Crimson Wine Group, Ltd - Quarter Report: 2022 June (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 June 30, 2022

☐ 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)
5901 Silverado Trail, 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 August 5, 2022 there were 22,360,558 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 June 30, 2022 and December 31, 2021	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	4
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2022 and 2021	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	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
	Signatures	30

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)



	June 30, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	39,196	$	32,732
Investments available for sale	8,961		12,493
Accounts receivable, net	5,594		6,572
Inventory	46,736		52,548
Other current assets	1,626		1,456

Total current assets	102,113		105,801
Property and equipment, net	110,397		111,439
Goodwill	1,262		1,262
Intangible and other non-current assets, net	7,660		8,322
Total non-current assets	119,319		121,023
Total assets	$	221,432	$	226,824
Liabilities
Current liabilities:
Accounts payable and accrued liabilities	$	8,756	$	13,171


Customer deposits	625		366
Current portion of long-term debt, net of unamortized loan fees	1,128		1,128
Total current liabilities	10,509		14,665
Long-term debt, net of current portion and unamortized loan fees	18,235		18,799
Deferred tax liability, net	798		748
Other non-current liabilities	9		9
Total non-current liabilities	19,042		19,556
Total liabilities	29,551		34,221
Commitments and contingencies (Note 13)
Stockholders’ Equity
Common shares, par value $0.01 per share, authorized 150,000,000 shares; 22,389,463 and 22,524,185 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively	224		225
Additional paid-in capital	277,877		277,719
Accumulated other comprehensive (loss) income	(23)		2
Accumulated deficit	(86,197)		(85,343)
Total stockholders’ equity	191,881		192,603
Total liabilities and stockholders’ equity	$	221,432	$	226,824

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net sales	$	18,082	$	17,391	$	36,705	$	31,972
Cost of sales	9,729		9,051		21,257		17,991
Gross profit	8,353		8,340		15,448		13,981
Operating expenses:
Sales and marketing	4,543		3,750		8,282		6,795
General and administrative	3,263		3,256		6,561		6,714
Total operating expenses	7,806		7,006		14,843		13,509
Net loss (gain) on disposal of property and equipment	107		(31)		127		(27)


Income from operations	440		1,365		478		499
Other (expense) income:
Interest expense, net	(94)		(181)		(377)		(431)
Gain on extinguishment of debt	—		3,863		—		3,863
Other income, net	99		208		126		258
Total other income (expense), net	5		3,890		(251)		3,690
Income before income taxes	445		5,255		227		4,189
Income tax expense	127		537		66		318
Net income	$	318	$	4,718	$	161	$	3,871
Basic weighted-average shares outstanding	22,450		22,943		22,486		23,092
Fully diluted weighted-average shares outstanding	22,450		22,947		22,487		23,092
Basic and fully diluted earnings per share	$	0.01	$	0.21	$	0.01	$	0.17

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income	$	318	$	4,718	$	161	$	3,871
Other comprehensive loss:
Net unrealized holding losses on investments arising during the period, net of tax	(19)		(1)		(25)		(6)
Comprehensive income	$	299	$	4,717	$	136	$	3,865

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2022		2021
Net cash flows from operating activities:
Net income	$	161	$	3,871
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization of property and equipment	2,976		3,240
Amortization of intangible assets	643		643


Loss on write-down of inventory	926		711

Net loss (gain) on disposal of property and equipment	127		(27)



Provision for deferred income taxes	66		314
Stock-based compensation	158		14
Gain on extinguishment of debt	—		(3,863)
Net change in operating assets and liabilities:
Accounts receivable	978		1,407
Inventory	4,886		4,432
Other current assets	(170)		833
Other non-current assets	19		(48)
Accounts payable and accrued liabilities	(4,825)		(2,175)


Customer deposits	265		164
Other non-current liabilities	—		(83)
Net cash provided by operating activities	6,210		9,433
Net cash flows from investing activities:

Purchase of investments available for sale	(5,750)		(8,000)
Redemptions of investments available for sale	9,250		6,750
Acquisition of property and equipment	(1,678)		(1,269)

Proceeds from disposals of property and equipment	18		143
Net cash provided by (used in) investing activities	1,840		(2,376)
Net cash flows from financing activities:

Principal payments on long-term debt	(570)		(285)
Repurchase of common stock	(1,016)		(6,240)


Net cash used in financing activities	(1,586)		(6,525)
Net increase in cash and cash equivalents	6,464		532
Cash and cash equivalents - beginning of period	32,732		29,314
Cash and cash equivalents - end of period	$	39,196	$	29,846
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	568	$	301
Income tax payments, net	$	—	$	—
Non-cash investing and financing activity:
Unrealized holding losses on investments, net of tax	$	(25)	$	(6)
Acquisition of property and equipment accrued but not yet paid	$	401	$	116

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)



						Accumulated
				Additional		Other
	Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Capital		(Loss) Income		Deficit		Total

Three Months Ended June 30, 2022
Balance, March 31, 2022	22,516,882	$	225	$	277,776	$	(4)	$	(85,559)	$	192,438
Net income	—	—		—		—		318		318
Other comprehensive loss	—	—		—		(19)		—		(19)
Stock-based compensation	—	—		101		—		—		101
Repurchase of common stock	(127,419)	(1)		—		—		(956)		(957)
Balance, June 30, 2022	22,389,463	$	224	$	277,877	$	(23)	$	(86,197)	$	191,881

Three Months Ended June 30, 2021
Balance, March 31, 2021	23,243,476	$	232	$	277,557	$	8	$	(83,122)	$	194,675
Net income	—	—		—		—		4,718		4,718
Other comprehensive loss	—	—		—		(1)		—		(1)
Stock-based compensation	—	—		7		—		—		7
Repurchase of common stock	(719,291)	(7)		—		—		(6,233)		(6,240)
Balance, June 30, 2021	22,524,185	$	225	$	277,564	$	7	$	(84,637)	$	193,159

Six Months Ended June 30, 2022
Balance, December 31, 2021	22,524,185	$	225	$	277,719	$	2	$	(85,343)	$	192,603
Net income	—	—		—		—		161		161
Other comprehensive loss	—	—		—		(25)		—		(25)
Stock-based compensation	—	—		158		—		—		158
Repurchase of common stock	(134,722)	(1)		—		—		(1,015)		(1,016)
Balance, June 30, 2022	22,389,463	$	224	$	277,877	$	(23)	$	(86,197)	$	191,881

Six Months Ended June 30, 2021
Balance, December 31, 2020	23,243,476	$	232	$	277,550	$	13	$	(82,275)	$	195,520
Net income	—	—		—		—		3,871		3,871
Other comprehensive loss	—	—		—		(6)		—		(6)
Stock-based compensation	—	—		14		—		—		14
Repurchase of common stock	(719,291)	(7)		—		—		(6,233)		(6,240)
Balance, June 30, 2021	22,524,185	$	225	$	277,564	$	7	$	(84,637)	$	193,159

See accompanying notes to unaudited interim condensed consolidated financial statements.

Table of Contents

CRIMSON WINE GROUP, LTD.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

1. Background and Basis of Presentation

Background

Crimson Wine Group, Ltd. and its subsidiaries (collectively, “Crimson” or the “Company”) is a Delaware corporation that has been conducting business since 1991. Crimson is in the business of producing and selling luxury wines (i.e., wines that retail for over $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, 2021, as filed with the SEC on Form 10-K (the “2021 Report”). Results of operations for interim periods are not necessarily indicative of annual results of operations. The unaudited condensed consolidated balance sheet at December 31, 2021 was extracted from the audited annual consolidated financial statements and does not include all disclosures required by GAAP for annual financial statements.

