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Crimson Wine Group, Ltd - Quarter Report: 2018 March (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 March 31, 2018
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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☐
 
Accelerated filer   ☒
Non-accelerated filer    ☐
(Do not check if a smaller reporting company)
Smaller reporting company  ☐
 
 
Emerging growth company  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
 
 
 
NO
X
 

On May 4, 2018 there were 23,984,406 outstanding shares of the Registrant’s Common Stock, par value $0.01 per share.



CRIMSON WINE GROUP, LTD.
TABLE OF CONTENTS

 
 
Page Number
PART I. FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




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)

 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,098

 
$
9,792

Available for sale debt securities
17,432

 
19,956

Accounts receivable, net
4,784

 
3,981

Inventory
74,388

 
75,458

Other current assets
1,937

 
1,328

Assets held for sale
638

 

Total current assets
106,277

 
110,515

Property and equipment, net
127,135

 
129,018

Goodwill
1,262

 
1,262

Intangible and other non-current assets, net
12,854

 
13,214

Total non-current assets
141,251

 
143,494

Total assets
$
247,528

 
$
254,009

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
4,946

 
$
10,323

Customer deposits
650

 
593

Current portion of long-term debt, net of unamortized loan fees
1,125

 
1,125

Total current liabilities
6,721

 
12,041

Long-term debt, net of current portion and unamortized loan fees
23,024

 
23,305

Deferred rent, non-current
53

 
63

Deferred tax liability
4,874

 
4,881

Total non-current liabilities
27,951

 
28,249

Total liabilities
34,672

 
40,290

Commitments and Contingencies (Note 13)


 


Equity
 

 
 

Common shares, par value $0.01 per share, 150,000,000 shares authorized; 23,997,385 shares issued and outstanding at March 31, 2018 and December 31, 2017
240

 
240

Additional paid-in capital
277,520

 
277,520

Accumulated other comprehensive loss
(41
)
 
(23
)
Accumulated deficit
(64,863
)
 
(64,018
)
Total equity
212,856

 
213,719

Total liabilities and equity
$
247,528

 
$
254,009


See accompanying notes to unaudited interim condensed consolidated financial statements.

1


CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Net sales
$
13,229

 
$
14,849

Cost of sales
6,874

 
7,064

Gross profit
6,355

 
7,785

Operating expenses:
 

 
 

Sales and marketing
4,049

 
3,949

General and administrative
2,706

 
2,588

Total operating expenses
6,755

 
6,537

Net loss (gain) on disposal of property and equipment
11

 
(2
)
Restructuring charges
432

 

(Loss) income from operations
(843
)
 
1,250

Other income (expense):
 

 
 

Interest expense, net
(338
)
 
(193
)
Other (expense) income, net
(5
)
 
158

Total other expense, net
(343
)
 
(35
)
(Loss) income before income taxes
(1,186
)
 
1,215

Income tax (benefit) provision
(341
)
 
466

Net (loss) income
$
(845
)
 
$
749

Basic and fully diluted weighted-average shares outstanding
23,997

 
23,997

Basic and fully diluted (loss) earnings per share
$
(0.04
)
 
$
0.03


See accompanying notes to unaudited interim condensed consolidated financial statements.


2


໿CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Net (loss) income
$
(845
)
 
$
749

Other comprehensive loss:
 
 
 
Net unrealized holding losses on investments arising during the period, net of tax
(18
)
 
(9
)
Comprehensive (loss) income
$
(863
)
 
$
740



See accompanying notes to unaudited interim condensed consolidated financial statements.


3


CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2018
 
2017
Net cash flows from operating activities:
 
 
 
Net (loss) income
$
(845
)
 
$
749

Adjustments to reconcile net (loss) income to net cash used in operations:
 
 
 
Depreciation and amortization of property and equipment
1,874

 
1,732

Amortization of intangible assets
390

 
389

Amortization of loan fees
4

 
2

Loss on change in fair value of contingent consideration
3

 
7

Loss on write-down of inventory
5

 

Net loss (gain) on disposal of property and equipment
11

 
(2
)
Restructuring charges
432

 

Impairment charges
24

 

Deferred rent
(8
)
 
(8
)
Provision for deferred income taxes

 
(2
)
Net change in operating assets and liabilities:
 
 
 
Accounts receivable
(803
)
 
(33
)
Inventory
1,065

 
773

Other current assets
(609
)
 
254

Other non-current assets
6

 
6

Accounts payable and accrued liabilities
(5,063
)
 
(5,892
)
Customer deposits
57

 
180

Net cash used in operating activities
(3,457
)
 
(1,845
)
Net cash flows from investing activities:
 

 
 

Purchase of available for sale debt securities
(4,000
)
 

Redemptions of available for sale debt securities
6,500

 
4,750

Acquisition of property and equipment
(1,289
)
 
