CWGL 10-Q Quarterly Report Sept. 30, 2019 | Alphaminr
Crimson Wine Group, Ltd
ALPHAMINR

CWGL 10-Q Quarter ended Sept. 30, 2019

Balance Sheet
Cash Flow
Income Statement
Debt
CRIMSON WINE GROUP, LTD
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10-Q 1 cwgl-9x30x201910xq.htm CWGL-9-30-2019 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, 2019
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)
______________________
Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
X
NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES
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    ☐
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 5, 2019 there were 23,421,098 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)

September 30, 2019
December 31, 2018
Assets
Current assets:
Cash and cash equivalents
$
15,220

$
9,376

Available for sale debt securities
9,766

19,213

Accounts receivable, net
6,801

7,285

Inventory
75,882

77,267

Other current assets
4,077

1,955

Assets held for sale
3,385

638

Total current assets
115,131

115,734

Property and equipment, net
119,948

126,230

Goodwill
1,262

1,262

Intangible and other non-current assets, net
10,993

11,859

Total non-current assets
132,203

139,351

Total assets
$
247,334

$
255,085

Liabilities


Current liabilities:


Accounts payable and accrued liabilities
$
11,040

$
12,595

Customer deposits
1,381

375

Current portion of long-term debt, net of unamortized loan fees
1,126

1,125

Total current liabilities
13,547

14,095

Long-term debt, net of current portion and unamortized loan fees
21,336

22,180

Deferred tax liability, net
5,660

5,608

Other non-current liabilities
—

23

Total non-current liabilities
26,996

27,811

Total liabilities
40,543

41,906

Commitments and Contingencies (Note 13)




Equity


Common shares, par value $0.01 per share, authorized 150,000,000 shares; 23,495,502 and 23,714,208 shares issued and outstanding at September 30, 2019 and December 31, 2018
235

237

Additional paid-in capital
277,520

277,520

Accumulated other comprehensive income (loss)
20

(19
)
Accumulated deficit
(70,984
)
(64,559
)
Total equity
206,791

213,179

Total liabilities and equity
$
247,334

$
255,085


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,
2019
2018
2019
2018
Net sales
$
14,672

$
16,820

$
46,192

$
47,331

Cost of sales
10,344

9,080

27,497

24,618

Gross profit
4,328

7,740

18,695

22,713

Operating expenses:




Sales and marketing
4,716

4,205

13,785

12,256

General and administrative
2,833

2,752

8,909

8,081

Total operating expenses
7,549

6,957

22,694

20,337

Net loss (gain) on disposal of property and equipment
204

(11
)
173

94

Restructuring charges
—

70

76

662

Impairment charges
625

—

1,860

—

(Loss) income from operations
(4,050
)
724

(6,108
)
1,620

Other (expense) income:




Interest expense, net
(367
)
(333
)
(730
)
(843
)
Other income, net
335

636

442

713

Total other (expense) income, net
(32
)
303

(288
)
(130
)
(Loss) income before income taxes
(4,082
)
1,027

(6,396
)
1,490

Income tax (benefit) provision
(963
)
261

(1,694
)
398

Net (loss) income
$
(3,119
)
$
766

$
(4,702
)
$
1,092

Basic and fully diluted weighted-average shares outstanding
23,521

23,851

23,564

23,940

Basic and fully diluted (loss) earnings per share
$
(0.13
)
$
0.03

$
(0.20
)
$
0.05


See accompanying notes to unaudited interim condensed consolidated financial statements.


2

໿ CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSES AND INCOME
(In thousands)
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Net (loss) income
$
(3,119
)
$
766

$
(4,702
)
$
1,092

Other comprehensive (loss) income:
Net unrealized holding gains (losses) on investments arising during the period, net of tax
2

17

39

(1
)
Comprehensive (loss) income
$
(3,117
)
$
783

$
(4,663
)
$
1,091



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,
2019
2018
Net cash flows from operating activities:
Net (loss) income
$
(4,702
)
$
1,092

Adjustments to reconcile net (loss) income to net cash provided by operations:
Depreciation and amortization of property and equipment
5,820

5,652

Amortization of intangible assets
965

1,077

Amortization of loan fees
11

12

Loss on change in fair value of contingent consideration liability
4

9

Loss on write-down of inventory
1,581

131

Net loss on disposal of property and equipment
173

94

Deferred Rent
—

(30
)
Restructuring charges
76

662

Impairment charges
1,916

24

Net change in operating assets and liabilities:
Accounts receivable
484

(3,332
)
Inventory
(196
)
(2,378
)
Other current assets
(2,122
)
(202
)
Other non-current assets
(99
)
(8
)
Accounts payable and accrued liabilities
(1,952
)
2,047

Customer deposits
1,006

822

Other non-current liabilities
14

—

Net cash provided by operating activities
2,979

5,672

Net cash flows from investing activities:


Purchase of investments available for sale
(7,250
)
(6,500
)
Redemptions of investments available for sale
16,750

11,750

Acquisition of property and equipment
(4,085
)
(4,588
)
Proceeds from disposals of property and equipment
142

51

Net cash provided by investing activities
5,557

713

Net cash flows from financing activities:


Principal payments on long-term debt
(855
)
(855
)
Repurchase of common stock
(1,725
)
(2,004
)
Payment of contingent consideration liability
(112
)
(141
)
Payment of loan fees
—

(42
)
Net cash used in financing activities
(2,692
)
(3,042
)
Net increase in cash and cash equivalents
5,844

3,343

Cash and cash equivalents - beginning of period
9,376

9,792

Cash and cash equivalents - end of period
$
15,220

$
13,135

Supplemental disclosure of cash flow information:


Cash paid during the period for:


Interest, net of capitalized interest
$
921

$
1,000

Income tax payments, net
$
—

$
—

Non-cash investing activity:

Unrealized holding gains (losses) on investments, net of tax
$
39

$
(1
)
Acquisition of property and equipment accrued but not yet paid
$
431

$
133


See accompanying notes to unaudited interim condensed consolidated financial statements.

