Crimson Wine Group, Ltd - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from						to

Commission File Number 000-54866

CRIMSON WINE GROUP, LTD.

(Exact name of registrant as specified in its Charter)


Delaware (State or Other Jurisdiction of			13-3607383 (I.R.S. Employer
Incorporation or Organization)			Identification Number)
2700 Napa Valley Corporate Drive, Suite B, Napa, California (Address of Principal Executive Offices)			94558 (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.

Yes

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).

Yes

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 ☒
Non-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

☐

On November 2, 2020 there were 23,243,476 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.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Losses for the Three and Nine Months Ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2020 and 2019	5
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Interim Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
	Signatures	35

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, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	25,474	$	12,986
Investments available for sale	8,774		10,006
Accounts receivable, net	6,274		10,131
Inventory	71,402		73,498
Other current assets	3,505		1,904
Assets held for sale	588		2,383
Total current assets	116,017		110,908
Property and equipment, net	116,075		119,112
Goodwill	1,262		1,262
Intangible and other non-current assets, net	9,849		10,950
Total non-current assets	127,186		131,324
Total assets	$	243,203	$	242,232
Liabilities
Current liabilities:
Accounts payable and accrued liabilities	$	11,296	$	10,368


Customer deposits	1,290		405
Current portion of long-term debt, net of unamortized loan fees	2,433		1,127
Total current liabilities	15,019		11,900
Long-term debt, net of current portion and unamortized loan fees	22,437		21,054
Deferred tax liability, net	4,095		4,178
Other non-current liabilities	140		255
Total non-current liabilities	26,672		25,487
Total liabilities	41,691		37,387
Commitments and contingencies (Note 13)
Equity
Common shares, par value $0.01 per share, authorized 150,000,000 shares; 23,243,476 shares issued and outstanding at September 30, 2020 and December 31, 2019	232		232
Additional paid-in capital	277,543		277,522
Accumulated other comprehensive income	25		12
Accumulated deficit	(76,288)		(72,921)
Total equity	201,512		204,845
Total liabilities and equity	$	243,203	$	242,232

See accompanying notes to unaudited interim condensed consolidated financial statements.

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,
	2020		2019		2020		2019
Net sales	$	15,867	$	14,672	$	43,922	$	46,192
Cost of sales	10,847		10,344		27,769		27,497
Gross profit	5,020		4,328		16,153		18,695
Operating expenses:
Sales and marketing	3,316		4,716		10,729		13,785
General and administrative	2,602		2,833		8,315		8,909
Total operating expenses	5,918		7,549		19,044		22,694
Net (gain) loss on disposal of property and equipment	(40)		204		137		173
Restructuring costs	114		—		1,424		76
Impairment charges	—		625		—		1,860
Loss from operations	(972)		(4,050)		(4,452)		(6,108)
Other (expense) income:
Interest expense, net	(328)		(367)		(765)		(730)
Other income, net	109		335		395		442
Total other expense, net	(219)		(32)		(370)		(288)
Loss before income taxes	(1,191)		(4,082)		(4,822)		(6,396)
Income tax benefit	(306)		(963)		(1,455)		(1,694)
Net loss	$	(885)	$	(3,119)	$	(3,367)	$	(4,702)
Basic and fully diluted weighted-average shares outstanding	23,243		23,521		23,243		23,564
Basic and fully diluted loss per share	$	(0.04)	$	(0.13)	$	(0.14)	$	(0.20)

See accompanying notes to unaudited interim condensed consolidated financial statements.

໿CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSES

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(885)	$	(3,119)	$	(3,367)	$	(4,702)
Other comprehensive (loss) income:
Net unrealized holding (losses) gains on investments arising during the period, net of tax	(16)		2		13		39
Comprehensive loss	$	(901)	$	(3,117)	$	(3,354)	$	(4,663)

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
Net cash flows from operating activities:
Net loss	$	(3,367)	$	(4,702)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization of property and equipment	5,376		5,820
Amortization of intangible assets	965		965


Loss on write-down of inventory	2,711		1,581
Provision for doubtful accounts	98		—
Net loss on disposal of property and equipment	137		173

Restructuring charges	1,424		76
Impairment charges	—		1,916
Benefit for deferred income tax	(88)		—
Stock-based compensation	21		—
Net change in operating assets and liabilities:
Accounts receivable	3,759		484
Inventory	(615)		(196)
Other current assets	(1,601)		(2,122)
Other non-current assets	136		(99)
Accounts payable and accrued liabilities	(535)		(1,952)


Customer deposits and other payables	894		1,021
Other non-current liabilities	(115)		14
Net cash provided by operating activities	9,200		2,979
Net cash flows from investing activities:

Purchase of investments available for sale	(7,250)		(7,250)
Redemptions of investments available for sale	8,500		16,750
Acquisition of property and equipment	(2,582)		(4,085)

Proceeds from disposals of property and equipment	1,940		142
Net cash provided by investing activities	608		5,557
Net cash flows from financing activities:
Proceeds from PPP term loan	3,820		—
Principal payments on long-term debt	(1,140)		(855)
Repurchase of common stock	—		(1,725)
Payment of contingent consideration	—		(112)

Net cash provided by (used in) financing activities	2,680		(2,692)
Net increase in cash and cash equivalents	12,488		5,844
Cash and cash equivalents - beginning of period	12,986		9,376
Cash and cash equivalents - end of period	$	25,474	$	15,220
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	1,242	$	921
Income tax payments, net	$	—	$	—
Non-cash investing activity:
Unrealized holding gains on investments, net of tax	$	13	$	39
Acquisition of property and equipment accrued but not yet paid	$	200	$	431

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share amounts)


						Accumulated
				Additional		Other
	Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Capital		Income (Loss)		Deficit		Total
Three Months Ended September 30, 2020
Balance, June 30, 2020	23,243,476	$	232	$	277,536	$	41	$	(75,403)	$	202,406
Net loss	—	—		—		—		(885)		(885)
Other comprehensive loss	—	—		—		(16)		—		(16)
Stock-based compensation	—	—		7		—		—		7

Balance, September 30, 2020	23,243,476	$	232	$	277,543	$	25	$	(76,288)	$	201,512
Three Months Ended September 30, 2019
Balance, June 30, 2019	23,526,684	$	235	$	277,520	$	18	$	(67,628)	$	210,145
Net loss	—	—		—		—		(3,119)		(3,119)
Other comprehensive income	—	—		—		2		—		2

Repurchase of common stock	(31,182)	—		—		—		(237)		(237)
Balance, September 30, 2019	23,495,502	$	235	$	277,520	$	20	$	(70,984)	$	206,791
Nine Months Ended September 30, 2020
Balance, December 31, 2019	23,243,476	$	232	$	277,522	$	12	$	(72,921)	$	204,845
Net loss	—	—		—		—		(3,367)		(3,367)
Other comprehensive income	—	—		—		13		—		13
Stock-based compensation	—	—		21		—		—		21

Balance, September 30, 2020	23,243,476	$	232	$	277,543	$	25	$	(76,288)	$	201,512
Nine Months Ended September 30, 2019
Balance, December 31, 2018	23,714,208	$	237	$	277,520	$	(19)	$	(64,559)	$	213,179
Net loss	—	—		—		—		(4,702)		(4,702)
Other comprehensive income	—	—		—		39		—		39

Repurchase of common stock	(218,706)	(2)		—		—		(1,723)		(1,725)
Balance, September 30, 2019	23,495,502	$	235	$	277,520	$	20	$	(70,984)	$	206,791

See accompanying notes to unaudited interim condensed consolidated financial statements.

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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 ultra-premium plus wines (i.e., wines that retail for over $16 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.

Financial Statement Preparation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited consolidated financial statements for the year ended December 31, 2019, as filed with the SEC on Form 10-K (the “2019 Report”). Results of operations for interim periods are not necessarily indicative of annual results of operations. The unaudited condensed consolidated balance sheet at December 31, 2019 was extracted from the audited annual consolidated financial statements and does not include all disclosures required by GAAP for annual financial statements.