Significant Accounting Policies

There were no changes to the Company’s significant accounting policies during the six months ended June 30, 2022. See Note 2 of the 2021 Report for a description of the Company’s significant accounting policies.

Recent Accounting Pronouncements

Subsequent to the filing of the 2021 Report, the Company evaluated Accounting Standards Update (“ASU”) 2022-01 through 2022-03 issued by the Financial Accounting Standards Board (“FASB”) and concluded none of the accounting pronouncements would have a material effect or are applicable to Crimson’s unaudited interim condensed consolidated financial statements.

2.Revenue

Revenue Recognition

Revenue is recognized once performance obligations under the terms of the Company’s contracts with its customers have been satisfied; this occurs at a point in time when control of the promised product or service is transferred to customers. Generally, the majority of the Company’s contracts with its customers have a single performance obligation and are short term in nature. Revenue is measured in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company accounts for shipping and handling activities as costs to fulfill its promise to transfer the associated products. Accordingly, the Company records amounts billed for shipping and handling costs as a component of net sales, and classifies such costs as a component of cost of sales. The Company’s products are generally not sold with a right of return unless the product is spoiled or damaged. Historically, returns have not been material to the Company.

Table of Contents

Wholesale Segment

The Company sells its wine to wholesale distributors under purchase orders. The Company transfers control and recognizes revenue for these orders upon shipment of the wine from the Company’s third-party warehouse facilities. Payment terms to wholesale distributors typically range from 30 to 120 days. The Company pays depletion allowances to its wholesale distributors based on their sales to their customers. The Company estimates these depletion allowances and records such estimates in the same period the related revenue is recognized, resulting in a reduction of wholesale product revenue and the establishment of a current liability. Subsequently, wholesale distributors will bill the Company for actual depletions, which may be different from the Company’s estimate. Any such differences are recognized in sales when the bill is received. The Company has historically been able to estimate depletion allowances without significant differences between actual and estimated expense.

Direct to Consumer Segment

The Company sells its wine and other merchandise directly to consumers through wine club memberships, at the wineries’ tasting rooms and through its website (http://www.crimsonwinegroup.com), third-party websites, direct phone calls, and other online sales (“Ecommerce”).

Wine club membership sales are made under contracts with customers, which specify the quantity and timing of future wine shipments. Customer credit cards are charged in advance of quarterly wine shipments in accordance with each contract. The Company transfers control and recognizes revenue for these contracts upon shipment of the wine to the customer.

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

Other

From time to time, the Company sells grapes or bulk wine because the grapes or wine do not meet the quality standards for the Company’s products, market conditions have changed resulting in reduced demand for certain products, or because the Company may have produced more of a particular varietal than it can use. Grape and bulk sales are made under contracts with customers which include product specification requirements, pricing and payment terms. Payment terms under grape contracts are generally structured around the timing of the harvest of the grapes and are generally due 30 days from the time the grapes are delivered. Payment terms under bulk wine contracts are generally 30 days from the date of shipment and may include an upfront payment upon signing of the sales agreement. The Company transfers control and recognizes revenue for grape sales when product specification has been met and title to the grapes has transferred, which is generally on the date the grapes are harvested, weighed and shipped. The Company transfers control and recognizes revenue for bulk wine contracts upon shipment.

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

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

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

Refer to Note 12, “Business Segment Information,” for revenue by sales channel amounts for the three and six months ended June 30, 2022 and 2021.

Contract Balances

When the Company receives payments from customers prior to transferring goods or services under the terms of a contract, the Company records deferred revenue, which it classifies as customer deposits on its unaudited condensed consolidated balance sheets, and represents a contract liability. Customer deposits are liquidated when revenue is recognized. Revenue that was included in the contract liability balance at the beginning of each of the 2022 and 2021 years consisted primarily of wine club

Table of Contents

revenue, grape and bulk sales and event fees. Changes in the contract liability balance during the six-month periods ended June 30, 2022 and 2021, were not materially impacted by any other factors.

The outstanding contract liability balance was $0.6 million at June 30, 2022 and $0.4 million at December 31, 2021. Of the amounts included in the opening contract liability balances at the beginning of each period, approximately $0.3 million and $0.2 million were recognized as revenue during the six month periods ended June 30, 2022 and 2021, respectively.

Accounts Receivable

Accounts receivable are reported at net realizable value. Credit is extended based on an evaluation of the customer’s financial condition. Accounts are charged against the allowance for bad debt as they are deemed uncollectible based on a periodic review of the accounts. In evaluating the collectability of individual receivable balances, the Company considers several factors, including the age of the balance, the customer’s historical payment history, its current credit worthiness and current economic trends. The Company’s accounts receivable balance is net of an allowance for doubtful accounts of $0.2 million at both June 30, 2022 and December 31, 2021.

3.Notes Receivable

Notes receivable consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):



	June 30, 2022		December 31, 2021
Notes receivable, current (1)	$	36	$	36
Notes receivable, non-current (2)	396		405
Total	$	432	$	441

__________________________________________

(1) Reported within other current assets of the unaudited interim condensed consolidated balance sheets

(2) Reported within other non-current assets of the unaudited interim condensed consolidated balance sheets

In June 2021, the Company closed on the sale of 36 acres of fallow apple orchards located in Umatilla County, Oregon for an aggregate sale price of $0.6 million. Per the sales agreement, approximately $0.1 million was paid in cash at the closing of the asset sale with the Company financing the remainder of the purchase price in the form of a promissory note in the aggregate principal amount of $0.5 million. The note earns interest at a rate per annum of 5.00% with monthly principal and interest payments commencing July 2021. The note contains an arrangement for two balloon payments with the first balloon payment paid to the Company in December 2021 and the final balloon payment due to the Company on or before June 1, 2024.

In June 2021, per the Company’s leasing agreement of its restaurant space in Walla Walla, Washington, the Company agreed to finance the incoming tenant’s purchase of restaurant equipment from the prior tenant. Therefore, a promissory note in the aggregate principal amount of approximately $0.1 million was issued to the Company. The note is due in June 2026 and earns interest at a rate per annum of 5.00% with annual principal and interest payments commencing on September 1, 2021.

Table of Contents

4.Inventory

A summary of inventory at June 30, 2022 and December 31, 2021 is as follows (in thousands):



	June 30, 2022		December 31, 2021
Finished goods	$	19,518	$	26,362
In-process goods	25,886		25,450
Packaging and bottling supplies	1,332		736
Total inventory	$	46,736	$	52,548

As required, the Company reduces the carrying value of inventories that are obsolete or in excess of estimated usage to estimated net realizable value. The Company’s estimates of net realizable value are based on analyses and assumptions including, but not limited to, historical usage, projected future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of sales. If future demand and/or profitability for the Company’s products are less than previously estimated, then the carrying value of the inventories may be required to be reduced, resulting in additional expense and reduced profitability. The Company's inventory write-downs may consist of reductions to bottled or bulk wine inventory as well as crop insurance proceeds from farming losses recorded as offsets against previously recognized write-downs.

Inventory write-downs of $0.2 million and $0.1 million were recorded during the three month periods ended June 30, 2022 and 2021, respectively. Inventory write-downs of $0.9 million and $0.7 million were recorded during the six month periods ended June 30, 2022 and 2021, respectively. The Company’s inventory balances are presented at the lower of cost or net realizable value.