(3,037
)
Proceeds from disposal of property and equipment
14

 
2

Net cash provided by investing activities
1,225

 
1,715

Net cash flows from financing activities:
 

 
 

Principal payments on long-term debt
(285
)
 
(160
)
Payment of contingent consideration
(141
)
 
(357
)
Payment of loan fees
(36
)
 

Net cash used in financing activities
(462
)
 
(517
)
Net decrease in cash and cash equivalents
(2,694
)
 
(647
)
Cash and cash equivalents - beginning of period
9,792

 
4,795

Cash and cash equivalents - end of period
$
7,098

 
$
4,148

Supplemental disclosure of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest, net of capitalized interest
$
336

 
$
216

Income taxes
$

 
$

Non-cash investing activity:
 

 
 
Net unrealized holding losses on investments, net of tax
$
(18
)
 
$
(9
)
Acquisition of property and equipment not yet paid
$
85

 
$
806


See accompanying notes to unaudited interim condensed consolidated financial statements.

4

Table of Contents

CRIMSON WINE GROUP, LTD.
Notes to Unaudited Interim Condensed Consolidated Financial Statements

1.
Background and Basis of Presentation

Background

Crimson Wine Group, Ltd. and its subsidiaries (collectively, “Crimson” or the “Company”) is a Delaware corporation that has been conducting business since 1991. Crimson is in the business of producing and selling 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 six wineries: Pine Ridge Vineyards, Archery Summit, Chamisal Vineyards, Seghesio Family Vineyards, Double Canyon and Seven Hills Winery.

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, 2017, as filed with the SEC on Form 10-K (the “2017 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, 2017 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

Except as described below under Recent Accounting Pronouncements and in Note 2 “Revenue,” there were no changes to the Company’s significant accounting policies during the three months ended March 31, 2018. See Note 3 to the 2017 Report for a description of the Company’s significant accounting policies.

Reclassifications

Certain reclassifications have been made to the prior period unaudited interim condensed consolidated statement of cash flows to conform to the current period presentation. The reclassifications had no impact on previously reported net income, equity or cash flows.

Recent Accounting Pronouncements

Subsequent to the filing of the 2017 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 an update of accounting pronouncements applicable to Crimson that are not yet adopted as of March 31, 2018 and a description of accounting pronouncements that were adopted during the three months ended March 31, 2018:

5

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໿
Standard
 
Description
 
Date of adoption
 
Effect on the financial statements or other significant matters
Standards that are not yet adopted
Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (Subsequently updated with ASU 2018-01)
 
Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. 
 
January 1, 2019, early adoption is permitted for the Company.
 
The Company is currently evaluating the impact of the pending adoption of this new standard on its unaudited interim consolidated financial statements and has yet to determine the overall impact this ASU is expected to have. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases.
ASU 2017-04, Goodwill and Other (Topic 350)
 
Eliminates Step 2 from the goodwill impairment test. Entities should perform their goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
 
January 1, 2020, early adoption is permitted for the Company.
 
Management is currently evaluating the potential impact of this guidance on the Company’s unaudited interim consolidated financial statements.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220)
 
Allows the company to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income into retained earnings.
 
January 1, 2019, early adoption is permitted for the Company.
 
Management is currently evaluating the potential impact of this guidance on the Company’s unaudited interim consolidated financial statements.
Standards that were adopted
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
(Subsequently updated with ASU 2016-08, ASU 2016-11, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13 and ASU 2017-14)
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, 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. Topic 606 defines a five step process to require revenue to be recognized when control of goods is transferred to the customer and consideration is expected to be received. ASU 2014-09 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments related to revenue recognition.
 
January 1, 2018
 
The Company adopted ASU 2014-09 using the modified retrospective method in Q1 2018. Based on the new guidance, the Company will continue to recognize revenue at a particular point in time for its contracts with customers. Therefore, the adoption of ASC 606 did not result in a cumulative-effect adjustment to opening retained earnings. See Note 2 “Revenue,” for further information.
ASU 2017-01, Business Combinations (Topic 805)
 
Clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
 
January 1, 2018
 
The adoption of this standard did not have an impact on the Company’s unaudited interim consolidated financial statements.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10)
 
Requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements.
 
January 1, 2018
 
The adoption of this standard did not have an impact on the Company’s unaudited interim consolidated financial statements.

6

Table of Contents

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, all 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 the internet.

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 internet 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 (internet sales).

Other

From time to time, the Company sells 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. 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 contracts upon shipment.

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 sales, which are paid for and received or consumed at the time of sale. The Company transfers control and recognizes revenue at the time of sale.

Refer to Note 12 “Business Segment Information,” for revenue by sales channel amounts for the three months ended March 31, 2018 and 2017.

7

Table of Contents

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.

