cwgl-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

☐ 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 November 1, 2021 there were 22,524,185 outstanding shares of the Registrant’s Common Stock, par value $0.01 per share.

CRIMSON WINE GROUP, LTD.

TABLE OF CONTENTS


		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, 2021 and 2020	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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

(Unaudited)



	September 30, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	31,381	$	29,314
Investments available for sale	10,748		8,507
Accounts receivable, net	8,547		7,906
Inventory	55,539		57,554
Other current assets	1,859		2,349
Assets held for sale	—		555
Total current assets	108,074		106,185
Property and equipment, net	111,406		113,683
Goodwill	1,262		1,262
Intangible and other non-current assets, net	8,654		9,238
Total non-current assets	121,322		124,183
Total assets	$	229,396	$	230,368
Liabilities
Current liabilities:
Accounts payable and accrued liabilities	$	13,487	$	9,419


Customer deposits	1,305		270
Current portion of long-term debt, net of unamortized loan fees	1,127		3,388
Total current liabilities	15,919		13,077
Long-term debt, net of current portion and unamortized loan fees	19,081		21,201
Deferred tax liability, net	870		477
Other non-current liabilities	9		93
Total non-current liabilities	19,960		21,771
Total liabilities	35,879		34,848
Commitments and contingencies (Note 14)
Stockholders’ Equity
Common shares, par value $0.01 per share, authorized 150,000,000 shares; 22,524,185 and 23,243,476 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	225		232
Additional paid-in capital	277,639		277,550
Accumulated other comprehensive income	6		13
Accumulated deficit	(84,353)		(82,275)
Total stockholders’ equity	193,517		195,520
Total liabilities and stockholders’ equity	$	229,396	$	230,368

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net sales	$	17,137	$	15,867	$	49,109	$	43,922
Cost of sales	9,557		11,411		27,548		29,159
Gross profit	7,580		4,456		21,561		14,763
Operating expenses:
Sales and marketing	3,875		3,316		10,670		10,729
General and administrative	3,081		2,602		9,795		8,315
Total operating expenses	6,956		5,918		20,465		19,044
Net loss (gain) on disposal of property and equipment	11		(40)		(16)		137
Restructuring costs	—		114		—		1,424

Income (loss) from operations	613		(1,536)		1,112		(5,842)
Other (expense) income:
Interest expense, net	(292)		(328)		(723)		(765)
Gain on extinguishment of debt	—		—		3,863		—
Other income, net	47		109		305		395
Total other (expense) income, net	(245)		(219)		3,445		(370)
Income (loss) before income taxes	368		(1,755)		4,557		(6,212)
Income tax provision (benefit)	84		(459)		402		(1,831)
Net income (loss)	$	284	$	(1,296)	$	4,155	$	(4,381)
Basic weighted-average shares outstanding	22,524		23,243		22,901		23,243
Fully diluted weighted-average shares outstanding	22,834		23,243		23,064		23,243
Basic and fully diluted earnings (loss) per share	$	0.01	$	(0.06)	$	0.18	$	(0.19)

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	284	$	(1,296)	$	4,155	$	(4,381)
Other comprehensive (loss) income:
Net unrealized holding (losses) gains on investments arising during the period, net of tax	(1)		(16)		(7)		13
Comprehensive income (loss)	$	283	$	(1,312)	$	4,148	$	(4,368)

See accompanying notes to unaudited interim condensed consolidated financial statements.

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2021		2020
Net cash flows from operating activities:
Net income (loss)	$	4,155	$	(4,381)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization of property and equipment	4,810		5,376
Amortization of intangible assets	965		965


Loss on write-down of inventory	901		2,717
Provision for doubtful accounts	—		98
Net (gain) loss on disposal of property and equipment	(16)		137

Restructuring charges	—		1,424

Provision (benefit) for deferred income taxes	395		(88)
Stock-based compensation	89		21
Gain on extinguishment of debt	(3,863)		—
Net change in operating assets and liabilities:
Accounts receivable	(641)		3,759
Inventory	1,114		769
Other current assets	611		(1,977)
Other non-current assets	(30)		136
Accounts payable and accrued liabilities	3,792		(535)


Customer deposits	1,044		894
Other non-current liabilities	(84)		(115)
Net cash provided by operating activities	13,242		9,200
Net cash flows from investing activities:

Purchase of investments available for sale	(9,250)		(7,250)
Redemptions of investments available for sale	7,000		8,500
Acquisition of property and equipment	(2,310)		(2,582)

Proceeds from disposals of property and equipment	195		1,940
Net cash (used in) provided by investing activities	(4,365)		608
Net cash flows from financing activities:
Proceeds from PPP term loan	—		3,820
Principal payments on long-term debt	(570)		(1,140)
Repurchase of common stock	(6,240)		—


Net cash (used in) provided by financing activities	(6,810)		2,680
Net increase in cash and cash equivalents	2,067		12,488
Cash and cash equivalents - beginning of period	29,314		12,986
Cash and cash equivalents - end of period	$	31,381	$	25,474
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	624	$	1,242
Income tax payments, net	$	—	$	—
Non-cash investing and financing activity:
Unrealized holding (losses) gains on investments, net of tax	$	(7)	$	13
Acquisition of property and equipment accrued but not yet paid	$	302	$	200
PPP loan and accrued interest forgiven by the SBA	$	3,863	$	—

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		Income (Loss)		Deficit		Total
Three Months Ended September 30, 2021
Balance, June 30, 2021	22,524,185	$	225	$	277,564	$	7	$	(84,637)	$	193,159
Net income	—	—		—		—		284		284
Other comprehensive loss	—	—		—		(1)		—		(1)
Stock-based compensation	—	—		75		—		—		75

Balance, September 30, 2021	22,524,185	$	225	$	277,639	$	6	$	(84,353)	$	193,517
Three Months Ended September 30, 2020
Balance, June 30, 2020	23,243,476	$	232	$	277,536	$	41	$	(78,952)	$	198,857
Net loss	—	—		—		—		(1,296)		(1,296)
Other comprehensive loss	—	—		—		(16)		—		(16)
Stock-based compensation	—	—		7		—		—		7

Balance, September 30, 2020	23,243,476	$	232	$	277,543	$	25	$	(80,248)	$	197,552
Nine Months Ended September 30, 2021
Balance, December 31, 2020	23,243,476	$	232	$	277,550	$	13	$	(82,275)	$	195,520
Net income	—	—		—		—		4,155		4,155
Other comprehensive loss	—	—		—		(7)		—		(7)
Stock-based compensation	—	—		89		—		—		89
Repurchase of common stock	(719,291)	(7)		—		—		(6,233)		(6,240)
Balance, September 30, 2021	22,524,185	$	225	$	277,639	$	6	$	(84,353)	$	193,517
Nine Months Ended September 30, 2020
Balance, December 31, 2019	23,243,476	$	232	$	277,522	$	12	$	(75,867)	$	201,899
Net loss	—	—		—		—		(4,381)		(4,381)
Other comprehensive income	—	—		—		13		—		13
Stock-based compensation	—	—		21		—		—		21

Balance, September 30, 2020	23,243,476	$	232	$	277,543	$	25	$	(80,248)	$	197,552

See accompanying notes to unaudited interim condensed consolidated financial statements.