4

CRIMSON WINE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share amounts)

Accumulated
Additional
Other
Common Stock
Paid-In
Comprehensive
Accumulated
Shares
Amount
Capital
(Loss) Income
Deficit
Total
Balance, December 31, 2017
23,997,385

$
240

$
277,520

$
(23
)
$
(64,018
)
$
213,719

Net income
—

—

—

—

1,092

1,092

Other comprehensive losses
—

—

—

(1
)
—

(1
)
Repurchase of common stock
(217,377
)
(2
)
—

—

(2,003
)
(2,005
)
Balance, September 30, 2018
23,780,008

$
238

$
277,520

$
(24
)
$
(64,929
)
$
212,805

Balance, December 31, 2018
23,714,208

$
237

$
277,520

$
(19
)
$
(64,559
)
$
213,179

Net loss
—

—

—

—

(4,702
)
(4,702
)
Other comprehensive income
—

—

—

39

—

39

Repurchase of common stock
(218,706
)
(2
)
—

—

(1,723
)
(1,725
)
Balance, September 30, 2019
23,495,502

$
235

$
277,520

$
20

$
(70,984
)
$
206,791


See accompanying notes to unaudited interim condensed consolidated financial statements.


5

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

1.
Background and Basis of Presentation

Background

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

Financial Statement Preparation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited consolidated financial statements for the year ended December 31, 2018 , as filed with the SEC on Form 10-K (the “2018 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, 2018 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 13 “Commitments and Contingencies,” there were no changes to the Company’s significant accounting policies during the nine months ended September 30, 2019 . See Note 2 to the 2018 Report for a description of the Company’s significant accounting policies.

Change in Accounting Estimate

In a strategic effort to maximize asset utilization in 2019, the Company increased focus on supply chain management. The Company reduced planned bottling of bulk wine on hand in an effort to re-align supply with changes in forecasted demand. In the third quarter of 2019, the Company finalized a review of standard overhead applied to bulk wine inventory and bulk wine inventory reserves in the current market and subsequently increased its reserve estimate from 50% to 75% of total projected bulk wine sale losses. As a result of this change in estimate, bulk wine inventory was reduced by $1.2 million , resulting in a decrease to net income of $1.2 million or $0.05 per diluted share for fiscal 2019.

Reclassifications

Certain reclassifications have been made to prior period unaudited interim condensed consolidated balance sheets and statements of cash flows to conform to 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 2018 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 September 30, 2019 and a description of accounting pronouncements that were adopted during the nine months ended September 30, 2019 :

6

໿
Standard
Description
Date of adoption
Effect on the financial statements or other significant matters
Standards that are not yet adopted
Accounting Standard Update (“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 condensed consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820)
Improves the disclosures related to fair value by removing, modifying or adding disclosure requirements related to recurring and non-recurring fair value measurements.
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 condensed consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)
Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirement of capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license).
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 condensed consolidated financial statements.
Standards that were adopted
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
The Company adopted ASU 2016-02 using the modified retrospective method in Q1 2019. The Company recognized a right-of-use asset and a lease liability associated with its long-term operating leases on the Company’s unaudited interim condensed consolidated financial statements. See Note 13 “Commitments and Contingencies,” for further information.
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
The adoption of this standard did not have an impact on the Company’s unaudited interim condensed consolidated financial statements.


7

2.
Revenue

Revenue Recognition

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

Wholesale Segment

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

Direct to Consumer Segment

The Company sells its wine and other merchandise directly to consumers through wine club memberships, at the wineries’ tasting rooms and through 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 grapes or wine do not meet the quality standards for the Company’s products, market conditions have changed resulting in reduced demand for certain products, or because the Company may have produced more of a particular varietal than it can use. Grape and bulk sales are made under contracts with customers which include product specification requirements, pricing and payment terms. Payment terms under grape contracts are generally structured around the timing of the harvest of the grapes and are generally due 30 days from the time the grapes are delivered. Payment terms under bulk wine contracts are generally 30 days from the date of shipment and may include an upfront payment upon signing of the sales agreement. The Company transfers control and recognizes revenue for grape sales when product specification has been met and title to the grapes has transferred, which is generally on the date the grapes are harvested, weighed and shipped. The Company transfers control and recognizes revenue for bulk contracts upon shipment.

The Company provides custom winemaking services at Double Canyon’s state-of-the-art Washington Winemaking Facility. Custom winemaking services are made under contracts with customers which include specific protocols, pricing, and payment terms and generally have a duration of less than one year. The customer retains title and control of the wine during the winemaking process. The Company recognizes revenue when contract specific performance obligations are met.