The following table reflects changes in the contract liability balance during the three months ended March 31, 2018 and 2017 (in thousands):

 
March 31, 2018
 
March 31, 2017
Outstanding at beginning of period
$
593

 
$
367

Increase (decrease) attributed to:
 
 
 
Upfront payments
10,727

 
10,912

Revenue recognized
(10,670
)
 
(10,732
)
Outstanding at end of period
$
650

 
$
547


Revenue recognized during the three months ended March 31, 2018 and 2017, which was included in the opening contract liability balances for those periods, consisted primarily of wine club revenue, grape and bulk sales and event fees.

Accounts Receivable

Accounts receivable are reported at net realizable value. Credit is extended based upon an evaluation of the customer’s financial condition. Accounts are charged against the allowance to bad debt as they are deemed uncollectible based upon 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 account receivable balance is net of an allowance for doubtful accounts of $0.1 million at March 31, 2018 and December 31, 2017.

3.
Restructuring

During the first quarter of 2018, the Company committed to various restructuring activities including the termination of a vineyard operating lease agreement in Oregon and certain departmental reorganizations.

Restructuring charges of $0.4 million incurred in the first quarter of 2018 related to asset impairment charges associated with leasehold improvements under the terminated operating lease agreement. The fair value of these leasehold improvements were determined using the undiscounted cash flows expected to result from the use and eventual disposition of the assets. The Company expects to incur an additional $0.1 million in restructuring charges in the second quarter of 2018 for severance related costs, and it may incur additional charges in future periods should additional restructuring activities be rolled out. The Company will continue to assess the need for additional restructuring activities during 2018 and would expect the restructuring program to be completed by the end of the fourth quarter of 2018.

No payments under the restructuring program were made during the three months ended March 31, 2018 and no liabilities were recorded as of March 31, 2018.

4.
Inventory

A summary of inventory at March 31, 2018 and December 31, 2017 is as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
Finished goods
$
37,328

 
$
40,778

In-process goods
36,110

 
34,080

Packaging and bottling supplies
950

 
600

Total inventory
$
74,388


$
75,458



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Table of Contents

5.
Property and Equipment

A summary of property and equipment at March 31, 2018 and December 31, 2017 and depreciation and amortization expense for the three months ended March 31, 2018 and 2017, is as follows (in thousands):
໿
 
Depreciable Lives
 
 
 
 
 
(in years)
 
March 31, 2018
 
December 31, 2017
Land and improvements
N/A
 
$
46,164

 
$
46,566

Buildings and improvements
20-40
 
59,092

 
58,946

Winery and vineyard equipment
3-25
 
38,400

 
38,631

Vineyards, orchards and improvements
7-25
 
36,685

 
37,090

Caves
20-40
 
5,639

 
5,639

Vineyards under development
N/A
 
2,217

 
3,353

Construction in progress
N/A
 
3,035

 
1,814

Total
 
 
191,232

 
192,039

Accumulated depreciation and amortization
 
 
(64,097
)
 
(63,021
)
Total property and equipment, net
 
 
$
127,135

 
$
129,018

 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Capitalized into inventory
 
$
1,464

 
$
1,358

 
Expensed to general and administrative
 
410

 
374

 
Total depreciation and amortization
 
$
1,874

 
$
1,732

 

During the first quarter of 2018, the Company began actively marketing 36 acres of apple orchards for sale as it does not intend to replant these orchards with vineyards. As of March 31, 2018, the Company had $0.6 million of assets held for sale classified as current assets on the condensed consolidated balance sheets that represent the net book value of these apple orchards. During the three months ended March 31, 2018, the Company recorded an impairment charge of less than $0.1 million to write-down the carrying value of the apple orchards to fair value less cost to sell. This impairment charge was recorded to Other (expense) income, net in the condensed consolidated statements of operations. The Company expects to complete the sale of the apple orchards within the next twelve months.


6.
Financial Instruments

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

The par value, amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as available for sale as of March 31, 2018 and December 31, 2017 are as follows (in thousands):
March 31, 2018
Par Value
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Level 1
 
Level 2
 
Total Fair Value
Measurements
Certificates of Deposit
$
17,500

 
$
17,500

 
$

 
$
(68
)
 
$

 
$
17,432

 
$
17,432

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Note
$
6,000

 
$
6,000

 
$

 
$
(1
)
 
$
5,999

 
$

 
$
5,999

Certificates of Deposit
14,000

 
14,000

 
2

 
(45
)
 

 
13,957

 
13,957

Total
$
20,000

 
$
20,000

 
$
2

 
$
(46
)
 
$
5,999

 
$
13,957

 
$
19,956



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Table of Contents

Gross unrealized losses on available-for-sale securities were $0.1 million as of March 31, 2018, and 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 March 31, 2018 and December 31, 2017, 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 liabilities, the carrying amounts of such financial instruments approximate their fair values. As of March 31, 2018, the Company has estimated the fair value of its outstanding debt to be approximately $22.2 million compared to its carrying value of $24.3 million, based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. 