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CRIMSON WINE GROUP, LTD.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

1. Background and Basis of Presentation

Background

Crimson Wine Group, Ltd. and its subsidiaries (collectively, “Crimson” or the “Company”) is a Delaware corporation that has been conducting business since 1991. Crimson is in the business of producing and selling ultra-premium plus wines (i.e., wines that retail for over $16 per 750ml bottle). Crimson is headquartered in Napa, California and through its subsidiaries owns seven primary wine estates and brands: Pine Ridge Vineyards, Archery Summit, Chamisal Vineyards, Seghesio Family Vineyards, Double Canyon, Seven Hills Winery and Malene Wines.

Financial Statement Preparation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited consolidated financial statements for the year ended December 31, 2020, as filed with the SEC on Form 10-K (the “2020 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, 2020 was extracted from the audited annual consolidated financial statements and does not include all disclosures required by GAAP for annual financial statements.

Revision of Prior Period Financial Statements

In connection with the preparation of the Company’s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2021, the Company became aware of a miscalculation of the income tax provision for the three months ended June 30, 2021. The miscalculation was an isolated incident related to the determination of the tax impact of the PPP loan forgiveness. In accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company determined that the related impact of the error was not material to the prior period financial statements for the three and six months ended June 30, 2021, but that correcting for the error as an out-of-period adjustment in the three months ended September 30, 2021 would be significant to the results of operations for the current quarter. Therefore, the prior period unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2021 have been revised to correct for the impact of this item. A summary of revisions to previously reported financial statements is presented in Note 16, “Revision of Prior Period Financial Statements.”

Significant Accounting Policies

There were no changes to the Company’s significant accounting policies during the nine months ended September 30, 2021. See Note 2 of the 2020 Report for a description of the Company’s significant accounting policies.

Reclassifications

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

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Recent Accounting Pronouncements

Subsequent to the filing of the 2020 Report, there were no accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that would have a material effect on Crimson’s unaudited interim condensed consolidated financial statements. The following table provides a description of accounting pronouncements that were adopted during the nine months ended September 30, 2021:

Standard

Description

Date of adoption

Effect on the financial statements or other significant matters

Standards that were adopted

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

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

January 1, 2021

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

2.Revenue

Revenue Recognition

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

Wholesale Segment

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

Direct to Consumer Segment

The Company sells its wine and other merchandise directly to consumers through wine club memberships, at the wineries’ tasting rooms and through our 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”).

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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 and Chamisal’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 13, “Business Segment Information,” for revenue by sales channel amounts for the three and nine months ended September 30, 2021 and 2020.

Contract Balances

When the Company receives payments from customers prior to transferring goods or services under the terms of a contract, the Company records deferred revenue, which it classifies as customer deposits on its condensed consolidated balance sheets, and represents a contract liability. Customer deposits are liquidated when revenue is recognized. Revenue that was included in the contract liability balance at the beginning of each of the 2021 and 2020 years consisted primarily of wine club revenue, grape and bulk sales and event fees. Changes in the contract liability balance during the nine-month periods ended September 30, 2021 and 2020, were not materially impacted by any other factors.

The outstanding contract liability balances were $0.3 million at December 31, 2020 and $1.3 million at September 30, 2021. Of the amounts included in the opening contract liability balances at the beginning of each year, approximately $0.2 million was recognized as revenue during both the nine months ended September 30, 2021 and 2020.

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 September 30, 2021 and December 31, 2020.

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3.Notes Receivable

Notes receivable consisted of the following as of September 30, 2021 and December 31, 2020:



	September 30, 2021		December 31, 2020
Notes receivable, current (1)	$	134	$	—
Notes receivable, non-current (2)	411		—
Total	$	545	$	—

__________________________________________

(1) Reported within other current assets in 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 due to the Company on the six month anniversary of the closing date 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.

4.Restructuring

During 2020, the Company committed to various restructuring activities (the “2020 Restructuring Program”) including the closure of the Double Canyon Vineyards tasting room, restructuring of management, changes in sales, marketing, and Direct to Consumer organizational structure, and transitioning of information technology services and export fulfillment to outsourced support models. Restructuring charges of $1.4 million were incurred in the nine months ended September 30, 2020. As of September 30, 2020, the 2020 Restructuring Program was completed with restructuring charges totaling $1.4 million, consisting of $1.1 million employee related costs, $0.2 million of asset impairment charges associated with the tasting room assets upon closure, and $0.1 million of other restructuring costs associated with departmental reorganization activities.

The Company paid less than $0.2 million in previously accrued employee related restructuring activities during the nine months ended September 30, 2021. The liability related to restructuring activities was less than $0.2 million and $0.3 million at September 30, 2021 and December 31, 2020, respectively.

A roll forward of the liability recognized related to restructuring activities as of September 30, 2021 is as follows (in thousands):


	Balance at December 31, 2020		Additions		Payments		Balance at September 30, 2021
Employee related restructuring activity	$	309	$	—	$	(155)	$	154

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5.Inventory

A summary of inventory at September 30, 2021 and December 31, 2020 is as follows (in thousands):



	September 30, 2021		December 31, 2020
Finished goods	$	30,425	$	34,970
In-process goods	23,852		21,498
Packaging and bottling supplies	1,262		1,086
Total inventory	$	55,539	$	57,554

Inventory consists of mainly bulk and bottled wine and is stated at the lower of cost or net realizable value. 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, future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of sales. If future demand and/or pricing 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. Inventory write-downs of $0.9 million and $2.7 million were recorded during the nine months ended September 30, 2021 and 2020, respectively. The Company’s inventory balances are presented net of inventory reserves of $2.7 million and $4.4 million at September 30, 2021 and December 31, 2020, respectively.

6.Property and Equipment

A summary of property and equipment at September 30, 2021 and December 31, 2020, and depreciation and amortization for the three and nine months ended September 30, 2021 and 2020, is as follows (in thousands):


	Depreciable Lives
	(in years)	September 30, 2021		December 31, 2020
Land and improvements	N/A	$	44,912	$	44,912
Buildings and improvements	20-40	59,441		59,265
Winery and vineyard equipment	3-25	34,052		35,350
Vineyards and improvements	7-25	35,375		33,651
Caves	20-40	5,639		5,639
Vineyards under development	N/A	991		2,565
Construction in progress	N/A	3,519		2,169
Total		183,929		183,551
Accumulated depreciation and amortization		(72,523)		(69,868)
Total property and equipment, net		$	111,406	$	113,683


	Three Months Ended September 30,				Nine Months Ended September 30,
Depreciation and amortization:	2021		2020		2021		2020
Capitalized into inventory	$	1,169	$	1,349	$	3,604	$	4,125
Expensed to general and administrative	401		397		1,206		1,251
Total depreciation and amortization	$	1,570	$	1,746	$	4,810	$	5,376

During 2018, the Company began actively marketing 36 acres of fallow apple orchards for sale as it does not intend to replant these orchards with vineyards and subsequently reclassified $0.6 million from property and equipment to assets held for sale. In the first quarter of 2019, the Company recorded an impairment charge of less than $0.1 million to write-down the carrying value of the fallow apple orchards to fair value less cost to sell. In March 2021, the Company finalized a sales agreement to sell the land for $0.6 million. In accordance with ASC 360-10, this subsequent event revealed evidence of fair value and conditions

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existing as of the balance sheet date, December 31, 2020. In the fourth quarter of 2020, the Company recorded an additional impairment charge of less than $0.1 million to write-down the carrying value of the fallow apple orchards to fair value less cost to sell. The impairment charges were recorded to other income (expense), net in the unaudited interim condensed consolidated statements of operations. The sale of the fallow apple orchards closed in June 2021.