Significant Accounting Policies

Except as described below under Recent Accounting Pronouncements and in Note 13 “Commitments and Contingencies,” there were no changes to the Company’s significant accounting policies during the nine months ended September 30, 2020. See Note 2 of the 2019 Report for a description of the Company’s significant accounting policies.

Reclassifications

Certain reclassifications have been made to prior period unaudited interim condensed consolidated balance sheets and statements of cash flows to conform to current period presentation. The reclassifications had no impact on previously reported net loss, equity or cash flows.

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Recent Accounting Pronouncements

Subsequent to the filing of the 2019 Report there were no accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that would have a material effect on Crimson’s unaudited interim condensed consolidated financial statements. The following table provides an update of accounting pronouncements applicable to Crimson that are not yet adopted as of September 30, 2020 and a description of accounting pronouncements that were adopted during the nine months ended September 30, 2020:

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Standard

Description

Date of adoption

Effect on the financial statements or other significant matters

Standards that are not yet adopted

Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740)

Simplifies the accounting for income taxes by removing certain Codification exceptions and others to be discussed.

January 1, 2021, early adoption is permitted for the Company.

Management is currently evaluating the potential impact of this guidance on the Company’s unaudited interim condensed consolidated financial statements and does not predict there to be a material impact.

Standards that were adopted

ASU 2017-04, Goodwill and Other (Topic 350)

Eliminates Step 2 from the goodwill impairment test. Entities should perform their goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

January 1, 2020

The adoption of this standard did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820)

Improves the disclosures related to fair value by removing, modifying or adding disclosure requirements related to recurring and non-recurring fair value measurements.

January 1, 2020

The adoption of this standard did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)

Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirement of capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license).

January 1, 2020

The adoption of this standard did not have a material impact on the Company’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 costs 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.

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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 out of 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 depletions, which may be different from the Company’s estimate. Any such differences are recognized in sales when the bill is received. The Company has historically been able to estimate depletion allowances without material 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 the internet.

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 internet wine sales are paid for at the time of sale. The Company transfers control and recognizes revenue for this wine when the product is either received by the customer (on-site tasting room sales) or upon shipment to the customer (internet sales).

Other

From time to time, the Company sells grapes or bulk wine because the grapes or wine do not meet the quality standards for the Company’s products, market conditions have changed resulting in reduced demand for certain products, or because the Company may have produced more of a particular varietal than it can use. Grape and bulk sales are made under contracts with customers which include product specification requirements, pricing and payment terms. Payment terms under grape contracts are generally structured around the timing of the harvest of the grapes and are generally due 30 days from the time the grapes are delivered. Payment terms under bulk wine contracts are generally 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 contracts upon shipment.

The Company provides custom winemaking services at Double Canyon’s state-of-the-art winemaking facility. Custom winemaking services are made under contracts with customers which include specific protocols, pricing, and payment terms and generally have a duration of less than one year. The customer retains title and control of the wine during the winemaking process. The Company recognizes revenue when contract specific performance obligations are met.

Estates hold various public and private events for customers and their wine club members. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. The balance of payments are due on the date of the event. The Company recognizes event revenue on the date the event is held.

Other revenue also includes tasting fees and retail merchandise sales, which are paid for and received or consumed at the time of sale. The Company transfers control and recognizes revenue at the time of sale.

Refer to Note 12, “Business Segment Information,” for revenue by sales channel amounts for the three and nine months ended September 30, 2020 and 2019.

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 condensed consolidated balance sheets, and represents a contract liability.

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The following table reflects changes in the contract liability balance during the nine months ended September 30, 2020 and 2019 (in thousands):


	September 30, 2020		September 30, 2019
Outstanding at beginning of period (December 31)	$	405	$	375
Increase (decrease) attributed to:
Upfront payments	22,078		38,983
Revenue recognized	(21,193)		(37,977)
Outstanding at end of period	$	1,290	$	1,381

Revenue recognized during the nine months ended September 30, 2020 and 2019, which was included in the opening contract liability balances for those periods, consisted primarily of wine club revenue, grape and bulk sales and event fees.

Accounts Receivable

Accounts receivable are reported at net realizable value. Credit is extended based on an evaluation of the customer’s financial condition. Accounts are charged against the allowance for bad debt as they are deemed uncollectable based on a periodic review of the accounts. In evaluating the collectability of individual receivable balances, the Company considers several factors, including the age of the balance, the customer’s historical payment history, its current credit worthiness and current economic trends. The Company’s accounts receivable balance is net of an allowance for doubtful accounts of $0.2 million and $0.1 million at September 30, 2020 and December 31, 2019, respectively.

3.Restructuring

During 2018, the Company committed to various restructuring activities (the “2018 Restructuring Program”) including the termination of a vineyard operating lease agreement in Oregon and certain departmental reorganizations. Restructuring charges of $0.1 million were incurred in the nine months ended September 30, 2019. As of September 30, 2019, the Company incurred $1.4 million of restructuring charges inception-to-date consisting of $0.9 million employee related costs, $0.4 million of asset impairment charges associated with leasehold improvements under the terminated vineyard operating lease agreement, and $0.1 million of other restructuring costs associated with departmental reorganization activities. The fair value of impaired leasehold improvements was determined using the undiscounted cash flows expected to result from the use and eventual disposition of the assets. The activities under the 2018 Restructuring Program were substantially complete as of March 31, 2019.

During 2020, the Company committed to various restructuring activities (the “2020 Restructuring Program”) including the closure of the Double Canyon Vineyards tasting room, restructuring of management, changes in sales, marketing, and Direct to Consumer organizational structure, and transitioning of information technology services and export fulfillment to outsourced support models. With the proceeds of the PPP loan as discussed in Note 9, “Debt,” the Company was able to delay certain restructuring events and employee notifications by an additional eight weeks. As of September 30, 2020, the Company incurred $1.4 million of restructuring charges inception-to-date, consisting of $1.1 million employee related costs, $0.2 million of asset impairment charges associated with the tasting room assets upon closure, and $0.1 million of other restructuring costs associated with departmental reorganization activities. The Company’s current restructuring plans were substantially complete as of September 30, 2020 but the Company will continue to assess the need for additional restructuring activities during the remainder of the year.

The Company recorded an additional liability of $1.2 million for restructuring charges and paid $1.0 million in previously accrued employee related restructuring activities during the nine months ended September 30, 2020. The liability related to restructuring activities was $0.6 million and $0.3 million at September 30, 2020 and December 31, 2019, respectively.

A roll forward of the liability recognized related to restructuring activities as of September 30, 2020 is as follows (in thousands):


	Balance at December 31, 2019		Additions		Payments		Balance at September 30, 2020
Employee related restructuring activity	$	308	$	1,242	$	(972)	$	578

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4.Inventory

A summary of inventory at September 30, 2020 and December 31, 2019 is as follows (in thousands):


	September 30, 2020		December 31, 2019
Finished goods	$	37,953	$	37,217
In-process goods	32,090		35,613
Packaging and bottling supplies	1,359		668
Total inventory	$	71,402	$	73,498

5.Property and Equipment

A summary of property and equipment at September 30, 2020 and December 31, 2019, and depreciation and amortization for the three and nine months ended September 30, 2020 and 2019, is as follows (in thousands):

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	Depreciable Lives
	(in years)	September 30, 2020		December 31, 2019
Land and improvements	N/A	$	44,913	$	44,928
Buildings and improvements	20-40	59,592		59,948
Winery and vineyard equipment	3-25	36,101		42,210
Vineyards, orchards and improvements	7-25	33,626		32,293
Caves	20-40	5,639		5,639
Vineyards under development	N/A	2,434		3,476
Construction in progress	N/A	3,513		2,537
Total		185,818		191,031
Accumulated depreciation and amortization		(69,743)		(71,919)
Total property and equipment, net		$	116,075	$	119,112


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Capitalized into inventory	$	1,349	$	1,436	$	4,125	$	4,414
Expensed to general and administrative	397		452		1,251		1,406
Total depreciation and amortization	$	1,746	$	1,888	$	5,376	$	5,820

During 2018, the Company began actively marketing 36 acres of fallow apple orchards for sale as it does not intend to replant these orchards with vineyards and subsequently reclassified $0.6 million from property and equipment to assets held for sale. In the nine months ended September 30, 2019, the Company recorded an impairment charge of less than $0.1 million to write-down the carrying value of the fallow apple orchards to fair value less cost to sell. This impairment charge was recorded to other income (expense), net in the unaudited interim condensed consolidated statements of operations.

