CWGL 10-Q Quarterly Report Sept. 30, 2017 | Alphaminr
Crimson Wine Group, Ltd
ALPHAMINR

CWGL 10-Q Quarter ended Sept. 30, 2017

Balance Sheet
Cash Flow
Income Statement
Debt
CRIMSON WINE GROUP, LTD
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10-Q 1 cwgl-93017x10q.htm 10-Q Document
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 September 30, 2017
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 November 3, 2017 there were 23,997,385 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.
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)

September 30, 2017
December 31, 2016
Assets
Current assets:
Cash and cash equivalents
$
7,891

$
4,795

Investments available for sale
21,724

23,754

Accounts receivable, net
4,703

5,061

Inventory
75,270

66,856

Other current assets
1,319

1,729

Total current assets
110,907

102,195

Property and equipment, net
129,320

123,261

Goodwill
1,262

1,262

Intangible and other non-current assets, net
13,610

14,779

Total non-current assets
144,192

139,302

Total assets
$
255,099

$
241,497

Liabilities


Current liabilities:


Accounts payable and accrued liabilities
$
13,183

$
11,792

Customer deposits
1,730

367

Current portion of long-term debt, net of unamortized loan fees
1,124

634

Total current liabilities
16,037

12,793

Long-term debt, net of current portion and unamortized loan fees
23,587

14,648

Deferred rent, non-current
71

95

Deferred tax liability
6,415

6,396

Total non-current liabilities
30,073

21,139

Total liabilities
46,110

33,932

Equity


Common shares, par value $0.01 per share, 150,000,000 shares authorized; 23,997,385 shares issued and outstanding at September 30, 2017 and December 31, 2016
240

240

Additional paid-in capital
277,520

277,520

Accumulated other comprehensive (loss) income
(12
)
5

Accumulated deficit
(68,759
)
(70,200
)
Total equity
208,989

207,565

Total liabilities and equity
$
255,099

$
241,497


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
September 30,
Nine Months Ended
September 30,
2017
2016
2017
2016
Net sales
$
13,505

$
15,838

$
43,361

$
46,627

Cost of sales
7,049

7,948

21,177

23,516

Gross profit
6,456

7,890

22,184

23,111

Operating expenses:




Sales and marketing
3,808

4,169

11,660

12,004

General and administrative
2,604

2,440

7,829

8,235

Total operating expenses
6,412

6,609

19,489

20,239

Net loss on disposal of property and equipment
196

146

195

168

(Loss) income from operations
(152
)
1,135

2,500

2,704

Other income (expense):




Interest expense, net
(276
)
(233
)
(516
)
(679
)
Other income, net
169

192

445

363

Total other expense, net
(107
)
(41
)
(71
)
(316
)
(Loss) income before income taxes
(259
)
1,094

2,429

2,388

Income tax (benefit) provision
(53
)
437

988

986

Net (loss) income
$
(206
)
$
657

$
1,441

$
1,402

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

24,085

23,997

24,165

Basic and fully diluted (loss) earnings per share
$
(0.01
)
$
0.03

$
0.06

$
0.06


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
September 30,
Nine Months Ended September 30,
2017
2016
2017
2016
Net (loss) income
$
(206
)
$
657

$
1,441

$
1,402

Other comprehensive (loss) income:
Net unrealized holding (losses) gains on investments arising during the period, net of tax
(1
)
(21
)
(17
)
101

Comprehensive (loss) income
$
(207
)
$
636

$
1,424

$
1,503



See accompanying notes to unaudited interim condensed consolidated financial statements.


3

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

Nine Months Ended September 30,
2017
2016
Net cash flows from operating activities:
Net income
$
1,441

$
1,402

Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization of property and equipment
5,238

4,966

Amortization of intangible assets
1,169

1,166

Amortization of loan fees
7

5

Loss on change in fair value of contingent consideration
25

37

Loss on write-down of inventory
83

149

Net loss on disposal of property and equipment
195

168

Deferred rent
(24
)
(13
)
Provision for deferred income taxes
32

283

Net change in operating assets and liabilities:
Accounts receivable
358

(357
)
Inventory
(8,497
)
(5,858
)
Other current assets
410

289

Other non-current assets
—

154

Accounts payable and accrued liabilities
2,180

4,301

Customer deposits
1,363

1,187

Net cash provided by operating activities
3,980

7,879

Net cash flows from investing activities:


