CRIMSON WINE GROUP, LTD. The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements, related disclosures and "Cautionary Statement for Forward-Looking Information," which appear elsewhere in this Report.
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 other non-wine retail sales such as merchandise ("non-wine sales").
The Company's wines are primarily sold to distributors, who then sell to retailers and restaurants. As permitted under federal, state 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 such grapes or bulk wine does not meet the quality standards for the its 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's 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 three to 36 months. Reductions to the carrying value of inventories are also included in costs of sales.
20
--------------------------------------------------------------------------------
Table of Contents As ofDecember 31, 2022 , wine inventory includes approximately 0.7 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
All of the Company's tasting rooms were impacted by government orders and
restrictions to significant and varying degrees from
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 twelve months ended
The Company has identified two operating segments, Direct to Consumer and Wholesale. 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 during the pandemic 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 consumption 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. 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. Demand for premium wines at Off-Premise locations has increased due to their initial classification as essential businesses that remained open during government imposed closings and/or restrictions due to COVID-19, as well as ongoing 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.
21
--------------------------------------------------------------------------------
Table of Contents
Additionally, the Company received loan proceeds of approximately
The extent of COVID-19's impact on the Company's financials and results of operations remains uncertain and will depend on future developments, including, but not limited to, the length of time that the pandemic continues, the severity and continued transmission of its variants, the effect of any governmental regulations imposed in response to the pandemic, the availability and effectiveness of vaccines and potential hesitancy to utilize them, and the effect on the demand for its products and its supply chain. 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 Item 1A. Risk Factors, for additional risks the Company faces due to the COVID-19 pandemic.
Seasonality
As discussed in Item 1 of this Form 10-K, the wine industry in general, historically experiences seasonal fluctuations in revenues and net income. The Company typically has lower sales and net income during the first quarter and higher sales and net income during the fourth quarter due to seasonal holiday buying as well as wine club shipment timing. The Company anticipates similar trends in the future.
Climate Conditions and Extreme Weather Events
Winemaking and grape growing are subject to a variety of agricultural risks. Various diseases, pests, natural disasters and certain climate conditions can materially and adversely affect the quality and quantity of grapes available to Crimson thereby materially and adversely affecting the supply of Crimson's products and its profitability. Given the risks presented by climate conditions and extreme weather, Crimson regularly evaluates impacts of climate conditions and weather on its business and plan to disclose any material impacts on the business. Along with various insurance policies currently in place, Crimson has made investments to improve its climate resilience and strives to effectively manage grape sourcing to help mitigate the impact of climate change and unforeseen natural disasters. During 2022, Crimson continued to complete upgrades to its facilities to improve water resilience and fire mitigation measures with plans to advance these initiatives through improvements of irrigation and water systems over the next several years.
Following a historic wildfire season across
Critical Accounting Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
Inventory - Inventory consists of mainly bulk and bottled wine and is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out method. Costs associated with winemaking, and other costs associated with the manufacturing of products for resale, are recorded as inventory. In accordance with general practice within the wine industry, wine inventories are included in current assets, although a portion of such inventories may be aged for periods longer than one year. 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
22
--------------------------------------------------------------------------------
Table of Contents
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 need to be reduced, resulting in additional expense and
reduced profitability. The Company's inventory write-downs may consist of
reductions to bottled or bulk wine inventory. Crop insurance proceeds from
farming losses may be recorded as offsets against previously recognized
write-downs. Inventory write-downs of
Vineyard Development Costs - The Company capitalizes internal vineyard
development costs when developing new vineyards or replacing or improving
existing vineyards. These costs consist primarily of the costs of the vines and
expenditures related to labor and materials to prepare the land and construct
vine trellises. Amortization of such costs is recorded on a straight-line basis
over the estimated economic useful life of the vineyard, which can be up to 25
years. As circumstances warrant, the Company re-evaluates the recoverability of
capitalized costs, and will record impairment charges if required. There were no
significant asset disposals related to vineyard development during the year
ended
Review of Long-lived Assets for Impairment - For intangible assets with definite
lives, impairment testing is required if conditions exist that indicate the
carrying value may not be recoverable. For intangible assets with indefinite
lives and for goodwill, impairment testing is required at least annually or more
frequently if events or circumstances indicate that these assets might be
impaired. Other than goodwill, the Company currently has no intangible assets
with indefinite lives. All of the Company's goodwill and substantially all
definite-lived intangible assets resulted from the acquisitions of
The Company evaluates long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Long-lived assets consist primarily of property and equipment and intangible assets with definite lives. Circumstances that might cause the Company to evaluate its long-lived assets for impairment could include a significant decline in the prices the Company or the industry can charge for its products, which could be caused by general economic or other factors, changes in laws or regulations that make it difficult or more costly for the Company to distribute its products to its markets at prices which generate adequate returns, natural disasters, significant decrease in demand for the Company's products or significant increase in the costs to manufacture the Company's products.
