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Crimson Wine Group, Ltd - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

__________

FORM 10-Q

 

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

For the quarterly period ended June 30, 2016

OR

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



 

 

 

For the transition period from

 

to

 



Commission File Number 000-54866



CRIMSON WINE GROUP, LTD.

(Exact name of registrant as specified in its Charter)



 

Delaware

(State or Other Jurisdiction of

13-3607383

(I.R.S. Employer

Incorporation or Organization)

Identification Number)

2700 Napa Valley Corporate Drive, Suite B, Napa, California

(Address of Principal Executive Offices)

94558

(Zip Code)



(800)  486-0503

(Registrant’s Telephone Number, Including Area Code)



N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

______________________



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

X

 

 

NO

 

 



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

       



 

 

 

 

 

 

YES

X

 

 

NO

 

 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



 

 

Large accelerated filer  

 

Accelerated filer  

Non-accelerated filer    

(Do not check if a smaller reporting company)

Smaller reporting company  



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





 

 

 

 

 

 

YES

 

 

 

NO

X

 



On August 5, 2016 there were 24,093,064 outstanding shares of the Registrant’s Common Stock, par value $.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 at June  30, 2016 and December 31, 2015

1



Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2016 and 2015

2



Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015

3



Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

4



Notes to Unaudited Interim Condensed Consolidated Financial Statements

5

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

19



 

 

 

 

PART II. OTHER INFORMATION



 

 

 

 

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

Item 3.

Defaults Under Senior Securities

20

Item 4.

Mine Safety Disclosures

20

Item 5.

Other Information

20

Item 6.

Exhibits

21



Signatures

22



Exhibit Index

23









 


 





 

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

 

 

 

 

 



 

 

 

 

 

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

(Unaudited)



June 30, 2016

 

December 31, 2015

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

10,164 

 

$

18,333 

Investments available for sale

 

23,861 

 

 

25,423 

Accounts receivable, net

 

4,456 

 

 

6,121 

Inventory

 

57,724 

 

 

55,636 

Other current assets

 

1,400 

 

 

1,851 

Total current assets

 

97,605 

 

 

107,364 

Property and equipment, net

 

117,319 

 

 

111,635 

Goodwill

 

1,196 

 

 

1,053 

Intangible assets and other non-current assets

 

15,569 

 

 

15,894 

Total non-current assets

 

134,084 

 

 

128,582 

Total assets

$

231,689 

 

$

235,946 

Liabilities

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

1,202 

 

$

3,936 

Accrued compensation related expenses

 

1,903 

 

 

2,504 

Other accrued expenses

 

2,162 

 

 

2,584 

Customer deposits

 

547 

 

 

385 

Current portion of long-term debt, net of unamortized loan fees

 

633 

 

 

633 

Total current liabilities

 

6,447 

 

 

10,042 

Long-term debt, net of current portion and unamortized loan fees

 

14,965 

 

 

15,282 

Deferred rent, non-current

 

107 

 

 

120 

Deferred tax liability

 

4,039 

 

 

3,642 

Total non-current liabilities

 

19,111 

 

 

19,044 

Total liabilities

 

25,558 

 

 

29,086 

Equity

 

 

 

 

 

Common shares, par value $0.01 per share, authorized 150,000,000 shares; 24,115,807

 

 

 

 

 

and 24,306,556 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

241 

 

 

243 

Additional paid-in capital

 

277,520 

 

 

277,520 

Accumulated other comprehensive income (loss)

 

75 

 

 

(47)

Accumulated deficit

 

(71,705)

 

 

(70,856)

Total equity

 

206,131 

 

 

206,860 

Total liabilities and equity

$

231,689 

 

$

235,946 



See accompanying notes to unaudited interim condensed consolidated financial statements.

1

 


 









 

 

 

 

 

 

 

 

 

 

 

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

Net sales

$

15,235 

 

$

14,791 

 

$

30,789 

 

$

28,508 

Cost of sales

 

7,669 

 

 

6,702 

 

 

15,568 

 

 

12,738 

Gross profit

 

7,566 

 

 

8,089 

 

 

15,221 

 

 

15,770 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

3,878 

 

 

3,398 

 

 

7,835 

 

 

6,573 

General and administrative

 

2,624 

 

 

2,618 

 

 

5,795 

 

 

5,191 

Total operating expenses

 

6,502 

 

 

6,016 

 

 

13,630 

 

 

11,764 

Net loss (gain) on disposal of property and equipment

 

28 

 

 

(83)

 

 

22 

 

 

(100)

Income from operations

 

1,036 

 

 

2,156 

 

 

1,569 

 

 

4,106 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(214)

 

 

(38)

 

 

(446)

 

 

(76)

Other income, net

 

101 

 

 

181 

 

 

171 

 

 

194 

Total other income (expense), net

 

(113)

 

 

143 

 

 

(275)

 

 

118 

Income before income taxes

 

923 

 

 

2,299 

 

 

1,294 

 

 

4,224 

Income tax provision

 

409 

 

 

757 

 

 

549 

 

 

1,608 

Net income

$

514 

 

$

1,542 

 

$

745 

 

$

2,616 

Basic and fully diluted weighted-average shares outstanding

 

24,155 

 

 

24,458 

 

 

24,205 

 

 

24,458 

Basic and fully diluted earnings per share

$

0.02 

 

$

0.06 

 

$

0.03 

 

$

0.11 



See accompanying notes to unaudited interim condensed consolidated financial statements.

2

 


 







 

 

 

 

 

 

 

 

 

 

 

 

CRIMSON WINE GROUP, LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(Unaudited)

 



 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended

 



June 30,

 

June 30,

 



2016

 

2015

 

2016

 

2015

 

Net income

$

514 

 

$

1,542 

 

$

745 

 

$

2,616 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on investments arising during the period, net of tax

 

26 

 

 

(8)

 

 

122 

 

 

53 

 

Comprehensive income

$

540 

 

$

1,534 

 

$

867 

 

$

2,669 

 





See accompanying notes to unaudited interim condensed consolidated financial statements.