5.Property and Equipment

A summary of property and equipment at June 30, 2022 and December 31, 2021, and depreciation and amortization for the three and six months ended June 30, 2022 and 2021, is as follows (in thousands):


	Depreciable Lives
	(in years)	June 30, 2022		December 31, 2021
Land and improvements	N/A	$	44,912	$	44,912
Buildings and improvements	20-40	60,548		59,529
Winery and vineyard equipment	3-25	33,921		33,744
Vineyards and improvements	7-25	34,411		34,331
Caves	20-40	5,639		5,639
Vineyards under development	N/A	1,554		1,224
Construction in progress	N/A	2,608		4,229
Total		183,593		183,608
Accumulated depreciation and amortization		(73,196)		(72,169)
Total property and equipment, net		$	110,397	$	111,439


	Three Months Ended June 30,				Six Months Ended June 30,
Depreciation and amortization:	2022		2021		2022		2021
Capitalized into inventory	$	1,110	$	1,213	$	2,234	$	2,435
Expensed to general and administrative	377		403		742		805
Total depreciation and amortization	$	1,487	$	1,616	$	2,976	$	3,240

Table of Contents

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 June 30, 2022 and December 31, 2021 are as follows (in thousands):


June 30, 2022	Par Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Level 1		Level 2		Total Fair Value Measurements

Certificates of Deposit	$	9,000	$	9,000	$	1	$	(40)	$	—	$	8,961	$	8,961

December 31, 2021	Par Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Level 1		Level 2		Total Fair Value Measurements
Certificates of Deposit	$	12,500	$	12,500	$	—	$	(7)	$	—	$	12,493	$	12,493

Gross unrealized losses on available for sale securities were less than $0.1 million as of June 30, 2022. The Company believes the gross unrealized losses are temporary as it does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

As of June 30, 2022 and December 31, 2021, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis. For cash and cash equivalents, the carrying amounts of such financial instruments approximate their fair values. For short-term debt, the carrying amounts of such financial instruments approximate their fair values. As of June 30, 2022, the Company has estimated the fair value of its outstanding debt to be approximately $16.7 million compared to its carrying value of $19.5 million, based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. Level 3 inputs include market rates obtained from American AgCredit, FLCA (“Lender”) as of June 30, 2022 of 6.78% and 6.68% for the 2015 Term Loan and 2017 Term Loan, respectively, as further discussed in Note 9, “Debt.”

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

Table of Contents

7.Intangible and Other Non-Current Assets

A summary of intangible and other non-current assets at June 30, 2022 and December 31, 2021, and amortization expense for the three and six months ended June 30, 2022 and 2021, is as follows (in thousands):


		June 30, 2022						December 31, 2021
	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	$	(11,624)	$	6,376	$	18,000	$	(11,092)	$	6,908
Distributor relationships	10-14	2,700		(2,122)		578		2,700		(2,025)		675
Legacy permits	14	250		(198)		52		250		(189)		61
Trademark	20	200		(138)		62		200		(133)		67
Total		$	21,150	$	(14,082)	$	7,068	$	21,150	$	(13,439)	$	7,711
Other non-current assets						592						611
Total intangible and other non-current assets, net						$	7,660					$	8,322

						Three Months Ended June 30,				Six Months Ended June 30,
Amortization expense						2022		2021		2022		2021
Total amortization expense						$	322	$	322	$	643	$	643

The estimated aggregate future amortization of intangible assets as of June 30, 2022 is identified below (in thousands):


	Amortization
Remainder of 2022	$	643
2023	1,286
2024	1,286
2025	1,168
2026	1,073
Thereafter	1,612
Total	$	7,068

8.Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):


	June 30, 2022		December 31, 2021
Accounts payable and accrued grape liabilities	$	2,311	$	5,689
Accrued compensation related expenses	2,136		2,881
Sales and marketing	633		1,434
Acquisition of property and equipment	407		649
Accrued interest	258		268
Depletion allowance	1,613		1,300
Production and farming	602		445


Other accrued expenses	796		505
Total accounts payable and accrued liabilities	$	8,756	$	13,171

Table of Contents

9.Debt

A summary of debt at June 30, 2022 and December 31, 2021 is as follows (in thousands):


	June 30, 2022		December 31, 2021
Revolving Credit Facility (1)	$	—	$	—
Senior Secured Term Loan Agreement due 2040, with an interest rate of 5.24% (2)	11,840		12,160
Senior Secured Term Loan Agreement due 2037, with an interest rate of 5.39% (3)	7,625		7,875

Unamortized loan fees	(102)		(108)
Total debt	19,363		19,927
Less current portion of long-term debt	1,128		1,128
Long-term debt due after one year, net	$	18,235	$	18,799

______________________________________

(1) The Revolving Credit Facility is comprised of a revolving loan facility (the “Revolving Loan”) and a term revolving loan facility (the “Term Revolving Loan”), which together are secured by substantially all of Crimson’s assets. The Revolving Loan is for up to $10.0 million of availability in the aggregate for a five year term, and the Term Revolving Loan is for up to $50.0 million in the aggregate for a fifteen year term. In addition to unused line fees ranging from 0.15% to 0.25%, rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the London Interbank Offered Rate.

(2) Pine Ridge Winery, LLC, a wholly-owned subsidiary of Crimson, is party to a senior secured term loan agreement due on October 1, 2040 (the “2015 Term Loan”). Principal and interest are payable in quarterly installments.

(3) Double Canyon Vineyards, LLC, a wholly-owned subsidiary of Crimson, is party to a senior secured term loan agreement due on July 1, 2037 (the “2017 Term Loan”). Principal and interest are payable in quarterly installments.

Debt covenants include the maintenance of specified debt and equity ratios, a specified debt service coverage ratio, and certain customary affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, limitations on dividends and other distributions to shareholders and restrictions on certain investments, certain mergers, consolidations and sales of assets. The Company was in compliance with all existing debt covenants as of June 30, 2022.

A summary of debt maturities as of June 30, 2022 is as follows (in thousands):


Principal due the remainder of 2022	$	570
Principal due in 2023	1,140
Principal due in 2024	1,140
Principal due in 2025	1,140
Principal due in 2026	1,140
Principal due thereafter	14,335
Total	$	19,465

10. Stockholders' Equity and Stock-Based Compensation

Share Repurchase

On May 24, 2021, with the unanimous written consent of the Board of Directors, the Company repurchased an aggregate of 719,291 shares of its common stock at a purchase price of $8.65 per share for an aggregate purchase price of $6.2 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.

In March 2022, the Company commenced a share repurchase program (the “2022 Repurchase Program”) that provided for the repurchase of up to $4.0 million of outstanding common stock. Under the 2022 Repurchase Program, any repurchased shares are constructively retired. During the six months ended June 30, 2022, the Company repurchased 134,722 shares of its common stock at an average purchase price of $7.52 per share for an aggregate purchase price of $1.0 million.

Table of Contents

Stock-Based Compensation

In February 2013, the Company adopted the 2013 Omnibus Incentive Plan (the "2013 Plan"), which provides for the granting of up to 1,000,000 stock options or other common stock-based awards. In July 2022, upon the approval of the Company's Board of Directors and shareholders, the Company adopted the 2022 Omnibus Incentive Plan ("the 2022 Plan") to supersede and replace the 2013 Plan. The 2022 Plan provides for the granting of up to 678,000 stock options or other common stock-based awards. The terms of awards that may be granted, including vesting and performance criteria, if any, will be determined by the Company’s Board of Directors.