In the fourth quarter of 2020, the Company recorded impairment charges totaling $1.1 million to write-down assets within construction in progress related to tasting room renovation projects.

7.Financial Instruments

The Company’s material financial instruments include cash and cash equivalents, investments classified as available for sale, and short-term and long-term debt. Investments classified as available for sale are the only assets or liabilities that are measured at fair value on a recurring basis.

All of the Company’s investments mature within two years or less. The par value, amortized cost, gross unrealized gains and losses, and estimated fair value of investments classified as available for sale as of September 30, 2021 and December 31, 2020 are as follows (in thousands):


September 30, 2021	Par Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Level 1		Level 2		Total Fair Value Measurements

Certificates of Deposit	$	10,750	$	10,750	$	—	$	(2)	$	—	$	10,748	$	10,748

December 31, 2020	Par Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Level 1		Level 2		Total Fair Value Measurements
Certificates of Deposit	$	8,500	$	8,500	$	7	$	—	$	—	$	8,507	$	8,507

Gross unrealized losses on available for sale securities were less than $0.1 million as of September 30, 2021. The Company believes the gross unrealized losses are temporary as it does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

As of September 30, 2021 and December 31, 2020, other than the assets, including assets held for sale, impaired in the respective periods, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis. For cash and cash equivalents, the carrying amounts of such financial instruments approximate their fair values. For short-term debt, the carrying amounts of such financial instruments approximate their fair values. As of September 30, 2021, the Company has estimated the fair value of its outstanding debt to be approximately $22.8 million compared to its carrying value of $20.3 million, based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. Level 3 inputs include market rates obtained from American AgCredit, FLCA (“Lender”) as of September 30, 2021 of 4.35% and 4.21% for the 2015 Term Loan and 2017 Term Loan, respectively, as further discussed in Note 10, “Debt.”

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

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8.Intangible and Other Non-Current Assets

A summary of intangible and other non-current assets at September 30, 2021 and December 31, 2020, and amortization expense for the three and nine months ended September 30, 2021 and 2020, is as follows (in thousands):


		September 30, 2021						December 31, 2020
	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	$	10,827	$	7,173	$	18,000	$	10,030	$	7,970
Distributor relationships	10-14	2,700		1,976		724		2,700		1,829		871
Legacy permits	14	250		184		66		250		171		79
Trademark	20	200		131		69		200		123		77
Total		$	21,150	$	13,118	$	8,032	$	21,150	$	12,153	$	8,997
Other non-current assets						622						241
Total intangible and other non-current assets, net						$	8,654					$	9,238

						Three Months Ended September 30,				Nine Months Ended September 30,
Amortization expense						2021		2020		2021		2020
Total amortization expense						$	322	$	322	$	965	$	965

The estimated aggregate future amortization of intangible assets as of September 30, 2021 is identified below (in thousands):


	Amortization
Remainder of 2021	$	321
2022	1,286
2023	1,286
2024	1,286
2025	1,168
Thereafter	2,685
Total	$	8,032

9.Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Accounts payable and accrued grape liabilities	$	7,506	$	3,956
Accrued compensation related expenses	2,917		1,422
Sales and marketing	593		575
Acquisition of property and equipment	342		35
Accrued interest	269		26
Depletion allowance	1,078		1,514
Production and farming	162		1,188

Operating lease liability, current	—		161
Other accrued expenses	620		542
Total accounts payable and accrued liabilities	$	13,487	$	9,419

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10.Debt

A summary of debt at September 30, 2021 and December 31, 2020 is as follows (in thousands):


	September 30, 2021		December 31, 2020
Revolving Credit Facility (1)	$	—	$	—
Senior Secured Term Loan Agreement due 2040, with an interest rate of 5.24% (2)	12,320		12,640
Senior Secured Term Loan Agreement due 2037, with an interest rate of 5.39% (3)	8,000		8,250
Unsecured Term Loan Agreement due 2022, with an interest rate of 1.00% (4)	—		3,820
Unamortized loan fees	(112)		(121)
Total debt	20,208		24,589
Less current portion of long-term debt	1,127		3,388
Long-term debt due after one year, net	$	19,081	$	21,201

______________________________________

(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.

(4) On April 22, 2020, Crimson entered into an unsecured term loan agreement (the “2020 PPP Term Loan”) with American AgCredit, FLCA (“Lender”) for an aggregate principal amount of $3.8 million pursuant to a new loan program through the U.S. Small Business Administration (“SBA”) as the result of 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 SBA was approved for the full principal amount including interest. The SBA has remitted payment to the lender and the Company has been legally released from the loan agreement. In June 2021, the Company recorded a gain on extinguishment of debt for approximately $3.9 million, which includes both the full principal and interest amounts.

Debt covenants include the maintenance of specified debt and equity ratios, a specified debt service coverage ratio, and certain customary affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, limitations on dividends and other distributions to shareholders and restrictions on certain investments, certain mergers, consolidations and sales of assets. The Company was in compliance with all existing debt covenants as of September 30, 2021.

A summary of debt maturities as of September 30, 2021 is as follows (in thousands):


Principal due the remainder of 2021	$	285
Principal due in 2022	1,140
Principal due in 2023	1,140
Principal due in 2024	1,140
Principal due in 2025	1,140
Principal due thereafter	15,475
Total	$	20,320

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11. 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 approximately $6.2 million. The Company’s repurchase was funded through cash on hand, and the shares were retired.

Stock-Based Compensation

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

In December 2019, 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 will 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. The exercise price for the options was the closing price on the date of grant.