During the second quarter of 2019, the Company placed 124 acres of land, composed of 15 acres of vineyards and 109 acres of fallow land, for sale and reclassified an additional $1.2 million from property and equipment to assets as held for sale. In October 2019, the Company finalized the sale of the land for $0.7 million and recorded an impairment charge of $0.5 million to write-down the carrying value to the price in the sales agreement less cost to sell. In the third quarter of 2019, the impairment charge was recorded to loss from operations, net in the unaudited interim condensed consolidated statements of operations.

In the third quarter of 2019, the Company placed 181 acres of land in Klickitat County, Washington, of which 93 acres were planted with wine grapes, for sale. As part of the process to determine the sale price of the property, the Company obtained an appraisal of the property in the second quarter of 2019. As a result, the Company recorded an impairment charge of $1.2 million to write-down the carrying value of the vineyard to the appraised fair value less cost to sell in the second quarter of 2019. The

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Company recorded an additional impairment charge of $0.1 million in the third quarter of 2019 due to the write-down of in progress vineyard development. The Company reclassified $2.1 million from property and equipment to assets held for sale related to the vineyard as of September 30, 2019. In November 2019, the Company finalized a sales agreement to sell the land for $1.9 million and recorded a final impairment charge of $0.3 million to write-down the carrying value to the price in the sales agreement less cost to sell. These impairment charges were recorded to loss from operations, net in the unaudited interim condensed consolidated statements of operations. The sale of the land closed in January 2020.

As of September 30, 2020, the Company had $0.6 million of assets held for sale classified as current assets on its unaudited interim condensed consolidated balance sheet. The Company expects to complete the sale of the fallow apple orchards within the next twelve months.

6.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 two years 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, 2020 and December 31, 2019 are as follows (in thousands):


September 30, 2020	Par Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Level 1		Level 2		Total Fair Value Measurements

Certificates of Deposit	$	8,750	$	8,750	$	24	$	—	$	—	$	8,774	$	8,774

December 31, 2019	Par Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Level 1		Level 2		Total Fair Value Measurements
Certificates of Deposit	$	10,000	$	10,000	$	8	$	(2)	$	—	$	10,006	$	10,006

Gross unrealized gains on available for sale securities were less than $0.1 million as of September 30, 2020. The Company believes the gross unrealized gains 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, 2020 and December 31, 2019, other than the assets which were impaired in the current period, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis. For cash and cash equivalents, the carrying amounts of such financial instruments approximate their fair values. For short-term debt, the carrying amounts of such financial instruments approximate their fair values. As of September 30, 2020, the Company has estimated the fair value of its outstanding debt to be approximately $29.6 million compared to its carrying value of $25.0 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 (“Lender”) as of September 30, 2020 of 3.73%, 3.58%, and 1.00% for the 2015 Term Loan, 2017 Term Loan, and 2020 PPP Term Loan respectively, as further discussed in Note 9, “Debt.”

The Company does not invest in any derivatives or engage in any hedging activities.

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7.Intangible and Other Non-Current Assets

A summary of intangible and other non-current assets at September 30, 2020 and December 31, 2019, and amortization expense for the three and nine months ended September 30, 2020 and 2019, is as follows (in thousands):


		September 30, 2020						December 31, 2019
	Amortizable lives (in years)	Gross carrying amount		Accumulated amortization		Net book value		Gross carrying amount		Accumulated amortization		Net book value
Brand	15-17	$	18,000	$	9,764	$	8,236	$	18,000	$	8,967	$	9,033
Distributor relationships	10-14	2,700		1,780		920		2,700		1,634		1,066
Customer relationships	7	1,900		1,900		—		1,900		1,900		—
Legacy permits	14	250		167		83		250		153		97
Trademark	20	200		121		79		200		113		87
Total		$	23,050	$	13,732	$	9,318	$	23,050	$	12,767	$	10,283
Other non-current assets						531						667
Total intangible and other non-current assets, net						$	9,849					$	10,950

						Three Months Ended September 30,				Nine Months Ended September 30,
Amortization expense						2020		2019		2020		2019
Total amortization expense						$	322	$	322	$	965	$	965

The estimated aggregate future amortization of intangible assets as of September 30, 2020 is identified below (in thousands):


	Amortization
Remainder of 2020	$	321
2021	1,286
2022	1,286
2023	1,286
2024	1,286
Thereafter	3,853
Total	$	9,318

8.Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Accounts payable and accrued grape liabilities	$	7,185	$	5,469
Accrued compensation related expenses	1,880		2,753
Sales and marketing	173		302
Acquisition of property and equipment	117		34
Accrued interest	17		297
Depletion allowance	1,205		813
Production and farming	116		75

Operating lease liability, current	149		171
Other accrued expenses	454		454
Total accounts payable and accrued liabilities	$	11,296	$	10,368

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9.Debt

Revolving Credit Facility

In March 2013, Crimson and its subsidiaries entered into a $60.0 million revolving credit facility (the “2013 Revolving Credit Facility”) with American AgCredit, FLCA, as agent for the lenders identified in the 2013 Revolving Credit Facility, 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. In March 2018, Crimson and its subsidiaries entered into the second amendment to the 2013 Revolving Credit Facility with American AgCredit, FCLA (the “Second Amendment”). The Second Amendment modified certain provisions of the 2013 Revolving Credit Facility, including, among other things, extending the Revolving Loan and Term Revolving Loan termination dates to March 31, 2023, extending the Term Revolving Loan conversion date to March 31, 2023 and extending the Term Revolving Loan maturity date to March 31, 2033.

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. All obligations of Crimson under the 2013 Revolving Credit Facility are collateralized by certain real property, including vineyards and certain winery facilities of Crimson, accounts receivable, inventory and intangible assets. 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 2013 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 2013 Revolving Credit Facility to date.

Details of the Company’s debt as of September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):


	September 30, 2020						December 31, 2019
	Current		Long-term		Total		Current		Long-term		Total		Interest Rate	Maturity Date
2015 Term Loan	$	480	$	12,320	$	12,800	$	640	$	12,800	$	13,440	5.24%	October 1, 2040
2017 Term Loan	375		8,000		8,375		500		8,375		8,875		5.39%	July 1, 2037
2020 PPP Term Loan	1,591		2,229		3,820		—		—		—		1.00%	April 1, 2022
Total debt	2,446		22,549		24,995		1,140		21,175		22,315
Unamortized loan fees	(13)		(112)		(125)		(13)		(121)		(134)
Total debt, net of unamortized loan fees	$	2,433	$	22,437	$	24,870	$	1,127	$	21,054	$	22,181

Term Loans

Term loans consist of the following:

(i) On November 10, 2015, Pine Ridge Winery, LLC (“PRW Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2015 Term Loan”) with American AgCredit, FLCA (“Lender”) for an aggregate principal amount of $16.0 million. Amounts outstanding under the 2015 Term Loan bear a fixed interest rate of 5.24% per annum.

The 2015 Term Loan will mature on October 1, 2040 (the “2015 Loan Maturity Date”). On the first day of each January, April, July and October, commencing January 1, 2016, PRW Borrower is required to make a principal payment in the amount of $160,000 and an interest payment equal to the amount of all interest accrued through the previous day. A final payment of all unpaid principal, interest and any other charges with respect to the 2015 Term Loan shall be due and payable on the 2015 Loan Maturity Date.