In December 2019, under the Company’s 2013 Omnibus Incentive Plan, option grants for 89,000 shares were issued. The options vest annually over five years and expire seven years from the date of grant. In July 2021, stock option awards for an additional 233,000 shares were issued to certain members of management. Subject to the terms of the respective option award agreements, the options vest in four equal increments on each of January 4, 2022, January 4, 2023, January 4, 2024 and January 4, 2025, and the options will expire seven years from the date of grant. In March 2022, stock option awards for an additional 500,000 shares were issued. The options for the aggregate of 500,000 shares are divided into four tranches, subject to both performance-based vesting requirements and time-based vesting requirements and expire ten years from the date of grant. The performance-based vesting requirements are tied to annual or cumulative Adjusted EBITDA targets, as defined within the underlying option award agreement. The Company believes it will achieve these targets and has recorded the related stock-based compensation expense for the three and six months ended June 30, 2022. The exercise price for all respective options was the closing price on the date of grant.

Estimates of stock-based compensation expense require a number of complex and subjective assumptions, including the selection of an option pricing model. 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:


	December 2019 Grants			July 2021 Grants			March 2022 Grants
Shares issued	89,000			233,000			500,000
Expected term	5.00 years			4.75 years			6.90 - 8.40 years
Expected dividend yield	—		%	—		%	—		%
Risk-free interest rate	1.60		%	0.76		%	2.01		%
Expected stock price volatility	22		%	31		%	27 - 28%
Stock price	$	6.90		$	8.88		$	7.50
Weighted-average grant date fair value	$	1.58		$	2.47		$ 2.54 - 2.73
Grant date fair value (in thousands)	$	141		$	575		$	1,331

As of June 30, 2022, options in respect of all 822,000 shares remained outstanding with no stock option exercises or expirations during the quarter. The stock-based compensation expense for these grants is based on the grant date fair value, which will be recorded over the vesting period. $102 thousand and $159 thousand were recorded as stock-based compensation expense for the three and six months ended June 30, 2022, respectively. $7 thousand and $14 thousand were recorded as stock-based compensation expense for the three and six months ended June 30, 2021, respectively. Stock-based compensation expense was recorded to general and administrative expense in the unaudited interim condensed consolidated statements of operations.

11.Income Taxes

The consolidated income tax expense for the three and six months ended June 30, 2022 and 2021, was determined based upon the Company’s estimated consolidated effective income tax rates calculated without discrete items for the years ending December 31, 2022 and 2021, respectively.

The Company’s effective tax rates for the three months ended June 30, 2022 and 2021 were 28.9% and 10.2%, respectively. The increase in the effective tax rate for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the three months ended June 30, 2021. The Company’s effective tax rates for the six months ended June 30, 2022 and 2021 were 29.1% and 7.6%, respectively. The increase in the effective tax rate for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the six months ended June 30, 2021.

The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three and six months ended June 30, 2022 was primarily attributable to state income taxes and other permanent items.

Table of Contents

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 sales, direct phone sales, Ecommerce sales, and other sales made directly to the consumer without the use of an intermediary.

The two segments reflect how the Company’s operations are evaluated by senior management and the structure of its internal financial reporting. The Company evaluates performance based on the gross profit of the respective business segments. Selling expenses that can be directly attributable to the segment are allocated accordingly. However, centralized selling expenses and general and administrative expenses are not allocated between operating segments. Therefore, net income information for the respective segments is not available. Based on the nature of the Company’s business, revenue generating assets are utilized across segments. Therefore, discrete financial information related to segment assets and other balance sheet data is not available and that information continues to be aggregated.

The following tables outline the net sales, cost of sales, gross profit (loss), directly attributable selling expenses and operating income (loss) for the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021, and also includes a reconciliation of consolidated income (loss) from operations. Other/Non-allocable net sales and gross profit include bulk wine and grape sales, event fees, tasting fees and non-wine retail sales. Other/Non-allocable expenses include centralized corporate expenses not specific to an identified reporting segment. Sales figures are net of related excise taxes.



	Three Months Ended June 30,
	Wholesale				Direct to Consumer				Other/Non-Allocable				Total
(in thousands)	2022		2021		2022		2021		2022		2021		2022		2021
Net sales	$	9,423	$	9,727	$	7,494	$	6,635	$	1,165	$	1,029	$	18,082	$	17,391
Cost of sales	6,194		5,844		2,630		2,440		905		767		9,729		9,051
Gross profit	3,229		3,883		4,864		4,195		260		262		8,353		8,340
Operating expenses:
Sales and marketing	1,465		1,142		1,965		1,530		1,113		1,078		4,543		3,750
General and administrative	—		—		—		—		3,263		3,256		3,263		3,256
Total operating expenses	1,465		1,142		1,965		1,530		4,376		4,334		7,806		7,006
Net loss (gain) on disposal of property and equipment	—		—		—		—		107		(31)		107		(31)


Income (loss) from operations	$	1,764	$	2,741	$	2,899	$	2,665	$	(4,223)	$	(4,041)	$	440	$	1,365



	Six Months Ended June 30,
	Wholesale				Direct to Consumer				Other/Non-Allocable				Total
(in thousands)	2022		2021		2022		2021		2022		2021		2022		2021
Net sales	$	20,973	$	17,917	$	13,721	$	12,602	$	2,011	$	1,453	$	36,705	$	31,972
Cost of sales	14,107		11,153		4,735		4,791		2,415		2,047		21,257		17,991
Gross profit (loss)	6,866		6,764		8,986		7,811		(404)		(594)		15,448		13,981
Operating expenses:
Sales and marketing	2,806		2,264		3,648		2,854		1,828		1,677		8,282		6,795
General and administrative	—		—		—		—		6,561		6,714		6,561		6,714
Total operating expenses	2,806		2,264		3,648		2,854		8,389		8,391		14,843		13,509
Net loss (gain) on disposal of property and equipment	—		—		—		—		127		(27)		127		(27)


Income (loss) from operations	$	4,060	$	4,500	$	5,338	$	4,957	$	(8,920)	$	(8,958)	$	478	$	499

Table of Contents

13.Commitments and Contingencies

Litigation

The Company and its subsidiaries may become parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not significant to the Company’s consolidated financial position or liquidity. The Company does not believe that there is any pending litigation that could have a significant adverse impact on its consolidated financial position, liquidity or results of operations.

2017 and 2020 Wildfires

In October 2017, significant wildfires impacted the Company's operations and damaged its inventory. The Company has settled on several insurance claims since the time of the wildfires but anticipates additional settlements for insurance proceeds for amounts that cannot be reasonably estimated at this time.

In August and September 2020, a series of major wildfires broke out in regions across the Western United States, including Napa and Sonoma counties in California, as well as Umatilla and Yamhill Counties in Oregon. The wildfires and ensuing smoke caused damage to grapes at the vineyard properties and traffic reduction at the Company’s tasting rooms. Some of the inventory losses and smoke damage to grapes were partially covered under existing crop insurance policies. During 2021, the Company settled and recognized a total of $0.8 million from crop insurance proceeds related to loss claims for the 2020 wildfires and recorded the proceeds as an offset against inventory losses, which are reductions to cost of sales.