3

 


 







 

 

 

 

 

CRIMSON WINE GROUP, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



 

 

 

 

 



Six Months Ended June 30,



2016

 

2015

Net cash flows from operating activities:

 

 

 

 

 

Net income

$

745 

 

$

2,616 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

Depreciation and amortization of property and equipment

 

3,323 

 

 

2,910 

Amortization of intangible assets

 

778 

 

 

757 

Amortization of loan fees

 

 

 

-  

Loss on write-down of inventory

 

314 

 

 

180 

Provision for doubtful accounts

 

-  

 

 

17 

Net loss (gain) on disposal of property and equipment

 

22 

 

 

(100)

Deferred rent

 

(9)

 

 

(1)

Provision for deferred income taxes

 

331 

 

 

1,064 

Net change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,897 

 

 

1,531 

Inventory

 

1,827 

 

 

(829)

Other current assets

 

451 

 

 

(119)

Other non-current assets

 

147 

 

 

12 

Accounts payable and expense accruals

 

(4,636)

 

 

(2,712)

Customer deposits

 

162 

 

 

142 

Net cash provided by operating activities

 

5,355 

 

 

5,468 

Net cash flows from investing activities:

 

 

 

 

 

Acquisition of Seven Hills Winery

 

(7,320)

 

 

-  

Purchase of investments available for sale

 

(3,000)

 

 

(1,750)

Redemptions of investments available for sale

 

4,750 

 

 

2,500 

Acquisition of property and equipment

 

(6,066)

 

 

(3,629)

Proceeds from disposals of property and equipment

 

28 

 

 

106 

Net cash used in investing activities

 

(11,608)

 

 

(2,773)

Net cash flows from financing activities:

 

 

 

 

 

Principal payments on long-term debt

 

(320)

 

 

-  

Repurchase of common stock

 

(1,596)

 

 

-  

Net cash used in financing activities

 

(1,916)

 

 

-  

Net (decrease) increase in cash and cash equivalents

 

(8,169)

 

 

2,695 

Cash and cash equivalents - beginning of period

 

18,333 

 

 

13,274 

Cash and cash equivalents - end of period

$

10,164 

 

$

15,969 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

372 

 

$

76 

Income taxes

$

-  

 

$

569 

Non-cash investing activity:

 

 

 

 

 

Unrealized holding gains on investments, net of tax

$

122 

 

$

53 

Acquisition of property and equipment accrued but not yet paid

$

406 

 

$

886 



See accompanying notes to unaudited interim condensed consolidated financial statements.

4

 


 





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 and luxury wines (i.e., wines that retail for $14 to $25 and over $25 per 750ml bottle, respectively).  Crimson is headquartered in Napa, California and through its subsidiaries owns six wineries:  Pine Ridge Vineyards, Archery Summit, Chamisal Vineyards,  Seghesio Family Vineyards, Double Canyon Vineyards and Seven Hills Winery.



Financial Statement Preparation



The accompanying unaudited 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, 2015, as filed with the SEC on Form 10-K (the “2015 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, 2015 was extracted from the audited annual 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, 2016.  See Note 3 to the 2015 Report for a description of the Company’s significant accounting policies.



Recent Accounting Pronouncements



The following table provides a brief description of recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) subsequent to the filing of the 2015 Report that could have a material effect on Crimson’s financial statements. The following table also provides a brief description of recent accounting pronouncements adopted during the six months ended June 30, 2016:



5

 


 



 

 

 

 

 

 

Standard

 

Description

 

Date of adoption

 

Effect on the financial statements or other significant matters



 

 

 

 

 

 

Standards that are not yet adopted

Accounting Standard Update ("ASU") 2016-08, Revenue from Contracts with Customers (Topic 606)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. ASU 2016-08 amends the principal-versus-agent implementation guidance set forth in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer.

 

January 1, 2018, early adoption is permitted for the Company beginning on January 1, 2017.

 

Management is currently evaluating the potential impact of this guidance on the Company’s consolidated financial statements.

ASU 2016-10, Revenue from Contracts with Customers (Topic 606)

 

Amends certain aspects of ASU 2014-09 related to identifying performance obligations and licensing implementation.

 

January 1, 2018, early adoption is permitted for the Company beginning on January 1, 2017.

 

Management is currently evaluating the potential impact of this guidance on the Company’s consolidated financial statements.

Standards that were adopted

ASU 2015-16, Business Combinations (Topic 805)

 

The standard eliminates the requirement for retrospective treatment of measurement-period adjustments in a business combination. Instead, a measurement-period adjustment will be recognized in the period in which the adjustment is determined.

 

January 1, 2016.

 

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

ASU 2015-05, Intangibles- Goodwill and Other- Internal-Use Software (Subtopic 350-40)

 

Cloud computing arrangements represent the delivery of hosted services over the internet which includes software, platforms, infrastructure and other hosting arrangements. The ASU provides criteria to determine whether the cloud computing arrangement includes a software license. A software license can include customized development, maintenance, hosting and other related costs. If the criteria are met, the customer will capitalize the fee attributable to the software license portion of the arrangement as internal-use software. If the arrangement does not include a software license, it should be treated as a service contract.

 

January 1, 2016.

 

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















2.Acquisition of Seven Hills Winery



On January 27, 2016, one of Crimson’s wholly-owned subsidiaries entered into a purchase agreement pursuant to which Crimson’s subsidiary acquired, or has rights in, substantially all of the assets and certain liabilities with respect to the Seven Hills Winery located in Walla Walla, Washington.  The acquisition provides a strategic opportunity for Crimson to expand its portfolio.

