 30 to 120 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 depletion allowances, 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, 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 wine sales 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 purchased or 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 30 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 Vineyards, and Pine Ridge Vineyard’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 for winemaking services 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 for tasting fees and retail merchandise sales at the time of sale.
Refer to Note 11, “Business Segment Information,” for revenue by sales channel amounts for the three and nine months ended September 30, 2023 and 2022.
7
Contract Balances
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 2023 and 2022 years consisted primarily of wine club revenue, grape and bulk sales, and event fees. Changes in the contract liability balance during the nine-month periods ended September 30, 2023 and 2022 were not materially impacted by any other factors.
The outstanding contract liability balance was $1.4 million at September 30, 2023 and $0.4 million at December 31, 2022. Of the amounts included in the opening contract liability balances at the beginning of each period, approximately $0.3
Accounts Receivable, Net
Accounts receivable are reported net of an allowance for credit losses. 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, in order to reasonably estimate future conditions. The Company’s accounts receivable balance is net of an allowance for credit losses of $0.2
3.Inventory
A summary of inventory at September 30, 2023 and December 31, 2022 is as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Finished goods | $ | $ | |||||||||
| In-process goods | |||||||||||
| Packaging and bottling supplies | |||||||||||
| Total inventory | $ | $ | |||||||||
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. Crop insurance proceeds from farming losses may be recorded as offsets against previously recognized write-downs.
Inventory write-downs of $0.2 million and $0.3 million were recorded during the three-month periods ended September 30, 2023 and 2022, respectively. Inventory write-downs of $0.7 million and $1.2 million were recorded during the nine-month periods ended September 30, 2023 and 2022, respectively. The Company’s inventory balances are presented at the lower of cost or net realizable value.
8
4.Property and Equipment
A summary of property and equipment at September 30, 2023 and December 31, 2022, and depreciation and amortization for the three and nine months ended September 30, 2023 and 2022, is as follows (in thousands):
| Depreciable Lives | |||||||||||||||||
| (in years) | September 30, 2023 | December 31, 2022 | |||||||||||||||
| Land and improvements | N/A | $ | $ | ||||||||||||||
| Buildings and improvements | |||||||||||||||||
| Winery and vineyard equipment | |||||||||||||||||
| Vineyards and improvements | |||||||||||||||||
| Caves | |||||||||||||||||
| Vineyards under development | N/A | ||||||||||||||||
| Construction in progress | N/A | ||||||||||||||||
| Total | |||||||||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||||||||
| Total property and equipment, net | $ | $ | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Depreciation and amortization: | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Capitalized into inventory | $ | $ | $ | $ | ||||||||||||||||||||||
| Expensed to general and administrative | ||||||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | ||||||||||||||||||||||
9
5.Financial Instruments
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 one year or less. The par value, amortized cost, gross unrealized gains and losses, and estimated fair value of investments classified as available for sale as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
| September 30, 2023 | Par Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Level 1 | Level 2 | Total Fair Value Measurements | ||||||||||||||||||||||||||||||||||
| Certificates of Deposit | ( | ||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | Par Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Level 1 | Level 2 | Total Fair Value Measurements | ||||||||||||||||||||||||||||||||||
| Certificates of Deposit | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
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 September 30, 2023 and December 31, 2022, the Company did not have any other assets or liabilities measured at fair value on a nonrecurring basis. For cash and cash equivalents and short-term debt, the carrying amounts of such financial instruments approximate their fair values. As of September 30, 2023, the Company has estimated the fair value of its outstanding debt to be approximately $13.4 million compared to its carrying value of $18.0 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 as of September 30, 2023 of 8.30 % and 8.22 % for the 2015 Term Loan (as defined below) and 2017 Term Loan (as defined below), respectively, as further discussed in Note 8, “Debt.”
The Company does not invest in any derivatives or engage in any hedging activities.