Acquisition of Seven Hills Winery
—

(7,320
)
Purchase of investments available for sale
(5,750
)
(5,500
)
Redemptions of investments available for sale
7,750

6,750

Acquisition of property and equipment
(11,983
)
(9,035
)
Proceeds from disposal of property and equipment
34

51

Net cash used in investing activities
(9,949
)
(15,054
)
Net cash flows from financing activities:


Proceeds from issuance of long-term debt
10,000

—

Principal payments on long-term debt
(480
)
(480
)
Repurchase of common stock
—

(2,260
)
Payment of contingent consideration
(357
)
—

Payment of term loan fees
(98
)
—

Net cash provided by (used in) financing activities
9,065

(2,740
)
Net increase (decrease) in cash and cash equivalents
3,096

(9,915
)
Cash and cash equivalents - beginning of period
4,795

18,333

Cash and cash equivalents - end of period
$
7,891

$
8,418

Supplemental disclosure of cash flow information:


Cash paid during the period for:


Interest, net of capitalized interest
$
494

$
583

Income taxes
$
—

$
—

Non-cash investing activity:

Unrealized holding (losses) gains on investments, net of tax
$
(17
)
$
101

Acquisition of property and equipment not yet paid
$
657

$
430

Contingent consideration for the acquisition of Seven Hills Winery
$
—

$
610


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 plus wines (i.e., wines that retail for over $15 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 and Vineyard.

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 condensed consolidated financial statements for the year ended December 31, 2016 , as filed with the SEC on Form 10-K (the “2016 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, 2016 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, there were no changes to the Company’s significant accounting policies during the nine months ended September 30, 2017 .  See Note 3 to the 2016 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 balance sheet and statement of cash flows to conform to the current period presentation. The reclassifications had no impact on previously reported net (loss) income, equity or cash flows.

Recent Accounting Pronouncements

Subsequent to the filing of the 2016 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 net yet adopted as of September 30, 2017 and a description of accounting pronouncements that were adopted during the nine months ended September 30, 2017 :
໿

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”) 2014-09, 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. 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
While the Company has not completed its full assessment, other than additional disclosure requirements, it does not believe the adoption of this standard will have a material impact on the amount or timing of revenue recognized or its revenue recognition policies. The Company expects to complete its assessment of the impact towards the end of 2017.


Standards that were adopted
ASU 2016-15, Statement of Cash Flows (Topic 230)
Amends the guidance in Topic 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic.
January 1, 2017
The adoption of this standard did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.
ASU 2015-11, Inventory (Topic 330)
Topic 330, Inventory, previously required an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in ASU 2015-11 require an entity to now measure inventory at the lower of cost or net realizable value.
January 1, 2017
The adoption of this standard did not have a material impact on the Company’s unaudited interim condensed 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. Achievements defined in the purchase agreement have been met and therefore $0.4 million of earn-out payments have been made during the nine months ended September 30, 2017. Total acquisition related costs were $0.3 million , which were recorded during the year ended December 31, 2016. Pro forma financial statements are not presented as they are not material to the Company’s overall condensed consolidated financial statements.

The Company recognized $0.2 million of acquisition related costs during the nine months ended September 30, 2016 under the line item entitled ‘General and administrative.’ The Company’s results for the three and nine months ended September 30, 2016 include the results of Seven Hills Winery for the period since the date of acquisition.

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

6

Accounts receivable
$
232

Inventory
4,148

Property and equipment
2,927

Intangible assets
600

Deferred tax asset
47

Total assets
7,954

Accounts payable and accruals
233

Net assets acquired
7,721

Goodwill
209

Total purchase price
$
7,930


Goodwill recognized of $0.2 million was primarily attributable to synergies expected from combining the Company’s operations with Seven Hills Winery’s operations, as well as the assembled workforce. All of the goodwill is deductible for income tax purposes. 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.

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


The methodology utilized to estimate the fair value of the assets acquired and liabilities assumed related to Seven Hills Winery was as follows:

Accounts Receivable and Accounts Payable

The carrying values for current assets and current liabilities were deemed to approximate their fair values due to the short-term nature of these assets and liabilities. The Company has subsequently collected on and paid out all of these balances.