Estates hold various public and private events for customers and their wine club members. Upfront consideration received from the sale of tickets or under private event contracts for future events is recorded as deferred revenue. The balance of payments are due on the date of the event. The Company recognizes event revenue on the date the event is held.


8

Other revenue also includes tasting fees and retail merchandise sales, which are paid for and received or consumed at the time of sale. The Company transfers control and recognizes revenue at the time of sale.

Refer to Note 12, “Business Segment Information,” for revenue by sales channel amounts for the three and nine months ended September 30, 2019 and 2018 .

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 nine months ended September 30, 2019 and 2018 (in thousands):

September 30, 2019
September 30, 2018
Outstanding at beginning of period (December 31)
$
375

$
593

Increase (decrease) attributed to:
Upfront payments
38,983

38,728

Revenue recognized
(37,977
)
(37,906
)
Outstanding at end of period
$
1,381

$
1,415


Revenue recognized during the nine months ended September 30, 2019 and 2018 , 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 on an evaluation of the customer’s financial condition. Accounts are charged against the allowance for bad debt as they are deemed uncollectable based on a periodic review of the accounts. In evaluating the collectability of individual receivable balances, the Company considers several factors, including the age of the balance, the customer’s historical payment history, its current credit worthiness and current economic trends. The Company’s accounts receivable balance is net of an allowance for doubtful accounts of $0.1 million at September 30, 2019 and December 31, 2018 .

3.
Restructuring

During 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 $0.1 million and $0.7 million were incurred in the nine months ended September 30, 2019 and 2018, respectively. The Company has incurred $1.4 million of restructuring charges inception-to-date consisting of $0.4 million of asset impairment charges associated with leasehold improvements under the terminated vineyard operating lease agreement, $0.9 million employee related costs, and $0.1 million of other restructuring costs associated with departmental reorganization activities. The fair value of impaired leasehold improvements was determined using the undiscounted cash flows expected to result from the use and eventual disposition of the assets. The Company’s restructuring activities were substantially complete as of March 31, 2019.

The Company recorded no additional liability for restructuring charges and paid $0.2 million in previously accrued employee related restructuring activities during the nine months ended September 30, 2019 . The liability related to restructuring activities was $0.4 million and $0.6 million at September 30, 2019 and December 31, 2018 , respectively.


9

4.
Inventory

A summary of inventory at September 30, 2019 and December 31, 2018 is as follows (in thousands):
September 30, 2019
December 31, 2018
Finished goods
$
45,667

$
37,447

In-process goods
29,609

38,902

Packaging and bottling supplies
606

918

Total inventory
$
75,882


$
77,267


The Company's inventory reserve balance was $1.7 million as of September 30, 2019 and $0.4 million as of December 31, 2018 .


5.
Property and Equipment

A summary of property and equipment at September 30, 2019 and December 31, 2018 and depreciation and amortization expense for the three and nine months ended September 30, 2019 and 2018 , is as follows (in thousands):
໿
Depreciable Lives
(in years)
September 30, 2019
December 31, 2018
Land and improvements
N/A
$
44,926

$
46,164

Buildings and improvements
20-40
59,722

60,229

Winery and vineyard equipment
3-25
41,100

40,724

Vineyards, orchards and improvements
7-25
32,599

36,458

Caves
20-40
5,639

5,639

Vineyards under development
N/A
3,327

3,943

Construction in progress
N/A
3,148

1,554

Total
190,461

194,711

Accumulated depreciation and amortization
(70,513
)
(68,481
)
Total property and equipment, net
$
119,948

$
126,230

Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Capitalized into inventory
$
1,436

$
1,468

$
4,414

$
4,400

Expensed to general and administrative
452

435

1,406

1,252

Total depreciation and amortization
$
1,888

$
1,903

$
5,820

$
5,652


During 2018, the Company began actively marketing 36 acres of apple orchards for sale as it does not intend to replant these orchards with vineyards and subsequently reclassified $0.6 million from property and equipment to assets held for sale. In each of the nine months ended September 30, 2019 and 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. These impairment charges were recorded to other income (expense), net in the unaudited interim condensed consolidated statements of operations.

During the second quarter of 2019, the Company placed 124 acres of land, composed of 15 acres of vineyards and 109 acres of fallow land, for sale and reclassified an additional $1.2 million from property and equipment to assets as held for sale. In October 2019, the Company finalized a sales agreement to sell the land for $0.7 million and recorded an impairment charge of $0.5 million to write-down the carrying value to the price in the sales agreement. In the third quarter of 2019, the impairment charge was recorded to (loss) income from operations, net in the unaudited interim condensed consolidated statements of operations. The sale of the land closed in October 2019.