10
6.Intangible and Other Non-Current Assets
A summary of intangible and other non-current assets at September 30, 2023 and December 31, 2022, and amortization expense for the three and nine months ended September 30, 2023 and 2022, is as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Amortizable lives (in years) | Gross carrying amount | Accumulated amortization | Net book value | Gross carrying amount | Accumulated amortization | Net book value | |||||||||||||||||||||||||||||||||||
| Brand | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Distributor relationships | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Legacy permits | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Trademark | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Other non-current assets | |||||||||||||||||||||||||||||||||||||||||
| Total intangible and other non-current assets, net | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Total amortization expense | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
The estimated aggregate future amortization of intangible assets as of September 30, 2023 is identified below (in thousands):
| Amortization | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
7.Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accounts payable and accrued grape liabilities | $ | $ | |||||||||
| Accrued compensation related expenses | |||||||||||
| Sales and marketing | |||||||||||
| Acquisition of property and equipment | |||||||||||
| Accrued interest | |||||||||||
| Depletion allowance | |||||||||||
| Production and farming | |||||||||||
| Other accrued expenses | |||||||||||
| Total accounts payable and accrued liabilities | $ | $ | |||||||||
11
8.Debt
A summary of debt at September 30, 2023 and December 31, 2022 is as follows (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||||||||
Revolving Credit Facility (1) | $ | $ | ||||||||||||
Senior Secured Term Loan Agreement due 2040, with an interest rate of | ||||||||||||||
Senior Secured Term Loan Agreement due 2037, with an interest rate of | ||||||||||||||
| Unamortized loan fees | ( | ( | ||||||||||||
| Total debt | ||||||||||||||
| Less current portion of long-term debt | ||||||||||||||
| Long-term debt due after one year, net | $ | $ | ||||||||||||
______________________________________
(1) The Revolving Credit Facility, a $60.0 million revolving credit facility between the Company and American AgCredit, FLCA, as agent for the lenders thereunder, 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 provides up to $10.0 million of availability in the aggregate for a five year term, and the Term Revolving Loan provides up to $50.0 million in the aggregate for a term. In addition to unused line fees ranging from 0.125 % to 0.225 %, rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the Secured Overnight Financing Rate. On June 15, 2023, the Company executed a renewal agreement with American AgCredit, which includes an extension of the termination date of the Revolving Loan and the Term Revolving Loan to May 31, 2028 along with updates to other terms of the credit agreement governing such loans.
(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 September 30, 2023.
A summary of debt maturities as of September 30, 2023 is as follows (in thousands):
| Principal due the remainder of 2023 | $ | ||||
| Principal due in 2024 | |||||
| Principal due in 2025 | |||||
| Principal due in 2026 | |||||
| Principal due in 2027 | |||||
| Principal due thereafter | |||||
| Total | $ | ||||
9.Stockholders’ Equity and Stock-Based Compensation
Share Repurchase
In 2022, the Company repurchased a total of 1,075,973 shares of its common stock at an average purchase price of $6.48 per share for an aggregate purchase price of $7.0 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.
12
In March 2023, the Company commenced a share repurchase program (the “2023 Repurchase Program”) that provided for the repurchase of up to 2,000,000 shares of outstanding common stock. Under the 2023 Repurchase Program, any repurchased shares are constructively retired. During the nine months ended September 30, 2023, the Company repurchased 255,250 shares of its common stock at an average purchase price of $6.50 per share for an aggregate purchase price of $1.7 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.
Stock-Based Compensation
In February 2013, the Company adopted the 2013 Omnibus Incentive Plan (the “2013 Plan”), which provides for the granting of up to 1,000,000 stock options or other common stock-based awards. In July 2022, upon the approval of the Board of Directors and the Company’s stockholders, 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 678,000 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 Board of Directors.
