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.
Significant Accounting Policies
There were no changes to the Company’s significant accounting policies during the six months ended June 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.
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 six months ended June 30, 2021:
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Standard
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Description
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Date of adoption
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Effect on the financial statements or other significant matters
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Standards that were adopted
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Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740)
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Simplifies the accounting for income taxes by removing certain Codification exceptions and others to be discussed.
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January 1, 2021
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The adoption of this standard did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.
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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”).
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’s state-of-the-art winemaking facility. Custom winemaking services are made under contracts with customers which include specific protocols, pricing, and payment terms and generally have a duration of less than one year. The customer retains title and control of the wine during the winemaking process. The Company recognizes revenue when contract specific performance obligations are met.
Estates hold various public and private events for customers and their wine club members. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. The balance of payments are due on the date of the event. The Company recognizes event revenue on the date the event is held.
Other revenue also includes tasting fees and retail merchandise sales, which are paid for and received or consumed at the time of sale. The Company transfers control and recognizes revenue at the time of sale.
Refer to Note 13, “Business Segment Information,” for revenue by sales channel amounts for the three and six months ended June 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 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 six-month periods ended June 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 $0.4 million at June 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 six months ended June 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 $0.2 million at both June 30, 2021 and December 31, 2020.
3.Notes Receivable
Notes receivable consisted of the following as of June 30, 2021 and December 31, 2020:
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June 30, 2021
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December 31, 2020
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Notes receivable, current (1)
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$
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126
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$
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—
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Notes receivable, non-current (2)
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426
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—
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Total
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$
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552
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$
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—
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__________________________________________
(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 $1.3 million were incurred in the six months ended June 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 six months ended June 30, 2021. The liability related to restructuring activities was less than $0.2 million and $0.3 million at June 30, 2021 and December 31, 2020, respectively.
A roll forward of the liability recognized related to restructuring activities as of June 30, 2021 is as follows (in thousands):
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Balance at
December 31,
2020
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Additions
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Payments
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Balance at
June 30, 2021
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Employee related restructuring activity
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$
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309
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$
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—
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$
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(151)
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$
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158
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5.Inventory
A summary of inventory at June 30, 2021 and December 31, 2020 is as follows (in thousands):
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June 30, 2021
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December 31, 2020
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Finished goods
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$
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31,213
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$
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34,970
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In-process goods
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19,887
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21,498
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Packaging and bottling supplies
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1,311
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1,086
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Total inventory
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$
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52,411
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$
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57,554
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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 $0.7 million were recorded during both of the six months ended June 30, 2021 and 2020. The Company’s inventory balances are presented net of inventory reserves of $3.3 million and $4.4 million at June 30, 2021 and December 31, 2020, respectively.
6.Property and Equipment
A summary of property and equipment at June 30, 2021 and December 31, 2020, and depreciation and amortization for the three and six months ended June 30, 2021 and 2020, is as follows (in thousands):
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Depreciable Lives
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(in years)
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June 30, 2021
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December 31, 2020
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Land and improvements
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N/A
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$
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44,912
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$
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44,912
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Buildings and improvements
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20-40
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59,467
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59,265
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Winery and vineyard equipment
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3-25
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35,524
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35,350
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Vineyards and improvements
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7-25
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35,507
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33,651
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Caves
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20-40
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5,639
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5,639
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Vineyards under development
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N/A
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774
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2,565
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Construction in progress
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N/A
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2,777
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2,169
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Total
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184,600
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183,551
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Accumulated depreciation and amortization
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(72,787)
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(69,868)
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Total property and equipment, net
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$
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111,813
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$
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113,683
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Three Months Ended June 30,
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Six Months Ended June 30,
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Depreciation and amortization:
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2021
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2020
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2021
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2020
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Capitalized into inventory
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$
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1,213
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$
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1,381
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$
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2,435
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$
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2,776
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Expensed to general and administrative
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403
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427
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|
805
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854
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Total depreciation and amortization
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$
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1,616
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$
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1,808
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$
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3,240
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$
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3,630
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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 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 $1.1 million to write-down assets within construction in progress related to tasting room renovation projects.