The Company incurred debt issuance costs of less than $0.1 million related to the 2015 Term Loan. These costs are recorded as a reduction from current portion of long-term debt or long-term debt based on the time frame in which the fees will be expensed, and as such, amounts to be expensed within twelve months shall be classified against current portion of long-term debt. The costs are being amortized to interest expense using the effective interest method over the contractual term of the loan.

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The full $16.0 million was drawn at closing and the 2015 Term Loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of September 30, 2020, $12.8 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were less than $0.1 million.

(ii) On June 29, 2017, Double Canyon Vineyards, LLC (the “DCV Borrower” and, individually and collectively with the PRW Borrower, “Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2017 Term Loan”) with the Lender for an aggregate principal amount of $10.0 million. Amounts outstanding under the 2017 Term Loan bear a fixed interest rate of 5.39% per annum.

The 2017 Term Loan will mature on July 1, 2037 (the “2017 Loan Maturity Date”). On the first day of each January, April, July and October, commencing October 1, 2017, DCV Borrower is required to make a principal payment in the amount of $125,000 and an interest payment equal to the amount of all interest accrued through the previous day. A final payment of all unpaid principal, interest and any other charges with respect to the 2017 Term Loan shall be due and payable on the 2017 Loan Maturity Date.

The Company incurred debt issuance costs of approximately $0.1 million related to the 2017 Term Loan. These costs were recorded using the same treatment as described for the 2015 Term Loan debt issuance costs.

The full $10.0 million was drawn at closing and the 2017 Term Loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of September 30, 2020, $8.4 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 parties.

(iii) In March 2020, in light of the global outbreak of the COVID-19 virus, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act included a small business stimulus program called the Paycheck Protection Program (“PPP”), which is intended to provide loans to qualified businesses to, as originally implemented, support eight weeks of payroll and other identified costs. PPP loans are eligible for partial or full forgiveness. On June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020 which, among other things, extended the loan forgiveness period for PPP loans from eight weeks to 24 weeks and increased the cap on usage of the loan on non-payroll costs from 25% to 40%.

In April 2020, the Company successfully secured a $3.8 million PPP loan. Under the CARES Act, the loan is eligible for forgiveness for the portion used to cover payroll costs and other specified non-payroll costs, including interest on mortgage obligations, rent and utilities (provided any non-payroll costs do not exceed 40% of the forgiven amount) over an eight-week or 24-week period after the loan is made if employee and compensation levels are maintained. The Company intends to apply for forgiveness of amounts received under the PPP in accordance with the requirements of the CARES Act, as amended. Any loan amounts forgiven will be removed from liabilities recorded. While the Company intends to use the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that it will be eligible for forgiveness of the PPP Loan, in full or in part.

On April 22, 2020, Crimson entered into an unsecured term loan agreement (the “2020 PPP Term Loan”) with American AgCredit, FLCA (“Lender”) for an aggregate principal amount of $3.8 million. Amounts outstanding under the 2020 PPP Term Loan bear a fixed interest rate of 1.00% per annum. If all or a portion of the 2020 PPP Term Loan is not forgiven, any accrued and unpaid interest shall be added to the outstanding balance (“Adjusted Loan Balance”).

The 2020 PPP Term Loan will mature on April 1, 2022 (the “2020 Loan Maturity Date”). Based on the original terms of the loan, Crimson is required to make payments of equal monthly principal and interest based on the Adjusted Loan Balance on the first day of each month commencing November 1, 2020. The payments will be based on an amortization period of 18 months. A final payment of all unpaid principal, interest and any other charges with respect to the 2020 PPP Term Loan shall be due and payable on the 2020 Loan Maturity Date. The original terms of the loan regarding payment commencement date and amortization period as discussed above are impacted by the updated terms in the following paragraph.

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On September 28, 2020, the Lender updated the payment terms of the 2020 PPP Term Loan. The amended terms provide for two scenarios of repayments. The first scenario calls for the payments on the loan to commence on the first day of the month following the date on which the Lender receives the applicable forgiveness amount, if any, from the Small Business Administration (“SBA”), if a balance on the loan remains after the forgiveness amount has been applied. If all obligations under the loan are forgiven by the SBA, no payments will be required. The second scenario applies if Crimson fails to timely apply for forgiveness of the 2020 PPP Term Loan. In this second scenario, the payments on the loan will commence on the first day of the month that is 10 months after the end of the eight-week period following the date of loan origination, April 22, 2020. The 2020 Loan Maturity Date of April 1, 2022 along with all other loan terms and conditions as stated in the Loan documents previously executed remain in full force and effect. The amortization period of equal monthly principal and interest will be adjusted based on which payment scenario is triggered, noting that the original 2020 Loan Maturity Date applies. While the loan currently has a two-year maturity, the amended law permits the borrower to request a five-year maturity from its lender.

The full $3.8 million was drawn at closing and the 2020 PPP Term Loan can be used for the purposes authorized and approved in the CARES Act. As of September 30, 2020, $3.8 million in principal was outstanding on the 2020 PPP Term Loan.

The Company was in compliance with all debt covenants as of September 30, 2020.

A summary of debt maturities as of September 30, 2020 is as follows (in thousands):


Principal due the remainder of 2020	$	—
Principal due in 2021	3,686
Principal due in 2022	2,414
Principal due in 2023	1,140
Principal due in 2024	1,140
Principal due thereafter	16,615
Total	$	24,995

10. Stockholders’ Equity and Equity Incentive Plan

Share Repurchase Program

In December 2018, the Company commenced a share repurchase program (the “2019 Winter Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Winter Repurchase Program, any repurchased shares were constructively retired, and on April 30, 2019, the 2019 Winter Repurchase Program was completed. Under the total 2019 Winter Repurchase Program, the Company repurchased 253,324 shares at a repurchase price of $2.0 million.

In September 2019, the Company commenced a share repurchase program (the “2019 Summer Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Summer Repurchase Program, any repurchased shares are constructively retired, and on December 12, 2019, the 2019 Summer Repurchase Program was completed. Under the total 2019 Summer Repurchase Program, the Company repurchased 283,208 shares at a repurchase price of $2.0 million.

Stock-Based Compensation

In February 2013, the Company adopted the 2013 Omnibus Incentive Plan, which provides for the granting of up to 1,000,000 stock options or other common stock-based awards. The terms of awards that may be granted, including vesting and performance criteria, if any, will be determined by the Company’s board of directors.

In December 2019, option grants for 89,000 shares were issued. As of September 30, 2020, all 89,000 shares remained outstanding with no additional grants or stock activities related to vesting, exercises or expirations during the quarter. The options vest annually over five years, expire in seven years and have an exercise price of $6.87, the market value at the date of grant. The share-based compensation expense for these grants was $141,000, the grant date fair value, which will be recorded over the vesting period. Estimates of share-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, with the following assumptions and values: stock price volatility, 22%; employee exercise patterns and expected life, five years; dividend yield, 0%; and risk-free interest rate, 1.6%.

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For the three and nine months ended September 30, 2020, $7,000 and $21,000 were recorded as share-based compensation expense, respectively. Share-based compensation expense was recorded to general and administrative expense in the unaudited interim condensed consolidated statements of operations. The related income tax benefits for these expenses were immaterial.

11.Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. In accordance with the CARES Act, the Company plans to carry back its 2019 NOL such that it would provide the Company $0.9 million in cash tax refunds and a permanent rate benefit of $0.3 million. Farming loss NOLs were permitted to be carried back based on prior law and were reflected as such in an earlier period. The incremental permanent rate benefit of $0.2 million from carrying back the remaining NOL in excess of the farming loss NOL is recognized in the first quarter of 2020.