 

The acquisition-date fair value of total consideration for the Seven Hills Winery acquisition was $7.9 million, consisting of $7.3 million in cash, which included  a working capital adjustment of $0.3 million, and $0.6 million of non-cash contingent consideration. The contingent consideration arrangement requires the Company to pay up to $0.8 million in future earn-out payments based on certain achievements of the acquired business over the 38 months following the closing of the acquisition.  The Company estimated the fair value of the contingent consideration at January 27, 2016 (the acquisition date) to be $0.6 million, using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurement.  Changes to the estimated fair value of the contingent consideration at each reporting period shall be recorded in the Company’s consolidated income statement under the line item entitled ‘General and administrative expense’ as an operating expense.  The fair value of the contingent consideration as of June 30, 2016 was $0.6 million and during the three and six months ended June 30, 2016 the amounts recognized in the unaudited condensed consolidated income statements related to the changes in the estimated fair value of the contingent liability were immaterial.



The Seven Hills Winery acquisition was recorded during the first quarter of 2016 using the acquisition method of accounting as prescribed under ASC 805, Business Combinations. Accordingly, assets acquired and liabilities assumed were recorded at their fair values estimated by management as of January 27, 2016.  The Company is in the process of finalizing fair value measurements of certain assets; thus, the measurements are subject to change. 



6

 


 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): 







 

 

Accounts receivable

$

232 

Inventory

 

4,229 

Property, plant and equipment

 

2,927 

Intangible assets

 

600 

Total assets

 

7,988 

Accounts payable and accruals

 

201 

Net assets acquired

 

7,787 

Goodwill

 

143 

Total purchase price

$

7,930 



The fair value of accounts receivable acquired of $0.2 million is equal to the gross contractual amount due, as the Company expects all amounts to be collectible.

Adjustments to record the assets acquired and liabilities assumed at fair value include the recognition of $0.6 million of intangible assets as follows (in thousands, except estimated life information):





 

 

 

 

 



 

Amount

 

 

Estimated Life

Brand

$

500 

 

 

15 years

Distributor relationships

 

100 

 

 

10 years

Total

$

600 

 

 

 



As described in Note 11 “Business Segment Information,” based on the nature of the Company’s business, revenue generating assets are utilized across segments.  Therefore, goodwill recognized has not been allocated to any particular segment of the Company.

 

The Company recognized $0.1 million and $0.2 million of acquisition related costs during the three and six months ended June 30, 2016, respectively. These costs are included in the unaudited condensed consolidated income statements under the line item entitled ‘General and administrative expense.’ The Company’s results for the three and six months ended June 30, 2016 include the results of Seven Hills Winery for the period since the date of acquisition. The amount of revenue and net loss included in the Company’s unaudited condensed consolidated income statements for the three months ended June 30, 2016 were $0.4 million and $0.1 million, respectively, and for the six months ended June 30, 2016 were $0.9 million and $0.2 million, respectively. Pro forma financial statements are not presented as they are not material to the Company’s overall consolidated financial statements.



3.Inventory



A summary of inventory at June 30, 2016 and December 31, 2015 is as follows (in thousands):

 









 

 

 

 

 



June 30, 2016

 

December 31, 2015

Case wine

$

32,468 

 

$

30,997 

In-process wine

 

24,481 

 

 

24,306 

Packaging and bottling supplies

 

775 

 

 

333 

Total inventory

$

57,724 

 

$

55,636 















7

 


 

4.Property and Equipment



A summary of property and equipment at June 30, 2016 and December 31, 2015, and depreciation expense for the six months ended June 30, 2016 and 2015, is as follows (in thousands):







 

 

 

 

 

 

 



Depreciable Lives

 

 

 

 

 

 



(in years)

 

June 30, 2016

 

December 31, 2015

Land and improvements

N/A

 

$

45,051 

 

$

41,573 

Buildings and improvements

20-40

 

 

50,993 

 

 

48,770 

Vineyards and improvements

7-25

 

 

35,779 

 

 

35,792 

Winery and vineyard equipment

3-25

 

 

30,808 

 

 

29,766 

Caves

20-40

 

 

5,639 

 

 

5,638 

Vineyards under development

N/A

 

 

2,150 

 

 

2,001 

Construction in progress

N/A

 

 

1,280 

 

 

195 

Total

 

 

 

171,700 

 

 

163,735 

Accumulated depreciation and amortization

 

 

 

(54,381)

 

 

(52,100)

Property and equipment, net

 

 

$

117,319 

 

$

111,635 



 

 

 

 

 

 

 



 

 

Six Months Ended June 30,



 

 

2016

 

2015

Depreciation expense

 

 

 

 

 

Capitalized into inventory

 

 

 

2,531 

 

 

2,372 

Expensed to general and administrative

 

 

 

792 

 

 

538 

Total depreciation

 

 

$

3,323 

 

$

2,910 



















5.Financial Instruments



The Company’s material financial instruments include cash and cash equivalents and investments classified as available for sale.  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 three 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, 2016 and December 31, 2015 are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

Par Value

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Level 1

 

Level 2

 

Total Fair Value Measurements

U.S. Treasury Note

$

10,000 

 

$

10,000 

 

$

45 

 

$

-  

 

$

10,045 

 

$

-  

 

$

10,045 

Certificates of Deposit

 

13,750 

 

 

13,750 

 

 

66 

 

 

-  

 

 

-  

 

 

13,816 

 

 

13,816 

Total

$

23,750 

 

$

23,750 

 

$

111 

 

$

-  

 

$

10,045 

 

$

13,816 

 

$

23,861 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

Par Value

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Level 1

 

Level 2

 

Total Fair Value Measurements

U.S. Treasury Note

$

10,000 

 

$

10,000 

 

$

-  

 

$

(45)

 

$

9,955 

 

$

-  

 

$

9,955 

Certificates of Deposit

 

15,500 

 

 

15,500 

 

 

 

 

(36)

 

 

-  

 

 

15,468 

 

 

15,468 

Total

$

25,500 

 

$

25,500 

 

$

 

$

(81)

 

$

9,955 

 

$

15,468 

 

$

25,423 



As of June 30, 2016 and December 31, 2015, other than the assets and liabilities related to the Seven Hills Winery acquisition (see Note 2), 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 and long-term debt, the carrying amounts of such financial instruments approximate their fair values.  The Company has estimated the

8

 


 

fair value of its short-term and long-term debt based upon 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.