10

In the third quarter of 2019, the Company authorized plans to list for sale a vineyard consisting of 181.1 acres, of which 92.8 acres are planted with wine grapes, in Klickitat County, Washington. As part of the process to determine the sale price of the property, the Company obtained an appraisal of the property in the second quarter of 2019. As a result, the Company recorded an impairment loss of $1.2 million to write-down the carrying value of the vineyard to the appraised fair value less cost to sell in the second quarter of 2019. The Company recorded an additional impairment of $0.1 million in the third quarter of 2019 due to the write-down of in progress vineyard development. These impairment charges were recorded to (loss) income from operations, net in the unaudited interim condensed consolidated statements of operations. The Company reclassified $2.1 million from property and equipment to assets held for sale related to the vineyard as of September 30, 2019 .
As of September 30, 2019 , the Company had $3.4 million of assets held for sale classified as current assets on its condensed consolidated balance sheet. The Company expects to complete the sale of both the apple orchards and vineyard 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 September 30, 2019 and December 31, 2018 are as follows (in thousands):
September 30, 2019
Par Value
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Level 1
Level 2
Total Fair Value
Measurements
Certificates of Deposit
$
9,750

$
9,750

$
16

$
—

$
—

$
9,766

$
9,766

December 31, 2018
Par Value
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Level 1
Level 2
Total Fair Value
Measurements
Certificates of Deposit
$
19,250

$
19,250

$
—

$
(37
)
$
—

$
19,213

$
19,213


As of September 30, 2019 and December 31, 2018 , 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 September 30, 2019 , the Company has estimated the fair value of its outstanding debt to be approximately $22.9 million compared to its carrying value of $22.6 million , based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors.

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


11

7.
Intangible and Other Non-Current Assets

A summary of intangible and other non-current assets at September 30, 2019 and December 31, 2018 , and amortization expense for the nine months ended September 30, 2019 and 2018 , is as follows (in thousands):
September 30, 2019
December 31, 2018
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

$
8,701

$
9,299

$
18,000

$
7,904

$
10,096

Distributor relationships
10 - 14
2,700

1,584

1,116

2,700

1,438

1,262

Customer relationships
7
1,900

1,900

—

1,900

1,900

—

Legacy permits
14
250

149

101

250

135

115

Trademark
20
200

111

89

200

103

97

Total
$
23,050

$
12,445

$
10,605

$
23,050

$
11,480

$
11,570

Other non-current assets
388



289

Total intangible and other non-current assets, net
$
10,993



$
11,859

Three Months Ended September 30,
Nine Months Ended September 30,
Amortization expense
2019
2018
2019
2018
Total amortization expense
$
321

$
321

$
965

$
1,077


The estimated aggregate future amortization of intangible assets as of September 30, 2019 is identified below (in thousands):
Amortization
Remainder of 2019
$
321

2020
1,286

2021
1,286

2022
1,286

2023
1,286

Thereafter
5,140

Total
$
10,605




12

8.
Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019
December 31, 2018
Accrued compensation related expenses
$
2,956

$
2,935

Accounts payable and accrued grape costs
5,932

7,733

Accrued interest
299

334

Depletion allowance
449

285

Operating lease liability, current
152

—

Production and farming
333

154

Sales and marketing
163

441

Acquisition of property and equipment
207

336

Contingent consideration liability related to Seven Hills Winery
—

146

Other accrued expenses
549

231

Total accounts payable and accrued liabilities
$
11,040

$
12,595


9.
Debt
Details of the Company’s debt as of September 30, 2019 and December 31, 2018 were as follows (in thousands):
September 30, 2019
December 31, 2018
Current
Long-term
Total
Current
Long-term
Total
Interest Rate
Maturity Date
2015 Term Loan
$
640

$
12,960

$
13,600

$
640

$
13,440

$
14,080

5.24%
October 1, 2040
2017 Term Loan
500

8,500

9,000

500

8,875

9,375

5.39%
July 1, 2037
Total
1,140

21,460

22,600

1,140

22,315

23,455

Debt issuance costs
(14
)
(124
)
(138
)
(15
)
(135
)
(150
)
Total debt
$
1,126

$
21,336

$
22,462

$
1,125

$
22,180

$
23,305

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.


13

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 less than $0.1 million related to the 2015 Term Loan. These costs are recorded as a reduction from current portion of long-term debt or long-term debt based on the time frame in which the fees will be expensed, and as such, amounts to be expensed within twelve months shall be classified against current portion of long-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, 2019 , $13.6 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were less than $0.1 million .

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

The 2017 Term Loan will mature on July 1, 2037 (the “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 September 30, 2019 , $9.0 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were less than $0.1 million .

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

The Company was in compliance with all debt covenants as of September 30, 2019 .

A summary of debt maturities as of September 30, 2019 is as follows (in thousands):
Principal due the remainder of 2019
$
285

Principal due in 2020
1,140

Principal due in 2021
1,140

Principal due in 2022
1,140

Principal due in 2023
1,140

Principal due thereafter
17,755

Total
$
22,600


14


10.
Stockholders’ Equity
In March 2018, the Company commenced 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 were constructively retired, and on September 19, 2018, the 2018 Repurchase Program was completed. Under the total 2018 Repurchase Program, the Company repurchased 217,377 shares at a repurchase price of $2.0 million .

In December 2018, the Company commenced a share repurchase program (the “2019 Winter Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Winter Repurchase Program, any repurchased shares were constructively retired, and on April 30, 2019, the 2019 Winter Repurchase Program was completed. Under the total 2019 Winter Repurchase Program, the Company repurchased 253,324 shares at a repurchase price of $2.0 million .

In September 2019, the Company commenced a share repurchase program (the "2019 Summer Repurchase Program") that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Summer Repurchase Program, any repurchased shares are constructively retired. During the nine months ended September 30, 2019 , the Company repurchased 31,182 shares at a purchase price of $0.2 million under the 2019 Summer Repurchase Program.