Consolidated income tax benefit for the three and nine months ended September 30, 2020 and 2019 were determined based upon the Company’s estimated consolidated effective income tax rates calculated without discrete items for the years ending December 31, 2020 and 2019, respectively.

The Company’s effective tax rates for the three months ended September 30, 2020 and 2019 were 27.6% and 23.0%, respectively. The Company’s effective tax rates for the nine months ended September 30, 2020 and 2019 were 26.6% and 26.3%, respectively. As a result of the Tax Cuts and Jobs Act (Public Law 115-97), the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 34% to 21%. 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, 2020 was primarily attributable to state income taxes and permanent items, which primarily consisted of meals and entertainment.

The Company does not have any amounts in its condensed consolidated balance sheets for unrecognized tax benefits related to uncertain tax positions as of September 30, 2020.

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12.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 net sales, direct phone 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 table outlines the net sales, cost of sales, gross profit (loss), directly attributable selling expenses and operating income (loss) for the Company’s reportable segments for the three and nine months ended September 30, 2020 and 2019, and also includes a reconciliation of consolidated income (loss) from operations. Other/Non-allocable net sales and gross profit include bulk wine and grape sales, event fees 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)	2020		2019		2020		2019		2020		2019		2020		2019
Net sales	$	8,772	$	6,890	$	6,243	$	5,879	$	852	$	1,903	$	15,867	$	14,672
Cost of sales	5,580		4,988		2,284		1,915		2,983		3,441		10,847		10,344
Gross profit (loss)	3,192		1,902		3,959		3,964		(2,131)		(1,538)		5,020		4,328
Operating expenses:
Sales and marketing	1,252		1,702		1,425		1,934		639		1,080		3,316		4,716
General and administrative	—		—		—		—		2,602		2,833		2,602		2,833
Total operating expenses	1,252		1,702		1,425		1,934		3,241		3,913		5,918		7,549
Net (gain) loss on disposal of property and equipment	—		—		—		—		(40)		204		(40)		204
Restructuring costs	—		—		—		—		114		—		114		—
Impairment charges	—		—		—		—		—		625		—		625
Income (loss) from operations	$	1,940	$	200	$	2,534	$	2,030	$	(5,446)	$	(6,280)	$	(972)	$	(4,050)


	Nine Months Ended September 30,
	Wholesale				Direct to Consumer				Other/Non-Allocable				Total
(in thousands)	2020		2019		2020		2019		2020		2019		2020		2019
Net sales	$	24,339	$	23,464	$	17,517	$	18,190	$	2,066	$	4,538	$	43,922	$	46,192
Cost of sales	16,249		15,291		6,611		5,775		4,909		6,431		27,769		27,497
Gross profit (loss)	8,090		8,173		10,906		12,415		(2,843)		(1,893)		16,153		18,695
Operating expenses:
Sales and marketing	3,930		5,013		4,494		5,601		2,305		3,171		10,729		13,785
General and administrative	—		—		—		—		8,315		8,909		8,315		8,909
Total operating expenses	3,930		5,013		4,494		5,601		10,620		12,080		19,044		22,694
Net loss on disposal of property and equipment	—		—		—		—		137		173		137		173
Restructuring costs	—		—		—		—		1,424		76		1,424		76
Impairment charges	—		—		—		—		—		1,860		—		1,860
Income (loss) from operations	$	4,160	$	3,160	$	6,412	$	6,814	$	(15,024)	$	(16,082)	$	(4,452)	$	(6,108)

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13.Commitments and Contingencies

Leases

The Company has leased retail and office space and has entered into various other agreements in conducting its business. At inception, the Company determines whether an agreement represents a lease, and at commencement the Company evaluates each lease agreement to determine whether the lease is an operating or financing lease. Some of the Company’s lease agreements have contained renewal options, tenant improvement allowances and rent escalation clauses.

Pursuant to ASU 2016-02, all of the Company’s leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASU 2016-02, the Company recorded an operating lease right-of-use asset and an operating lease liability on its condensed consolidated balance sheet beginning January 1, 2019. Right-of-use lease assets represent the Company’s right to use the underlying asset for the lease term and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company has used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The right-of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. For all lease agreements, the Company combines lease and non-lease components, and leases with an initial term of 12 months or less are not recorded on the balance sheet.

Supplemental balance sheet information related to leases is as follows (in thousands):


	September 30, 2020			December 31, 2019
Assets:
Other non-current assets	$	285		$	407

Liabilities:
Accounts payable and accrued liabilities	$	149		$	171
Other non-current liabilities	140			255
Total operating lease liabilities	$	289		$	426

Weighted Average Remaining Lease Term
Operating leases	1.75 years			2.50 years
Weighted Average Discount Rate
Operating leases	6.34		%	5.46		%

Maturities of lease liabilities are as follows (in thousands):


	Amortization
Remainder of 2020	$	34
2021	161
2022	94
Total	$	289

Base rent expense was less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2020. Base rent expense was less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2019. Of the base rent expense for the nine months ended September 30, 2020, $0.1 million relates to the lease liability referred to in this footnote. Cash paid for amounts included in the measurement of operating lease liabilities as part of operating cash flows was $0.2 million for both the nine months ended September 30, 2020 and September 30, 2019.

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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 and 2020 Wildfires

In October 2017, significant wildfires broke out in Napa, Sonoma, and surrounding counties in Northern California. Operations at two of the Company’s properties, Pine Ridge Vineyards and Seghesio Family Vineyards, were temporarily impacted due to these wildfires and then resumed shortly thereafter. At the time of the wildfires, both properties had already harvested substantially all of their 2017 estate grapes. Certain inventory on hand was impacted by power losses and smoke damage which was covered under existing insurance policies. During 2018, the Company recognized $1.1 million in insurance proceeds of which $0.6 million was offset against inventory losses and $0.5 million was included in other income, net.

In October 2019 and August 2020, the Company received an additional $0.2 million and $0.1 million, respectively, from insurance proceeds related to the October 2017 wildfires. The Company recorded both of the proceeds amounts in other income, net.

In August and September 2020, a series of major wildfires broke out in regions across the Western United States, including Napa and Sonoma counties in California, as well as Umatilla and Yamhill Counties in Oregon, where the Company has Direct to Consumer tasting rooms, farming operations, and wine-making facilities. Operations at some of the Company’s properties were impacted by smoke which caused damage to the unharvested grapes in the vineyard properties, event cancellations, and traffic reduction at the Company’s tasting rooms. In order to assess grape inventory losses, the Company has sent grape samples to independent testing labs for evaluations. The Company has recognized $0.5 million in inventory losses for the 2020 vintage for the three and nine months ended September 30, 2020. Some of the inventory losses and smoke damage to grapes are partially covered under existing crop insurance policies for which the Company currently has open claims pending. Although the Company anticipates additional inventory losses related to the 2020 vintage and settlements for insurance proceeds from the Company's insurance policies, these amounts cannot be reasonably estimated at this time.

COVID-19

In March 2020, the coronavirus disease (“COVID-19”) outbreak was declared a National Public Health Emergency which continues to spread throughout the world and has adversely impacted global activity and contributed to significant declines and volatility in financial markets. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak. The outbreak has adversely impacted the Company’s tasting room visitations, On-Premise business, and special events. The outbreak presents uncertainty and risk with respect to the Company and its future performance and financial results.

As of March 16, 2020, with the exception of key operations personnel, the Company has shifted its office staff to remote workstations, which has been an effective transition to date. The Company will continue to operate remotely until management determines it is safe for employees to return to offices.

The Company has not experienced nor does it anticipate significant impact or disruptions to its supply chain network.

On March 16, 2020, 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. Following months of closures, each of the aforementioned states issued reopening guidelines and metrics that counties must achieve prior to business reopening. After remaining closed for nearly all of the second quarter and complying with reopening guidelines, the Company’s tasting rooms reopened during June 2020 in limited capacity and operating hours, and with additional safety measures in place. In addition to limiting the number of guests and by reservations only, the Company has implemented various measures to prevent the spread of the virus including assigning tasting room staff to discrete guest parties to limit contact exposure, screening workers before they enter facilities, practicing social distancing, implementing COVID-19 protocols and travel guidelines, and advising employees to adhere to prevention measures recommended by the Center for Disease Control (“CDC”).