In December 2019, under the Company’s 2013 Omnibus Incentive Plan, option grants for 89,000 shares were issued. The options vest annually over five years and expire seven years from the date of grant. In July 2021, stock option awards for an additional 233,000 shares were issued to certain members of management. Subject to the terms of the respective option award agreements, the options vest in four equal increments in January 2022, January 2023, January 2024 and January 2025, and the options will expire seven years from the date of grant. In March 2022, stock option awards for an additional 500,000 shares were granted to the Company’s Chief Executive Officer. Such options are divided into four tranches, are subject to both performance-based vesting requirements and time-based vesting requirements, and expire ten years from the date of grant. In March 2023, stock option awards for an additional 500,000 five tranches, are subject to both performance-based vesting requirements and time-based vesting requirements, and expire ten years from the date of grant. The performance-based vesting requirements for the grants made in March 2022 and March 2023 are tied to annual or cumulative Adjusted EBITDA targets, as defined within the respective underlying option award agreements. The Company believes it will achieve the listed targets for each agreement and has recorded the related stock-based compensation expense for the three and nine months ended September 30, 2023. The exercise price for all respective options was either the closing price or average trading 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. The Company determined the grant date fair value of the awards using the Black-Scholes-Merton option-pricing valuation model.
During the nine months ended September 30, 2023, the Company granted stock options in respect of 500,000 The fair value of these grants was computed based on the following assumptions:
| March 2023 Grants | ||||||||
| Shares issued | ||||||||
| Expected term | ||||||||
| Expected dividend yield | % | |||||||
| Risk-free interest rate | % | |||||||
| Expected stock price volatility | ||||||||
| Stock price | $ | |||||||
| Weighted-average grant date fair value | $ | |||||||
| Grant date fair value (in thousands) | $ | |||||||
As of September 30, 2023, stock options in respect of 1,182,500 shares remained outstanding net of stock option forfeitures of 139,500 shares during the quarter ended September 30, 2023. There were no 102 thousand and $366 thousand were recorded as stock-based compensation expense for the three and nine months ended September 30, 2023, respectively. $103 thousand and $261 thousand were recorded as stock-based compensation expense for the three and nine months ended September 30, 2022, respectively. Stock-based compensation expense was recorded to general and administrative expense in the unaudited interim condensed consolidated statements of operations.
13
10.Income Taxes
The consolidated income tax expense or benefit for the three and nine months ended September 30, 2023 and 2022, was determined based upon the Company’s estimated consolidated effective income tax rates calculated without discrete items for the years ending December 31, 2023 and 2022, respectively, and then adjusting for any discrete items.
The Company’s effective tax rates for the three months ended September 30, 2023 and 2022 were 26.3 % and 28.9 %, respectively. The decrease in the effective tax rate for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to the income exclusion of the Fire Victim Trust wildfire settlement for California income taxes during the three months ended September 30, 2023. The Company’s effective tax rates for the nine months ended September 30, 2023 and 2022 were 26.3 % and 28.8 %, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to the income exclusion of the Fire Victim Trust wildfire settlement for California income taxes during the nine months ended September 30, 2023. See Note 12 below for more detail on the Fire Victim Trust wildfire settlement.
The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three and nine months ended September 30, 2023 was primarily attributable to state income taxes and other permanent items.
11.Business Segment Information
The Company has identified two 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 two 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.
The following tables outline the net sales, cost of sales, gross profit, directly attributable selling expenses and operating income (loss) for the Company’s reportable segments for the three and nine months ended September 30, 2023 and 2022, and also includes a reconciliation of consolidated income (loss) from operations. Other/Non-Allocable net sales and gross profit (loss) 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 September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| Wholesale | Direct to Consumer | Other/Non-Allocable | Total | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit (loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss on disposal of property and equipment | |||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
14
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| Wholesale | Direct to Consumer | Other/Non-Allocable | Total | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit (loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss on disposal of property and equipment | |||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
12.Contingencies
Litigation
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 Wildfires
In October 2017, significant wildfires impacted the Company’s operations and damaged its inventory. The Company has settled on several insurance claims totaling $1.3 million since the time of the wildfires through August 2020. In September 2023, the Company accepted and received a settlement payout from the Fire Victim Trust (the “Fire Victim Trust”), which was formed in connection with PG&E Corporation and Pacific Gas and Electric Company’s (together, “PG&E”) joint plan of reorganization under Chapter 11 to, among other things, review and resolve eligible claims arising from certain wildfires. The settlement payout was in the amount of $1.9 million, which the Company recorded in other income, net. This amount represents a portion of the total amount approved by the Fire Victim Trust for lost business income over a 36-month period from October 2017 to September 2020. Although the Company is expecting additional payouts from this settlement with PG&E, the amounts and timing are not guaranteed and could vary contingent on additional funding from PG&E towards the Fire Victim Trust for all fire victims. Furthermore, the Company anticipates additional insurance settlements with its underwriters for amounts that cannot be reasonably estimated at this time.