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



6.Intangible and Other Non-Current Assets



A summary of intangible and other non-current assets at June 30, 2016 and December 31, 2015, and amortization expense for the six months ended June 30, 2016 and 2015, is as follows (in thousands):







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Amortizable Lives
(in years)

 

June 30, 2016

 

December 31, 2015

Brand, net of accumulated amortization of $5,248 and $4,717

15 - 17

 

$

12,753 

 

$

12,783 

Distributor relationships, net of accumulated amortization of $948 and $851

10 - 14

 

 

1,752 

 

 

1,749 

Customer relationships, net of accumulated amortization of $1,380 and $1,243

7

 

 

520 

 

 

657 

Legacy permits, net of accumulated amortization of $91 and $82

14

 

 

159 

 

 

168 

Trademark, net of accumulated amortization of $78 and $74

20

 

 

122 

 

 

126 

Total intangible assets, net

 

 

$

15,306 

 

$

15,483 

Other non-current assets

 

 

 

263 

 

 

411 

Total intangible and other non-current assets

 

 

$

15,569 

 

$

15,894 



 

 

 

 

 

 

 



 

 

Six Months Ended June 30,

Amortization expense

 

 

2016

 

2015

Total amortization expense

 

 

$

778 

 

$

757 



The estimated aggregate future amortization as of June 30, 2016 is identified below (in thousands):







 

 

 

Years Remaining

 

Amortization

2016

 

$

778 

2017

 

 

1,557 

2018

 

 

1,402 

2019

 

 

1,286 

2020

 

 

1,286 

Thereafter

 

 

8,997 

Total

 

$

15,306 





































9

 


 

7.   Other Accrued Expenses



Other accrued expenses consisted of the following as of June 30, 2016 and December 31, 2015 (in thousands):







 

 

 

 

 



 

 

 

 

 



 

June 30, 2016

 

 

December 31, 2015

Depletion allowance

$

621 

 

$

977 

Production and farming

 

228 

 

 

768 

Sales and marketing

 

58 

 

 

253 

Professional fees

 

69 

 

 

83 

Contingent liability related to Seven Hills Winery

 

632 

 

 

-  

Accrued interest

 

201 

 

 

114 

Other accrued expenses

 

353 

 

 

389 

Total other accrued expenses

$

2,162 

 

$

2,584 

















8.Debt

Revolving Credit Facility

 

In March 2013, Crimson and its subsidiaries entered into a $60.0 million revolving credit facility with American AgCredit, FLCA, as agent for the lenders identified in the revolving credit facility, comprised of a revolving loan facility and a term revolving loan facility, which together is secured by substantially all of Crimson’s assets.  The revolving credit facility is for up to $10.0 million of availability in the aggregate for a five year term, and the term revolving credit facility is for up to $50.0 million in the aggregate for a fifteen year term.  All obligations of Crimson under the revolving credit facility are collateralized by certain real property, including vineyards and certain winery facilities of Crimson, accounts receivable, inventory and intangible assets.  In addition to unused line fees ranging from 0.15% to 0.25%, rates for the borrowings are priced based on a performance grid tied to certain financial ratios and the London Interbank Offered Rate. The 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 Loan

 

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

 

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

 

The Company incurred debt issuance costs of approximately $0.1 million related to this term loan. These costs are recorded as a reduction from short-term or long-term debt, based on the timeframe in which the fees will be expensed (i.e. – expensed within 12-months shall be classified against short-term debt). The costs are being amortized to interest expense using the effective interest method over the contractual term of the loan. 

 

Borrower’s obligations under the term loan are guaranteed by the Company. All obligations of Borrower under the 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, sale of assets and merging or consolidating with other persons.

 

The full $16.0 million was drawn at closing and the term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of June 30, 2016, $15.6 million in principal was outstanding, net of unamortized loan fees of $0.1 million.

 

The Company was in compliance with all debt covenants as of June 30, 2016.



10

 


 

9.Stockholders’ Equity

In March 2014, the Board of Directors of the Company authorized a share repurchase program (the “2014 Repurchase Program”) that provides for the repurchase of up to $2.0 million of outstanding common stock. Under the 2014 Repurchase Program, any repurchased shares are constructively retired. During the six months ended June 30, 2016, the Company repurchased 76,710 shares under the 2014 Repurchase Program which were constructively retired at an original repurchase cost of $0.6 million, and on February 29, 2016 the 2014 Repurchase Program was completed. Under the total 2014 Repurchase Program the Company repurchased 228,522 shares which were constructively retired at an original repurchase cost of $2.0 million.



In March 2016, the Board of Directors of the Company authorized a second share repurchase program (the “2016 Repurchase Program”) that provides for the repurchase of up to $2.0 million of outstanding common stock. Under the 2016 Repurchase Program, any repurchased shares are constructively retired. During the six months ended and as of June 30, 2016, the Company repurchased 114,039 shares under the 2016 Repurchase Program which were constructively retired at an original repurchase cost of $1.0 million.  Through August 5, 2016, the Company had repurchased 136,782 shares under the 2016 Repurchase Program which were constructively retired at an original repurchase price of $1.2 million.



10.Income Taxes

The Company’s effective tax rates for the three months ended June 30, 2016 and 2015 were 44.3% and 32.9%, respectively. The Company’s effective tax rates for the six months ended June 30, 2016 and 2015 were 42.4% and 38.1%, respectively. The consolidated income tax expense for the three and six months ended June 30, 2016 and 2015 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2016 and 2015, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state taxes and permanent items, which primarily consist of meals and entertainment and the domestic production activity deduction.



The Company does not have any amounts in its consolidated balance sheet for unrecognized tax benefits related to uncertain tax positions at June 30, 2016 and December 31, 2015. 



11.Business Segment Information

The Company has identified two operating segments which are reportable segments for financial statement reporting purposes, Wholesale Sales and Direct to Consumer Sales, based upon their different distribution channels, margins and selling strategies.  Wholesale Sales includes all sales through a third party where prices are given at a wholesale rate whereas Direct to Consumer Sales includes retail sales in the tasting room, remote sites and on-site events, Wine Club 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, directly attributable selling expenses and operating income for the Company’s reportable segments for the three and six months ended June 30, 2016 and 2015, 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 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.