11.
Income Taxes
Consolidated income tax expenses for the three and nine months ended September 30, 2019 and 2018 were determined based upon the Company’s estimated consolidated effective income tax rates calculated without discrete items for the years ending December 31, 2019 and 2018 , respectively.

The Company’s effective tax rates for the three months ended September 30, 2019 and 2018 were 23.0% and 28.5% , respectively. The Company’s effective tax rates for the nine months ended September 30, 2019 and 2018 were 26.3% and 28.7% , 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 and nine months ended September 30, 2019 is primarily attributable to state income taxes and permanent items, which primarily consisted of meals and entertainment.

The Company does not have any amounts in its condensed consolidated balance sheets for unrecognized tax benefits related to uncertain tax positions as of September 30, 2019 .


15

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 (loss), directly attributable selling expenses and operating income (loss) for the Company’s reportable segments for the three and nine months ended September 30, 2019 and 2018 , 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)
2019
2018
2019
2018
2019
2018
2019
2018
Net sales
$
6,890

$
7,777

$
5,879

$
6,397

$
1,903

$
2,646

$
14,672

$
16,820

Cost of sales
4,988

4,557

1,915

1,964

3,441

2,559

10,344

9,080

Gross profit (loss)
1,902

3,220

3,964

4,433

(1,538
)
87

4,328

7,740

Operating expenses:
Sales and marketing
1,702

1,537

1,934

1,672

1,080

996

4,716

4,205

General and administrative
—

—

—

—

2,833

2,752

2,833

2,752

Total operating expenses
1,702

1,537

1,934

1,672

3,913

3,748

7,549

6,957

Net loss (gain) on disposal of property & equipment
—

—

—

—

204

(11
)
204

(11
)
Restructuring charges
—

—

—

—

—

70

—

70

Impairment charges
—

—

—

—

625

—

625

—

Income (loss) from operations
$
200

$
1,683

$
2,030

$
2,761

$
(6,280
)
$
(3,720
)
$
(4,050
)
$
724


Nine Months Ended September 30,
Wholesale
Direct to Consumer
Other/Non-Allocable
Total
(in thousands)
2019
2018
2019
2018
2019
2018
2019
2018
Net sales
$
23,464

$
25,223

$
18,190

$
17,527

$
4,538

$
4,581

$
46,192

$
47,331

Cost of sales
15,291

14,536

5,775

5,616

6,431

4,466

27,497

24,618

Gross profit (loss)
8,173

10,687

12,415

11,911

(1,893
)
115

18,695

22,713

Operating expenses:
Sales and marketing
5,013

4,702

5,601

4,798

3,171

2,756

13,785

12,256

General and administrative
—

—

—

—

8,909

8,081

8,909

8,081

Total operating expenses
5,013

4,702

5,601

4,798

12,080

10,837

22,694

20,337

Net loss on disposal of property & equipment
—

—

—

—

173

94

173

94

Restructuring charges
—

—

—

—

76

662

76

662

Impairment charges
—

—

—

—

1,860

—

1,860

—

Income (loss) from operations
$
3,160

$
5,985

$
6,814

$
7,113

$
(16,082
)
$
(11,478
)
$
(6,108
)
$
1,620

13.
Commitments and Contingencies

16


Leases

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

Pursuant to ASU 2016-02, all of the Company’s leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASU 2016-02, the Company recorded an operating lease right-of-use asset and an operating lease liability on its condensed consolidated balance sheet beginning January 1, 2019. Right-of-use lease assets represent the Company’s right to use the underlying asset for the lease term and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company has used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The right-of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. For all lease agreements, the Company combines lease and non-lease components, and leases with an initial term of 12 months or less are not recorded on the balance sheet.

Supplemental balance sheet information related to leases were as follows (in thousands):
September 30, 2019
Other non-current assets
$
124

Accounts payable and accrued liabilities
$
152

Other non-current liabilities
—

Total operating lease liabilities
$
152

Weighted Average Remaining Lease Term
Operating leases
0.75 years

Weighted Average Discount Rate
Operating leases
6.34
%

Base rent expense was $0.2 million for the nine months ended September 30, 2019 and 2018 . Cash paid for amounts included in the measurement of operating lease liabilities as part of operating cash flows was $0.2 million for the nine months ended September 30, 2019 .

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 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 court granted final approval of the settlement amount and the final payments were issued in the fourth quarter of 2018.


17

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. Certain inventory on hand was impacted by power losses and smoke damage which was covered under existing insurance policies. During 2018, the Company recognized $1.1 million in insurance proceeds of which $0.6 million was offset against inventory losses and $0.5 million was included in other income, net.

In October 2019, the Company received an additional $0.2 million from insurance proceeds related to the October 2017 wildfires. As of September 30, 2019 , the Company recognized the receivable and recorded $0.2 million in other income, net.

18


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, 2018 included in the Company’s Annual Report on Form 10-K as filed with the SEC (the “ 2018 Report”).

Quantities or results referred to as “current quarter” and “current three and nine -month period” refer to the three and nine months ended September 30, 2019 .

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 2018 Report. Readers should carefully review the risk factors described in the 2018 Report and in other documents that the Company files from time to time with the SEC.