7.Financial Instruments
The Company’s material financial instruments include cash and cash equivalents, investments classified as available for sale, and short-term and long-term debt. Investments classified as available for sale are the only assets or liabilities that are measured at fair value on a recurring basis.
All of the Company’s investments mature within two years or less. The par value, amortized cost, gross unrealized gains and losses, and estimated fair value of investments classified as available for sale as of June 30, 2021 and December 31, 2020 are as follows (in thousands):
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June 30, 2021
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Par Value
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Amortized Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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Level 1
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Level 2
|
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Total Fair Value
Measurements
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Certificates of Deposit
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$
|
9,750
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|
|
$
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9,750
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|
|
$
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—
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|
|
$
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(1)
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|
|
$
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—
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|
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$
|
9,749
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|
|
$
|
9,749
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December 31, 2020
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Par Value
|
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Amortized Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
|
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Level 1
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Level 2
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Total Fair Value
Measurements
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Certificates of Deposit
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$
|
8,500
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|
$
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8,500
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$
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7
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|
$
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—
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|
$
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—
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$
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8,507
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$
|
8,507
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Gross unrealized losses on available for sale securities were less than $0.1 million as of June 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 June 30, 2021 and December 31, 2020, other than the assets which were impaired in the current period, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis. For cash and cash equivalents, the carrying amounts of such financial instruments approximate their fair values. For short-term debt, the carrying amounts of such financial instruments approximate their fair values. As of June 30, 2021, the Company has estimated the fair value of its outstanding debt to be approximately $23.9 million compared to its carrying value of $20.6 million, based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. Level 3 inputs include market rates obtained from American AgCredit, FLCA (“Lender”) as of June 30, 2021 of 4.08% and 3.91% 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.
8.Intangible and Other Non-Current Assets
A summary of intangible and other non-current assets at June 30, 2021 and December 31, 2020, and amortization expense for the three and six months ended June 30, 2021 and 2020, is as follows (in thousands):
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June 30, 2021
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|
December 31, 2020
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Amortizable lives
(in years)
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Gross carrying amount
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Accumulated amortization
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Net book value
|
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Gross carrying amount
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Accumulated amortization
|
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Net book value
|
Brand
|
15-17
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|
$
|
18,000
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|
|
$
|
10,561
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|
|
$
|
7,439