11

 


 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,



 

Wholesale

 

Direct to Consumer

 

Other/Non-Allocable

 

Total

(in thousands)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

Net sales

$

8,626 

$

8,574 

$

5,514 

$

5,576 

$

1,095 

$

641 

$

15,235 

$

14,791 

Cost of sales

 

4,797 

 

4,336 

 

1,682 

 

1,517 

 

1,190 

 

849 

 

7,669 

 

6,702 

Gross profit (loss)

 

3,829 

 

4,238 

 

3,832 

 

4,059 

 

(95)

 

(208)

 

7,566 

 

8,089 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,522 

 

1,390 

 

1,534 

 

1,487 

 

822 

 

521 

 

3,878 

 

3,398 

General and administrative

 

 -

 

 -

 

 -

 

 -

 

2,624 

 

2,618 

 

2,624 

 

2,618 

Total operating expenses

 

1,522 

 

1,390 

 

1,534 

 

1,487 

 

3,446 

 

3,139 

 

6,502 

 

6,016 

Net loss (gain) on disposal of property and equipment

 

 -

 

 -

 

 -

 

 -

 

28 

 

(83)

 

28 

 

(83)

Income (loss) from operations

$

2,307 

$

2,848 

$

2,298 

$

2,572 

$

(3,569)

$

(3,264)

$

1,036 

$

2,156 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Six Months Ended June 30,



 

Wholesale

 

Direct to Consumer

 

Other/Non-Allocable

 

Total

(in thousands)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

Net sales

$

18,569 

$

16,947 

$

10,207 

$

10,316 

$

2,013 

$

1,245 

$

30,789 

$

28,508 

Cost of sales

 

10,388 

 

8,606 

 

3,112 

 

2,878 

 

2,068 

 

1,254 

 

15,568 

 

12,738 

Gross profit (loss)

 

8,181 

 

8,341 

 

7,095 

 

7,438 

 

(55)

 

(9)

 

15,221 

 

15,770 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

3,195 

 

2,787 

 

2,976 

 

2,867 

 

1,664 

 

919 

 

7,835 

 

6,573 

General and administrative

 

 -

 

 -

 

 -

 

 -

 

5,795 

 

5,191 

 

5,795 

 

5,191 

Total operating expenses

 

3,195 

 

2,787 

 

2,976 

 

2,867 

 

7,459 

 

6,110 

 

13,630 

 

11,764 

Net loss (gain) on disposal of property and equipment

 

 -

 

 -

 

 -

 

 -

 

22 

 

(100)

 

22 

 

(100)

Income (loss) from operations

$

4,986 

$

5,554 

$

4,119 

$

4,571 

$

(7,536)

$

(6,019)

$

1,569 

$

4,106 













12

 


 





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, 2015 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the 2015 Report”).  



Quantities or results referred to as “current quarter and “current six-month period” refer to the three and six months ended June  30, 2016, respectively.



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

Factors 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 the following: worsening economic conditions causing a decline in estimated future cash flows; our dependence on certain key personnel; significant increases in operating costs and reduced profitability due to competition for skilled management and staff employees; various diseases, pests and weather conditions affecting the quality and quantity of grapes; our inability to grow or acquire enough fruit for our wines; significant competition adversely affecting our profitability; competition for shelf space in retail stores and for marketing focus by our independent distributors; the contamination of our wines; a reduction in consumer demand for our wines; a decrease in wine score rating by important rating organizations; climate change, or legal, regulatory or market measures to address climate change, negatively affecting our business, operations or financial performance, and water scarcity or poor quality negatively impacting our production costs and capacity, including the continuation or worsening of the drought in California; environmental issues or hazardous substances on our properties resulting in us incurring significant liabilities; indebtedness we may incur materially affecting our financial health; changes in laws and government regulations or in the implementation and/or enforcement of government rules and regulations increasing our costs or restricting our ability to sell our products into certain markets; our inability to insure certain risks economically; being subject to litigation which may have a significant adverse effect on our consolidated financial condition or results of operations; not paying dividends currently or in the future; impairment of our intangible assets; the limited market for our common stock because our stock is not listed on any securities exchange; volatility in our common stock price; future sales of our common stock depressing the market price of our stock; public company compliance costs; loss of our status as an emerging growth company; restrictions on our ability to enter into certain transactions that could jeopardize our tax free spin-off from Leucadia National Corporation; and the significant influence of certain principal stockholders.  For additional information see Part I, Item 1A. Risk Factors in the 2015 Report.



Overview of Business

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

 

Our wines are primarily sold to wholesale distributors, who then sell to retailers and restaurants.  As permitted under federal and local regulations, we have also been placing increased emphasis on generating revenue from direct sales to consumers which occur through wine clubs, at the wineries’ tasting rooms and through the internet and direct outreach to customers. Direct sales to consumers are more profitable for the Company as it is able to sell its products at a price closer to

13

 


 

retail prices rather than the wholesale price sold to distributors. From time to time, we may sell grapes or bulk wine, because the wine does 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 and 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 costs of sales.



At June 30, 2016, wine inventory includes approximately 0.6 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.



Seasonality

As discussed in the 2015 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.



Results of Operations


Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015



Net Sales





 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

(in thousands, except percentages)

 

2016

 

 

2015

 

Increase  (Decrease)

 

% change

Wholesale

$

8,626 

 

$

8,574 

$

52 

 

1%

Direct to consumer

 

5,514 

 

 

5,576 

 

(62)

 

-1%

Other

 

1,095 

 

 

641 

 

454 

 

71%

Total net sales

$

15,235 

 

$

14,791 

$

444 

 

3%



Wholesale net sales increased $0.1 million, or 1%, in the current quarter as compared to the same period in 2015. The increase in the current quarter was driven by export volume growth of 58% and decreased price support, partially offset by a decrease in domestic volume of 4% which was anticipated due to planned second quarter price increases for certain products and a temporary shift in product mix to lower priced products.