Overview of Business

The Company generates revenues from sales of wine to wholesalers and direct to consumers, sales of bulk wine and grapes, custom winemaking services, special event fees, tasting fees and 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 grapes or wine do not meet the quality standards for the Company’s products, market conditions have changed resulting in reduced demand for certain products, or because the Company may have produced more of a particular varietal than it can use. When these sales occur, they may result in a loss.
Cost of sales includes grape and bulk wine costs, whether purchased or produced from the Company’s controlled vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs. For the Company controlled vineyard produced grapes, grape costs include annual farming labor costs, harvest costs and depreciation of vineyard assets. For wines that age longer than one year, winemaking and processing costs continue to be incurred and capitalized to the cost of wine, which can range from 3 to 36 months. Reductions to the carrying value of inventories are also included in cost of sales.
The Company has recently increased focus on supply chain management in an effort to maximize asset utilization. During the three months ended September 30, 2019 , the Company performed regular costing updates to apply actual cost for the 2017 and 2018 vintage bulk wine compared to the standard cost estimates used. The analysis showed higher cellar overhead costs incurred for these vintages than previously estimated in the standard rate applied to bulk wine gallons produced. The increase in the revised standard rate over the production period was a result of a strategic reduction of wine bottled driven by less than forecasted demand

19

for certain products. Additionally, cost capitalized to inventory increased due to growth in general and administrative overhead costs as well as onboarding cellar costs related to the Double Canyon winemaking facility and acquired Seven Hills Winery.
As of September 30, 2019 , 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.

Seasonality

As discussed in the 2018 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 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 $0.1 million and $0.7 million were incurred in the nine months ended September 30, 2019 and 2018, respectively. The Company has incurred $1.4 million of restructuring charges inception-to-date consisting of $0.4 million of asset impairment charges associated with leasehold improvements under the terminated vineyard operating lease agreement, $0.9 million employee related costs, and $0.1 million of other restructuring costs associated with departmental reorganization activities. The fair value of impaired leasehold improvements was determined using the undiscounted cash flows expected to result from the use and eventual disposition of the assets. The Company’s restructuring activities were substantially complete as of March 31, 2019.

Results of Operations

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Net Sales
໿
Three Months Ended September 30,
(in thousands, except percentages)
2019
2018
(Decrease)
% change
Wholesale
$
6,890

$
7,777

$
(887
)
(11)%
Direct to Consumer
5,879

6,397

(518
)
(8)%
Other
1,903

2,646

(743
)
(28)%
Total net sales
$
14,672

$
16,820

$
(2,148
)
(13)%

Wholesale net sales decreased $0.9 million , or 11% , in the current quarter as compared to the same quarter in 2018 . The decrease was primarily driven by a decrease in domestic and export wine sales, as well as increased price support compared to the same quarter in 2018 .

Direct to Consumer net sales decreased $0.5 million , or 8% , in the current quarter as compared to the same quarter in 2018 . The decrease was primarily driven by timing of wine club shipments and partially offset by successful strategic e-commerce offers compared to the same quarter in 2018 .

Other net sales include bulk wine, grape sales, custom winemaking services, event fees and retail sales, and decreased $0.7 million , or 28% primarily due to a decrease in gallons of bulk wine sold, a decrease in tons of bulk grapes sold, and a decrease in revenue from custom winemaking services compared to the same quarter in 2018 .

20


Gross Profit
Three Months Ended September 30,
(in thousands, except percentages)
2019
2018
(Decrease)
% change
Wholesale
$
1,902

$
3,220

$
(1,318
)
(41)%
Wholesale gross margin percentage
28
%
41
%

Direct to Consumer
3,964

4,433

(469
)
(11)%
Direct to Consumer gross margin percentage
67
%
69
%

Other
(1,538
)
87

(1,625
)
(1,868)%
Total gross profit
$
4,328

$
7,740

$
(3,412
)
(44)%
Total gross margin percentage
29
%
46
%

Wholesale gross profit decreased $1.3 million , or 41% , in the current quarter as compared to the same quarter in 2018 primarily driven by the release of higher cost vintages, lower sales volume, and increased price support. Increased costs were primarily driven by higher fixed production costs, planned decreased production volumes in an effort to re-align supply with demand, and
a lower crop yield. Gross margin percentage, which is defined as gross profit as a percentage of net sales, decreased 1,380 basis points primarily driven by increased cost of goods sold and increased price support compared to the same quarter in 2018 .

Direct to Consumer gross profit decreased $0.5 million , or 11% , in the current quarter as compared to the same quarter in 2018 driven primarily by a decrease in volume caused by timing of wine club shipments. Gross margin percentage decreased 187 basis points in the current quarter primarily driven by timing of wine club shipments compared to the same quarter in 2018 .

Other gross profit includes bulk wine, grape sales, event fees and non-wine retail sales and decreased $1.6 million , or 1,868% in the current quarter as compared to the same quarter in 2018 . The decrease in gross profit is primarily driven by increased costs related to the 2017 and 2018 vintage bulk wine, higher fixed production costs, and planned decreased production volumes in an effort to re-align supply with demand.

Operating Expenses
Three Months Ended September 30,
(in thousands, except percentages)
2019
2018
Increase
% change
Sales and marketing
$
4,716

$
4,205

$
511

12%
General and administrative
2,833

2,752

81

3%
Total operating expenses
$
7,549

$
6,957

$
592

9%

Sales and marketing expenses increased $0.5 million , or 12% , in the current quarter as compared to the same quarter in 2018 . The increase was primarily driven by the increased compensation related expenses and increased sales incentive programs compared to the same quarter in 2018 .