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

7.
Intangible and Other Non-Current Assets

A summary of intangible and other non-current assets at March 31, 2018 and December 31, 2017, and amortization expense for the three months ended March 31, 2018 and 2017, is as follows (in thousands):
 
 
 
March 31, 2018
 
December 31, 2017
 
Amortizable lives
(in years)
 
Gross carrying amount
 
Accumulated amortization
 
Net book value
 
Gross carrying amount
 
Accumulated amortization
 
Net book value
Brand
15 - 17
 
$
18,000

 
$
7,107

 
$
10,893

 
$
18,000

 
$
6,841

 
$
11,159

Distributor relationships
10 - 14
 
2,700

 
1,291

 
1,409

 
2,700

 
1,242

 
1,458

Customer relationships
7
 
1,900

 
1,855

 
45

 
1,900

 
1,787

 
113

Legacy permits
14
 
250

 
122

 
128

 
250

 
118

 
132

Trademark
20
 
200

 
96

 
104

 
200

 
93

 
107

Total
 
 
$
23,050

 
$
10,471

 
$
12,579

 
$
23,050

 
$
10,081

 
$
12,969

Other non-current assets
 
 
 
 
 
 
275

 
 
 


 
245

Total intangible and other non-current assets, net
 
 
 
 
 
 
$
12,854

 
 
 


 
$
13,214

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
Amortization expense
 
 
 
 
 
 
 
 
 
 
2018
 
2017
Total amortization expense
 
 
 
 
 
 
 
 
 
 
$
390

 
$
389


The estimated aggregate future amortization of intangible assets as of March 31, 2018 is identified below (in thousands):
 
Amortization
Remainder of 2018
$
1,012

2019
1,286

2020
1,286

2021
1,286

2022
1,286

Thereafter
6,423

Total
$
12,579




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8.
Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Accrued compensation related expenses
$
1,350

 
$
5,412

Accounts payable
1,436

 
2,225

Litigation settlement accrual
390

 
390

Sales and marketing
350

 
324

Accrued interest
322

 
324

Depletion allowance
290

 
608

Production and farming
209

 
307

Contingent liability related to Seven Hills Winery
136

 
308

Acquisition of property and equipment
85

 
264

Other accrued expenses
378

 
161

Total accounts payable and accrued liabilities
$
4,946

 
$
10,323


9.
Debt
Details of the Company’s debt as of March 31, 2018 and December 31, 2017 were as follows (dollars in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
 
Current
 
Long-term
 
Total
 
Current
 
Long-term
 
Total
 
Interest Rate
 
Maturity Date
2015 Term Loan
 
$
640

 
$
13,920

 
$
14,560

 
$
640

 
$
14,080

 
$
14,720

 
5.24%
 
October 1, 2040
2017 Term Loan
 
500

 
9,250

 
9,750

 
500

 
9,375

 
9,875

 
5.39%
 
July 1, 2037
Total debt
 
1,140

 
23,170

 
24,310

 
1,140

 
23,455

 
24,595

 
 
 
 
Unamortized loan fees
 
(15
)
 
(146
)
 
(161
)
 
(15
)
 
(150
)
 
(165
)
 
 
 
 
Total debt, net of unamortized loan fees
 
$
1,125

 
$
23,024

 
$
24,149

 
$
1,125

 
$
23,305

 
$
24,430

 
 
 
 
Revolving Credit Facility

In March 2013, Crimson and its subsidiaries entered into a $60.0 million revolving credit facility (the “2013 Revolving Credit Facility”) with American AgCredit, FLCA, as agent for the lenders identified in the 2013 Revolving Credit Facility, 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. In March 2018, Crimson and its subsidiaries entered into the second amendment to the 2013 Revolving Credit Facility with American AgCredit, FCLA (the “Second Amendment”). The Second Amendment modified certain provisions of the 2013 Revolving Credit Facility, including, among other things, extending the Revolving Loan and Term Revolving Loan termination dates to March 31, 2023, extending the Term Revolving Loan conversion date to March 31, 2023 and extending the Term Revolving Loan maturity date to March 31, 2033.

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. All obligations of Crimson under the 2013 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 2013 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. 


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Term Loans

Term loans consist of the following:

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

The 2015 Term Loan will mature on October 1, 2040 (the “2015 Loan Maturity Date”). On the first day of each January, April, July and October, commencing January 1, 2016, PRW Borrower is required to make 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. A final payment of all unpaid principal, interest and any other charges with respect to the 2015 Term Loan shall be due and payable on the 2015 Loan Maturity Date.

The Company incurred debt issuance costs of approximately $0.1 million related to the 2015 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, and as such, amounts to be expensed within twelve 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.

The full $16.0 million was drawn at closing and the 2015 Term Loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of March 31, 2018, $14.6 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were $0.1 million.