Inventory

Inventory fair values were estimated by significant component. In-process wine was valued at the estimated selling prices of finished goods less the sum of costs to complete, costs of disposal and reasonable profit allowances for completing and selling efforts based on profits for similar finished goods. Cased wine was valued at estimated selling price less the sum of costs of disposal and reasonable profit allowances for the selling efforts. These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement .

Property and Equipment

Property and equipment acquired consisted primarily of a building, land and machinery and equipment used in manufacturing operations. Property and equipment fair values were estimated at their highest and best use value using either the cost or market approach, when appropriate based on available data, and further corroborated with an income approach when appropriate. These fair value measurements represent Level 2 and Level 3 measurements.

Intangible Assets

The identifiable intangible assets acquired consisted of brand and distributor relationships. The relief from royalty valuation method, a form of the income approach, was used to estimate the fair value of the brand. The multi-period excess earnings method, a form of the income approach, was used to estimate the fair value of the distributor relationships. These fair value measurements represent Level 3 measurements.


7

Contingent Consideration

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 represents a Level 3 measurement. Changes to the estimated fair value of the contingent consideration at each reporting period are recorded in the Company’s condensed consolidated statement of operations under the line item titled ‘General and administrative’ as an operating expense. The fair value of the contingent consideration as of September 30, 2017 and December 31, 2016 was $0.3 million and $0.7 million , respectively, and during each of the three and nine months ended September 30, 2017 and 2016, changes in the estimated fair value of the contingent consideration were insignificant.

3.
Inventory

A summary of inventory at September 30, 2017 and December 31, 2016 is as follows (in thousands):
September 30, 2017
December 31, 2016
Finished goods
$
42,446

$
33,650

In-process goods
32,337

32,828

Packaging and bottling supplies
487

378

Total inventory
$
75,270


$
66,856


4.
Property and Equipment

A summary of property and equipment at September 30, 2017 and December 31, 2016 , and depreciation expense for the three and nine months ended September 30, 2017 and 2016 , is as follows (in thousands):
໿
Depreciable Lives
(in years)
September 30, 2017
December 31, 2016
Land and improvements
N/A
$
46,566

$
46,564

Buildings and improvements
20-40
58,919

51,140

Vineyards, orchards and improvements
7-25
37,108

36,163

Winery and vineyard equipment
3-25
36,261

33,690

Caves
20-40
5,639

5,639

Vineyards under development
N/A
3,020

3,176

Construction in progress
N/A
2,983

3,788

Total
190,496

180,160

Accumulated depreciation and amortization
(61,176
)
(56,899
)
Property and equipment, net
$
129,320

$
123,261

Three Months Ended September 30,
Nine Months Ended September 30,
2017
2016
2017
2016
Capitalized into inventory
$
1,378

$
1,365

$
4,096

$
3,896

Expensed to general and administrative
387

278

1,142

1,070

Total depreciation
$
1,765

$
1,643

$
5,238

$
4,966



5.
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 three years or less.


8

The par value, amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as available for sale as of September 30, 2017 and December 31, 2016 are as follows (in thousands):
September 30, 2017
Par Value
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Level 1
Level 2
Total Fair Value
Measurements
U.S. Treasury Note
$
6,000

$
6,000

$
—

$
(5
)
$
5,995

$
—

$
5,995

Certificates of Deposit
15,750

15,750

6

(27
)
—

15,729

15,729

Total
$
21,750

$
21,750

$
6

$
(32
)
$
5,995

$
15,729

$
21,724

December 31, 2016
U.S. Treasury Note
$
10,000

$
10,000

$
—

$
(5
)
$
9,995

$
—

$
9,995

Certificates of Deposit
13,750

13,750

27

(18
)
—

13,759

13,759

Total
$
23,750

$
23,750

$
27

$
(23
)
$
9,995

$
13,759

$
23,754


Gross unrealized losses on available-for-sale securities were less than $0.1 million as of September 30, 2017 , 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 September 30, 2017 and December 31, 2016 , 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 liabilities, the carrying amounts of such financial instruments approximate their fair values. As of September 30, 2017 the Company has estimated the fair value of its outstanding debt to be approximately $24.5 million compared to its carrying value of $24.9 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.