General and administrative expenses increased $0.1 million , or 3% , in the current quarter as compared to the same quarter in 2018 primarily due to compensation expenses related to severance expense compared to the same quarter in 2018 .

Other Income (Expense)
Three Months Ended September 30,
(in thousands, except percentages)
2019
2018
Increase (Decrease)
% change
Interest expense, net
$
(367
)
$
(333
)
$
34

10%
Other income, net
335

636

(301
)
(47)%
Total other (expense) income, net
$
(32
)
$
303

$
335

(111)%


21

Interest expense, net increased less than $0.1 million, or 10% , in the current quarter compared to the same quarter in 2018 .  The increase was primarily driven by the timing of capitalized interest on vineyard development projects compared to the same quarter in 2018 .

Other income decreased by $0.3 million , or 47% in the current quarter as compared to the same quarter in 2018 . The decrease was primarily driven by lower insurance proceeds received compared to the same quarter in 2018 .

Income Tax Provision

The Company’s effective tax rates for the three months ended September 30, 2019 and 2018 were 23.0% and 28.5% , 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 September 30, 2019 was primarily attributable to state income taxes and the effect of certain permanent differences, which primarily consisted of meals and entertainment.


Nine Months Ended September 30, 2019 Compared To Nine Months Ended September 30, 2018

Net Sales
໿
Nine Months Ended September 30,
(in thousands, except percentages)
2019
2018
Increase (Decrease)
% change
Wholesale
$
23,464

$
25,223

$
(1,759
)
(7)%
Direct to Consumer
18,190

17,527

663

4%
Other
4,538

4,581

(43
)
(1)%
Total net sales
$
46,192

$
47,331

$
(1,139
)
(2)%

Wholesale net sales decreased $1.8 million , or 7% , in the current nine month period as compared to the same period in 2018 . The decrease was primarily driven by increased price support compared to the prior period.

Direct to Consumer net sales increased $0.7 million , or 4% , in the current nine month period as compared to the prior period. The increase was primarily driven by successful strategic e-commerce offers.

Other net sales include bulk wine, grape sales, custom winemaking services, event fees and retail sales, and remained relatively flat with increased tasting fees and custom crush revenue offsetting lower sales from grapes compared to the prior period.

Gross Profit
Nine Months Ended September 30,
(in thousands, except percentages)
2019
2018
Increase (Decrease)
% change
Wholesale
$
8,173

$
10,687

$
(2,514
)
(24)%
Wholesale gross margin percentage
35
%
42
%

Direct to Consumer
12,415

11,911

504

4%
Direct to Consumer gross margin percentage
68
%
68
%

Other
(1,893
)
115

(2,008
)
(1,746)%
Total gross profit
$
18,695

$
22,713

$
(4,018
)
(18)%
Total gross margin percentage
40
%
48
%

Wholesale gross profit decreased $2.5 million , or 24% , in the current nine month period as compared to the same period in 2018 primarily driven by the release of higher cost vintages, lower sales volume, and increased price support. Increased costs were primarily driven by higher fixed production costs, planned decreased production volumes in an effort to re-align supply with demand, and a lower crop yield. Gross margin percentage, which is defined as gross profit as a percentage of net sales, decreased 754 basis points primarily driven by increased cost of goods sold and increased price support compared to the prior period.


22

Direct to Consumer gross profit increased $0.5 million , or 4% , in the current nine month period as compared to the same period in 2018 driven primarily by an increase in e-commerce volume. Gross margin percentage was relatively flat compared to the prior period.

Other gross profit includes bulk wine, grape sales, event fees and non-wine retail sales and decreased $2.0 million , or 1,746% in the current nine month period as compared to the same period in 2018 . The decrease in gross profit is primarily driven by increased costs related to the 2017 and 2018 vintage bulk wine, higher fixed production costs, and planned decreased production volumes in an effort to re-align supply with demand.

Operating Expenses
Nine Months Ended September 30,
(in thousands, except percentages)
2019
2018
Increase
% change
Sales and marketing
$
13,785

$
12,256

$
1,529

12%
General and administrative
8,909

8,081

828

10%
Total operating expenses
$
22,694

$
20,337

$
2,357

12%

Sales and marketing expenses increased $1.5 million , or 12% , in the current nine month period as compared to the same period in 2018 . The increase was primarily driven by compensation related expenses and increased customer promotional events compared to the prior period.

General and administrative expenses increased $0.8 million , or 10% , in the current nine month period as compared to the same period in 2018 primarily due to compensation expenses related to severance expense, and consulting services related to corporate governance compared to the prior period.

Other Expense
Nine Months Ended September 30,
(in thousands, except percentages)
2019
2018
Increase (Decrease)
% change
Interest expense, net
$
(730
)
$
(843
)
$
(113
)
(13)%
Other income, net
442

713

(271
)
(38)%
Total other expense, net
$
(288
)
$
(130
)
$
158

122%

Interest expense, net decreased $0.1 million , or 13% , in the current nine month period compared to the same period in 2018 .  The decrease was primarily driven by a higher patronage dividend received and decreased principal balances on fixed loans compared to the prior period.

Other income decreased by $0.3 million , or 38% in the current nine month period as compared to the same period in 2018 . The decrease was primarily driven by lower insurance proceeds received compared to the prior period.