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|
|
$
|
18,000
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|
|
$
|
10,030
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|
|
$
|
7,970
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Distributor relationships
|
10-14
|
|
2,700
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|
|
1,927
|
|
|
773
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|
|
2,700
|
|
|
1,829
|
|
|
871
|
|
Legacy permits
|
14
|
|
250
|
|
|
180
|
|
|
70
|
|
|
250
|
|
|
171
|
|
|
79
|
|
Trademark
|
20
|
|
200
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|
|
128
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|
|
72
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|
|
200
|
|
|
123
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|
|
77
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|
Total
|
|
|
$
|
21,150
|
|
|
$
|
12,796
|
|
|
$
|
8,354
|
|
|
$
|
21,150
|
|
|
$
|
12,153
|
|
|
$
|
8,997
|
|
Other non-current assets
|
|
|
|
|
|
|
882
|
|
|
|
|
|
|
241
|
|
Total intangible and other non-current assets, net
|
|
|
|
|
|
|
$
|
9,236
|
|
|
|
|
|
|
$
|
9,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Amortization expense
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Total amortization expense
|
|
|
|
|
|
$
|
322
|
|
|
$
|
322
|
|
|
$
|
643
|
|
|
$
|
643
|
|
The estimated aggregate future amortization of intangible assets as of June 30, 2021 is identified below (in thousands):
|
|
|
|
|
|
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Amortization
|
Remainder of 2021
|
$
|
643
|
|
2022
|
1,286
|
|
2023
|
1,286
|
|
2024
|
1,286
|
|
2025
|
1,168
|
|
Thereafter
|
2,685
|
|
Total
|
$
|
8,354
|
|
9.Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Accounts payable and accrued grape liabilities
|
$
|
2,188
|
|
|
$
|
3,956
|
|
Accrued compensation related expenses
|
2,550
|
|
|
1,422
|
|
Sales and marketing
|
393
|
|
|
575
|
|
Acquisition of property and equipment
|
116
|
|
|
35
|
|
Accrued interest
|
303
|
|
|
26
|
|
Depletion allowance
|
998
|
|
|
1,514
|
|
Production and farming
|
61
|
|
|
1,188
|
|
|
|
|
|
Operating lease liability, current
|
15
|
|
|
161
|
|
Other accrued expenses
|
711
|
|
|
542
|
|
Total accounts payable and accrued liabilities
|
$
|
7,335
|
|
|
$
|
9,419
|
|
10.Debt
A summary of debt at June 30, 2021 and December 31, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Revolving Credit Facility (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
Senior Secured Term Loan Agreement due 2040,
with an interest rate of 5.24% (2)
|
|
12,480
|
|
|
12,640
|
|
Senior Secured Term Loan Agreement due 2037,
with an interest rate of 5.39% (3)
|
|
8,125
|
|
|
8,250
|
|
Unsecured Term Loan Agreement due 2022,
with an interest rate of 1.00% (4)
|
|
—
|
|
|
3,820
|
|
Unamortized loan fees
|
|
(115)
|
|
|
(121)
|
|
Total debt
|
|
20,490
|
|
|
24,589
|
|
Less current portion of long-term debt
|
|
1,127
|
|
|
3,388
|
|
Long-term debt due after one year, net
|
|
$
|
19,363
|
|
|
$
|
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 June 30, 2021.
A summary of debt maturities as of June 30, 2021 is as follows (in thousands):
|
|
|
|
|
|
Principal due the remainder of 2021
|
$
|
570
|
|
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
|
$
|
20,605
|
|
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, option grants for 89,000 shares were issued. As of June 30, 2021, all 89,000 shares remained outstanding with no additional grants or stock activities related to vesting, exercises or expirations during the quarter. The options vest annually over five years, expire seven years from the date of grant and have an exercise price of $6.87, the market value at the date of grant. The share-based compensation expense for these grants was $141,000, the grant date fair value, which will be recorded over the vesting period. Estimates of share-based compensation expense require a number of complex and subjective assumptions, including the selection of an option pricing model. The Company determined the grant date fair value of the awards using the Black-Scholes-Merton option-pricing valuation model, with the following assumptions and values: stock price volatility, 22%; employee exercise patterns and expected life, five years; dividend yield, 0%; and risk-free interest rate, 1.6%. For the three and six months ended June 30, 2021 and 2020, $7,000 and $14,000 were recorded as share-based compensation expense, respectively, in both years. Share-based compensation expense was recorded to general and administrative expense in the unaudited interim condensed consolidated statements of operations. The related income tax benefits for these expenses were immaterial.
12.Income Taxes
Consolidated income tax benefits for the three and six months ended June 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 June 30, 2021 and 2020 were (9.4)% and 26.2%, respectively. The Company’s effective tax rates for the six months ended June 30, 2021 and 2020 were (17.0)% and 30.8%, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three and six months ended June 30, 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 June 30, 2021.