Estimates of share-based compensation expense require a number of complex and subjective assumptions, including the selection of an option pricing model. The Company determined the grant date fair value of the awards using the Black-Scholes-Merton option-pricing valuation model, with the following assumptions and values:


	December 2019 Grants			July 2021 Grants
Expected term	5.00 years			4.75 years
Expected dividend yield	—		%	—		%
Risk-free interest rate	1.6		%	0.76		%
Expected stock price volatility	22		%	31		%
Stock price	$	6.90		$	8.88
Grant date fair value	$	141,000		$	575,000

As of September 30, 2021, options in respect of all 322,000 shares remained outstanding with no additional grants or stock activities related to vesting, exercises or expirations during the quarter. The share-based compensation expense for these grants is based on the grant date fair value, which will be recorded over the vesting period. For the three and nine months ended September 30, 2021, $75,000 and $89,000 was recorded as share-based compensation expense, respectively. For the three and nine months ended September 30, 2020, $7,000 and $21,000 were recorded as share-based compensation expense, respectively. Share-based compensation expense was recorded to general and administrative expense in the unaudited interim condensed consolidated statements of operations.

12.Income Taxes

Consolidated income tax benefits for the three and nine months ended September 30, 2021 and 2020 were determined based upon the Company’s estimated consolidated effective income tax rates calculated without discrete items for the years ending December 31, 2021 and 2020, respectively.

The Company’s effective tax rates for the three months ended September 30, 2021 and 2020 were 23.0% and 26.2%, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three months ended September 30, 2021 was primarily attributable to state income taxes and other permanent items. The Company’s effective tax rates for the nine months ended September 30, 2021 and 2020 were 8.8% and 29.5%, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2021 was primarily attributable to income exclusion of PPP loan forgiveness for federal income taxes, state income taxes and other permanent items.

The Company does not have any amounts in its condensed consolidated balance sheets for unrecognized tax benefits related to uncertain tax positions as of September 30, 2021.

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13.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 table outlines the net sales, cost of sales, gross profit (loss), directly attributable selling expenses and operating income (loss) for the Company’s reportable segments for the three and nine months ended September 30, 2021 and 2020, and also includes a reconciliation of consolidated income (loss) from operations. Other/Non-allocable net sales and gross profit include bulk wine and grape sales, event fees and non-wine retail sales. Other/Non-allocable expenses include centralized corporate expenses not specific to an identified reporting segment. Sales figures are net of related excise taxes.



	Three Months Ended September 30,
	Wholesale				Direct to Consumer				Other/Non-Allocable				Total
(in thousands)	2021		2020		2021		2020		2021		2020		2021		2020
Net sales	$	9,149	$	8,772	$	6,689	$	6,243	$	1,299	$	852	$	17,137	$	15,867
Cost of sales	5,901		5,727		2,342		2,339		1,314		3,345		9,557		11,411
Gross profit (loss)	3,248		3,045		4,347		3,904		(15)		(2,493)		7,580		4,456
Operating expenses:
Sales and marketing	1,447		1,252		1,688		1,425		740		639		3,875		3,316
General and administrative	—		—		—		—		3,081		2,602		3,081		2,602
Total operating expenses	1,447		1,252		1,688		1,425		3,821		3,241		6,956		5,918
Net loss (gain) on disposal of property and equipment	—		—		6		—		5		(40)		11		(40)
Restructuring costs	—		—		—		—		—		114		—		114

Income (loss) from operations	$	1,801	$	1,793	$	2,653	$	2,479	$	(3,841)	$	(5,808)	$	613	$	(1,536)



	Nine Months Ended September 30,
	Wholesale				Direct to Consumer				Other/Non-Allocable				Total
(in thousands)	2021		2020		2021		2020		2021		2020		2021		2020
Net sales	$	27,066	$	24,339	$	19,291	$	17,517	$	2,752	$	2,066	$	49,109	$	43,922
Cost of sales	17,054		16,660		7,133		6,810		3,361		5,689		27,548		29,159
Gross profit (loss)	10,012		7,679		12,158		10,707		(609)		(3,623)		21,561		14,763
Operating expenses:
Sales and marketing	3,711		3,930		4,542		4,494		2,417		2,305		10,670		10,729
General and administrative	—		—		—		—		9,795		8,315		9,795		8,315
Total operating expenses	3,711		3,930		4,542		4,494		12,212		10,620		20,465		19,044
Net loss (gain) on disposal of property and equipment	—		—		6		—		(22)		137		(16)		137
Restructuring costs	—		—		—		—		—		1,424		—		1,424

Income (loss) from operations	$	6,301	$	3,749	$	7,610	$	6,213	$	(12,799)	$	(15,804)	$	1,112	$	(5,842)

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14.Commitments and Contingencies

Leases

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

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

During the fourth quarter of 2020, the Company completed the relocation of its administrative offices from the leased location at 2700 Napa Valley Corporate Drive, Suite B, Napa, California 94558 to its wholly-owned winery, Pine Ridge Vineyards, located at 5901 Silverado Trail, Napa, California 94558. As a result, the Company recorded a full impairment of the carrying value of the associated right-of-use lease asset component as of December 31, 2020. On May 6, 2021, the Company reached an agreement with the lessor for an early lease termination. The terms of the agreement required the Company to continue to make lease payments through July 31, 2021. As this agreement represented a lease modification, the Company remeasured the lease liabilities based on the revised terms and recorded a gain on lease modification. The gain on lease modification was recorded to other income (expense), net in the unaudited interim condensed consolidated statements of operations. The Company exercised its option to terminate the lease agreement as of July 31, 2021 with a written notice to the lessor. With July's lease payment representing the final payment, as of September 30, 2021, the Company has settled all obligations related to its office lease.

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


	September 30, 2021		December 31, 2020



Liabilities:
Accounts payable and accrued liabilities	$	—	$	161
Other non-current liabilities	—		94
Total operating lease liabilities	$	—	$	255

Weighted Average Remaining Lease Term
Operating leases	—		1.50 years
Weighted Average Discount Rate
Operating leases	—		5.22		%

Base rent expense was less than $0.1 million for both the three and nine months ended September 30, 2021. Base rent expense was less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2020, respectively. Of the base rent expense for each of the nine months ended September 30, 2021 and 2020, approximately $0.1 million and $0.2 million, respectively, relate to each of the lease liability referred to in this footnote. Cash paid for amounts included in the measurement of operating lease liabilities as part of operating cash flows was approximately $0.1 million and $0.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

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Litigation

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

2017 and 2020 Wildfires

In October 2017, significant wildfires broke out in Napa, Sonoma, and surrounding counties in Northern California. Operations at two of the Company’s properties, Pine Ridge Vineyards and Seghesio Family Vineyards, were temporarily impacted due to these wildfires and then resumed shortly thereafter. At the time of the wildfires, both properties had already harvested substantially all of their 2017 estate grapes. Certain inventory on hand was impacted by power losses and smoke damage which was covered under existing insurance policies. During 2018, the Company recognized $1.1 million in insurance proceeds of which $0.6 million was offset against inventory losses and $0.5 million was included in other income, net. In October 2019 and August 2020, the Company received an additional $0.2 million and $0.1 million, respectively, from insurance proceeds related to the October 2017 wildfires. The Company recorded both of the proceeds amounts in other income, net. Although the Company anticipates additional settlements for insurance proceeds from the Company’s insurance policies, these amounts 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, where the Company has Direct to Consumer tasting rooms, farming operations, and wine-making facilities. Operations at some of the Company’s properties were impacted by smoke which caused damage to grapes in the vineyard properties and traffic reduction at the Company’s tasting rooms. In order to assess grape inventory losses, the Company sent grape samples to independent testing labs for evaluations. During 2020, the Company recognized $3.5 million in inventory losses for the 2020 vintage. The Company was selective in its evaluations of grape inventory for smoke taint damages in order to maintain its high standards for quality of wine. Some of the inventory losses and smoke damage to grapes are partially covered under existing crop insurance policies for which the Company currently has open claims pending. In June and September 2021, the Company settled and recognized $0.2 million and $0.1 million, respectively, 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. Although the Company anticipates additional settlements for insurance proceeds from the Company’s insurance policies, these amounts cannot be reasonably estimated at this time.