(ii) On June 29, 2017, Double Canyon Vineyards, LLC (the “DCV Borrower” and, individually and collectively with the PRW Borrower, “Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2017 Term Loan”) with the Lender for an aggregate principal amount of $10.0 million. Amounts outstanding under the 2017 Term Loan bear a fixed interest rate of 5.39% per annum.

The 2017 Term Loan will mature on July 1, 2037 (the “2017 Loan Maturity Date”). On the first day of each January, April, July and October, commencing October 1, 2017, DCV Borrower is required to make a principal payment in the amount of $125,000 and an interest payment equal to the amount of all interest accrued through the previous day. A final payment of all unpaid principal, interest and any other charges with respect to the 2017 Term Loan shall be due and payable on the 2017 Loan Maturity Date.

The Company incurred debt issuance costs of approximately $0.1 million related to the 2017 Term Loan. These costs were recorded using the same treatment as described for the 2015 Term Loan debt issuance costs.

The full $10.0 million was drawn at closing and the 2017 Term Loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of March 31, 2018, $9.8 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were $0.1 million.

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

The Company was in compliance with all debt covenants as of March 31, 2018.

A summary of debt maturities as of March 31, 2018 is as follows (in thousands):
Principal due the remainder of 2018
$
855

Principal due in 2019
1,140

Principal due in 2020
1,140

Principal due in 2021
1,140

Principal due in 2022
1,140

Principal due thereafter
18,895

Total
$
24,310


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10.
Stockholders’ Equity
In March 2018, the Board of Directors of the Company authorized a share repurchase program (the “2018 Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2018 Repurchase Program, any repurchased shares are constructively retired. Through March 31, 2018, there were no shares repurchased under the plan. Through May 4, 2018, the Company has repurchased 12,979 shares at an original repurchase price of $0.1 million.

11.
Income Taxes
Consolidated income tax expense for the three months ended March 31, 2018 and 2017 was determined based upon the Company’s estimated consolidated annual effective income tax rates for the years ending December 31, 2018 and 2017 respectively.

The Company’s effective tax rates for the three months ended March 31, 2018 and 2017 were 28.8% and 38.4%, respectively. As a result of the Tax Cuts and Jobs Act (Public Law 115-97), the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 34% to 21%. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three months ended March 31, 2018 was primarily attributable to state taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment.

The Company does not have any amounts in its condensed consolidated balance sheet for unrecognized tax benefits related to uncertain tax positions at March 31, 2018 and December 31, 2017

12.
Business Segment Information

The Company has identified two operating segments which are reportable segments for financial statement reporting purposes, Wholesale net sales and Direct to Consumer net sales, 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 the tasting room, remote sites and on-site events, wine club net 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 (loss) for the Company’s reportable segments for the three months ended March 31, 2018 and 2017, 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.

 
Three Months Ended March 31,
 
Wholesale
 
Direct to Consumer
 
Other/Non-Allocable
 
Total
(in thousands)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net sales
$
7,490

 
$
9,021

 
$
5,003

 
$
5,095

 
$
736

 
$
733

 
$
13,229

 
$
14,849

Cost of sales
4,510

 
4,832

 
1,653

 
1,517

 
711

 
715

 
6,874

 
7,064

Gross profit
2,980

 
4,189

 
3,350

 
3,578

 
25

 
18

 
6,355

 
7,785

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
1,680

 
1,669

 
1,517

 
1,489

 
852

 
791

 
4,049

 
3,949

General and administrative

 

 

 

 
2,706

 
2,588

 
2,706

 
2,588

Total operating expenses
1,680

 
1,669

 
1,517

 
1,489

 
3,558

 
3,379

 
6,755

 
6,537

Net loss (gain) on disposal of property and equipment

 

 

 

 
11

 
(2
)
 
11

 
(2
)
Restructuring costs

 

 

 

 
432

 

 
432

 

Income (loss) from operations
$
1,300

 
$
2,520

 
$
1,833

 
$
2,089

 
$
(3,976
)
 
$
(3,359
)
 
$
(843
)
 
$
1,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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13.
Commitments and Contingencies

Litigation

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

On May 17, 2017, a former employee filed a class action complaint against one of the Company’s subsidiaries, Pine Ridge Vineyards, alleging various wage and labor violations. On February 5, 2018, the Company settled this class action complaint at mediation for $0.4 million, which was recorded in the consolidated financial statements for the year ended December 31, 2017. The settlement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties. The preliminary approval of the settlement by the court is scheduled for May 18, 2018, with final approval expected within the next three months.

Other

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 and did not endure any property or vineyard damage. Certain inventory on hand, as well as inventory purchased under contract, may have been subject to smoke taint and reduced quality, however, the amount of loss, if any, cannot be reasonably estimated at this time. Any loss due to the wildfires will be partially offset by proceeds from the Company’s insurance policies.