14.Earnings Per Share

The following table reconciles the weighted-average common shares outstanding used in the calculations of the Company's basic and diluted earnings per share:


	Three Months Ended June 30,				Six Months Ended June 30,
($ and shares in thousands, except per share amounts)	2022		2021		2022		2021
Net income	$	318	$	4,718	$	161	$	3,871

Common shares:
Weighted-average number of common shares outstanding - basic	22,450		22,943		22,486		23,092
Dilutive effect of stock options outstanding	—		4		1		—
Weighted-average number of common shares outstanding - diluted	22,450		22,947		22,487		23,092

Earnings per share:
Basic	$	0.01	$	0.21	$	0.01	$	0.17
Diluted	$	0.01	$	0.21	$	0.01	$	0.17

Antidilutive stock options (1)	822		—		540		89

__________________________________________

(1) Amounts represent stock options that are excluded from the diluted earnings per share calculations because the options are antidilutive.

15.Subsequent Events

None.

Table of Contents

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

Statements included in this Report may contain forward-looking statements. See “Cautionary Statement for Forward-Looking Information” below. The following should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the Company’s audited consolidated financial statements for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the “2021 Report”).

Quantities or results referred to as “current quarter” and “current three and six-month period” refer to the three and six months ended June 30, 2022.

Cautionary Statement for Forward-Looking Information

This MD&A and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited interim condensed consolidated financial statements, that include results of Crimson Wine Group, Ltd. and all of its subsidiaries further collectively known as “we”, “Crimson”, “our”, “us”, or “the Company”, have been prepared in accordance with GAAP for interim financial information and with the general instruction for quarterly reports filed on Form 10-Q and Article 8 of Regulation S-X. All statements, other than statements of historical fact, regarding the Company's strategy, future operations, financial position, prospects, plans, opportunities, and objectives constitute “forward-looking statements.” The words “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential,” or “continue” and similar types of expressions identify such statements, although not all forward-looking statements contain these identifying words. Forward-looking statements include those relating to the Company's financial condition, results of operations, plans, objectives, future performance and business. These statements are based upon information that is currently available to the Company and its management’s current expectations speak only as of the date hereof and are subject to risks and uncertainties. The Company expressly disclaims any obligation, except as required by federal securities laws, or undertaking to update or revise any forward-looking statements contained herein to reflect any change or expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based, in whole or in part. The Company's actual results may differ materially from the results discussed in or implied by such forward-looking statements.

Risks that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or that may materially and adversely affect the Company's actual results include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors in the 2021 Report. Readers should carefully review the risk factors described in the 2021 Report and in other documents that the Company files from time to time with the SEC.

Overview of Business

The Company generates revenues from sales of wine to wholesalers and direct to consumers, sales of bulk wine and grapes, custom winemaking services, special event fees, tasting fees and non-wine retail sales.

The Company's wines are primarily sold to wholesale distributors, who then sell to retailers and restaurants. As permitted under federal and local regulations, the Company has also been placing increased emphasis on generating revenue from direct sales to consumers which occur through wine clubs, at the wineries’ tasting rooms and through the Ecommerce channel. Direct sales to consumers are more profitable for the Company as it is able to sell its products at a price closer to retail prices rather than the wholesale price sold to distributors. From time to time, the Company may sell grapes or bulk wine because the grapes or wine do not meet the quality standards for its products, market conditions have changed resulting in reduced demand for certain products, or because it may have produced more of a particular varietal than can be used. When these sales occur, they may result in a loss.

Cost of sales includes grape and bulk wine costs, whether purchased or produced from the Company’s controlled vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs. For the Company-controlled vineyard-produced grapes, grape costs include annual farming labor costs, harvest costs and depreciation of vineyard assets. For wines that age longer than one year, winemaking and processing costs continue to be incurred and capitalized to the cost of wine, which can range from 3 to 36 months. Reductions to the carrying value of inventories are also included in cost of sales.

As of June 30, 2022, wine inventory includes approximately 0.4 million cases of bottled and bulk wine in various stages of the aging process. Cased wine is expected to be sold over the next 12 to 36 months and generally before the release date of the next vintage.

Table of Contents

Impact of COVID-19 on Operations

In March 2020, in response to the coronavirus disease ("COVID-19") outbreak, the Company temporarily closed all of its tasting rooms, which are located in California, Oregon, and Washington, in compliance with shelter-in-place orders issued by local government offices. During 2020, the Company was challenged with several months of temporary closures and intermittent government restrictions impacting both operational capacities and steadiness throughout the year. All of the Company’s tasting rooms were allowed to reopen in late January 2021 with varying impacts created by the guidelines, restrictions, and tiered structures of each respective state in which the Company operates. The intermittent updates for each state and county caused operating capacity at each tasting room to fluctuate for most of 2021. Although capacity restrictions within the Company's tasting rooms were lifted in the second half of June 2021, the Company continues to maintain a set of operating guidelines to protect the safety of all employees and guests, which may affect capacity and will vary based on estate experience and parameters.

All of the Company’s tasting rooms have been impacted by government orders and restrictions to significant and varying degrees at times. Management and staff at all estate locations have taken the appropriate steps to ensure a safe and enjoyable experience for all guests and staff. In addition to limiting the number of guests and encouraging reservations, the Company has implemented various measures to prevent the spread of the virus including using available forms of personal protective equipment ("PPE"), screening employees and vendors before they enter facilities, practicing social distancing, implementing COVID-19 protocols and travel guidelines, and advising employees of Center for Disease Control ("CDC") guidelines and recommendations.

The Company has experienced port shipping delays within its export shipments but does not anticipate significant impact or disruptions to its supply chain network. In order to mitigate against potential logistical challenges, the Company has effectively managed distributor inventory levels for its domestic wholesale business, which accounts for the majority of the Company's total wholesale shipments.

The Company has experienced both reductions and increases in consumer demand in various channels due to the ongoing COVID-19 pandemic in the three and six months ended June 30, 2022 and 2021 with a lesser impact to the current period as the world continues its efforts against the pandemic.

The Direct to Consumer segment includes retail sales in the tasting rooms, remote sites and on-site events, wine club sales, direct phone sales, Ecommerce sales, and other sales made directly to the consumer without the use of an intermediary. Tasting room sales have been negatively impacted during periods of closures and operating limitations. As restrictions were gradually lifted throughout 2021 and the early part of 2022, the Company experienced a rebound in visitor counts to its tasting rooms. Ecommerce sales were initially favorably impacted as consumers sought to purchase wines through an online platform to minimize human contact. As restrictions eased throughout 2021 and the early part of 2022, Ecommerce sales remained elevated over pre-pandemic levels but declined from the highs of 2020 with consumers returning to traditional channels, including tasting rooms, bars, restaurants, and other hospitality locations.

The Wholesale segment includes all sales through a third party where prices are given at a wholesale rate. The Company sells wine (through distributors and directly) to restaurants, bars, and other hospitality locations (“On-Premise”). In 2020, demand for wines at On-Premise locations was reduced due to COVID-19 containment measures restricting consumers from visiting, as well as in many cases both the temporary and permanent closures of On-Premise venues. However, as restrictions continued to be lifted throughout 2021 and the early part of 2022, demand for wines at On-Premise locations started to rebound. The Company also sells wine (through distributors and directly) to supermarkets, grocery stores, liquor stores, and other chains, third-party Ecommerce and independent stores (“Off-Premise”). Demand for premium wines at Off-Premise locations has increased due to their classification as essential businesses that remained open during government imposed closings and/or restrictions due to COVID-19, as well as premiumization of at-home wine consumption. As On-Premise demand continues to recover, other than sales made through third-party Ecommerce, the Company has not observed a reversing trend in Off-Premise demand.