 

Direct to consumer net sales decreased $0.1 million, or 1%, in the current quarter as compared to the same period in 2015.  In the current quarter tasting room net sales increased $0.3 million offset by a decrease in wine club net sales of $0.3 million, due to a temporary shift in product mix, and a decrease in e-commerce net sales of $0.1 million.

 

Other net sales include bulk wine and grape sales, event fees and retail sales which had an overall increase of $0.5 million, or 71%, in the current quarter as compared to the same period in 2015. The year over year increase was primarily driven by a higher volume of higher priced bulk wine sales.



Gross Profit





 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

(in thousands, except percentages)

 

2016

 

 

2015

 

Increase  (Decrease)

 

% change

Wholesale

$

3,829 

 

$

4,238 

$

(409)

 

-10%

  Wholesale gross margin percentage

 

44% 

 

 

49% 

 

 

 

 

Direct to consumer

 

3,832 

 

 

4,059 

 

(227)

 

-6%

  Direct to consumer gross margin percentage

 

69% 

 

 

73% 

 

 

 

 

Other

 

(95)

 

 

(208)

 

113 

 

54%

Total gross profit

$

7,566 

 

$

8,089 

$

(523)

 

-6%



14

 


 

Wholesale gross profit decreased $0.4 million, or 10%, in the current quarter as compared to the same period in 2015.  Gross margin percentage, which is defined as gross profit as a percentage of net sales, decreased approximately 504 basis points in the current quarter, which was driven primarily by a  temporary shift in product mix to lower margin products. Planned price increases on certain products,  as well as improved mix of higher margin products, are expected to improve margins in the second half of the year.      

 

Direct to consumer gross profit decreased $0.2 million, or 6%, in the current quarter as compared to the same period in 2015. Gross margin percentage decreased approximately 330 basis points in the current period, which was driven primarily by an overall expected temporary shift in product mix to lower margin products and expected lower margins on the inventory purchased in the Seven Hills Winery acquisition due to fair value acquisition related accounting.  We anticipate higher margins in the second half of the year when the mix of our wine clubs shifts to the higher value and margin items.

 

Other gross profit includes bulk wine and grape sales, event fees, non-wine retail sales and inventory write-downs which reflected an overall increase of $0.1 million, or 54%, in the current quarter as compared to the same period in 2015. The overall increase was primarily driven by lower inventory write-downs and higher margins recognized on non-wine retail sales, partially offset by  an increased loss on higher volume bulk wine sales.



Operating Expenses





 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

(in thousands, except percentages)

 

2016

 

 

2015

 

Increase

 

% change

Sales and marketing

$

3,878 

 

$

3,398 

$

480 

 

14%

General and administrative

 

2,624 

 

 

2,618 

 

 

0%

Total operating expenses

$

6,502 

 

$

6,016 

$

486 

 

8%



Sales and marketing expenses increased $0.5 million, or 14%, in the current quarter as compared to the same period in 2015. The increase was primarily to support growth, partially due to the addition of the Estates Wine Room in December 2015 and the acquisition of Seven Hills Winery in January 2016, which resulted in higher compensation costs and increased contract services, office related expenses and marketing costs.

 

General and administrative expenses remained relatively flat in the current quarter as compared to the same period in 2015.  The current quarter had increases in operating expenses associated with Seven Hills Winery, contract services, depreciation of leasehold improvements and depreciation and other costs associated with technology enhancements to support planned business growth.  These increases were offset by decreases due to several other general and administrative items. 



Other Income (Expense)





 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

(in thousands, except percentages)

 

2016

 

 

2015

 

Increase  (Decrease)

 

% change

Interest expense

$

(214)

 

$

(38)

$

176 

 

463%

Other income, net

 

101 

 

 

181 

 

(80)

 

-44%

Total

$

(113)

 

$

143 

$

256 

 

-179%



Interest expense increased $0.2 million, or 463%, in the current quarter as compared to the same period in 2015.  The increase relates to interest expense incurred on the term loan entered into with American AG Credit during November 2015.

Other income decreased $0.1 million, or 44%, in the current quarter as compared to the same period in 2015.  The overall decrease in other income relates to one-time income of $0.1 million, recognized during the three months ended June 30, 2015,  associated with a vineyard lease.

Income Tax Provision

The Company’s effective tax rates for the three months ended June 30, 2016 and 2015 were 44.3% and 32.9%, respectively. The effective tax rate for the second quarter of 2016 increased compared to the same period in 2015 primarily due to a reduction in the benefit from the domestic production activities deduction.



15

 


 

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Net Sales





 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30,

(in thousands, except percentages)

 

 

2016

 

 

2015

 

Increase  (Decrease)

 

% change

Wholesale

 

$

18,569 

 

$

16,947 

$

1,622 

 

10%

Direct to consumer

 

 

10,207 

 

 

10,316 

 

(109)

 

-1%

Other

 

 

2,013 

 

 

1,245 

 

768 

 

62%

Total net sales

 

$

30,789 

 

$

28,508 

$

2,281 

 

8%



Wholesale net sales increased $1.6 million, or 10%, in the current six-month period as compared to the same period in 2015. The increase in the current year was driven by export volume growth of 16%  and domestic volume growth of 11%,  partially offset by a temporary shift in product mix to lower priced products.  

 

Direct to consumer net sales decreased $0.1 million, or 1%, in the current six-month period as compared to the same period in 2015.  In the current six-month period, tasting room and e-commerce combined net sales increased $0.6 million, offset by a decrease in wine club net sales of $0.6 million due to a temporary shift in product mix.

 

Other net sales include bulk wine and grape sales, event fees and retail sales which had an overall increase of $0.8 million, or 62%, in the current six-month period as compared to the same period in 2015. The year over year increase was primarily driven by a higher volume of higher priced bulk wine sales.