23

Income Tax Provision

The Company’s effective tax rates for the nine months ended September 30, 2019 and 2018 were 26.3% and 28.7% , 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 nine months ended September 30, 2019 was primarily attributable to state income 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 September 30, 2019 , $13.6 million in principal was outstanding on the 2015 Term Loan, and unamortized loan fees were less than $0.1 million .

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

24


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 September 30, 2019 , $9.0 million in principal was outstanding on the 2017 Term Loan, and unamortized loan fees were less than $0.1 million .

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






25

Consolidated Statements of Cash Flows

The following table summarizes our cash flow activities for the nine months ended September 30, 2019 and 2018 (in thousands):
Cash (used in) provided by:
2019
2018
Operating activities
$
2,979

$
5,672

Investing activities
5,557

713

Financing activities
(2,692
)
(3,042
)

Cash provided by operating activities

Net cash provided by operating activities was $3.0 million for the nine months ended September 30, 2019 , consisting primarily of $4.7 million of net loss adjusted for non-cash items such as $10.5 million primarily consisting of depreciation, amortization, impairment charges, and loss on the write-down of inventory, partially offset by $2.9 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 accrued liabilities, and increase in other current assets, partially offset by an increase in customer deposits. The decrease in accounts payable and accrued liabilities was primarily due to grower payments made in the current period for the 2018 harvest. The increase in other current assets was primarily due to an increase in prepaid income taxes.

Net cash provided by operating activities was $5.7 million for the nine months ended September 30, 2018 , consisting primarily of $1.1 million of net income adjusted for non-cash items such as $6.7 million of depreciation and amortization and $0.7 million of restructuring charges, partially offset by $3.1 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 accounts receivable including $1.1 million in insurance proceeds and inventory partially offset by an increase in accounts payable and expense accruals. The decrease in accounts payable and expense accruals was primarily due to grower payments made in the current period for the 2017 harvest.

Cash provided by investing activities

Net cash provided by investing activities was $5.6 million for the nine months ended September 30, 2019 , consisting primarily of net redemptions of available for sale investments of $9.5 million , partially offset by capital expenditures of $4.1 million .

Net cash provided by investing activities was $0.7 million for the nine months ended September 30, 2018 , consisting primarily of net redemptions of available for sale investments of $5.3 million , partially offset by capital expenditures of $4.6 million .

Cash used in financing activities

Net cash used in financing activities for the nine months ended September 30, 2019 was $2.7 million , which reflects the repurchase of shares of our common stock at a repurchase price of $1.7 million , principal payments on our term loans of $0.9 million and contingent consideration payments of $0.1 million associated with the Seven Hills Winery acquisition.

Net cash used in financing activities for the nine months ended September 30, 2018 was $3.0 million which reflects the repurchase of shares of our common stock at a repurchase price of $2.0 million , principal payments on our term loans of $0.9 million , and contingent consideration payments of $0.1 million associated with the Seven Hills Winery acquisition.

Share Repurchases

In March 2018, the Company commenced 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 were constructively retired and on September 19, 2018 the 2018 Repurchase Program was completed. Under the total 2018 Repurchase Program, the Company repurchased 217,377 shares at a repurchase price of $2.0 million.

In December 2018, the Company commenced a share repurchase program (the “2019 Winter Repurchase Program”) that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Winter Repurchase Program, any repurchased shares were constructively retired. On April 30, 2019, the 2 019 Winter Repurchase Program was completed. Under the total 2019 Winter Repurchase Program, the Company has repurchased 253,324 shares at a repurchase price of $2.0 million .

In September 2019, the Company commenced a share repurchase program (the "2019 Summer Repurchase Program") that provided for the repurchase of up to $2.0 million of outstanding common stock. Under the 2019 Summer Repurchase Program, any

26

repurchased shares are constructively retired. During the nine months ended September 30, 2019 , the Company repurchased 31,182 shares at a purchase price of $0.2 million under the 2019 Summer Repurchase Program.

Commitments & Contingencies

There have been no significant changes to our contractual obligations table as disclosed in the 2018 Report.

Off-Balance Sheet Financing Arrangements

None.

Critical Accounting Policies and Estimates

Except as disclosed in Note 1 and Note 13 of this Form 10-Q, there have been no material changes to the critical accounting policies and estimates previously disclosed in the 2018 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, 2019 , and bears interest at floating rates on borrowings.  The term loans had $22.6 million outstanding at September 30, 2019 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2019 . 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, 2019 .

There has been no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

27

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 court granted final approval of the settlement amount and the final payments were issued in the fourth quarter of 2018.

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 2018 Report, which could materially affect our business, results of operations or financial condition. The risks described in our 2018 Report are not the only risks facing us.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

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

Share repurchase activity under the Company’s share repurchase program on a trade date basis, for the three months ended September 30, 2019 was as follows:

Fiscal Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans
(millions)
July 1-31, 2019
—

$
—

—

-

August 1-31, 2019
—

—

—

-

September 1-30, 2019
31,182

7.61

31,182

1,762,080

Total
31,182



Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.


28

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, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Loss; (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Unaudited Interim Condensed Consolidated Financial Statements.
* Incorporated by reference
** Filed herewith

29

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 7, 2019
By:
/s/ Karen L. Diepholz
Karen L. Diepholz
Chief Financial Officer

30
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