CRIMSON WINE GROUP, LTD.
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-month
period" refer to the three months ended
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 ofCrimson 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 theSEC .
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
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Impact of COVID-19 on Operations
In March 2020 , in response to the outbreak of COVID-19, 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 PPE, screening employees and vendors before they enter facilities,
practicing social distancing, implementing COVID-19 protocols and travel
guidelines, and advising employees of 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 months ended
March 31, 2022 and 2021 with a lesser impact to the current quarter 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 first quarter 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 first
quarter of 2022, Ecommerce sales remained elevated over pre-pandemic levels but
declined from the highs of 2020 in favor of 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 first quarter 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".
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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 acrossCalifornia ,Oregon , andWashington 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. 18 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 Net Sales Three Months Ended March 31, Increase (in thousands, except percentages) 2022 2021 (Decrease) % change Wholesale$ 11,550 $ 8,190 $ 3,360 41% Direct to Consumer 6,227 5,967 260 4% Other 846 424 422 100% Total net sales$ 18,623 $ 14,581 $ 4,042 28% Wholesale net sales increased$3.4 million , or 41%, in the current quarter as compared to the same quarter 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 continued 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 depletions. The increase in export wine sales was driven by several large shipments toEurope andCanada as the Company continues to grow this channel and minimize delays with international shipping. Direct to Consumer net sales increased$0.3 million , or 4%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher sales in the tasting rooms and wine clubs as compared to the same quarter in 2021. Lower Ecommerce sales in the current quarter partially offset overall increase in DTC sales. An increase in visitors and higher spend per guest driven by the Company's elevated tasting experiences combined to drive higher tasting room sales. Sales for wine clubs increased in the current quarter driven by sales mix of higher average prices for wines sold and through increased order customizations. Ecommerce sales decreased in the current quarter as consumers shifted 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$0.4 million , or 100%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher tasting and event fee revenues and bulk sales. Higher tasting fee revenues were driven by the Company's premiumization of the wine tasting experiences and increased tasting room traffic. 19 --------------------------------------------------------------------------------
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Gross Profit
Three Months Ended March 31,
Increase
(in thousands, except percentages) 2022 2021 (Decrease) % change
Wholesale $ 3,637 $ 2,881 $ 756 26%
Wholesale gross margin percentage 31 % 35 %
Direct to Consumer 4,122 3,616 506 14%
Direct to Consumer gross margin percentage 66 % 61 %
Other (664) (856) 192 22%
Total gross profit $ 7,095 $ 5,641 $ 1,454 26%
Total gross margin percentage 38 % 39 %
Wholesale gross profit increased $0.8 million , or 26%, in the current quarter as
compared to the same quarter in 2021 primarily driven by overall volume increase
in wine sales. Wholesale gross margin percentage, which is defined as wholesale
gross profit as a percentage of wholesale net sales, decreased 369 basis points
primarily driven by a shift in sales mix towards wines with a higher cost
vintage compared to the same quarter in 2021.
Direct to Consumer gross profit increased $0.5 million , or 14%, in the current
quarter as compared to the same quarter in 2021. The increase was a result of
higher sales in the tasting rooms and wine clubs when compared to the same
quarter in 2021. Direct to Consumer gross margin percentage increased 560 basis
points in the current quarter compared to the same quarter in 2021. The increase
was primarily driven by a shift in sales channel mix driven by increased tasting
rooms sales, and higher average prices of wine club shipments from increased
order customizations compared to the same quarter 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 22% 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 and improved margins on custom
winemaking services, partially offset by higher inventory write-downs.
Operating Expenses
Three Months Ended March 31,
Increase
(in thousands, except percentages) 2022 2021 (Decrease) % change
Sales and marketing $ 3,739 $ 3,045 $ 694 23%
General and administrative 3,298 3,458 (160) (5)%
Total operating expenses $ 7,037 $ 6,503 $ 534 8%
Sales and marketing expenses increased
General and administrative expenses decreased$0.2 million , or 5%, in the current quarter as compared to the same quarter in 2021 primarily due 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, partially offset by increased professional services and compensation expenses related to stock grants when compared to the same quarter in 2021. 20 --------------------------------------------------------------------------------
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Other (Expense) Income
Three Months Ended March 31,
(in thousands, except percentages) 2022 2021 Change % change
Interest expense, net $ (283) $ (250) $ (33) (13)%
Other income, net 27 50 (23) (46)%
Total other expense, net $ (256) $ (200) $ (56) (28)%
Interest expense, net, increased less than $0.1 million , or 13%, in the current
quarter compared to the same quarter in 2021. The increase was primarily driven
by timing of patronage dividend received by the Company partially offset by
lower interest expense on declining principal balances on the 2015 and 2017 Term
Loans.
Other income, net, decreased less than
Income Tax Benefit The Company's effective tax rates for the three months endedMarch 31, 2022 and 2021 were 28.7% and 20.6%, respectively. The difference between the consolidated effective income tax rate and theU.S. federal statutory rate for the three months endedMarch 31, 2022 was primarily attributable to state income taxes and other permanent items. 21
-------------------------------------------------------------------------------- Table of Contents 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. 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 InMarch 2013 , Crimson and its subsidiaries entered into a$60.0 million revolving credit facility (the "Revolving Credit Facility") withAmerican 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) OnNovember 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") withAmerican 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 onOctober 1, 2040 . The term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As ofMarch 31, 2022 ,$12.0 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were less than$0.1 million . (ii) OnJune 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 onJuly 1, 2037 . The term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As ofMarch 31, 2022 ,$7.8 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 ofMarch 31, 2022 . 22
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