COVID-19

In March 2020, the coronavirus disease (“COVID-19”) outbreak was declared a national public health emergency which continues to affect the world and has adversely impacted global activity and contributed to significant economic declines and volatility in financial markets. The outbreak could have a continued material adverse impact on economic and market conditions and be followed by a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak. The outbreak has adversely impacted the Company’s tasting room visitations, On-Premise business, and special events. The Company sells wine (through distributors and directly) to restaurants, bars, and other hospitality locations (“On-Premise”). The outbreak presents uncertainty and risk with respect to the Company, its future performance and financial results.

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

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

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On March 16, 2020, the Company temporarily closed all of its tasting rooms, which are located in California, Oregon, and Washington, in compliance with shelter-in-place orders issued by local government offices. Following months of closures, each of the aforementioned states issued reopening guidelines and metrics that counties must achieve prior to businesses reopening. After remaining closed for nearly all of the second quarter and complying with reopening guidelines, the Company’s tasting rooms reopened during June 2020 in limited capacity and operating hours, and with additional safety measures in place. In the first several weeks of July 2020, businesses located in several Northern California counties were required to shut down indoor dining and winery tasting rooms. In late July 2020, the State of Washington required the shutdown of wineries, regardless of whether food is served. During this period, while the State of Oregon allowed indoor wine tastings with noted restrictions, the Company’s Oregon-based tasting room, Archery Summit, operated almost entirely outdoors. Although outdoor operations were allowed to resume in August, COVID-19 containment measures and the 2020 wildfires limited the amount of traffic at the Company’s tasting rooms. In mid-November 2020, further government restrictions and shutdown orders were issued for the State of Oregon with California and Washington following suit in December 2020, resulting in either shutdowns or outdoor-only tastings for all of the Company’s tasting rooms. All of the Company’s tasting rooms were allowed to reopen in late January 2021 with varying impacts created by guidelines, restrictions, and tiered structures of each respective state the Company's tasting rooms operate in. The intermittent updates for each state and county caused operating capacity at each tasting room to fluctuate throughout the first nine months of 2021. Although capacity restrictions within the Company's tasting rooms were lifted in the second half of June, 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 continue accommodations for outdoor tastings, when permitted, to ensure the safety of all guests and staff. In addition to limiting the number of guests and requiring reservations, the Company has implemented various measures to prevent the spread of the virus including using available forms of personal protective equipment (PPE), screening workers before they enter facilities, practicing social distancing, implementing COVID-19 protocols and travel guidelines, and advising employees to adhere to prevention measures recommended by the Center for Disease Control (“CDC”).

More recently, many news agencies have reported the spread of new variants of COVID-19, such as the Delta variant, that are significantly more contagious than previous strains. The spread of these new variants are beginning to cause some government authorities to reimplement restrictions and measures to try to reduce the spread that had become less prevalent. Accordingly, the emergence of these new variants, particularly the Delta variant, and the prevalence of breakthrough cases of infection among fully vaccinated people adds additional uncertainty to the Company’s business and operations and could result in further impacts, such as those discussed above and in the section entitled “Risk Factors” in the 2020 Report.

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 its 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 the Company’s products and 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, but it could have a larger impact on the Company’s financial and operational results beyond what is discussed in this Report.

15.Subsequent Events

None.

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16.Revision of Prior Period Financial Statements

The Company revised prior period financial statements for an error related to the calculation of the income tax provision for the three months ended June 30, 2021 (see Note 1, “Background and Basis of Presentation,” for additional information). A summary of revisions to the Company's previously reported financial statements is presented below (in thousands, except per share data).

Revised Consolidated Balance Sheet


	June 30, 2021
	As previously reported		Adjustment		As revised
Intangible and other non-current assets, net	$	9,236	$	(241)	$	8,995
Total assets	222,452		(241)		222,211
Deferred tax liability, net	—		789		789
Total liabilities	28,263		789		29,052
Accumulated deficit	(83,607)		(1,030)		(84,637)
Total stockholders’ equity	194,189		(1,030)		193,159
Total liabilities and stockholders’ equity	$	222,452	$	(241)	$	222,211

Revised Consolidated Statements of Operations and Comprehensive Income


	Three Months Ended June 30, 2021
	As previously reported		Adjustment		As revised
Income (loss) before income taxes	$	5,255	$	—	$	5,255
Income tax (benefit) provision	(493)		1,030		537
Net income (loss)	5,748		(1,030)		4,718
Basic earnings (loss) per share	0.25		(0.04)		0.21
Fully diluted earnings (loss) per share	0.25		(0.05)		0.20
Comprehensive income (loss)	$	5,747	$	(1,030)	$	4,717


	Six Months Ended June 30, 2021
	As previously reported		Adjustment		As revised
Income (loss) before income taxes	$	4,189	$	—	$	4,189
Income tax (benefit) provision	(712)		1,030		318
Net income (loss)	4,901		(1,030)		3,871
Basic earnings (loss) per share	0.21		(0.04)		0.17
Fully diluted earnings (loss) per share	0.21		(0.04)		0.17
Comprehensive income (loss)	$	4,895	$	(1,030)	$	3,865

Revised Consolidated Statement of Cash Flow


	Six Months Ended June 30, 2021
	As previously reported		Adjustment		As revised
Operating Activities:
Net income (loss)	$	4,901	$	(1,030)	$	3,871
(Benefit) provision for deferred income tax	(716)		1,030		314
Net cash provided by operating activities	$	9,433	$	—	$	9,433

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

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

Quantities or results referred to as “current quarter” and “current three and nine-month period” refer to the three and nine months ended September 30, 2021.

Cautionary Statement for Forward-Looking Information

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

Risks that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or that may materially and adversely affect our actual results include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors in the 2020 Report. Readers should carefully review the risk factors described in the 2020 Report and in other documents that the Company files from time to time with the SEC.

Overview of Business

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

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

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

As of September 30, 2021, 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.