15
13.Earnings (Loss) Per Share
The following table reconciles the weighted-average common shares outstanding used in the calculations of the Company’s basic and diluted earnings (loss) per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| ($ and shares in thousands, except per share amounts) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Common shares: | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding - basic | |||||||||||||||||||||||
| Dilutive effect of stock options outstanding | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding - diluted | |||||||||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Antidilutive stock options (1) | |||||||||||||||||||||||
(1) Amounts represent stock options that are excluded from the diluted earnings per share calculations because the options are antidilutive.
14.Subsequent Events
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Interim Operations.
Statements included in this Quarterly Report on Form 10-Q (the “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 and the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC (the “2022 Report”).
Quantities or results referred to as “current quarter” and “current three and nine-month period” refer to the three and nine months ended September 30, 2023.
Cautionary Statement for Forward-Looking Information
This Management’s Discussion and Analysis of Financial Condition and Results of Interim Operations and other parts of this Report 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, which 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 2022 Report. Readers should carefully review the risk factors described in the 2022 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. The Company sells wine (through distributors and directly) to restaurants, bars, and other hospitality locations (“On-Premise”). 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”). As permitted under federal and local regulations, the Company has increased its emphasis on 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 received from 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 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 three to 36 months. Reductions to the carrying value of inventories are also included in cost of sales.
17
As of September 30, 2023, wine inventory included approximately 0.7 million cases of bottled wine and bulk wine, both 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.
Seasonality
As discussed in the 2022 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 and plans to disclose any material impacts on the 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. Crimson continues to complete 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 and 2022 harvests were impacted by drought and heat resulting in lower yields than historical averages. Compounded with the losses on the 2020 vintage, the lower yields of the 2021 and 2022 vintages 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. Lower harvest yields have also resulted in reduced bottled inventory and limited availability of select wines and vintages available for sale.
Inflation and Market Conditions
The Company expects profit margins 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, increased commodity costs, including dry goods and packaging materials, and increased transportation costs. 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.
18
Results of Operations
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Net Sales
| Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Increase (Decrease) | % change | |||||||||||||||||||
| Wholesale | $ | 10,874 | $ | 8,933 | $ | 1,941 | 22% | ||||||||||||||||
| Direct to Consumer | 6,104 | 6,361 | (257) | (4)% | |||||||||||||||||||
| Other | 1,052 | 1,392 | (340) | (24)% | |||||||||||||||||||
| Total net sales | $ | 18,030 | $ | 16,686 | $ | 1,344 | 8% | ||||||||||||||||
Wholesale net sales increased $1.9 million, or 22%, in the current quarter as compared to the same quarter in 2022, reflecting an increase in domestic wine sales of $1.6 million and export wine sales of $0.3 million. The increase in domestic wine sales is primarily driven by increased demand and price increases in the current quarter compared to the prior year quarter. The increase in export wine sales is primarily driven by increased shipments to Europe.
Direct to Consumer net sales decreased $0.3 million, or 4%, in the current quarter as compared to the same quarter in 2022. The decrease was primarily driven by a slight decrease in sales across all channels as compared to the same quarter in 2022. The decrease can be attributed to softening demand, higher temporary holds and cancellations from current club members, and lower visitations across the tasting rooms partially offset by price increases quarter-over-quarter.
Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales, decreased $0.3 million, or 24%, in the current quarter as compared to the same quarter in 2022. The decrease was primarily driven by lower sales of excess bulk wine.
19
Gross Profit
| Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Increase (Decrease) | % change | |||||||||||||||||||
| Wholesale | $ | 3,942 | $ | 3,405 | $ | 537 | 16% | ||||||||||||||||
| Wholesale gross margin percentage | 36 | % | 38 | % | |||||||||||||||||||
| Direct to Consumer | 4,098 | 4,218 | (120) | (3)% | |||||||||||||||||||
| Direct to Consumer gross margin percentage | 67 | % | 66 | % | |||||||||||||||||||
| Other | 386 | (71) | 457 | 644% | |||||||||||||||||||
| Total gross profit | $ | 8,426 | $ | 7,552 | $ | 874 | 12% | ||||||||||||||||
| Total gross margin percentage | 47 | % | 45 | % | |||||||||||||||||||
Wholesale gross profit increased $0.5 million, or 16%, in the current quarter as compared to the same quarter in 2022 primarily driven by increased demand and price increases. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, decreased 187 basis points primarily driven by a shift in sales mix of certain wines with a higher cost vintage when compared to the same quarter in 2022.
Direct to Consumer gross profit decreased $0.1 million, or 3%, in the current quarter as compared to the same quarter in 2022 primarily driven by a slight decrease in sales across all channels. Direct to Consumer gross margin percentage increased 83 basis points primarily driven by price increases as compared to the same quarter of 2022.
“Other” includes a gross profit (loss) on bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales. Other gross profit increased $0.5 million, or 644%, in the current quarter as compared to the same quarter in 2022 and is primarily driven by lower inventory write-downs and increased profitability on all aforementioned sales, services and fees included in “Other”.
Operating Expenses
| Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Increase (Decrease) | % change | |||||||||||||||||||
| Sales and marketing | $ | 4,500 | $ | 4,552 | $ | (52) | (1)% | ||||||||||||||||
| General and administrative | 3,528 | 3,313 | 215 | 6% | |||||||||||||||||||
| Total operating expenses | $ | 8,028 | $ | 7,865 | $ | 163 | 2% | ||||||||||||||||
Sales and marketing expenses decreased slightly in the current quarter as compared to the same quarter in 2022 with various offsets across expense categories.
General and administrative expenses increased $0.2 million, or 6%, in the current quarter as compared to the same quarter in 2022 primarily attributable to severance expense incurred in the current quarter.
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Other Income (Expense)
| Three Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % change | |||||||||||||||||||
| Interest expense, net | $ | (245) | $ | (279) | $ | 34 | 12% | ||||||||||||||||
| Other income, net | 2,172 | 24 | 2,148 | 8,950% | |||||||||||||||||||
| Total other income, net | $ | 1,927 | $ | (255) | $ | 2,182 | 856% | ||||||||||||||||
Interest expense, net, decreased by less than $0.1 million, or 12%, in the current quarter compared to the same quarter in 2022. The decrease was primarily driven by lower interest expense on declining principal balances on the 2015 Term Loan and 2017 Term Loan.
Other income, net, increased $2.1 million, or 8,950%, in the current quarter compared to the same quarter in 2022 primarily driven by a settlement payout for $1.9 million received from the Fire Victim Trust, formed in connection with PG&E Corporation and Pacific Gas and Electric Company’s joint plan of reorganization under Chapter 11 (the “Fire Victim Trust”), related to the 2017 wildfires with the remainder due to increased investment income correlated with a higher interest rate environment in the current quarter.
Income Tax Expense (Benefit)
The Company’s effective tax rates for the three months ended September 30, 2023 and 2022 were 26.3% and 28.9%, respectively. The decrease in the effective tax rate for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to the income exclusion of the Fire Victim Trust wildfire settlement for California income taxes during the three months ended September 30, 2023.