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In the first several weeks of July 2020, businesses located in several Northern California counties were required to shut down indoor dining and winery tasting rooms. In late July 2020, the State of Washington required the shutdown of wineries, regardless of whether food is served. During this period, while the State of Oregon allowed indoor wine tastings with noted restrictions, the Company's Oregon-based tasting room, Archery Summit, operated almost entirely outdoors. All of the Company’s tasting rooms have been impacted by government orders and restrictions to a varying degree and much of the aforementioned restrictions on indoor operations of winery tasting rooms remained in place throughout the third quarter of 2020. Management and staff at all vineyard locations have taken the appropriate steps to continue accommodations for outdoor tastings and to ensure the safety of our guests and staff.

The extent of COVID-19’s impact on the Company's financials and results of operations will depend on the length of time that the pandemic continues, the effect of governmental regulations imposed in response to the pandemic, its effect on the demand for the Company’s products and supply chain, and uncertainties surrounding the aforementioned. The Company cannot at this time predict the full impact of COVID-19, but it could have a larger impact on the Company’s financial and operational results beyond what is discussed within this Report.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Interim Operations.

Statements included in this Report may contain forward-looking statements. See “Cautionary Statement for Forward-Looking Information” below. The following should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the Company’s audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the “2019 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, 2020.

Cautionary Statement for Forward-Looking Information

This MD&A and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited interim condensed consolidated financial statements, that include results of Crimson Wine Group, Ltd. and all of its subsidiaries further collectively known as “we”, “Crimson”, “our”, “us”, or “the Company”, have been prepared in accordance with GAAP for interim financial information and with the general instruction for quarterly reports filed on Form 10-Q and Article 8 of Regulation S-X. All statements, other than statements of historical fact, regarding our 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. These statements are based upon information that is currently available to us and our management’s current expectations speak only as of the date hereof and are subject to risks and uncertainties. We expressly disclaim 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. Our 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 our actual results include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors in the 2019 Report and the additional risk factor regarding COVID-19 discussed in Part II, Item 1A of this Report. Readers should carefully review the risk factors described in the 2019 Report, this 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.

Our wines are primarily sold to wholesale distributors, who then sell to retailers and restaurants. As permitted under federal and local regulations, we have 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 internet and direct outreach to customers. Direct sales to consumers are more profitable for the Company as we are able to sell our products at a price closer to retail prices rather than the wholesale price sold to distributors. From time to time, we may sell grapes or bulk wine because the grapes or wine do not meet the quality standards for the Company’s products, market conditions have changed resulting in reduced demand for certain products, or because the Company may have produced more of a particular varietal than it can use. 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.

In a strategic effort to maximize asset utilization in 2019, the Company increased focus on supply chain management. During 2019, the Company performed regular costing updates to apply actual cost for the 2017 and 2018 vintage bulk wine compared to the standard cost estimates used. The analysis showed higher cellar overhead costs incurred for these vintages than previously estimated in the standard rate applied to bulk wine gallons produced. The increase in the revised standard rate over the production period was a result of a strategic reduction of wine bottled driven by less than forecasted demand for certain

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products. Additionally, cost capitalized to inventory increased due to growth in general and administrative overhead costs as well as onboarding cellar costs related to the Double Canyon winemaking facility and acquired Seven Hills Winery.

As of September 30, 2020, wine inventory includes approximately 0.8 million cases of bottled and bulk wine in various stages of the aging process. Cased wine is expected to be sold over the next 12 to 36 months and generally before the release date of the next vintage.

Impact of COVID-19 on Operations

In March 2020, the coronavirus disease (“COVID-19”) outbreak was declared a National Public Health Emergency which continues to spread throughout the world and has adversely impacted global activity and contributed to significant declines and volatility in financial markets. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak. The outbreak has adversely impacted our tasting room visitations, On-Premise business, and special events. The outbreak presents uncertainty and risk with respect to the Company and its future performance and financial results.

As of March 16, 2020, with the exception of key operations personnel, we have shifted our office staff to remote workstations, which has been an effective transition to date. We will continue to operate remotely until management determines it is safe for employees to return to offices.

We have not experienced nor do we anticipate significant impact or disruptions to our supply chain network.

The Company has experienced both reductions and increases in consumer demand in various channels due to the COVID-19 outbreak in the three and nine months ended September 30, 2020.

Our Direct to Consumer segment includes retail sales in the tasting rooms, remote sites and on-site events, wine club net sales, direct phone sales, and other sales made directly to the consumer without the use of an intermediary. Tasting room sales have been negatively impacted due to closures and operating limitations. The Company also sells wine directly to consumers through our website (http://www.crimsonwinegroup.com), third-party websites, direct phone calls, and other online sales (“Ecommerce”). The Company’s Ecommerce operations have been favorably impacted through changes in consumer behavior and our opportunistic web offers to our customers.

Our 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”). Demand for wines at On-Premise locations has been 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. The Company also sells wine (through distributors and directly) to supermarkets, grocery stores, liquor stores, and other chains and independent stores (“Off-Premise”). Demand for wines at Off-Premise locations has increased due to their classification as essential businesses that remain open during government imposed closings and/or restrictions due to COVID-19.

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The extent of COVID-19’s impact on our financials and results of operations will depend on the length of time that the pandemic continues, the effect of governmental regulations imposed in response to the pandemic, its effect on the demand for our products and our supply chain, and uncertainties surrounding the aforementioned. We cannot at this time predict the full impact of COVID-19, but it could have a larger impact on our financial and operational results beyond what is discussed within this Report.

Seasonality

As discussed in the 2019 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. We anticipate similar trends in the future.

Restructuring

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Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Net Sales

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	Three Months Ended September 30,
(in thousands, except percentages)	2020		2019		Increase (Decrease)		% change
Wholesale	$	8,772	$	6,890	$	1,882	27%
Direct to Consumer	6,243		5,879		364		6%
Other	852		1,903		(1,051)		(55)%
Total net sales	$	15,867	$	14,672	$	1,195	8%

Wholesale net sales increased $1.9 million, or 27%, in the current quarter as compared to the same quarter in 2019. The increase was primarily driven by an increase in domestic wine sales, decreased price support, and an increase in export wine sales compared to the same quarter in 2019. The increase in domestic wine sales was driven by increased consumer demand in Off-Premise locations and the timing of inventory fulfillment with new wholesale distributors.

Direct to Consumer net sales increased $0.4 million, or 6%, in the current quarter as compared to the same quarter in 2019. The increase was primarily driven by successful strategic Ecommerce offers and higher wine club sales compared to the same quarter in 2019. The increase was partially offset by decreased sales in our tasting rooms and reduction in special events. The negative impact on hospitality services was due to operating limitations as a result of COVID-19 containment measures and intermittent closures due to extreme heat and poor air quality caused by the 2020 wildfires in California and Oregon.

Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales, decreased $1.1 million, or 55%, in the current quarter as compared to the same quarter in 2019. The decrease was primarily driven by reduced event fees and non-wine retail sales due to capacity limitations of tasting rooms and event cancellations as a result of COVID-19 containment measures, as well as a decrease in tons of grapes sold, partially offset by increase in gallons of bulk wine sold compared to the same quarter in 2019.