Additionally, the Company received loan proceeds of approximately $3.8 million under the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and amended by the Paycheck Protection Program Flexibility Act of 2020. The Company requested loan forgiveness in April 2021 and on June 14, 2021, the forgiveness application to the U.S. Small Business Administration (“SBA”) was approved for the full principal amount including interest. For additional information about the loan, see “Liquidity and Capital Resources—Term Loans”.

Table of Contents

The extent of COVID-19’s impact on the Company's financials and results of operations is currently unknown and will depend on future developments, including, but not limited to, the length of time that the pandemic continues, the emergence and severity of new variants, the effect of governmental regulations imposed in response to the pandemic, the availability of vaccines and potential hesitancy to utilize them, the effect on the demand for its products and its supply chain, and how quickly and to what extent normal economic and operation conditions can resume. The Company cannot at this time predict the full impact of COVID-19 on its financial and operational results. Accordingly, the Company's current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to the section entitled “Risk Factors” in the 2021 Report for additional risks the Company faces due to the COVID-19 pandemic.

Seasonality

As discussed in the 2021 Report, the wine industry in general historically experiences seasonal fluctuations in revenues and net income. The Company typically has lower sales and net income during the first quarter and higher sales and net income during the fourth quarter due to seasonal holiday buying as well as wine club shipment timing. The Company anticipates similar trends in the future.

Climate Conditions and Extreme Weather Events

Winemaking and grape growing are subject to a variety of agricultural risks. Various diseases, pests, natural disasters and certain climate conditions can materially and adversely affect the quality and quantity of grapes available to Crimson thereby materially and adversely affecting the supply of Crimson’s products and its profitability. Given the risks presented by climate conditions and extreme weather, Crimson regularly evaluates impacts of climate conditions and weather on its business. Along with various insurance policies currently in place, Crimson has made investments to improve its climate resilience and strives to effectively manage grape sourcing to help mitigate the impact of climate change and unforeseen natural disasters. During 2021, Crimson completed upgrades to its facilities to improve water resilience and fire mitigation measures with plans to advance these initiatives through improvements of irrigation and water systems over the next several years.

Following a historic wildfire season across California, Oregon, and Washington in 2020, the 2021 harvest was impacted by drought resulting in lower yields than historical averages. Compounded with the losses on the 2020 vintage, the lower yields of the 2021 vintage may cause upward pricing pressure on the bulk wine market in addition to increased costs for grapes produced by the Company. Depending on the wine, the production cycle from harvest to bottled sales is anywhere from one to three years.

Inflation and Market Conditions

As the Company continues to grow sales, it expects gross profit to remain steady or increase if it is able to effectively manage cost of sales and operating expenses, subject to any volatility in the bulk wine markets, increased labor costs, and increased commodity costs, including dry goods and packaging materials. The Company continues to monitor the impact of inflation in an attempt to minimize its effects through pricing strategies and cost reductions. If, however, the Company's operations are impacted by significant inflationary pressures, it may not be able to completely offset increased costs through price increases on its products, negotiations with suppliers, cost reductions or production improvements.

Table of Contents

Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Net Sales



	Three Months Ended June 30,
(in thousands, except percentages)	2022		2021		Increase (Decrease)		% change
Wholesale	$	9,423	$	9,727	$	(304)	(3)%
Direct to Consumer	7,494		6,635		859		13%
Other	1,165		1,029		136		13%
Total net sales	$	18,082	$	17,391	$	691	4%

Wholesale net sales decreased $0.3 million, or 3%, in the current quarter as compared to the same quarter in 2021, with a decrease in domestic wine sales of $1.0 million partially offset by an increase in export wine sales of $0.7 million. The quarter-over-quarter decrease in domestic wine sales is primarily related to timing of inventory fulfillment to distributors following large shipments in the first quarter. This timing impact to the current quarter is evident in the discussion of the Company's year-over-year growth for the six months ended June 30, 2022 financial results discussed in the next section. The increase in export wine sales was driven by several large shipments to Europe and Canada as the Company continues to grow this channel.

Direct to Consumer net sales increased $0.9 million, or 13%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher sales through the wine clubs and in the tasting rooms as compared to the same quarter in 2021. Sales for wine clubs increased in the current quarter driven by price increases and sales mix. The Company's elevated tasting experiences drove higher tasting room sales through increased visitors and higher spend per guest. Ecommerce sales increased due to timing of marketing campaigns in the current quarter as compared to the same quarter in 2021. Ecommerce's sales growth continues to face challenges from the shift in consumer purchasing behaviors towards other sales channels.

Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales, increased $0.1 million, or 13%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher tasting and event fee revenues partially offset by lower bulk wine sales. Higher tasting and event fee revenues were driven by the Company's premiumization of the wine tasting experiences and increased tasting room traffic and private events.

Table of Contents

Gross Profit



	Three Months Ended June 30,
(in thousands, except percentages)	2022			2021			Increase (Decrease)		% change
Wholesale	$	3,229		$	3,883		$	(654)	(17)%
Wholesale gross margin percentage	34		%	40		%
Direct to Consumer	4,864			4,195			669		16%
Direct to Consumer gross margin percentage	65		%	63		%
Other	260			262			(2)		1%
Total gross profit	$	8,353		$	8,340		$	13	—%
Total gross margin percentage	46		%	48		%

Wholesale gross profit decreased $0.7 million, or 17%, in the current quarter as compared to the same quarter in 2021 primarily driven by a shift in sales mix towards wines with a higher cost vintage and lower volumes, partially offset by price increases. Compounded with the wildfire losses on the 2020 vintage, the lower yields of the 2021 vintage resulted in higher cost vintages on certain wines sold in the current period. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, decreased 565 basis points primarily driven by a shift in sales mix towards wines with a higher cost vintage partially offset by price increases when compared to the same quarter in 2021.

Direct to Consumer gross profit increased $0.7 million, or 16%, in the current quarter as compared to the same quarter in 2021. Gross margin percentage increased 168 basis points in the current quarter compared to the same quarter in 2021. Both increases were driven by higher wine club and tasting rooms sales compared to the same quarter of 2021.

“Other” includes a gross profit on bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales. Other gross profit was flat in the current quarter as compared to the same quarter in 2021 and is primarily driven by higher tasting and event fee revenues due to increased traffic at tasting rooms, mostly offset by nonrecurring insurance proceeds for smoke taint affected inventory received in the prior year quarter and higher inventory write-downs in the current quarter.

Operating Expenses



	Three Months Ended June 30,
(in thousands, except percentages)	2022		2021		Increase (Decrease)		% change
Sales and marketing	$	4,543	$	3,750	$	793	21%
General and administrative	3,263		3,256		7		—%
Total operating expenses	$	7,806	$	7,006	$	800	11%

Sales and marketing expenses increased $0.8 million, or 21%, in the current quarter as compared to the same quarter in 2021. The increase was primarily driven by higher compensation, travel expenses, and hospitality operational expenses related to increased events compared to the same quarter in 2021. Increased compensation is driven by hospitality staffing related to increased traffic and volume, open positions in the prior year quarter, and increased accrued bonuses related to company performance.