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Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Net Sales
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Increase (Decrease) | % change | |||||||||||||||||||
| Wholesale | $ | 29,076 | $ | 29,906 | $ | (830) | (3)% | ||||||||||||||||
| Direct to Consumer | 18,988 | 20,082 | (1,094) | (5)% | |||||||||||||||||||
| Other | 2,905 | 3,403 | (498) | (15)% | |||||||||||||||||||
| Total net sales | $ | 50,969 | $ | 53,391 | $ | (2,422) | (5)% | ||||||||||||||||
Wholesale net sales decreased $0.8 million, or 3%, in the current nine month period as compared to the same period in 2022, reflecting a decrease in domestic wine sales of $0.2 million and export wine sales of $0.6 million. The decrease in domestic wine sales is primarily driven by a significant reduction in close out sales, partially offset by price increases in the current period compared to the prior year period. The decrease in export wine sales is primarily driven by reduced shipments to key markets.
Direct to Consumer net sales decreased $1.1 million, or 5%, in the current nine month period as compared to the same period in 2022. The decrease was primarily driven by lower sales through the Ecommerce and tasting room channels, partially offset by higher sales through the wine clubs as compared to the same period in 2022. Ecommerce sales decreased in the current period due to softening demand in this channel when compared to the prior year period. Sales through the tasting rooms decreased in the current period due to lower visitations across the tasting rooms with traffic in the first several months of the year from changing consumer behavior and severe weather conditions. Wine club sales increased in the current period due to price increases when compared to the prior year period.
Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales, decreased $0.5 million, or 15%, in the current nine month period as compared to the same period in 2022. The decrease was primarily driven by lower sales of excess bulk wine partially offset by higher custom winemaking service revenues.
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Gross Profit
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Increase (Decrease) | % change | |||||||||||||||||||
| Wholesale | $ | 10,704 | $ | 10,271 | $ | 433 | 4% | ||||||||||||||||
| Wholesale gross margin percentage | 37 | % | 34 | % | |||||||||||||||||||
| Direct to Consumer | 12,715 | 13,204 | (489) | (4)% | |||||||||||||||||||
| Direct to Consumer gross margin percentage | 67 | % | 66 | % | |||||||||||||||||||
| Other | 538 | (475) | 1,013 | 213% | |||||||||||||||||||
| Total gross profit | $ | 23,957 | $ | 23,000 | $ | 957 | 4% | ||||||||||||||||
| Total gross margin percentage | 47 | % | 43 | % | |||||||||||||||||||
Wholesale gross profit increased $0.4 million, or 4%, in the current nine month period as compared to the same period in 2022 primarily driven by price increases and a significant reduction of close out sales. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, increased 247 basis points primarily driven by price increases and a significant reduction of close out sales in the current period when compared to the same period in 2022.
Direct to Consumer gross profit decreased $0.5 million, or 4%, in the current nine month period as compared to the same period in 2022 primarily driven by a reduction in Ecommerce and tasting room sales. Direct to Consumer gross margin percentage increased 121 basis points primarily driven by price increases as compared to the same period of 2022.
“Other” includes a gross profit (loss) on bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales. Other gross profit increased $1.0 million, or 213%, in the current nine month period as compared to the same period in 2022 and is primarily driven by lower inventory write-downs and increased profitability on all aforementioned sales, services and fees included in “Other”.
Operating Expenses
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Increase (Decrease) | % change | |||||||||||||||||||
| Sales and marketing | $ | 13,330 | $ | 12,834 | $ | 496 | 4% | ||||||||||||||||
| General and administrative | 10,556 | 9,874 | 682 | 7% | |||||||||||||||||||
| Total operating expenses | $ | 23,886 | $ | 22,708 | $ | 1,178 | 5% | ||||||||||||||||
Sales and marketing expenses increased $0.5 million, or 4%, in the current nine month period as compared to the same period in 2022. The increase was primarily driven by higher compensation and travel expenses compared to the same period in 2022. Increased compensation is driven by filling positions that were previously vacant in the prior year period.