6.
Intangible and Other Non-Current Assets

A summary of intangible and other non-current assets at September 30, 2017 and December 31, 2016 , and amortization expense for the three and nine months ended September 30, 2017 and 2016 , is as follows (in thousands):
September 30, 2017
December 31, 2016
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

$
6,576

$
11,424

$
18,000

$
5,779

$
12,221

Distributor relationships
10 - 14
2,700

1,193

1,507

2,700

1,046

1,654

Customer relationships
7
1,900

1,719

181

1,900

1,515

385

Legacy permits
14
250

113

137

250

100

150

Trademark
20
200

91

109

200

83

117

Total
$
23,050

$
9,692

$
13,358

$
23,050

$
8,523

$
14,527

Other non-current assets
252



252

Total intangible and other non-current assets, net
$
13,610



$
14,779

Three Months Ended
September 30,
Nine Months Ended
September 30,
Amortization expense
2017
2016
2017
2016
Total amortization expense
$
390

$
388

$
1,169

$
1,166


9


The estimated aggregate future amortization as of September 30, 2017 for the next five years and thereafter is identified below (in thousands):
Amortization
Remainder of 2017
$
388

2018
1,402

2019
1,286

2020
1,286

2021
1,286

Thereafter
7,710

Total
$
13,358


7.
Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):
September 30, 2017
December 31, 2016
Accounts payable
$
8,015

$
5,863

Accrued compensation related expenses
1,856

2,428

Acquisition of property and equipment
657

1,098

Production and farming
602

381

Depletion allowance
456

583

Accrued interest
355

224

Sales and marketing
339

352

Accrued taxes
310

—

Contingent liability related to Seven Hills Winery
297

697

Other accrued expenses
296

166

Total accounts payable and accrued liabilities
$
13,183

$
11,792



10

8.
Debt
Details of the Company’s debt as of September 30, 2017 and December 31, 2016 were as follows (dollars in thousands):
September 30, 2017
December 31, 2016
Current
Long-term
Total
Current
Long-term
Total
Interest Rate
Maturity Date
2015 Term Loan
$
640

$
14,240

$
14,880

$
640

$
14,720

$
15,360

5.24%
October 1, 2040
2017 Term Loan
500

9,500

10,000

—

—

—

5.39%
July 1, 2037
Total debt
1,140

23,740

24,880

640

14,720

15,360

Unamortized loan fees
(16
)
(153
)
(169
)
(6
)
(72
)
(78
)
Total debt, net of unamortized loan fees
$
1,124

$
23,587

$
24,711

$
634

$
14,648

$
15,282

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 are secured by substantially all of Crimson’s assets.  The revolving loan facility is for up to $10.0 million of availability in the aggregate for a five year term, and the term revolving loan 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 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 will 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 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.

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 September 30, 2017 , $14.9 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 and A Fine Old Building, LLC (individually and collectively the “DCV Borrower” and, individually and collectively with the PRW Borrower, the “Borrower”), both wholly-owned subsidiaries 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 will 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, Borrower is required to make a principal payment in the amount of $125,000 and an

11

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 September 30, 2017 , $10.0 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 parties.

The Company was in compliance with all debt covenants as of September 30, 2017 . During the three and nine months ended September 30, 2017 , $0.1 million and $0.2 million , respectively, of interest expense was capitalized associated with the buildout of the winemaking facility in West Richland, Washington (the “Washington Winemaking Facility”). The Washington Winemaking Facility was completed in September 2017.

A summary of debt maturity as of September 30, 2017 is as follows (in thousands):

Principal due the remainder of 2017
$
285

Principal due in 2018
1,140

Principal due in 2019
1,140

Principal due in 2020
1,140

Principal due in 2021
1,140

Principal due thereafter
20,035

Total
$
24,880



9.
Stockholders’ Equity
In March 2014, the Board of Directors of the Company authorized a share repurchase program (the “2014 Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2014 Repurchase Program, any repurchased shares were constructively retired, and on February 29, 2016, the 2014 Repurchase Program was completed. Under the total 2014 Repurchase Program the Company repurchased 228,522 shares 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 provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2016 Repurchase Program, any repurchased shares were constructively retired, and on November 14, 2016, the 2016 Repurchase Program was completed. Under the total 2016 Repurchase Program the Company repurchased 232,461 shares at an original repurchase price of $2.0 million .