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Impact of COVID-19 on Operations

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

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

On March 16, 2020, the Company temporarily closed all of its tasting rooms, which are located in California, Oregon, and Washington, in compliance with shelter-in-place orders issued by local government offices. Following months of closures, each of the aforementioned states issued reopening guidelines and metrics that counties must achieve prior to businesses reopening. After remaining closed for nearly all of the second quarter and complying with reopening guidelines, the Company’s tasting rooms reopened during June 2020 in limited capacity and operating hours, and with additional safety measures in place. In the first several weeks of July 2020, businesses located in several Northern California counties were required to shut down indoor dining and winery tasting rooms. In late July 2020, the State of Washington required the shutdown of wineries, regardless of whether food is served. During this period, while the State of Oregon allowed indoor wine tastings with noted restrictions, the Company’s Oregon-based tasting room, Archery Summit, operated almost entirely outdoors. Although outdoor operations were allowed to resume in August, COVID-19 containment measures and the 2020 wildfires limited the amount of traffic at the Company’s tasting rooms. In mid-November 2020, further government restrictions and shutdown orders were issued for the State of Oregon with California and Washington following suit in December 2020, resulting in either shutdowns or outdoor-only tastings for all of the Company’s tasting rooms. 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 we operate in. The intermittent updates for each state and county caused operating capacity at each tasting room to fluctuate throughout the first nine months of 2021. Although capacity restrictions within the Company's tasting rooms were lifted in the second half of June, 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 continue accommodations for outdoor tastings to ensure the safety of all guests and staff. In addition to limiting the number of guests and requiring reservations, the Company has implemented various measures to prevent the spread of the virus including using available forms of PPE, screening workers before they enter facilities, practicing social distancing, implementing COVID-19 protocols and travel guidelines, and advising employees to adhere to prevention measures recommended by the CDC.

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 nine months ended September 30, 2021 and 2020.

Our Direct to Consumer segment includes retail sales in the tasting rooms, remote sites and on-site events, wine club net sales, direct phone sales, and other sales made directly to the consumer without the use of an intermediary. Tasting room sales have been negatively impacted during periods of closures and operating limitations. As restrictions were gradually lifted throughout the first nine months of 2021, the Company has seen a rebound in visitor counts to its tasting rooms. The Company also sells wine directly to consumers through Ecommerce sales. The Company’s Ecommerce operations have been favorably impacted through changes in consumer behavior and our opportunistic email campaigns and web offers to our customers.

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Our Wholesale segment includes all sales through a third party where prices are given at a wholesale rate. The Company sells wine (through distributors and directly) to restaurants, bars, and other hospitality locations (“On-Premise”). Demand for wines at On-Premise locations has been reduced due to COVID-19 containment measures restricting consumers from visiting, as well as in many cases both the temporary and permanent closures of On-Premise venues. However, as restrictions continued to be lifted throughout the first nine months of 2021, demand for wines at On-Premise locations has 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 wines at Off-Premise locations has increased due to their classification as essential businesses that remain open during government-imposed closings and/or restrictions due to COVID-19. As On-Premise demand recovers, other than sales made through third-party Ecommerce, we have not observed a reversing trend in Off-Premise demand.

Additionally, we 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. We 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”.

The extent of COVID-19’s impact on our 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 its 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 our products and our supply chain, and how quickly and to what extent normal economic and operation conditions can resume. We cannot at this time predict the full impact of COVID-19 on our financial and operational results. Accordingly, our 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 2020 Report for additional risks we face due to the COVID-19 pandemic.

Seasonality

As discussed in the 2020 Report, the wine industry in general historically experiences seasonal fluctuations in revenues and net income. The Company typically has lower sales and net income during the first quarter and higher sales and net income during the fourth quarter due to seasonal holiday buying as well as wine club shipment timing. We anticipate similar trends in the future.

Restructuring

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Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Net Sales



	Three Months Ended September 30,
(in thousands, except percentages)	2021		2020		Increase (Decrease)		% change
Wholesale	$	9,149	$	8,772	$	377	4%
Direct to Consumer	6,689		6,243		446		7%
Other	1,299		852		447		52%
Total net sales	$	17,137	$	15,867	$	1,270	8%

Wholesale net sales increased $0.4 million, or 4%, in the current quarter as compared to the same quarter in 2020. The increase was primarily driven by increased export wine sales and domestic wine sales compared to the same quarter in 2020. The increase in export wine sales was driven by a rebound in shipments to Europe, which were negatively impacted by COVID-19 in 2020. The increase in domestic wine sales was driven by increased rate of sales of our core wines, timing of inventory fulfillment to distributors, and continued recovery in our On-Premise sales as a result of the reopening of restaurants, bars, and other hospitality locations in the current quarter.

Direct to Consumer net sales increased $0.4 million, or 7%, in the current quarter as compared to the same quarter in 2020. The increase was primarily driven by higher sales in the tasting rooms and wine clubs as compared to the same quarter in 2020. The increase was partially offset by lower Ecommerce sales in the current quarter. There was a significant increase in visitors to our tasting rooms in the current quarter compared to the same quarter in 2020, where our tasting rooms were negatively impacted by temporary closures and operating limitations. Sales for wine clubs increased in the current quarter driven by sales mix of higher average prices for wines sold. Ecommerce sales decreased in the current quarter as consumers shifted purchasing behaviors with the reopening of tasting rooms, retail and restaurants.

Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales, increased $0.4 million, or 52%, in the current quarter as compared to the same quarter in 2020. The increase was primarily driven by higher tasting and event fee revenues as we experienced higher traffic through our tasting rooms. The increase in traffic was primarily related to eased COVID-19 government restrictions and increased tourism in the current quarter as compared to the same quarter in 2020. Higher tasting fees were also driven by our strategy for premiumization of the tasting experience made possible through the appropriate investments in our tasting room redesigns and elevated wine tasting experiences.

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Gross Profit



	Three Months Ended September 30,
(in thousands, except percentages)	2021			2020			Increase (Decrease)		% change
Wholesale	$	3,248		$	3,045		$	203	7%
Wholesale gross margin percentage	36		%	35		%
Direct to Consumer	4,347			3,904			443		11%
Direct to Consumer gross margin percentage	65		%	63		%
Other	(15)			(2,493)			2,478		99%
Total gross profit	$	7,580		$	4,456		$	3,124	70%
Total gross margin percentage	44		%	28		%

Wholesale gross profit increased $0.2 million, or 7%, in the current quarter as compared to the same quarter in 2020 primarily driven by a shift in sales mix towards wines with a more favorable vintage cost and an overall increase in wine sales. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, increased 79 basis points primarily driven by a shift in sales mix towards wines with a more profitable vintage compared to the same quarter in 2020.

Direct to Consumer gross profit increased $0.4 million, or 11%, in the current quarter as compared to the same quarter in 2020. The increase was a result of higher sales in the tasting rooms and wine clubs when compared to the same quarter in 2020. Direct to Consumer gross margin percentage increased 245 basis points in the current quarter compared to the same quarter in 2020. The increase was primarily driven by a shift in sales channel mix from increased tasting rooms sales, a shift in sales mix towards wines with a more favorable vintage cost, and higher average prices within the sales mix of wine club shipments compared to the same quarter of 2020.