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

Statements included in this Report may contain forward-looking statements. See “Cautionary Statement for Forward-Looking Information” below. The following should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the Company’s audited consolidated financial statements for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the “2017 Report”).

Quantities or results referred to as “current quarter” and “current three-month period” refer to the three months ended March 31, 2018.

Cautionary Statement for Forward-Looking Information

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

Risks that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or that may materially and adversely affect our actual results include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors in the 2017 Report. Readers should carefully review the risk factors described in the 2017 Report and in other documents that the Company files from time to time with the SEC.

Overview of Business

The Company generates revenues from sales of wine to wholesalers and direct to consumers, sales of bulk wine and grapes, 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 we are able to sell our products at a price closer to retail prices rather than the wholesale price sold to distributors. From time to time, we may sell grapes or bulk wine, because the 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, 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 March 31, 2018, wine inventory includes approximately 0.8 million cases of bottled and bulk wine in various stages of the aging process. Cased wine is expected to be sold over the next 12 to 36 months and generally before the release date of the next vintage.


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Table of Contents

Seasonality

As discussed in the 2017 Report, the wine industry in general historically experiences seasonal fluctuations in revenues and net income. The Company typically has lower sales and net income during the first quarter and higher sales and net income during the fourth quarter due to seasonal holiday buying as well as wine club shipment timing. We anticipate similar trends in the future.

Restructuring

During the first quarter of 2018, the Company committed to various restructuring activities including the termination of a vineyard operating lease agreement in Oregon and certain departmental reorganizations.

Restructuring charges of $0.4 million incurred in the first quarter of 2018 related to asset impairment charges associated with leasehold improvements under the terminated operating lease agreement. The fair value of these leasehold improvements were determined using the undiscounted cash flows expected to result from the use and eventual disposition of the assets. The Company expects to incur an additional $0.1 million in restructuring charges in the second quarter of 2018 for severance related costs, and it may incur additional charges in future periods should additional restructuring activities be rolled out. The Company will continue to assess the need for additional restructuring activities during 2018 and would expect the restructuring program to be completed by the end of the fourth quarter of 2018.

No payments under the restructuring program were made during the three months ended March 31, 2018 and no liabilities were recorded as of March 31, 2018.

Results of Operations

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

Net Sales
໿
 
Three Months Ended March 31,
(in thousands, except percentages)
2018
 
2017
 
Increase (Decrease)
 
% change
Wholesale
$
7,490

 
$
9,021

 
$
(1,531
)
 
(17)%
Direct to Consumer
5,003

 
5,095

 
(92
)
 
(2)%
Other
736

 
733

 
3

 
—%
Total net sales
$
13,229

 
$
14,849

 
$
(1,620
)
 
(11)%

Wholesale net sales decreased $1.5 million, or 17%, in the current quarter as compared to the same period in 2017. The decrease was primarily driven by domestic volume declines of 20% and increased price support, partially offset by export volume increases of 32%. The decline in domestic volume was driven by increased competition, continued slower wine category growth and the impact of distributor inventory reductions.

Direct to Consumer net sales decreased $0.1 million, or 2%, in the current quarter as compared to the same period in 2017. The decrease was primarily driven by a one time impact of reduced wine club customer conversions during the months following the fires and timing difference related to certain phone and e-commerce offers.

Other net sales include bulk wine, grape sales, event fees and retail sales and was flat in the current quarter as compared to the same period in 2017


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Table of Contents

Gross Profit
 
Three Months Ended March 31,
(in thousands, except percentages)
2018
 
2017
 
Increase (Decrease)
 
% change
Wholesale
$
2,980

 
$
4,189

 
$
(1,209
)
 
(29)%
Wholesale gross margin percentage
40
%
 
46
%
 
 

 
 
Direct to Consumer
3,350

 
3,578

 
(228
)
 
(6)%
Direct to Consumer gross margin percentage
67
%
 
70
%
 
 

 
 
Other
25

 
18

 
7

 
39%
Total gross profit
$
6,355

 
$
7,785

 
$
(1,430
)
 
(18)%
Total gross margin percentage
48
%
 
52
%
 
 
 
 

Wholesale gross profit decreased $1.2 million, or 29%, in the current quarter as compared to the same period in 2017. Gross margin percentage, which is defined as gross profit as a percentage of net sales, decreased approximately 665 basis points in the current quarter driven by higher winegrowing costs mostly related to vintage variations, increased price support and expected lower margins on inventory purchased in the Seven Hills Winery acquisition due to fair value acquisition related accounting.

Direct to Consumer gross profit decreased by $0.2 million, or 6%, in the current quarter as compared to the same period in 2017. Gross margin percentage decreased 327 basis points in the current quarter as compared to the same period in 2017. The decline in margin was primarily driven by a shift in wine club product mix to vintages with higher winegrowing costs mostly related to vintage variations.