Gross Profit





 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30,

(in thousands, except percentages)

 

 

2016

 

 

2015

 

Decrease

 

% change

Wholesale

 

$

8,181 

 

$

8,341 

$

(160)

 

-2%

  Wholesale gross margin percentage

 

 

44% 

 

 

49% 

 

 

 

 

Direct to consumer

 

 

7,095 

 

 

7,438 

 

(343)

 

-5%

  Direct to consumer gross margin percentage

 

 

70% 

 

 

72% 

 

 

 

 

Other

 

 

(55)

 

 

(9)

 

(46)

 

-511%

Total gross profit

 

$

15,221 

 

$

15,770 

$

(549)

 

-3%



Wholesale gross profit decreased $0.2 million, or 2%, in the current six-month period as compared to the same period in 2015.  Gross margin percentage decreased approximately 516 basis points in the current quarter, which was driven primarily by a temporary shift in product mix to lower margin products including the close out of one lower priced and lower margin wine.  Planned price increases on certain products,  as well as improved mix of higher margin products, are expected to improve margins in the second half of the year.

 

Direct to consumer gross profit decreased $0.3 million, or 5%, in the current six-month period as compared to the same period in 2015. Gross margin percentage decreased approximately 259 basis points in the current period, which was driven primarily by an overall temporary shift in product mix to lower margin products and expected lower margins on the inventory purchased in the Seven Hills Winery acquisition due to fair value acquisition related accounting.  We anticipate higher margins in the second half of the year when the mix of our wine clubs shifts to the higher value and margin items.

 

Other gross profit includes bulk wine and grape sales, event fees, non-wine retail sales and inventory write-downs which reflected an overall decrease of less than $0.1 million or 511%, in the current six-month period as compared to the same period in 2015. The overall decrease was primarily driven by higher inventory write-downs partially offset by higher margins recognized on non-wine retail sales.



Operating Expenses





 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30,

(in thousands, except percentages)

 

 

2016

 

 

2015

 

Increase

 

% change

Sales and marketing

 

$

7,835 

 

$

6,573 

$

1,262 

 

19%

General and administrative

 

 

5,795 

 

 

5,191 

 

604 

 

12%

Total operating expenses

 

$

13,630 

 

$

11,764 

$

1,866 

 

16%



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Sales and marketing expenses increased $1.3 million, or 19%, in the current six-month period as compared to the same period in 2015. The increase was primarily to support growth, partially due to the addition of the Estates Wine Room in December 2015 and the acquisition of Seven Hills Winery in January 2016, which resulted in higher compensation costs, increased travel expenses, increased professional fees and increased contract services. These increases were partially offset by an overall decrease in public relations special programs and design services.

 

General and administrative expenses increased $0.6 million, or 12%, in the current six-month period as compared to the same period in 2015.  The increase was primarily driven by operating expenses and one-time acquisition related professional fees associated with Seven Hills Winery, increased outside services, depreciation of leasehold improvements, depreciation and other costs associated with technology enhancements to support planned business growth and increased salaries.  These increases were partially offset by  a  decrease in recruiting fees and several other general and administrative items.



Other Income (Expense)





 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30,

(in thousands, except percentages)

 

 

2016

 

 

2015

 

Increase  (Decrease)

 

% change

Interest expense

 

$

(446)

 

$

(76)

$

370 

 

487%

Other income, net

 

 

171 

 

 

194 

 

(23)

 

-12%

Total

 

$

(275)

 

$

118 

$

393 

 

-333%



Interest expense increased $0.4 million, or 487%, in the current six-month period as compared to the same period in 2015.  The increase relates to interest expense incurred on the term loan entered into with American AG Credit during November 2015.

Other income, net remained relatively flat year over year, and is primarily comprised of interest income and rental property income.

Income Tax Provision

The Company’s effective annual tax rates for the six months ended June 30, 2016 and 2015 were 42.4% and 38.1%, respectively. The effective tax rate for the first half of 2016 increased compared to the first half of 2015 primarily due to a reduction in the benefit from the domestic production activities deduction.



Liquidity and Capital Resources

General

The Company’s principal sources of liquidity are its available cash, funds generated from operations and its revolving credit facility. The Company’s primary cash needs are to fund working capital requirements and capital expenditures.

Credit Facilities

In March 2013, Crimson entered into a $60.0 million revolving credit facility with American AgCredit, FLCA, as agent for the lenders identified in the revolving credit facility, comprised of a revolving loan facility and a term revolving loan facility, which together is secured by substantially all of Crimson’s assets. The revolving credit facility is for up to $10.0 million of availability in the aggregate for a five year term, and the term revolving credit facility is for up to $50.0 million in the aggregate for a fifteen year term. All obligations of Crimson under the revolving credit facility are collateralized by certain real property, including vineyards and certain winery facilities of Crimson, accounts receivable, inventory and intangibles. 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. 

 

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

 

The term loan will mature on October 1, 2040 (the “Maturity Date”). On the first day of each January, April, July and October, commencing January 1, 2016,  Borrower is required to make a principal payment in the amount of One Hundred Sixty Thousand Dollars ($160,000) and an interest payment equal to the amount of all interest accrued through the previous

17

 


 

day. A final payment of all unpaid principal, interest and any other charges with respect to the term loan shall be due and payable on the Maturity Date.

 

Borrower’s obligations under the term loan are guaranteed by the Company. All obligations of Borrower under the 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, sale of assets and merging or consolidating with other persons.

 

The full $16.0 million was drawn at closing and the term loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of June 30, 2016, $15.7 million in principal was outstanding, net of unamortized loan fees of $0.1 million.



Consolidated Statements of Cash Flows

The following table summarizes our cash flow activities for the six months ended June 30, 2016 and 2015 (in thousands):





 

 

 

 

 

 

Cash provided by (used in):

 

 

2016

 

 

2015

Operating activities

 

$

5,355 

 

$

5,468 

Investing activities

 

 

(11,608)

 

 

(2,773)

Financing activities

 

 

(1,916)

 

 

 -



Cash provided by operating activities

 

Net cash provided by operating activities was $5.4 million for the six months ended June 30, 2016, consisting primarily of $0.7 million of net income adjusted for non-cash items such as $4.1 million of depreciation and amortization, $0.3 million of loss on write-down of inventory, $0.3 million of deferred income tax provision and $0.2 million of net cash outflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to a  decrease in accounts payable and expense accruals, partially offset by a decrease in accounts receivable, inventory, excluding inventory acquired in the Seven Hills Winery acquisition and other current assets.