“Other” includes a gross loss on bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales. Other gross loss decreased $2.5 million, or 99% in the current quarter as compared to the same quarter in 2020 and is primarily driven by lower write-downs of excess bulk wine inventory, non-recurring inventory write-downs related to the 2020 wildfires recognized in the same quarter in 2020, and higher tasting fee revenue due to increased traffic at tasting rooms.

Operating Expenses



	Three Months Ended September 30,
(in thousands, except percentages)	2021		2020		Increase (Decrease)		% change
Sales and marketing	$	3,875	$	3,316	$	559	17%
General and administrative	3,081		2,602		479		18%
Total operating expenses	$	6,956	$	5,918	$	1,038	18%

Sales and marketing expenses increased $0.6 million, or 17%, in the current quarter as compared to the same quarter in 2020. The increase was primarily driven by increased bonus accruals, tasting room staff correlated with increased tasting room traffic and operating hours, and travel costs in line with higher sales activities and lifting of COVID-19 containment measures when compared to the same quarter in 2020.

General and administrative expenses increased $0.5 million, or 18%, in the current quarter as compared to the same quarter in 2020 primarily due to increased accrued bonuses related to current year performance and increased professional services, partially offset by savings from the corporate office relocation when compared to the same quarter in 2020.

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Other (Expense) Income


	Three Months Ended September 30,
(in thousands, except percentages)	2021		2020		Change		% change
Interest expense, net	$	(292)	$	(328)	$	36	11%

Other income, net	47		109		(62)		(57)%
Total other expense, net	$	(245)	$	(219)	$	(26)	(12)%

Interest expense, net, decreased less than $0.1 million, or 11%, in the current quarter compared to the same quarter in 2020. The decrease was primarily driven by lower interest expense on declining principal balances on the 2015 and 2017 Term Loans.

Other income, net, decreased $0.1 million, or 57%, in the current quarter compared to the same quarter in 2020. The decrease was primarily driven by non-recurring insurance proceeds received in the same quarter in 2020.

Income Tax Provision (Benefit)

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Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net Sales



	Nine Months Ended September 30,
(in thousands, except percentages)	2021		2020		Increase (Decrease)		% change
Wholesale	$	27,066	$	24,339	$	2,727	11%
Direct to Consumer	19,291		17,517		1,774		10%
Other	2,752		2,066		686		33%
Total net sales	$	49,109	$	43,922	$	5,187	12%

Wholesale net sales increased $2.7 million, or 11%, in the current nine month period as compared to the same period in 2020. The increase was primarily driven by an increase in domestic wine sales compared to the same period in 2020. The increase in domestic wine sales was driven by an increased rate of sales of our core wines, new distribution in Off-Premise locations, and continued recovery from lower On-Premise sales in the prior year period as a result of the reopening of restaurants, bars, and other hospitality locations in the current period. The increase in export wine sales was driven by a rebound in shipments to Europe, Asia and the Caribbean markets, which were the most impacted by COVID-19 in 2020.

Direct to Consumer net sales increased $1.8 million, or 10%, in the current nine month period as compared to the same period in 2020. The increase was primarily driven by higher sales across all channels, most notably in tasting room sales, compared to the same period in 2020. With lifting COVID-19 containment measures beginning in late January of this year, all of the Company's tasting rooms were opened for visitations for the majority of the current nine month period. There was a significant increase in visitors to our tasting rooms in the current nine month period compared to the same period in 2020, where the tasting rooms were negatively impacted by temporary closures and operating limitations.

Other net sales, which include bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales, increased $0.7 million, or 33%, in the current nine month period as compared to the same period in 2020. The increase was primarily driven by higher tasting fees and a higher volume of bulk grapes sold. Higher tasting fees were driven by increased visitations to the tasting rooms as the Company continues to recover from the height of COVID-19 containment measures in the 2020 period.

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Gross Profit



	Nine Months Ended September 30,
(in thousands, except percentages)	2021			2020			Increase (Decrease)		% change
Wholesale	$	10,012		$	7,679		$	2,333	30%
Wholesale gross margin percentage	37		%	32		%
Direct to Consumer	12,158			10,707			1,451		14%
Direct to Consumer gross margin percentage	63		%	61		%
Other	(609)			(3,623)			3,014		83%
Total gross profit	$	21,561		$	14,763		$	6,798	46%
Total gross margin percentage	44		%	34		%

Wholesale gross profit increased $2.3 million, or 30%, in the current nine month period as compared to the same period in 2020 primarily driven by an overall increase in wine sales, a significant reduction of close out sales in the current period as inventory realignment initiatives were completed, and a shift in sales mix towards wines with a more favorable vintage cost. Wholesale gross margin percentage, which is defined as wholesale gross profit as a percentage of wholesale net sales, increased 544 basis points in the current period compared to the same period in 2020 primarily driven by a significant reduction of close out sales in the current period and a shift in sales mix towards wines with a more profitable vintage.

Direct to Consumer gross profit increased $1.5 million, or 14%, in the current nine month period as compared to the same period in 2020. The increase was as a result of higher Direct to Consumer sales compared to the same period in 2020 as discussed above under Net Sales. Direct to Consumer gross margin percentage increased 190 basis points in the current period compared to the same period in 2020 primarily driven by a shift in sales channel mix from increased tasting rooms sales and a shift in sales mix towards wines with a more favorable vintage cost.

“Other” includes a gross loss on bulk wine and grape sales, custom winemaking services, event fees and non-wine retail sales. Other gross loss decreased $3.0 million, or 83% in the current nine month period as compared to the same period in 2020 and the decrease in gross loss is primarily driven by lower write-downs of excess bulk wine inventory, non-recurring inventory write-downs related to the 2020 wildfires recognized in the same period in 2020, improved margins on bulk wine sales, higher tasting fee revenue due to increased traffic at tasting rooms, and insurance proceeds for smoke taint affected inventory from the 2020 vintage.

Operating Expenses



	Nine Months Ended September 30,
(in thousands, except percentages)	2021		2020		Increase (Decrease)		% change
Sales and marketing	$	10,670	$	10,729	$	(59)	(1)%
General and administrative	9,795		8,315		1,480		18%
Total operating expenses	$	20,465	$	19,044	$	1,421	7%

Sales and marketing expenses decreased slightly in the current nine month period as compared to the same period in 2020. The decrease was primarily driven by reduced compensation as a result of the 2020 Restructuring Program and lower professional services, offset by increased accrued bonuses related to current year performance and increased advertising and promotional expenses compared to the same period in 2020.

General and administrative expenses increased $1.5 million, or 18%, in the current nine month period as compared to the same period in 2020 primarily due to costs related to the amended 2019 Annual Report on Form 10-K and amended 2020 Quarterly Reports on Form 10-Q, increased accrued bonuses related to current year performance, and increased professional services, partially offset by savings from the corporate office relocation and temporarily and voluntarily reduced Board of Directors fees compared to the same period in 2020.