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 net 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 six months ended June 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 June 30,
|
|
Wholesale
|
|
Direct to Consumer
|
|
Other/Non-Allocable
|
|
Total
|
(in thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net sales
|
$
|
9,727
|
|
|
$
|
7,638
|
|
|
$
|
6,635
|
|
|
$
|
5,712
|
|
|
$
|
1,029
|
|
|
$
|
235
|
|
|
$
|
17,391
|
|
|
$
|
13,585
|
|
Cost of sales
|
5,844
|
|
|
5,280
|
|
|
2,440
|
|
|
2,456
|
|
|
767
|
|
|
990
|
|
|
9,051
|
|
|
8,726
|
|
Gross profit (loss)
|
3,883
|
|
|
2,358
|
|
|
4,195
|
|
|
3,256
|
|
|
262
|
|
|
(755)
|
|
|
8,340
|
|
|
4,859
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
1,142
|
|
|
1,175
|
|
|
1,530
|
|
|
1,461
|
|
|
1,078
|
|
|
826
|
|
|
3,750
|
|
|
3,462
|
|
General and administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,256
|
|
|
2,631
|
|
|
3,256
|
|
|
2,631
|
|
Total operating expenses
|
1,142
|
|
|
1,175
|
|
|
1,530
|
|
|
1,461
|
|
|
4,334
|
|
|
3,457
|
|
|
7,006
|
|
|
6,093
|
|
Net loss (gain) on disposal of property and equipment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31)
|
|
|
191
|
|
|
(31)
|
|
|
191
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
803
|
|
|
—
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
$
|
2,741
|
|
|
$
|
1,183
|
|
|
$
|
2,665
|
|
|
$
|
1,795
|
|
|
$
|
(4,041)
|
|
|
$
|
(5,206)
|
|
|
$
|
1,365
|
|
|
$
|
(2,228)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Wholesale
|
|
Direct to Consumer
|
|
Other/Non-Allocable
|
|
Total
|
(in thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net sales
|
$
|
17,917
|
|
|
$
|
15,567
|
|
|
$
|
12,602
|
|
|
$
|
11,274
|
|
|
$
|
1,453
|
|
|
$
|
1,214
|
|
|
$
|
31,972
|
|
|
$
|
28,055
|
|
Cost of sales
|
11,153
|
|
|
10,933
|
|
|
4,791
|
|
|
4,471
|
|
|
2,047
|
|
|
2,344
|
|
|
17,991
|
|
|
17,748
|
|
Gross profit (loss)
|
6,764
|
|
|
4,634
|
|
|
7,811
|
|
|
6,803
|
|
|
(594)
|
|
|
(1,130)
|
|
|
13,981
|
|
|
10,307
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
2,264
|
|
|
2,678
|
|
|
2,854
|
|
|
3,069
|
|
|
1,677
|
|
|
1,666
|
|
|
6,795
|
|
|
7,413
|
|
General and administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,714
|
|
|
5,713
|
|
|
6,714
|
|
|
5,713
|
|
Total operating expenses
|
2,264
|
|
|
2,678
|
|
|
2,854
|
|
|
3,069
|
|
|
8,391
|
|
|
7,379
|
|
|
13,509
|
|
|
13,126
|
|
Net loss on disposal of property and equipment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27)
|
|
|
177
|
|
|
(27)
|
|
|
177
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,310
|
|
|
—
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
$
|
4,500
|
|
|
$
|
1,956
|
|
|
$
|
4,957
|
|
|
$
|
3,734
|
|
|
$
|
(8,958)
|
|
|
$
|
(9,996)
|
|
|
$
|
499
|
|
|
$
|
(4,306)
|
|
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 require the Company to continue to make lease payments through July 31, 2021. The Company has exercised its option to terminate the lease agreement after July 31, 2021 with a written notice to the lessor. 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 remeasured lease obligations remained on the balance sheet as of June 30, 2021 and will continue to be amortized through the end of July.
Supplemental balance sheet information related to leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
15
|
|
|
$
|
161
|
|
Other non-current liabilities
|
|
—
|
|
|
94
|
|
Total operating lease liabilities
|
|
$
|
15
|
|
|
$
|
255
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
0.08 years
|
|
1.50 years
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
4.64
|
%
|
|
5.22
|
%
|
Maturities of lease liabilities are as follows (in thousands):
|
|
|
|
|
|
|
Amortization
|
Remainder of 2021
|
$
|
15
|
|
|
|
|
|
Base rent expense was less than $0.1 million for both the three and six months ended June 30, 2021. Base rent expense was less than $0.1 million and $0.1 million for the three and six months ended June 30, 2020, respectively. Of the base rent expense for each of the six months ended June 30, 2021 and 2020, approximately $0.1 million relates 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 for both the six months ended June 30, 2021 and June 30, 2020.
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 2021, the Company settled and recognized $0.2 million from crop insurance proceeds related to loss claims for the 2020 wildfires and recorded the proceeds as an offset against inventory losses, which is a reduction 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.
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 six 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
On July 6, 2021, as approved by the Board of Directors and under the Company’s 2013 Omnibus Incentive Plan, stock option awards for 233,000 shares were issued to 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.