Other gross profit includes bulk wine, grape sales, event fees and non-wine retail sales and was flat in the current quarter as compared to the same period in 2017

Operating Expenses
 
Three Months Ended March 31,
(in thousands, except percentages)
2018
 
2017
 
Increase
 
% change
Sales and marketing
$
4,049

 
$
3,949

 
$
100

 
3%
General and administrative
2,706

 
2,588

 
118

 
5%
Total operating expenses
$
6,755

 
$
6,537

 
$
218

 
3%

Sales and marketing expenses increased $0.1 million, or 3%, in the current quarter as compared to the same period in 2017. The increase was primarily driven by increased compensation related expenses.

General and administrative expenses increased $0.1 million, or 5%, in the current quarter as compared to the same period in 2017. The increase was primarily driven by legal fees associated with the class action claim, which settled in mediation in February 2018, and increased professional fees.

Other Income (Expense)
 
Three Months Ended March 31,
(in thousands, except percentages)
2018
 
2017
 
Increase (Decrease)
 
% change
Interest expense, net
$
(338
)
 
$
(193
)
 
$
145

 
75%
Other (expense) income, net
(5
)
 
158

 
(163
)
 
(103)%
Total other expense
$
(343
)
 
$
(35
)
 
$
308

 
880%

Interest expense, net increased by $0.1 million, or 75%, in the current quarter as compared to the same period in 2017.  The increase was primarily driven by the 2017 Term Loan entered into during the second quarter of 2017.

Other (expense) income, net decreased $0.2 million, or 103%, in the current quarter as compared to the same period in 2017. The decrease was primarily driven by a $0.2 million loss in the current quarter on apple consignment sales, which we began selling

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Table of Contents

in the fourth quarter of 2017. During the current quarter, we reclassified a significant portion of our apple orchards and associated land to held for sale assets as we do not plan to continue harvesting and selling apples.

Income Tax Benefit

The Company’s effective tax rates for the three months ended March 31, 2018 and 2017 were 28.8% and 38.4%, respectively. As a result of the Tax Cuts and Jobs Act (Public Law 115-97), the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 34% to 21%. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the three months ended March 31, 2018 was primarily attributable to state taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment.

Liquidity and Capital Resources

General

The Company’s principal sources of liquidity are its available cash and cash equivalents, investments in available for sale securities, funds generated from operations and bank borrowings. The Company’s primary cash needs are to fund working capital requirements and capital expenditures.

Revolving Credit Facility

In March 2013, Crimson and its subsidiaries entered into a $60.0 million revolving credit facility (the “2013 Revolving Credit Facility”) with American AgCredit, FLCA, as agent for the lenders identified in the 2013 Revolving Credit Facility, 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. In March 2018, Crimson and its subsidiaries entered into the second amendment to the 2013 Revolving Credit Facility with American AgCredit, FCLA (the “Second Amendment”). The Second Amendment modified certain provisions of the 2013 Revolving Credit Facility, including, among other things, extending the Revolving Loan and Term Revolving Loan termination dates to March 31, 2023, extending the Term Revolving Loan conversion date to March 31, 2023 and extending the Term Revolving Loan maturity date to March 31, 2033.

 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. All obligations of Crimson under the 2013 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 2013 Revolving Credit Facility can be used to fund acquisitions, capital projects and other general corporate purposes. Covenants include the maintenance of specified debt and equity ratios, limitations on the incurrence of additional indebtedness, limitations on dividends and other distributions to shareholders and restrictions on certain mergers, consolidations and sales of assets. No amounts have been borrowed under the revolving credit facility to date. 

Term Loans

Term loans consist of the following:

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

The 2015 Term Loan will mature on October 1, 2040 (the “2015 Loan Maturity Date”). On the first day of each January, April, July and October, commencing January 1, 2016, PRW Borrower is required to make 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. A final payment of all unpaid principal, interest and any other charges with respect to the 2015 Term Loan shall be due and payable on the 2015 Loan Maturity Date.

The full $16.0 million was drawn at closing and the 2015 Term Loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of March 31, 2018, $14.6 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were $0.1 million.


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Table of Contents

(ii) On June 29, 2017, Double Canyon Vineyards, LLC (the “DCV Borrower” and, individually and collectively with the PRW Borrower, “Borrower”), a wholly-owned subsidiary of Crimson, entered into a senior secured term loan agreement (the “2017 Term Loan”) with the Lender for an aggregate principal amount of $10.0 million. Amounts outstanding under the 2017 Term Loan bear a fixed interest rate of 5.39% per annum.

The 2017 Term Loan will mature on July 1, 2037 (the “2017 Loan Maturity Date”). On the first day of each January, April, July and October, commencing October 1, 2017, DCV Borrower is required to make a principal payment in the amount of $125,000 and an interest payment equal to the amount of all interest accrued through the previous day. A final payment of all unpaid principal, interest and any other charges with respect to the 2017 Term Loan shall be due and payable on the 2017 Loan Maturity Date.