General and administrative expenses increased $0.7 million, or 7%, in the current nine month period as compared to the same period in 2022 primarily attributable to severance expense, higher compensation, and inflationary price increases for professional services when compared to the same period in 2022.
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Other Income (Expense)
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | Change | % change | |||||||||||||||||||
| Interest expense, net | $ | (572) | $ | (656) | $ | 84 | 13% | ||||||||||||||||
| Other income, net | 2,769 | 150 | 2,619 | 1,746% | |||||||||||||||||||
| Total other income (expense), net | $ | 2,197 | $ | (506) | $ | 2,703 | 534% | ||||||||||||||||
Interest expense, net, decreased by less than $0.1 million, or 13%, in the current nine month period compared to the same period in 2022. The decrease was primarily driven by lower interest expense on declining principal balances on the 2015 Term Loan and 2017 Term Loan (each term as defined below).
Other income, net, increased $2.6 million, or 1,746%, in the current nine month period compared to the same period in 2022 primarily driven by a settlement payout for $1.9 million received from the Fire Victim Trust related to the 2017 wildfires with the remainder due to increased investment income correlated with a higher interest rate environment in the current period.
Income Tax Expense (Benefit)
The Company’s effective tax rates for the nine months ended September 30, 2023 and 2022 were 26.3% and 28.8%, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to the income exclusion of the Fire Victim Trust wildfire settlement for California income taxes during the nine months ended September 30, 2023.
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Liquidity and Capital Resources
General
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.
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 (“American AgCredit”), 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 0.125% to 0.225%, rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the Secured Overnight Financing 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 stockholders and restrictions on certain mergers, consolidations, and sales of assets. No amounts have been borrowed under the Revolving Credit Facility to date.
On June 15, 2023, the Company executed a renewal agreement with American AgCredit, which includes an extension of the termination date of the Revolving Loan and the Term Revolving Loan to May 31, 2028 along with updates to other terms of the credit agreement governing such loans. Refer to the Company’s Current Report on Form 8-K as filed with the SEC on June 16, 2023 for additional information.
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 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 2015 Term Loan can be used to fund acquisitions, capital projects, and other general corporate purposes. As of September 30, 2023, $11.0 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 American AgCredit 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 2017 Term Loan can be used to fund acquisitions, capital projects, and other general corporate purposes. As of September 30, 2023, $7.0 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 stockholders, and restrictions on certain investments, the sale of assets, and merging or consolidating with other entities. The Company was in compliance with all debt covenants as of September 30, 2023.
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Consolidated Statements of Cash Flows
The following table summarizes the Company’s cash flow activities for the nine months ended September 30, 2023 and 2022 (in thousands):
| Net cash provided by (used in): | 2023 | 2022 | |||||||||
| Operating activities | $ | 2,683 | $ | 8,989 | |||||||
| Investing activities | (6,559) | (3,399) | |||||||||
| Financing activities | (2,518) | (2,523) | |||||||||
Cash provided by operating activities
Net cash provided by operating activities was $2.7 million for the nine months ended September 30, 2023, consisting primarily of $1.6 million of net income adjusted for $7.2 million of non-cash items and $6.1 million net cash outflow related to changes in operating assets and liabilities. Adjustments for non-cash items primarily consist of depreciation, amortization, loss on the write-down of inventory, and deferred income taxes. The change in operating assets and liabilities was primarily due to an increase in inventory, accounts receivable, other current assets, and other non-current assets and a decrease in accounts payable and accrued liabilities, partially offset by an increase in customer deposits.
Net cash provided by operating activities was $9.0 million for the nine months ended September 30, 2022, consisting primarily of $0.3 million of net loss adjusted for $7.0 million of non-cash items and $2.3 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 an increase in accounts payable and accrued liabilities and customer deposits and decrease in accounts receivable and other non-current assets, partially offset by an increase in inventory and other current assets. The increase in accounts payable and accrued liabilities was driven by timing of higher bulk and grape purchases to align with the timing of the 2022 harvest.