10.
Income Taxes
Consolidated income tax expense for the three and nine months ended September 30, 2017 and 2016 was determined based upon the Company’s estimated consolidated annual effective income tax rates for the years ending December 31, 2017 and 2016, respectively.

The Company’s effective tax rates for the three months ended September 30, 2017 and 2016 were 20.5% and 39.9% , respectively.

12

The Company’s effective tax rates for the nine months ended September 30, 2017 and 2016 were 40.7% and 41.3% , respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2017 was primarily attributable to state taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2016 was primarily attributable to state taxes and permanent items, which primarily consisted of meals and entertainment and the domestic production activity deduction.

The Company does not have any amounts in its condensed consolidated balance sheet for unrecognized tax benefits related to uncertain tax positions at September 30, 2017 and December 31, 2016 .

11.
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 for the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016 , 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 September 30,
Wholesale
Direct to Consumer
Other/Non-Allocable
Total
(in thousands)
2017
2016
2017
2016
2017
2016
2017
2016
Net sales
$
6,480

$
8,698

$
5,319

$
5,288

$
1,706

$
1,852

$
13,505

$
15,838

Cost of sales
3,903

4,585

1,552

1,509

1,594

1,854

7,049

7,948

Gross profit (loss)
2,577

4,113

3,767

3,779

112

(2
)
6,456

7,890

Operating expenses:
Sales and marketing
1,358

1,719

1,512

1,602

938

848

3,808

4,169

General and administrative
—

—

—

—

2,604

2,440

2,604

2,440

Total operating expenses
1,358

1,719

1,512

1,602

3,542

3,288

6,412

6,609

Net loss on disposal of property and equipment
—

—

—

—

196

146

196

146

Income (loss) from operations
$
1,219

$
2,394

$
2,255

$
2,177

$
(3,626
)
$
(3,436
)
$
(152
)
$
1,135

Nine Months Ended September 30,
Wholesale
Direct to Consumer
Other/Non-Allocable
Total
(in thousands)
2017
2016
2017
2016
2017
2016
2017
2016
Net sales
$
23,308

$
27,267

$
16,450

$
15,495

$
3,603

$
3,865

$
43,361

$
46,627

Cost of sales
13,067

14,973

4,981

4,621

3,129

3,922

21,177

23,516

Gross profit (loss)
10,241

12,294

11,469

10,874

474

(57
)
22,184

23,111

Operating expenses:
Sales and marketing
4,468

4,914

4,710

4,578

2,482

2,512

11,660

12,004

General and administrative
—

—

—

—

7,829

8,235

7,829

8,235

Total operating expenses
4,468

4,914

4,710

4,578

10,311

10,747

19,489

20,239

Net loss on disposal of property and equipment
—

—

—

—

195

168

195

168

Income (loss) from operations
$
5,773

$
7,380

$
6,759

$
6,296

$
(10,032
)
$
(10,972
)
$
2,500

$
2,704



13

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, 2016 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the “2016 Report”).

Quantities or results referred to as “current quarter” and “current nine-month period” refer to the three and nine months ended September 30, 2017 .

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 2016 Report. Readers should carefully review the risk factors described in the 2016 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 September 30, 2017 , wine inventory includes approximately 1.0 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.


14

Seasonality

As discussed in the 2016 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 September 30, 2017 Compared to Three Months Ended September 30, 2016

Net Sales
໿
Three Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase (Decrease)
% change
Wholesale
$
6,480

$
8,698

$
(2,218
)
(26)%
Direct to Consumer
5,319

5,288

31

1%
Other
1,706

1,852

(146
)
(8)%
Total net sales
$
13,505

$
15,838

$
(2,333
)
(15)%

Wholesale net sales decreased $2.2 million, or 26%, in the current quarter as compared to the same period in 2016 . The decrease was primarily driven by domestic volume declines of 23%, export volume declines of 11% and increased price support, partially offset by a shift in product mix. The decline in domestic wholesale volume was due to significant distributor inventory reductions, increased competitive activity and slower than anticipated retail uptake of price increases on certain products.

Direct to Consumer net sales remained relatively flat in the current quarter as compared to the same period in 2016 .  The Company had lower than anticipated wine club net sales during the three months ended September 30, 2017 as a result of hurricanes, which delayed certain shipments to the fourth quarter of 2017.