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Gross Profit


	Three Months Ended September 30,
(in thousands, except percentages)	2020			2019			Increase (Decrease)		% change
Wholesale	$	3,192		$	1,902		$	1,290	68%
Wholesale gross margin percentage	36		%	28		%
Direct to Consumer	3,959			3,964			(5)		—%
Direct to Consumer gross margin percentage	63		%	67		%
Other	(2,131)			(1,538)			(593)		(39)%
Total gross profit	$	5,020		$	4,328		$	692	16%
Total gross margin percentage	32		%	29		%

Wholesale gross profit increased $1.3 million, or 68%, in the current quarter as compared to the same quarter in 2019 primarily driven by an increase in domestic wine sales, decreased price support, shift in sales mix towards higher profit wines, and lower cost of goods sold. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, increased 878 basis points primarily driven by decreased price support, shift in sales mix towards higher profit wines, and lower cost of goods sold compared to the same quarter in 2019.

Direct to Consumer gross profit in the current quarter was flat as compared to the same quarter in 2019 primarily driven by lower sales from tasting rooms and special events, but was largely offset by successful strategic Ecommerce offers and timing of wine club shipments compared to the same quarter in 2019. The negative impact on hospitality services was due to operating limitations as a result of COVID-19 containment measures and intermittent closures due to extreme heat and poor air quality caused by the 2020 wildfires in California and Oregon. Direct to Consumer gross margin percentage decreased 401 basis points in the current quarter primarily driven by Ecommerce offers driving higher discounts as a percentage of sales and a less favorable sales mix compared to the same quarter in 2019.

Other gross profit, which includes bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales, decreased $0.6 million, or 39% in the current quarter as compared to the same quarter in 2019. The decrease in other gross profit is primarily driven by inventory write-downs related to the 2020 vintage grapes not harvested due to smoke taint and reduced event fees and non-wine retail sales due to the tasting rooms’ operating limitations and intermittent closures as discussed above, partially offset by lower cost of bulk wine sold compared to the same quarter in 2019.

Operating Expenses


	Three Months Ended September 30,
(in thousands, except percentages)	2020		2019		Increase (Decrease)		% change
Sales and marketing	$	3,316	$	4,716	$	(1,400)	(30)%
General and administrative	2,602		2,833		(231)		(8)%
Total operating expenses	$	5,918	$	7,549	$	(1,631)	(22)%

Sales and marketing expenses decreased $1.4 million, or 30%, in the current quarter as compared to the same quarter in 2019. The decrease was primarily driven by reduced compensation as a result of the 2020 Restructuring Program, decreased travel costs related to COVID-19, and reduced advertising and promotional expenses compared to the same quarter in 2019.

General and administrative expenses decreased $0.2 million, or 8%, in the current quarter as compared to the same quarter in 2019 primarily due to decreased employee related expenses and temporarily reduced Board of Directors fees, partially offset by higher compensation related expenses compared to the same quarter in 2019.

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Other (Expense) Income


	Three Months Ended September 30,
(in thousands, except percentages)	2020		2019		Change		% change
Interest expense, net	$	(328)	$	(367)	$	39	11%
Other income, net	109		335		(226)		(67)%
Total other expense, net	$	(219)	$	(32)	$	(187)	(584)%

Interest expense, net, decreased less than $0.1 million, or 11%, in the current quarter compared to the same quarter in 2019. The decrease was primarily driven by decreased principal balances on the 2015 and 2017 Term Loans and capitalized interest on vineyard development projects, partially offset by the accrued interest on the 2020 PPP Term Loan compared to the same quarter in 2019.

Other income decreased $0.2 million, or 67%, in the current quarter compared to the same quarter in 2019. The decrease was primarily driven by lower insurance proceeds and investments interest income received compared to the same quarter in 2019.

Income Tax Benefit

The Company’s effective tax rates for the three months ended September 30, 2020 and 2019 were 27.6% and 23.0%, respectively. As a result of the Tax Cuts and Jobs Act (Public Law 115-97), the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 34% to 21%. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three months ended September 30, 2020 was primarily attributable to state income taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Net Sales

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	Nine Months Ended September 30,
(in thousands, except percentages)	2020		2019		Increase (Decrease)		% change
Wholesale	$	24,339	$	23,464	$	875	4%
Direct to Consumer	17,517		18,190		(673)		(4)%
Other	2,066		4,538		(2,472)		(54)%
Total net sales	$	43,922	$	46,192	$	(2,270)	(5)%

Wholesale net sales increased $0.9 million, or 4%, in the current nine month period as compared to the same period in 2019. The increase was primarily driven by increased domestic wine sales as well as decreased price support compared to the same period in 2019, partially offset by decreased export wine sales to cruise and transportation segments and Asia. The increase in domestic wine sales was driven by increased consumer demand in Off-Premise locations and the timing of inventory fulfillment with new wholesale distributors.

Direct to Consumer net sales decreased $0.7 million, or 4%, in the current nine month period as compared to the same period in 2019. The decrease was primarily driven by reduced wine sold in the tasting rooms and during special events, partially offset by successful strategic Ecommerce offers compared to the same period in 2019. The decrease in wine sold in the tasting rooms and during special events is driven by the temporary closures of tasting rooms and cancelled special events from March 16, 2020 through various points in June 2020 related to COVID-19 containment measures, reduced operating capacity due to COVID-19 containment measures, and temporary closures of tasting rooms related to poor air quality and extreme heat during the August and September 2020 wildfires in California and Oregon.

Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales, decreased $2.5 million, or 54%, in the current nine month period as compared to the same period in 2019. The decrease was primarily driven by reduced event fees and non-wine retail sales due to capacity limitations of tasting rooms and event cancellations as a result of COVID-19 containment measures, as well as a decrease in both gallons of bulk wine and tons of grapes sold compared to the same period in 2019.

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Gross Profit


	Nine Months Ended September 30,
(in thousands, except percentages)	2020			2019			Increase (Decrease)		% change
Wholesale	$	8,090		$	8,173		$	(83)	(1)%
Wholesale gross margin percentage	33		%	35		%
Direct to Consumer	10,906			12,415			(1,509)		(12)%
Direct to Consumer gross margin percentage	62		%	68		%
Other	(2,843)			(1,893)			(950)		(50)%
Total gross profit	$	16,153		$	18,695		$	(2,542)	(14)%
Total gross margin percentage	37		%	40		%

Wholesale gross profit decreased $0.1 million, or 1%, in the current nine month period as compared to the same period in 2019 primarily driven by the liquidation of obsolete inventory, and partially offset by increased domestic wine sales. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, decreased 159 basis points primarily driven by the liquidation of obsolete inventory compared to the same period in 2019.

Direct to Consumer gross profit decreased $1.5 million, or 12%, in the current nine month period as compared to the same period in 2019. The decrease was primarily driven by reduced wine sold in the tasting rooms and during special events, partially offset by successful strategic Ecommerce offers compared to the same period in 2019. The negative impact on hospitality services was due to operating limitations as a result of COVID-19 containment measures and intermittent closures due to the poor air quality and extreme heat related to the 2020 wildfires in California and Oregon. Direct to Consumer gross margin percentage decreased 599 basis points in the current nine month period primarily driven by release of higher cost vintages and Ecommerce offers driving higher discounts with a less favorable sales mix compared to the same period in 2019.

Other gross profit, which includes bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales, decreased $1.0 million, or 50%, in the current nine month period as compared to the same period in 2019. The decrease in other gross profit is primarily driven by inventory write-downs related to the 2020 vintage grapes not harvested due to smoke taint, reduced event fees and non-wine retail sales due to the tasting rooms’ operating limitations and intermittent closures as discussed above, as well as increased cost of goods sold due to inventory write-downs related to the 2019 vintage, partially offset by lower costs of bulk wine sold compared to the same period in 2019.

Operating Expenses


	Nine Months Ended September 30,
(in thousands, except percentages)	2020		2019		Increase (Decrease)		% change
Sales and marketing	$	10,729	$	13,785	$	(3,056)	(22)%
General and administrative	8,315		8,909		(594)		(7)%
Total operating expenses	$	19,044	$	22,694	$	(3,650)	(16)%

Sales and marketing expenses decreased $3.1 million, or 22%, in the current nine month period as compared to the same period in 2019. The decrease was primarily driven by reduced compensation as a result of the 2020 Restructuring Program, decreased travel costs related to COVID-19, and reduced advertising and promotional expenses compared to the same period in 2019.