General and administrative expenses were flat in the current quarter as compared to the same quarter in 2021 due to offsetting drivers. A decrease in expenses related to nonrecurring costs of the prior year quarter related to the amended 2019 Annual Report on Form 10-K and amended 2020 Quarterly Reports on Form 10-Q was offset by increased compensation expenses related to stock grants, increased costs under software as a service (SaaS) model, and reinstatement of previously voluntarily waived Board of Director fees when compared to the same quarter in 2021.

Table of Contents

Other (Expense) Income


	Three Months Ended June 30,
(in thousands, except percentages)	2022		2021		Change		% change
Interest expense, net	$	(94)	$	(181)	$	87	48%
Gain on extinguishment of debt	—		3,863		(3,863)		100%
Other income, net	99		208		(109)		(52)%
Total other income, net	$	5	$	3,890	$	(3,885)	100%

Interest expense, net, decreased less than $0.1 million, or 48%, in the current quarter compared to the same quarter in 2021. The decrease was primarily driven by timing of patronage dividend received by the Company and lower interest expense on declining principal balances on the 2015 and 2017 Term Loans.

Gain on extinguishment of debt was recognized for $3.9 million in the previous year during the three months ended June 30, 2021. The gain on extinguishment of debt was related to the PPP loan forgiveness approved by the SBA on June 14, 2021.

Other income, net, decreased less than $0.1 million, or 52%, in the current quarter compared to the same quarter in 2021. The decrease was primarily driven by a nonrecurring gain on lease modification recognized in the prior year quarter upon the Company's early termination agreement of the leased space previously used as the Company's corporate headquarters.

Income Tax Expense

Table of Contents

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net Sales



	Six Months Ended June 30,
(in thousands, except percentages)	2022		2021		Increase (Decrease)		% change
Wholesale	$	20,973	$	17,917	$	3,056	17%
Direct to Consumer	13,721		12,602		1,119		9%
Other	2,011		1,453		558		38%
Total net sales	$	36,705	$	31,972	$	4,733	15%

Wholesale net sales increased $3.1 million, or 17%, in the current six month period as compared to the same period in 2021, with increases in both domestic and export wine sales. The increase in domestic wine sales was driven by a combination of the Company's execution of its growth strategies with the year-over-year recovery of On-Premise sales. These factors drove an increased rate of sales of the Company's core wines, continued growth in new points of distributions, and timing of inventory fulfillment to distributors following strong distributor sales at the end of 2021. The increase in export wine sales was driven by several large shipments to Europe and Canada as the Company continues to grow this channel.

Direct to Consumer net sales increased $1.1 million, or 9%, in the current six month period as compared to the same period in 2021. The increase was primarily driven by higher sales through the wine clubs and in the tasting rooms as compared to the same period in 2021. The increase in wine club and tasting room sales was partially offset by lower Ecommerce sales in the current period. Sales for wine clubs increased in the current period driven by price increases and sales mix. An increase in visitors and higher spend per guest driven by the Company's elevated tasting experiences combined to drive higher tasting room sales. Ecommerce sales decreased in the current period as compared to the same period in 2021 as consumers continued to shift purchasing behaviors with the reopening of tasting rooms, retail and restaurants.

Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales, increased $0.6 million, or 38%, in the current six month period as compared to the same period in 2021. The increase was primarily driven by higher tasting and event fee revenues partially offset by lower bulk wine sales. Higher tasting and event fee revenues were driven by the Company's premiumization of the wine tasting experiences and increased tasting room traffic and private events.

Table of Contents

Gross Profit



	Six Months Ended June 30,
(in thousands, except percentages)	2022			2021			Increase (Decrease)		% change
Wholesale	$	6,866		$	6,764		$	102	2%
Wholesale gross margin percentage	33		%	38		%
Direct to Consumer	8,986			7,811			1,175		15%
Direct to Consumer gross margin percentage	65		%	62		%
Other	(404)			(594)			190		32%
Total gross profit	$	15,448		$	13,981		$	1,467	10%
Total gross margin percentage	42		%	44		%

Wholesale gross profit increased $0.1 million, or 2%, in the current six month period as compared to the same period in 2021 primarily driven by overall volume increase in wine sales and price increases, mostly offset by a shift in sales mix towards wines with a higher cost vintage. Compounded with the wildfire losses on the 2020 vintage, the lower yields of the 2021 vintage resulted in higher cost vintages on certain wines sold in the current period. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, decreased 501 basis points primarily driven by a shift in sales mix towards wines with a higher cost vintage compared to the same period in 2021.

Direct to Consumer gross profit increased $1.2 million, or 15%, in the current six month period as compared to the same period in 2021. The increase was a result of higher wine clubs and tasting rooms sales when compared to the same period in 2021. Direct to Consumer gross margin percentage increased 351 basis points in the current period compared to the same period in 2021. The increase was primarily driven by price increases and a shift in sales channel mix driven by higher wine clubs and tasting rooms sales as compared to the same period of 2021.

“Other” includes a gross loss on bulk wine and grape sales, custom winemaking services, event fees, tasting fees and non-wine retail sales. Other gross loss decreased $0.2 million, or 32%, in the current six month period as compared to the same period in 2021 primarily driven by higher tasting and event fee revenues due to increased traffic at tasting rooms and improved margins on custom winemaking services, partially offset by nonrecurring insurance proceeds for smoke taint affected inventory received in the prior year period and higher inventory write-downs in the current period.

Operating Expenses



	Six Months Ended June 30,
(in thousands, except percentages)	2022		2021		Increase (Decrease)		% change
Sales and marketing	$	8,282	$	6,795	$	1,487	22%
General and administrative	6,561		6,714		(153)		(2)%
Total operating expenses	$	14,843	$	13,509	$	1,334	10%

Sales and marketing expenses increased $1.5 million, or 22%, in the current six month period as compared to the same period in 2021. The increase was primarily driven by higher compensation, advertising and promotional, and travel expenses compared to the same period in 2021. Increased compensation is driven by hospitality staffing related to increased traffic and volume, open positions in the prior year, and increased accrued bonuses related to company performance.

General and administrative expenses decreased $0.2 million, or 2%, in the current six month period as compared to the same period in 2021 primarily due to nonrecurring costs of the prior year period related to the amended 2019 Annual Report on Form 10-K and amended 2020 Quarterly Reports on Form 10-Q, partially offset by increased compensation expenses related to stock

grants and open positions in the prior year, increased costs under software as a service (SaaS) model, and reinstatement of previously voluntarily waived Board of Director fees when compared to the same period in 2021.

Table of Contents

Other (Expense) Income


	Six Months Ended June 30,
(in thousands, except percentages)	2022		2021		Change		% change
Interest expense, net	$	(377)	$	(431)	$	54	13%
Gain on extinguishment of debt	—		3,863		(3,863)		100%
Other income, net	126		258		(132)		(51)%
Total other expense (income), net	$	(251)	$	3,690	$	(3,941)	107%

Interest expense, net, decreased less than $0.1 million, or 13%, in the current six month period compared to the same period in 2021. The decrease was primarily driven by lower interest expense on declining principal balances on the 2015 and 2017 Term Loans.

Gain on extinguishment of debt was recognized for $3.9 million in the previous year during the six month period ended June 30, 2021. The gain on extinguishment of debt was related to the PPP loan forgiveness approved by the SBA on June 14, 2021.

Other income, net, decreased $0.1 million, or 51%, in the current six month period compared to the same period in 2021. The decrease was primarily driven by a nonrecurring gain on lease modification recognized in the prior year six month period upon the Company's early termination agreement of the leased space previously used as the Company's corporate headquarters.