Other net sales include bulk wine and grape sales, event fees and retail sales which had an overall decrease of $0.1 million, or 8%, in the current quarter as compared to the same period in 2016 . The decrease was primarily driven by reduced grape sales compared to the same period in 2016.

Gross Profit
Three Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase   (Decrease)
% change
Wholesale
$
2,577

$
4,113

$
(1,536
)
(37)%
Wholesale gross margin percentage
40
%
47
%

Direct to Consumer
3,767

3,779

(12
)
—%
Direct to Consumer gross margin percentage
71
%
71
%

Other
112

(2
)
114

5,700%
Total gross profit
$
6,456

$
7,890

$
(1,434
)
(18)%
Total gross margin percentage
48
%
50
%

Wholesale gross profit decreased $1.5 million, or 37%, in the current quarter as compared to the same period in 2016 . Gross margin percentage, which is defined as gross profit as a percentage of net sales, decreased approximately 752 basis points in the current quarter driven by increased price support, higher costs related to the transition to new vintage products 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 and gross margin percentage remained relatively flat in the current quarter as compared to the same period in 2016 .


15

Other gross profit includes bulk wine and grape sales, event fees and non-wine retail sales which reflected an overall increase of $0.1 million, or 5,700%, in the current quarter as compared to the same period in 2016 . The overall increase was primarily driven by improved margins on bulk wine and grape sales.

Operating Expenses
Three Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase
(Decrease)
% change
Sales and marketing
$
3,808

$
4,169

$
(361
)
(9)%
General and administrative
2,604

2,440

164

7%
Total operating expenses
$
6,412

$
6,609

$
(197
)
(3)%

Sales and marketing expenses decreased $0.4 million, or 9%, in the current quarter as compared to the same period in 2016 . The decrease was primarily driven by decreased compensation related expenses in line with financial results.

General and administrative expenses increased $0.2 million, or 7%, in the current quarter as compared to the same period in 2016 . The increase was primarily driven by increased legal fees and increased outside services associated with technology enhancements, partially offset by decreased compensation related expenses in line with financial results.

Other Income (Expense) ໿
Three Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase   (Decrease)
% change
Interest expense, net
$
(276
)
$
(233
)
$
43

18%
Other income, net
169

192

(23
)
(12)%
Total
$
(107
)
$
(41
)
$
66

161%

Interest expense increased by less than $0.1 million, or 18%, in the current quarter as compared to the same period in 2016 .  The increase was primarily driven by the 2017 Term Loan entered into during the second quarter of 2017, partially offset by capitalized interest in the current quarter related to the buildout of the Washington Winemaking Facility which was completed in September 2017.

Other income remained relatively flat in the current quarter as compared to the same period in 2016 .

Income Tax Benefit

Income tax benefit in the current quarter was immaterial.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Net Sales
໿
Nine Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase (Decrease)
% change
Wholesale
$
23,308

$
27,267

$
(3,959
)
(15)%
Direct to Consumer
16,450

15,495

955

6%
Other
3,603

3,865

(262
)
(7)%
Total net sales
$
43,361

$
46,627

$
(3,266
)
(7)%

Wholesale net sales decreased $4.0 million, or 15%, in the current nine-month period as compared to the same period in 2016 . The decrease was primarily driven by domestic volume declines of 15%, export volume declines of 6% and increased price support, partially offset by a shift in product mix. The decline in domestic volume was driven by significant distributor inventory reductions,

16

increased competitive activity, the close-out of certain wines and slower than anticipated retail uptake of price increases on certain products.

Direct to Consumer net sales increased $1.0 million, or 6%, in the current nine-month period as compared to the same period in 2016 .  The increase was primarily driven by an increase in wine club net sales of $0.9 million and an increase in combined e-commerce, special events and freight net sales of $0.5 million, partially offset by a decrease in tasting room net sales of $0.4 million. The increase in wine club net sales was primarily driven by price increases and a shift toward higher value varietals and the shift in e-commerce was primarily driven by favorable campaign responses on certain wines. The Company had lower than anticipated wine club net sales during the nine months ended September 30, 2017 as a result of hurricanes, which delayed certain shipments to the fourth quarter of 2017. The decrease in tasting room net sales was primarily driven by less foot traffic and a shift in product mix.