The full $10.0 million was drawn at closing and the 2017 Term Loan can be used to fund acquisitions, capital projects and other general corporate purposes. As of March 31, 2018, $9.8 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were $0.1 million.

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

Consolidated Statements of Cash Flows

The following table summarizes our cash flow activities for the three months ended March 31, 2018 and 2017 (in thousands):
Cash (used in) provided by:
2018
 
2017
Operating activities
$
(3,457
)
 
$
(1,845
)
Investing activities
1,225

 
1,715

Financing activities
(462
)
 
(517
)

Cash used in operating activities

Net cash used in operating activities was $3.5 million for the three months ended March 31, 2018, consisting primarily of $0.8 million of net loss adjusted for non-cash items such as $2.3 million of depreciation and amortization and $0.4 million of restructuring charges, partially offset by $5.3 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 inventory. The decrease in accounts payable and expense accruals was primarily due to grower payments made in the current quarter for the 2017 harvest.

Net cash used in operating activities was $1.8 million for the three months ended March 31, 2017, consisting primarily of $0.7 million of net income adjusted for non-cash items such as $2.1 million of depreciation and amortization, partially offset by $4.7 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 inventory and other current assets. The decrease in accounts payable and expense accruals was primarily due to grower payments made in the three months ended March 31, 2017 for the 2016 harvest.

Cash provided by investing activities

Net cash provided by investing activities was $1.2 million for the three months ended March 31, 2018, consisting primarily of net redemptions of available for sale investments of $2.5 million, partially offset by capital expenditures of $1.3 million. 

Net cash provided by investing activities was $1.7 million for the three months ended March 31, 2017, consisting primarily of net redemptions of available for sale investments of $4.8 million, partially offset by capital expenditures of $3.0 million. Capital expenditures of $3.0 million included $1.9 million of costs related to the buildout of the Washington Winemaking Facility.


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Cash used in financing activities

Net cash used in financing activities for the three months ended March 31, 2018 was $0.5 million which reflects principal payments on our term loans of $0.3 million and contingent consideration payments of $0.1 million associated with the Seven Hills Winery acquisition.

Net cash used in financing activities for the three months ended March 31, 2017 was $0.5 million, which reflects contingent consideration payments of $0.4 million associated with the Seven Hills Winery acquisition and principal payments on our term loan of $0.2 million. 

Share Repurchases

In March 2018, the Board of Directors of the Company authorized a share repurchase program (the “2018 Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2018 Repurchase Program, any repurchased shares are constructively retired. Through March 31, 2018, there were no shares repurchased under the plan. Through May 4, 2018, the Company has repurchased 12,979 shares at an original repurchase price of $0.1 million.

Commitments & Contingencies

There have been no significant changes to our contractual obligations table as disclosed in the 2017 Report.

Off-Balance Sheet Financing Arrangements

None.

Critical Accounting Policies and Estimates

Except as disclosed in Note 1 and Note 2 of this Form 10-Q, there have been no material changes to the critical accounting policies and estimates previously disclosed in the 2017 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 two term loans. The revolving credit facility had no outstanding balance as of March 31, 2018, and bears interest at floating rates on borrowings.  The term loans had $24.3 million outstanding at March 31, 2018 and are fixed-rate debt and therefore are not subject to fluctuations in market interest rates.

Item 4. Controls and Procedures.
The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2018. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.

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 March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Beginning January 1, 2018, we implemented internal controls to ensure we have adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to revenue recognition to facilitate adoption on that date. We do not expect significant changes to our internal control over financial reporting due to the adoption of the new standard.


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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

On May 17, 2017, a former employee filed a class action complaint against one of the Company’s subsidiaries, Pine Ridge Vineyards, alleging various wage and hour violations. On February 5, 2018, the Company settled this class action complaint at mediation for $0.4 million, which was recorded in the consolidated financial statements for the year ended December 31, 2017. The settlement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties. The preliminary approval of the settlement by the court is scheduled for May 18, 2018, with final approval expected within the next three months.

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 2017 Report, which could materially affect our business, results of operations or financial condition. The risks described in our 2017 Report are not the only risks facing us.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.


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Item 6. Exhibits.

2.1
3.1
3.2
10.1
31.1
31.2
32.1
32.2
101
Unaudited financial statements from the Quarterly Report on Form 10-Q of Crimson Wine Group, Ltd. for the quarter ended March 31, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

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SIGNATURES

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

 
 
 
CRIMSON WINE GROUP, LTD.
 
 
 
 
(Registrant)
 
 
 
 
 
Date:
May 9, 2018
By:
/s/ Shannon McLaren
 
 
 
Shannon McLaren
 
 
 
Chief Financial Officer
 
 
 
 

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