Income Tax Expense

The Company’s effective tax rates for the six months ended June 30, 2022 and 2021 were 29.1% and 7.6%, respectively. The increase in the effective tax rate for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily due to the income exclusion of PPP loan forgiveness for federal income taxes during the six months ended June 30, 2021.

Table of Contents

Liquidity and Capital Resources

General

The Company’s principal sources of liquidity are its available cash and cash equivalents, investments in available for sale securities, funds generated from operations and bank borrowings. The Company’s primary cash needs are to fund working capital requirements and capital expenditures. Despite the negative effects of COVID-19 on its business, the Company has maintained adequate liquidity to meet working capital requirements, fund capital expenditures, meet payroll, and repay scheduled principal and interest payments on debt.

In response to the current macro-economic environment, the Company protected its financial position and liquidity as evidenced by the following items: the Company managed both operating expense and capital expenditure increases closely, limited discretionary spending, and actively managed its working capital, including supporting its business partners most impacted by the pandemic through extended terms and closely monitoring its customers’ solvency and its ability to collect from them. As a result, the Company believes that cash flows generated from operations and its cash, cash equivalents, and marketable securities balances, as well as its borrowing arrangements, will be sufficient to meet its presently anticipated cash requirements for capital expenditures, working capital, debt obligations and other commitments during the next twelve months.

Revolving Credit Facility

In March 2013, Crimson and its subsidiaries entered into a $60.0 million revolving credit facility (the “Revolving Credit Facility”) with American AgCredit, FLCA, as agent for the lenders. The Revolving Credit Facility is comprised of a revolving loan facility (the “Revolving Loan”) and a term revolving loan facility (the “Term Revolving Loan”), which together are secured by substantially all of Crimson’s assets. The Revolving Loan is for up to $10.0 million of availability in the aggregate for a five year term, and the Term Revolving Loan is for up to $50.0 million in the aggregate for a fifteen year term. In addition to unused line fees ranging from 0.15% to 0.25%, rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the London Interbank Offered Rate. The Revolving Credit Facility can be used to fund acquisitions, capital projects and other general corporate purposes. Covenants include the maintenance of specified debt and equity ratios, limitations on the incurrence of additional indebtedness, limitations on dividends and other distributions to shareholders and restrictions on certain mergers, consolidations and sales of assets. No amounts have been borrowed under the Revolving Credit Facility to date.

Term Loans

The Company's term loans consist of the following:

(i) On November 10, 2015, Pine Ridge Winery, LLC (“PRW Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2015 Term Loan”) with American AgCredit, FLCA (“Lender”) for an aggregate principal amount of $16.0 million. Amounts outstanding under the 2015 Term Loan bear a fixed interest rate of 5.24% per annum. The 2015 Term Loan will mature on October 1, 2040. The term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of June 30, 2022, $11.8 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were less than $0.1 million.

(ii) On June 29, 2017, Double Canyon Vineyards, LLC (the “DCV Borrower” and, individually and collectively with the PRW Borrower, “Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2017 Term Loan”) with the Lender for an aggregate principal amount of $10.0 million. Amounts outstanding under the 2017 Term Loan bear a fixed interest rate of 5.39% per annum. The 2017 Term Loan will mature on July 1, 2037. The term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of June 30, 2022, $7.6 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were less than $0.1 million.

Borrower’s obligations under the 2015 Term Loan and 2017 Term Loan are guaranteed by the Company. All obligations of Borrower under the 2015 Term Loan and 2017 Term Loan are collateralized by certain real property of the Company. Borrower’s covenants include the maintenance of a specified debt service coverage ratio and certain customary affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, limitations on distributions to shareholders, and restrictions on certain investments, the sale of assets, and merging or consolidating with other entities. Borrower was in compliance with all debt covenants as of June 30, 2022.

Table of Contents

Consolidated Statements of Cash Flows

The following table summarizes the Company's cash flow activities for the six months ended June 30, 2022 and 2021 (in thousands):



Cash provided by (used in):	2022		2021
Operating activities	$	6,210	$	9,433
Investing activities	1,840		(2,376)
Financing activities	(1,586)		(6,525)

Cash provided by operating activities

Net cash provided by operating activities was $6.2 million for the six months ended June 30, 2022, consisting primarily of $0.2 million of net income adjusted for $4.9 million of non-cash items and $1.1 million net cash inflow related to changes in operating assets and liabilities. Adjustments for non-cash items primarily consist of depreciation, loss on the write-down of inventory, and amortization. The change in operating assets and liabilities was primarily due to a decrease in inventory and accounts receivable and increase in customer deposits and other payables, partially offset by a decrease in accounts payable and accrued liabilities and increase in other current assets.

Net cash provided by operating activities was $9.4 million for the six months ended June 30, 2021, consisting primarily of $3.9 million of net income adjusted for $1.0 million of non-cash items and $4.5 million net cash inflow related to changes in operating assets and liabilities. Adjustments for non-cash items primarily consist of depreciation, loss on the write-down of inventory, and amortization, partially offset by the gain on extinguishment of debt. The change in operating assets and liabilities was primarily due to a decrease in inventory, accounts receivable, and other current assets and increase in customer deposits and other payables, partially offset by a decrease in accounts payable and accrued liabilities and other non-current liabilities.

Cash provided by (used in) investing activities

Net cash provided by investing activities was $1.8 million for the six months ended June 30, 2022, consisting primarily of the net redemptions of available for sale investments of $3.5 million, partially offset by capital expenditures of $1.7 million.

Net cash used in investing activities was $2.4 million for the six months ended June 30, 2021, consisting primarily of the net purchases of available for sale investments of $1.2 million and capital expenditures of $1.3 million, partially offset by proceeds from sale of the fallow apple orchards in Umatilla County, Oregon totaling $0.1 million which represents the down payment with the remaining balance of $0.5 million financed by the Company.

Cash used in financing activities

Net cash used in financing activities for the six months ended June 30, 2022 was $1.6 million, consisting primarily of the repurchase of shares of the Company's common stock at an aggregate purchase price of $1.0 million and the principal payments on the 2015 and 2017 Term Loans of $0.6 million.

Net cash used in financing activities for the six months ended June 30, 2021 was $6.5 million, consisting primarily of the repurchase of shares of the Company's common stock at an aggregate purchase price of $6.2 million and the principal payments on the 2015 and 2017 Term Loans of $0.3 million.

Share Repurchases

Table of Contents

Off-Balance Sheet Financing Arrangements

None.

Critical Accounting Policies and Estimates

There have been no material changes to the critical accounting policies and estimates previously disclosed in the 2021 Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2022. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

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 other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company's 2021 Report, which could materially affect its business, results of operations or financial condition. The risks described in the Company's 2021 Report are not the only risks it faces. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may eventually prove to materially adversely affect its business, results of operations or financial condition.

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

Share repurchase activity under the Company’s share repurchase program on a trade date basis, for the three months ended June 30, 2022 was as follows:


Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans (millions)
April 1-30, 2022	31,676	$	8.12	38,979	$	3.7
May 1-31, 2022	68,531	$	7.20	107,510	$	3.2
June 1-30, 2022	27,212	$	7.47	134,722	$	3.0
Total	127,419

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Table of Contents

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 June 30, 2022, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Interim Condensed Consolidated Financial Statements.
104**			The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included as Exhibit 101).

* Incorporated by reference
** Filed/furnished herewith

Table of Contents

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:

August 10, 2022

By:

/s/ Karen L. Diepholz

Karen L. Diepholz

Chief Financial Officer