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Other Income (Expense)


	Nine Months Ended September 30,
(in thousands, except percentages)	2021		2020		Change		% change
Interest expense, net	$	(723)	$	(765)	$	42	5%
Gain on extinguishment of debt	3,863		—		3,863		100%
Other income, net	305		395		(90)		(23)%
Total other income (expense), net	$	3,445	$	(370)	$	3,815	1,031%

Interest expense, net, decreased less than $0.1 million, or 5%, in the current nine month period as compared to the same period in 2020. 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 current nine month period. 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 23%, in the current nine month period as compared to the same period in 2020. The decrease was primarily driven by lower investments interest income received and non-recurring insurance proceeds received in the prior period. The decrease was partially offset by a gain on lease modification recognized in the current period.

Income Tax Provision (Benefit)

The Company’s effective tax rates for the nine months ended September 30, 2021 and 2020 were 8.8% and 29.5%, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2021 was primarily attributable to income exclusion of PPP loan forgiveness for federal income taxes, state income taxes and other permanent items.

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Liquidity and Capital Resources

General

The Company’s principal sources of liquidity are its available cash and cash equivalents, investments in available for sale securities, funds generated from operations and bank borrowings. The Company’s primary cash needs are to fund working capital requirements and capital expenditures. Despite the negative effects of COVID-19 on our 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, we protected our financial position and liquidity as evidenced by the following items: we managed our operating expenses closely and limited discretionary spending; reduced and/or deferred capital projects where prudent; and actively managed our working capital, including supporting our business partners most impacted by the pandemic through extended terms and closely monitoring our customers’ solvency and our ability to collect from them. As a result, we believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our 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

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 September 30, 2021, $12.3 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 September 30, 2021, $8.0 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were less than $0.1 million.

Borrower’s obligations under the 2015 Term Loan and 2017 Term Loan are guaranteed by the Company. All obligations of Borrower under the 2015 Term Loan and 2017 Term Loan are collateralized by certain real property of the Company. Borrower’s covenants include the maintenance of a specified debt service coverage ratio and certain customary affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, limitations on distributions to 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 September 30, 2021.

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(iii) On April 22, 2020, Crimson entered into an unsecured term loan agreement (the “2020 PPP Term Loan”) with Lender for an aggregate principal amount of $3.8 million pursuant to a new loan program through the SBA as the result of the PPP established by the 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 SBA was approved for the full principal amount including interest. The SBA has remitted payment to the lender and the Company has been legally released from the loan agreement. In June 2021, the Company recorded a gain on extinguishment of debt for approximately $3.9 million, which includes both the full principal and interest amounts.

Consolidated Statements of Cash Flows

The following table summarizes our cash flow activities for the nine months ended September 30, 2021 and 2020 (in thousands):



Cash provided by (used in):	2021		2020
Operating activities	$	13,242	$	9,200
Investing activities	(4,365)		608
Financing activities	(6,810)		2,680

Cash provided by operating activities

Net cash provided by operating activities was $13.2 million for the nine months ended September 30, 2021, consisting primarily of $4.2 million of net income adjusted for $3.3 million of non-cash items and $5.8 million net cash inflow related to changes in operating assets and liabilities. Adjustments for non-cash items primarily consist of depreciation, amortization, and loss on the write-down of inventory, partially offset by the gain on extinguishment of debt. The change in operating assets and liabilities was primarily due to an increase in accounts payable and accrued liabilities and customer deposits and decrease in inventory and other current assets, partially offset by an increase in accounts receivable. The increase in accounts payable and accrued liabilities were driven by higher grape purchases and grower activities correlated with a higher vintage yield for the 2021 harvest.

Net cash provided by operating activities was $9.2 million for the nine months ended September 30, 2020, consisting primarily of $4.4 million of net loss adjusted for non-cash items such as $9.2 million primarily consisting of depreciation, amortization, and loss on the write-down of inventory, $1.4 million of restructuring charges, and $2.9 million net cash inflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to a decrease in accounts receivable and inventory and increase in customer deposits and other payables, partially offset by an increase in other current assets and a decrease in accounts payable and accrued liabilities.

Cash (used in) provided by investing activities

Net cash used in investing activities was $4.4 million for the nine months ended September 30, 2021, consisting primarily of the net purchases of available for sale investments of $2.3 million and capital expenditures of $2.3 million, partially offset by proceeds from the sale of property and equipment totaling $0.2 million.

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

Cash (used in) provided by financing activities

Net cash used in financing activities for the nine months ended September 30, 2021 was $6.8 million, consisting primarily of the repurchase of shares of our common stock at an aggregate purchase price of $6.2 million and the principal payments on our 2015 and 2017 Term Loans of $0.6 million.

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

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Share Repurchases

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 2020 Report.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2021 due to the material weakness in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

The Company previously determined that it did not have adequate controls in place to monitor and associate the cost of bulk wine inventory with quantity or gallons on hand. As a result, the cost related to certain bulk wine inventory was not properly transferred to bulk and bottled inventory accounts that would subsequently be relieved through sales transactions. This material weakness resulted in the restatement of our 2019 Annual Report on Form 10-K and 2020 Quarterly Reports on Form 10-Q. It should be noted that the custody and recordkeeping of physical inventory have always been properly maintained through physical inventory counts and the restatement error is strictly related to the cost component.

Remediation of the Material Weakness

Management has implemented changes to strengthen our internal controls over the accounting for bulk wine inventory valuation and the related impacts. The remediation plan includes both management’s assessment and recommendations from independent accounting advisors used in the review process. This remediation is intended to address the identified material weakness and enhance our overall control environment.

Management has implemented a bulk wine sub-ledger to general ledger reconciliation. This added control is intended to ensure accurate costing is assigned and maintained for the Company’s bulk wine inventory. It should be noted that the custody and recordkeeping of physical inventory have always been properly maintained through physical inventory counts and the restatement error is strictly related to the cost component.

While we believe that the above action will ultimately remediate the material weakness, we intend to continue to refine this control and monitor its effectiveness for a sufficient period of time prior to reaching any determination as to whether the material weakness has been remediated.

Notwithstanding the identified material weakness, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented in accordance with GAAP.

Changes in Internal Control over Financial Reporting

Other than as described in the Remediation of the Material Weakness section above, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2020 Report, which could materially affect our business, results of operations or financial condition. The risks described in our 2020 Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.


2.1*			Separation Agreement, dated February 1, 2013, between Crimson Wine Group, Ltd. and Leucadia National Corporation (incorporated by reference to Exhibit 2.1 to Form 8-K filed on February 25, 2013).
3.1*			Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed on February 25, 2013).
3.2*			Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K filed on February 25, 2013).
31.1**			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**			Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**			Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**			Unaudited financial statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Interim Condensed Consolidated Financial Statements.
104**			The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (included as Exhibit 101).

* Incorporated by reference
** Filed/furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CRIMSON WINE GROUP, LTD.

(Registrant)

Date:

November 4, 2021

By:

/s/ Karen L. Diepholz

Karen L. Diepholz

Chief Financial Officer