Other net sales include bulk wine and grape sales, event fees and retail sales which had an overall decrease of $0.3 million, or 7%, in the current nine-month period as compared to the same period in 2016 . The decrease was primarily driven by a decline in event fee revenue and reduced grape sales, partially offset by a higher average price per gallon on bulk wine sales.

Gross Profit
Nine Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase   (Decrease)
% change
Wholesale
$
10,241

$
12,294

$
(2,053
)
(17)%
Wholesale gross margin percentage
44
%
45
%

Direct to Consumer
11,469

10,874

595

5%
Direct to Consumer gross margin percentage
70
%
70
%

Other
474

(57
)
531

932%
Total gross profit
$
22,184

$
23,111

$
(927
)
(4)%
Total gross margin percentage
51
%
50
%

Wholesale gross profit decreased $2.1 million, or 17%, in the current nine-month period as compared to the same period in 2016 . Gross margin percentage decreased approximately 115 basis points in the current nine-month period primarily driven by increased price support, higher costs related to the transition to new vintage products 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 increased $0.6 million, or 5%, in the current nine-month period as compared to the same period in 2016 . The increase in gross profit was primarily driven by price increases on certain products and a shift in product mix. Gross margin percentage remained relatively flat in the current nine-month period as compared to the same period in 2016.

Other gross profit includes bulk wine and grape sales, event fees and non-wine retail sales which reflected an overall increase of $0.5 million, or 932%, in the current nine-month period as compared to the same period in 2016 . The overall increase was primarily driven by improved margins on bulk wine and grape sales, partially offset by reduced event fees.

Operating Expenses
Nine Months Ended September 30,
(in thousands, except percentages)
2017
2016
Decrease
% change
Sales and marketing
$
11,660

$
12,004

$
(344
)
(3)%
General and administrative
7,829

8,235

(406
)
(5)%
Total operating expenses
$
19,489

$
20,239

$
(750
)
(4)%

Sales and marketing expenses decreased $0.3 million, or 3%, in the current nine-month period compared to the same period in 2016 . The decrease was primarily driven by decreased compensation related expenses in line with financial results, partially offset by increased legal fees and licensing and permit fees.

General and administrative expenses decreased $0.4 million, or 5%, in the current nine-month period as compared to the same period in 2016 .  The decrease was primarily driven by decreased legal fees associated with the Seven Hills Winery acquisition in

17

the first quarter of 2016, outside services associated with technology enhancements in 2016 and compensation related expenses in line with financial results, partially offset by increased depreciation.

Other Income (Expense) ໿
Nine Months Ended September 30,
(in thousands, except percentages)
2017
2016
Increase   (Decrease)
% change
Interest expense, net
$
(516
)
$
(679
)
$
(163
)
(24)%
Other income, net
445

363

82

23%
Total
$
(71
)
$
(316
)
$
(245
)
(78)%

Interest expense decreased $0.2 million, or 24%, in the current nine-month period as compared to the same period in 2016 .  The decrease was primarily driven by a higher patronage dividend received in the current period related to our 2015 Term Loan and capitalized interest in the current period related to the buildout of the Washington Winemaking Facility, partially offset by interest expense associated with the 2017 Term Loan.

Other income increased $0.1 million, or 23%, in the current nine-month period as compared to the same period in 2016 .  The overall increase in other income was primarily driven by increased interest income on our short-term investments and increased net rental property income.

Income Tax Provision

The Company’s effective tax rates for the nine months ended September 30, 2017 and 2016 were 40.7% and 41.3% , respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2017 was primarily attributable to state income taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate for the nine months ended September 30, 2016 was primarily attributable to state taxes and permanent items, which primarily consisted of meals and entertainment and the domestic production activity deduction.

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.