 

Net cash provided by operating activities was $5.5 million for the six months ended June 30, 2015, consisting primarily of $2.6 million of net income adjusted for non-cash items such as $3.7 million of depreciation and amortization, $1.1 million of deferred income tax provision and $2.0 million of net cash outflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to a decrease in accounts payable and expense accruals and an increase in inventory, partially offset by a decrease in accounts receivable.



Cash used in investing activities

 

Net cash used in investing activities was $11.6 million for the six months ended June 30, 2016, consisting primarily of $7.3 million of cash paid in the acquisition of Seven Hills Winery, capital expenditures of $6.1 million and net purchases and redemptions of available for sale investments of $1.8 million. The increase in capital expenditures primarily relates to $3.1 million in strategic land acquisitions.  The Company expects to spend approximately $5.0 million in the remainder of 2016 for capital expenditures, excluding costs to buildout the recently announced winemaking facility in West Richland, Washington. We expect to use our available cash and cash flows generated from operating activities to fund capital expenditures.

 

Net cash used in investing activities was $2.8 million for the six months ended June 30, 2015, consisting primarily of capital expenditures of $3.6 million partially offset by net purchases and redemptions of available for sale investments of $0.8 million.



Cash used in financing activities

 

Net cash used in financing activities for the six months ended June 30, 2016 was $1.9 million, which reflects the repurchase of shares of our common stock at a repurchase price of $1.6 million and principal payments on our term loan of $0.3 million. No cash flows related to financing activities occurred in the first six months of 2015.



Share Repurchases



In March 2014, the Board of Directors of the Company authorized a share repurchase program (the “2014 Repurchase Program”) that provides for the repurchase of up to $2.0 million of outstanding common stock. Under the 2014 Repurchase

18

 


 

Program, any repurchased shares are constructively retired. During the six months ended June 30, 2016, the Company repurchased 76,710 shares under the 2014 Repurchase Program which were constructively retired at an original repurchase cost of $0.6 million, and on February 29, 2016 the 2014 Repurchase Program was completed. Under the total 2014 Repurchase Program the Company repurchased 228,522 shares which were constructively retired at an original repurchase cost of $2.0 million.



In March 2016, the Board of Directors of the Company authorized a second share repurchase program (the “2016 Repurchase Program”) that provides for the repurchase of up to $2.0 million of outstanding common stock. Under the 2016 Repurchase Program, any repurchased shares are constructively retired. During the six months ended and as of June 30, 2016, the Company repurchased 114,039 shares under the 2016 Repurchase Program which were constructively retired at an original repurchase cost of $1.0 million (See Part II, Item 2 in this Report). Through August 5, 2016, the Company had repurchased 136,782 shares under the 2016 Repurchase Program which were constructively retired at an original repurchase price of $1.2 million.

Commitments & Contingencies

There have been no significant changes to our contractual obligations table as disclosed in the 2015 Report.



Critical Accounting Policies and Estimates

There have been no material changes to the critical accounting policies and estimates previously disclosed in the 2015 Report.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Crimson does not currently have any exposure to financial market risk.  Sales to international customers are denominated in U.S. dollars; therefore, Crimson is not exposed to market risk related to changes in foreign currency exchange rates.  As discussed above under Liquidity and Capital Resources, Crimson has a revolving credit facility and a term loan. The revolving credit facility had no outstanding balance as of June 30, 2016, and has interest at floating rates on borrowings.  The term loan had $15.7 million outstanding at June 30, 2016, and is a fixed-rate debt, and therefore is not subject to fluctuations in market interest rates.



Item 4. Controls and Procedures.

The Company’s management evaluated, with the participation of the Companys principal executive and principal financial officers, the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2016.  Based on their evaluation, the Companys principal executive and principal financial officers concluded that the Companys disclosure controls and procedures were effective as of June 30, 2016.



There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

19

 


 

PART II – OTHER INFORMATION



Item 1. Legal Proceedings.



From time to time, the Company may be involved in legal proceedings in the ordinary course of its business. The Company 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 2015 Report, which could materially affect our business, results of operations or financial condition.  The risks described in our 2015 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.



Share repurchase activity under the Company’s share repurchase program, on a trade date basis, for the three months ended June 30, 2016, was as follows:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Fiscal Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans
(millions)(1)

April 1-30, 2016

 

29,968 

 

 

8.65 

 

60,372 

 

 

1.5 

May 1-31, 2016

 

30,065 

 

 

8.53 

 

90,437 

 

 

1.2 

June 1-30, 2016

 

23,602 

 

 

8.46 

 

114,039 

 

 

1.0 

Total

 

83,635 

 

 

 

 

 

 

 

 



(1)

In March 2016, the Board of Directors of the Company authorized the 2016 Repurchase Program that provides for the repurchase of up to $2.0 million of outstanding common stock. The 2016 Repurchase Program expires on the earlier of March 1, 2017 or the date that the aggregate purchase price of all shares repurchased reaches $2.0 million.  Under the 2016 Repurchase Program, any repurchased shares are constructively retired.



Item 3. Defaults Upon Senior Securities.



None



Item 4. Mine Safety Disclosures.



None



Item 5. Other Information.



None.

20

 


 

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 President and 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

Financial statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended June 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Income Statements; (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.



21

 


 

SIGNATURES



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





 

CRIMSON WINE GROUP, LTD.

 

 



 

(Registrant)

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

 

Date: August 8, 2016

By:

/s/ Shannon McLaren

 



 

Shannon McLaren

 



 

Chief Financial Officer

 



 

 

 







22

 


 

EXHIBIT INDEX







 

Exhibit Number

Description



 

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 President and 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

Financial statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended June 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Income Statements; (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.









23