Recoverability of long-lived assets is measured using a comparison of the carrying amount of an asset group to the fair value or future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company groups its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). This would typically be at the property level which is in the Business section of this Form 10-K.
The Company recorded no impairment charges during the years ended
Depletion allowances - The Company pays depletion allowances to its distributors based on their sales to their customers. These allowances are estimated on a monthly basis by the Company, and allowances are accrued as a reduction of sales. Subsequently, 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 any material differences between actual and estimated expense.
23
--------------------------------------------------------------------------------
Table of Contents Results of Operations
In this section, we discuss the results of our operations for the year ended
Year Ended December 31,
(in thousands, except percentages) 2022 2021 Increase % change
Wholesale $ 41,042 $ 37,049 $ 3,993 11%
Direct to consumer 28,882 28,201 681 2%
Other 4,320 3,668 652 18%
Total net sales $ 74,244 $ 68,918 $ 5,326 8%
Wholesale net sales increased
Direct to consumer net sales increased
Other net sales, which include bulk wine and grape sales, custom winemaking
services, event fees, tasting fees and non-wine retail sales, increased
24
--------------------------------------------------------------------------------
Table of Contents
Gross Profit
Year Ended December 31,
(in thousands, except percentages) 2022 2021 Increase % change
Wholesale $ 14,223 $ 13,045 $ 1,178 9%
Wholesale gross margin percentage 35 % 35 %
Direct to consumer 18,844 18,110 734 4%
Direct to consumer gross margin percentage 65 % 64 %
Other (276) (1,102) 826 75%
Total gross profit $ 32,791 $ 30,053 $ 2,738 9%
Wholesale gross profit increased
Direct to consumer gross profit increased
"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
Operating Expenses
Year Ended December 31,
(in thousands, except percentages) 2022 2021 Increase % change
Sales and marketing $ 17,414 $ 15,658 $ 1,756 11%
General and administrative 13,102 13,122 (20) -%
Total operating expenses $ 30,516 $ 28,780 $ 1,736 6%
Sales and marketing expenses increased
General and administrative expenses were flat in 2022 compared to 2021 due to various offsetting drivers. Restatement costs incurred in the prior year period were partially offset by higher compensation related to merit increases, added positions, and stock grants and reinstatement of previously voluntarily waived board of director fees in the current year.
25
--------------------------------------------------------------------------------
Table of Contents
Other (Expense) Income
Year Ended December 31 ,
(in thousands, except percentages) 2022 2021 Change % change Interest expense, net
$ (926) $ (1,015) $ 89 9% Gain on extinguishment of debt - 3,863 (3,863) (100)% Other income, net 415 359 56 16%
Total other (expense) income, net
Interest expense, net, decreased less than
Gain on extinguishment of debt was recognized for
Other income, net, increased
Income Tax Provision
The Company's income tax provision increased
26
--------------------------------------------------------------------------------
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. 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, and maintain compliance with debt covenants. The Company's capital program is designed to operate within or near operating cash flow and may fluctuate with strategic initiatives and other factors impacting cash flow. The Company's operating cash flow funded its capital expenditures in 2022 and fully funded its capital expenditures in 2021.
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 and closely monitoring its
customers' solvency and collectability. 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. The Company's 2023 capital expenditure is expected to be
approximately
Revolving Credit Facility
In
The Revolving Credit Facility agreement was previously set to expire on
Term Loans
Term loans consist of the following:
(i) On
(ii) On
27
--------------------------------------------------------------------------------
Table of Contents
Term Loan") with the Lender for an aggregate principal amount of
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
Consolidated Statements of Cash Flows
The following table summarizes the Company's cash flow activities for the years
ended
Net cash provided by (used in): 2022 2021 Operating activities$ 7,493 $ 18,702 Investing activities (6,387) (8,189) Financing activities (8,133) (7,095)
Cash provided by operating activities
Net cash provided by operating activities was
Net cash provided by operating activities was
Cash used in investing activities
Net cash used in investing activities was
Net cash used in investing activities was
Cash used in financing activities
Net cash used in financing activities was
Net cash used in financing activities was
28
--------------------------------------------------------------------------------
Table of Contents Share Repurchases
On
In
© Edgar Online, source