Credit Facilities

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 are secured by substantially all of Crimson’s assets. The revolving loan facility is for up to $10.0 million of availability in the aggregate for a five year term, and the term revolving loan 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 Loans

Term loans consist of the following:


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(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 will 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 September 30, 2017 , $14.9 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 and A Fine Old Building, LLC (individually and collectively the “DCV Borrower” and, individually and collectively with the PRW Borrower, the “Borrower”), both wholly-owned subsidiaries of Crimson, entered into a senior secured term loan agreement (the “2017 Term Loan”) with Lender for an aggregate principal amount of $10.0 million. Amounts outstanding under the 2017 Term Loan will 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, 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 September 30, 2017 , $10.0 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 Loans 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 nine months ended September 30, 2017 and 2016 (in thousands):
Cash provided by (used in):
2017
2016
Operating activities
$
3,980

$
7,879

Investing activities
(9,949
)
(15,054
)
Financing activities
9,065

(2,740
)

Cash provided by operating activities

Net cash provided by operating activities was $4.0 million for the nine months ended September 30, 2017 , consisting primarily of $1.4 million of net income adjusted for non-cash items such as $6.4 million of depreciation and amortization and $0.2 million of loss related to disposals of property and equipment, partially offset by $4.2 million of net cash outflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to an increase in inventory, partially offset by an increase in accounts payable and accrued liabilities, and customer deposits.

Net cash provided by operating activities was $7.9 million for the nine months ended September 30, 2016 , consisting primarily of $1.4 million of net income adjusted for non-cash items such as $6.1 million of depreciation and amortization, $0.3 million of deferred income tax provision and $0.2 million of loss related to disposals of property and equipment, partially offset by $0.3 million of net cash outflow related to changes in operating assets and liabilities. The change in operating assets and liabilities was primarily due to an increase in inventory and accounts receivable, excluding inventory acquired in the Seven Hills Winery acquisition, partially offset by an increase in accounts payable and accrued liabilities and customer deposits.

19


Cash used in investing activities

Net cash used in investing activities was $9.9 million for the nine months ended September 30, 2017 , consisting primarily of capital expenditures of $12.0 million, partially offset by net redemptions of available for sale investments of $2.0 million. Capital expenditures of $12.0 million include $7.0 million of costs related to the buildout of the Washington Winemaking Facility and other planned purchases associated with ongoing business activities.

Net cash used in investing activities was $15.1 million for the nine months ended September 30, 2016 , consisting primarily of capital expenditures of $9.0 million, $7.3 million of cash paid in the acquisition of Seven Hills Winery, partially offset by net redemptions of available for sale investments of $1.3 million.

Cash provided by ( used in) financing activities

Net cash provided by financing activities for the nine months ended September 30, 2017 was $9.1 million, consisting primarily of proceeds of $10.0 million from the issuance of the 2017 Term Loan, partially offset by principal payments on our 2015 Term Loan of $0.5 million and contingent consideration payments of $0.4 million associated with the Seven Hills Winery acquisition.

Net cash used in financing activities for the nine months ended September 30, 2016 was $2.7 million, consisting primarily of the repurchase of shares of our common stock at a repurchase price of $2.3 million and principal payments on our 2015 Term Loan of $0.5 million.

Share Repurchases

In March 2014, the Board of Directors of the Company authorized a share repurchase program (the “2014 Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2014 Repurchase Program, any repurchased shares were constructively retired, and on February 29, 2016, the 2014 Repurchase Program was completed. Under the total 2014 Repurchase Program the Company repurchased 228,522 shares 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 provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2016 Repurchase Program, any repurchased shares were constructively retired, and on November 14, 2016, the 2016 Repurchase Program was completed. Under the total 2016 Repurchase Program the Company repurchased 232,461 shares at an original repurchase price of $2.0 million .

Commitments & Contingencies

There have been no significant changes to our contractual obligations table as disclosed in the 2016 Report.

Off-Balance Sheet Financing Arrangements

None.

Critical Accounting Policies and Estimates

Except as disclosed in Note 1 of this Form 10-Q, there have been no material changes to the critical accounting policies and estimates previously disclosed in the 2016 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 September 30, 2017 , and bears interest at floating rates on borrowings.  The term loans had $24.9 million outstanding at September 30, 2017 , and are fixed-rate debt and therefore are not subject to fluctuations in market interest rates.


20

Item 4. Controls and Procedures.
The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2017 .  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 September 30, 2017 .

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 September 30, 2017 , that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

21

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 2016 Report, which could materially affect our business, results of operations or financial condition.  The risks described in our 2016 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.


22

Item 6. Exhibits.

2.1
3.1
3.2
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 September 30, 2017, 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:
November 9, 2017
By:
/s/ Shannon McLaren
Shannon McLaren
Chief Financial Officer

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