Cash used in investing activities
Net cash used in investing activities was $6.6 million for the nine months ended September 30, 2023, consisting primarily of capital expenditures of $7.5 million partially offset by the net redemptions of available for sale investments of $0.9 million.
Net cash used in investing activities was $3.4 million for the nine months ended September 30, 2022, consisting primarily of capital expenditures of $3.6 million and the net purchases of available for sale investments of $0.3 million, partially offset by principal payments received on notes receivable of $0.4 million and proceeds from the sale of property and equipment totaling $0.1 million.
Cash used in financing activities
Net cash used in financing activities was $2.5 million for the nine months ended September 30, 2023, consisting of the repurchase of shares of the Company’s common stock at an aggregate purchase price of $1.7 million and the principal payments on the 2015 and 2017 Term Loans of $0.9 million.
Net cash used in financing activities was $2.5 million for the nine months ended September 30, 2022, consisting of the repurchase of shares of the Company’s common stock at an aggregate purchase price of $1.7 million and the principal payments on the 2015 and 2017 Term Loans of $0.9 million.
Share Repurchases
In 2022, the Company repurchased a total of 1,075,973 shares of its common stock at an average purchase price of $6.48 per share for an aggregate purchase price of $7.0 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.
In March 2023, the Company commenced a share repurchase program (the “2023 Repurchase Program”) that provided for the repurchase of up to 2,000,000 shares of outstanding common stock. Under the 2023 Repurchase Program, any repurchased shares are constructively retired. During the nine months ended September 30, 2023, the Company repurchased 255,250 shares of its common stock at an average purchase price of $6.50 per share for an aggregate purchase price of $1.7 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.
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Off-Balance Sheet Financing Arrangements
None.
Critical Accounting Policies and Estimates
There have been no material changes to the critical accounting policies and estimates previously disclosed in the 2022 Report.
Item 3. Quantitative and Qualitative Disclosures About 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 September 30, 2023. 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 September 30, 2023.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth under Note 12, “Contingencies,” to the Company’s condensed consolidated interim financial statements included in Part I, “Item 1. Financial Statements (Unaudited)” of this Report is incorporated herein by reference.
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 2022 Report, which could materially affect its business, results of operations or financial condition. The risks described in the 2022 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, Use of Proceeds, and Issuer Purchases of Equity Securities.
Share repurchase activity under the Company’s share repurchase program on a trade date basis, for the three months ended September 30, 2023 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 Plans1 | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans1 | ||||||||||||||||||||||
| July 1-31, 2023 | 57,977 | $ | 6.62 | 148,533 | 1,851,467 | |||||||||||||||||||||
| August 1-31, 2023 | 71,836 | $ | 6.47 | 220,369 | 1,779,631 | |||||||||||||||||||||
| September 1-30, 2023 | 34,881 | $ | 6.11 | 255,250 | 1,744,750 | |||||||||||||||||||||
Total | 164,694 | |||||||||||||||||||||||||
1On March 16, 2023, the Company announced that the Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to an aggregate of 2,000,000 shares of the Company’s outstanding common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| 2.1 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1** | |||||
| 32.2** | |||||
| 101* | Unaudited financial statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended September 30, 2023, 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 Income (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 September 30, 2023, formatted in Inline XBRL (included as Exhibit 101). | ||||
| * Filed herewith. | |||||
| ** Furnished herewith. | |||||
Explanatory Note: The Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, filed with the SEC on August 9, 2023, included a “Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Crimson Wine Group, Ltd.” as Exhibit 3.2 (the “Former Exhibit”) under its Part II, “Item 6. Exhibits”. On August 21, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Correction to null and void the Certificate of Amendment of the Amended and Restated Certificate of Incorporation in its entirety. The Former Exhibit is hereby removed as an exhibit.
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SIGNATURES
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.
| CRIMSON WINE GROUP, LTD. | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | November 9, 2023 | By: | /s/ Kimberly A. Benson | |||||||||||
| Kimberly A. Benson | ||||||||||||||
| Interim Chief Financial Officer | ||||||||||||||
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