General and administrative expenses decreased $0.6 million, or 7%, in the current nine month period as compared to the same period in 2019 primarily due to decreased employee related expenses, consulting services, and travel costs.

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Other (Expense) Income


	Nine Months Ended September 30,
(in thousands, except percentages)	2020		2019		Change		% change
Interest expense, net	$	(765)	$	(730)	$	(35)	(5)%
Other income, net	395		442		(47)		(11)%
Total other expense, net	$	(370)	$	(288)	$	(82)	(28)%

Interest expense, net, increased less than $0.1 million, or 5%, in the current nine month period compared to the same period in 2019. The increase was primarily driven by a lower patronage dividend received and lower capitalized interest on vineyard development projects during the current period.

Other income decreased less than $0.1 million, or 11%, in the current nine month period as compared to the same period in 2019. The decrease was primarily driven by lower insurance proceeds and investments interest income received, partially offset by the discontinuation of apple consignment sales, which yielded a loss, in the same period in 2019.

Income Tax Benefit

The Company’s effective tax rates for the nine months ended September 30, 2020 and 2019 were 26.6% and 26.3%, respectively. As a result of the Tax Cuts and Jobs Act (Public Law 115-97), the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 34% to 21%. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2020 was primarily attributable to state income taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment.

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 our business, and with the help of proceeds from the PPP Term Loan, 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, we protected our financial position and liquidity as evidenced by the following items: we managed our operating expenses closely and limited discretionary spending; reduced and/or deferred capital projects where prudent; actively managed our working capital, including supporting our business partners most impacted by the pandemic through extended terms and closely monitoring our customers’ solvency and our ability to collect from them; and held back plans for a share repurchase program to both preserve liquidity and remain compliant with the terms of the PPP loan agreement.

Revolving Credit Facility

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borrowings are priced based on a performance grid tied to certain financial ratios and the London Interbank Offered Rate. The 2013 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

Term loans consist of the following:

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forgiveness of amounts received under the PPP in accordance with the requirements of the CARES Act, as amended. Any loan amounts forgiven will be removed from liabilities recorded. While the Company intends to use the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that it will be eligible for forgiveness of the PPP Loan, in full or in part.

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Consolidated Statements of Cash Flows

The following table summarizes our cash flow activities for the nine months ended September 30, 2020 and 2019 (in thousands):


Cash provided by (used in):	2020		2019
Operating activities	$	9,200	$	2,979
Investing activities	608		5,557
Financing activities	2,680		(2,692)

Cash provided by operating activities

Net cash provided by operating activities was $9.2 million for the nine months ended September 30, 2020, consisting primarily of $3.4 million of net loss adjusted for non-cash items such as $9.2 million primarily consisting of depreciation, amortization, and loss on the write-down of inventory, $1.4 million of restructuring charges, and $1.9 million net cash inflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to a decrease in accounts receivable and increase in customer deposits and other payables, partially offset by an increase in other current assets and inventory and a decrease in accounts payable and accrued liabilities.

Net cash provided by operating activities was $3.0 million for the nine months ended September 30, 2019, consisting primarily of $4.7 million of net loss adjusted for non-cash items such as $10.5 million primarily consisting of depreciation, amortization, impairment charges, and loss on the write-down of inventory, partially offset by $2.9 million of net cash outflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to a decrease in accounts payable and accrued liabilities, and increase in other current assets, partially offset by an increase in customer deposits. The decrease in accounts payable and accrued liabilities was primarily due to grower payments made in the 2019 period for the 2018 harvest. The increase in other current assets was primarily due to an increase in prepaid income taxes.

Cash provided by investing activities

Net cash provided by investing activities was $0.6 million for the nine months ended September 30, 2020, consisting primarily of proceeds from sale of land in Klickitat County, Washington totaling $1.9 million and the net redemptions of available for sale investments of $1.3 million, partially offset by capital expenditures of $2.6 million.

Net cash provided by investing activities was $5.6 million for the nine months ended September 30, 2019, consisting primarily of net redemptions of available for sale investments of $9.5 million, partially offset by capital expenditures of $4.1 million.

Cash used in financing activities

Net cash provided by financing activities for the nine months ended September 30, 2020 was $2.7 million, consisting primarily of proceeds of the 2020 PPP Term Loan totaling $3.8 million, partially offset by principal payments on our 2015 and 2017 Term Loans of $1.1 million.

Net cash used in financing activities for the nine months ended September 30, 2019 was $2.7 million, which reflects the repurchase of shares of our common stock at a repurchase price of $1.7 million, principal payments on our 2015 and 2017 Term Loans of $0.9 million and contingent consideration payments of $0.1 million associated with the Seven Hills Winery acquisition.

Share Repurchases

In December 2018, the Company commenced a share repurchase program (the “2019 Winter Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Winter Repurchase Program, any repurchased shares were constructively retired. On April 30, 2019, the 2019 Winter Repurchase Program was completed. Under the total 2019 Winter Repurchase Program, the Company had repurchased 253,324 shares at a repurchase price of $2.0 million.

In September 2019, the Company commenced a share repurchase program (the “2019 Summer Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Summer Repurchase Program, any repurchased shares were constructively retired. On December 12, 2019, the 2019 Summer Repurchase Program was

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completed. Under the total 2019 Summer Repurchase Program, the Company had repurchased 283,208 shares at a repurchase price of $2.0 million.

Commitments & Contingencies

There have been no significant changes to our contractual obligations table as disclosed in the 2019 Report.

Off-Balance Sheet Financing Arrangements

None.

Critical Accounting Policies and Estimates

Except as disclosed in Note 1 of this Form 10-Q, there have been no material changes to the critical accounting policies and estimates previously disclosed in the 2019 Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Crimson does not currently have any exposure to financial market risk. Sales to international customers are denominated in U.S. dollars; therefore, Crimson is not exposed to market risk related to changes in foreign currency exchange rates. As discussed above under Liquidity and Capital Resources, Crimson has a revolving credit facility, two term loans, and a PPP Term Loan. The revolving credit facility had no outstanding balance as of September 30, 2020, and bears interest at floating rates on borrowings. The three term loans had a total of $25.0 million outstanding at September 30, 2020, and are fixed-rate debt and therefore are not subject to fluctuations in market interest rates.

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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2020. 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, 2020.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2020 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.

From time to time, Crimson may be involved in legal proceedings in the ordinary course of its business. Crimson is not currently involved in any legal or administrative proceedings individually or together that it believes are likely to have a significant adverse effect on its business, results of operations or financial condition.

Item 1A. Risk Factors.

In addition to the factors discussed in Part I, “Item 1A. Risk Factors” in our 2019 Report, which could materially affect our business, results of operations or financial condition, please carefully consider the additional risk factor below.

We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations.

Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world. The effects of this outbreak on our business have included and could continue to include disruptions or restrictions on our employees’ ability to travel in affected regions, as well as temporary closures of our tasting rooms and temporary closures of the facilities of our suppliers, customers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our customers, third-party suppliers and contractors, and results of operations. In addition, a significant outbreak of contagious disease in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could reduce the demand for our products and likely impact our results of operations. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition and results of operations will be affected.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.


2.1*			Separation Agreement, dated February 1, 2013, between Crimson Wine Group, Ltd. and Leucadia National Corporation (incorporated by reference to Exhibit 2.1 to Form 8-K filed on February 25, 2013).
3.1*			Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed on February 25, 2013).
3.2*			Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K filed on February 25, 2013).
31.1**			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**			Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**			Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**			Unaudited financial statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended September 30, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Loss; (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, 2020, formatted in Inline XBRL.

* Incorporated by reference
** Filed herewith

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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 5, 2020

By:

/s/ Karen L. Diepholz

Karen L. Diepholz

Chief Financial Officer