Willamette Valley Vineyards Inc: Form 10-Q for the period ended Mar 31, 2023

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” and “the Company” refer to Willamette Valley Vineyards, Inc.

Forward Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company’s business, and beliefs and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”, “predicts,” “potential,” “should,” or “will” or the negative thereof and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease or smoke from forest fires, changes in consumer spending, and the reduction in consumer demand for premium wines. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Many of these risks as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as well as in the Company’s other Securities and Exchange Commission filings and reports. The forward-looking statements in this report are made as of the date hereof, and, except as otherwise required by law, the Company disclaims any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

The foregoing discussion and analysis of the Company’s financial condition and results of operations are based upon our unaudited condensed financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, collection of accounts receivable, valuation of inventories, and amortization of vineyard development costs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of the Company’s critical accounting policies and related judgments and estimates that affect the preparation of the Company’s financial statements is set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Such policies were unchanged during the three months ended March 31, 2023.

Overview

The Company, one of the largest wine producers in Oregon by volume, believes its success is dependent upon its ability to: (1) grow and purchase high quality vinifera wine grapes; (2) vinify the grapes into premium, super premium and ultra-premium wine; (3) achieve significant brand recognition for its wines, first in Oregon, and then nationally and internationally; (4) effectively distribute and sell its products nationally; and (5) continue to build on its base of direct to consumer sales.

The Company’s goal is to continue to build on a reputation for producing some of Oregon’s finest, most sought-after wines. The Company has focused on positioning itself for strategic growth through property purchases, property development and issuance of the Company’s Series A Redeemable Preferred Stock (the “Preferred Stock”). Management expects near term financial results to be negatively impacted by these activities as a result of incurring costs of accrued preferred stock dividends, strategic planning and development costs and other growth associated costs.

The Company’s wines are made from grapes grown in vineyards owned, leased or contracted by the Company, and from grapes purchased from other vineyards. The grapes are harvested, fermented and made into wine primarily at the Company’s winery in Turner Oregon (the “Winery”) and the wines are sold principally under the Company’s Willamette Valley Vineyards label, but also under the Griffin Creek, Pambrun, Elton, Maison Bleue, Metis, Natoma, Pere Ami, Elton, Domaine Willamette and Tualatin Estates labels. The Company also owns the Tualatin Estate Vineyards and Winery, located near Forest Grove, Oregon and the Domaine Willamette Winery located near Dundee, Oregon. The Company generates revenues from the sales of wine to wholesalers and direct to consumers.

Direct to consumer sales primarily include sales through the Company’s tasting rooms, telephone, internet and wine club. Direct to consumer sales are at a higher unit price than sales through distributors due to prices received being closer to retail than those prices paid by wholesalers. The Company continues to emphasize growth in direct to consumer sales through the Company’s existing tasting rooms and the opening of new locations, and growth in wine club membership. Additionally, the Company’s Preferred Stock sales since August 2015 have resulted in approximately 12,000 new preferred stockholders many of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent approximately 18,000 current and potential customers of the Company.

Periodically, the Company will sell grapes or bulk wine, due to them not meeting Company standards or being in excess of production targets, however this is not a significant part of the Company’s activities.

The Company sold 42,387 and 33,639 cases of produced wine during the three months ended March 31, 2023 and 2022, respectively, an increase of 8,748 cases, or 26.0% in the current year period over the prior year period. The increase in wine case sales was primarily the result of having more locations and more availability of some vintages in the quarter when compared to the prior year period.

Cost of sales includes grape costs, whether purchased or grown at Company vineyards, winemaking and processing costs, bottling, packaging, warehousing, and shipping and handling costs. For grapes grown at Company vineyards, costs include farming expenditures and amortization of vineyard development costs.

At March 31, 2023, wine inventory included 106,487 cases of bottled wine and 523,910 gallons of bulk wine in various stages of the aging process. Case wine is expected to be sold over the next 12 to 24 months and generally before the release date of the next vintage. The Winery bottled 56,974 cases during the three months ended March 31, 2023.

Willamette Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers and online bloggers including the accolades below.

James Suckling rated the Company’s 2021 Estate Pinot Noir 91 points, Dijon Clone Chardonnay 91 points and the 2022 Pinot Gris 90 points.

The San Francisco Chronicle Wine Competition 2023 awarded the Company’s White Pinot Noir with a Gold Medal.

The Great Northwest Wine Competition awarded the Company’s 2017 Brut with a Double Gold Medal.

RESULTS OF OPERATIONS

Revenue

Sales revenue for the three months ended March 31, 2023 and 2022 was $8,308,940 and $6,242,318, respectively, an increase of $2,066,622, or 33.1%, in the current year period over the prior year period. This increase was caused by an increase in revenues from direct sales of $1,114,341 and an increase in revenues from shipments to distributors of $952,281 in the current year three-month period over the same period in the prior year. The increase in direct sales to consumers was primarily the result of more tasting rooms in 2023 compared to 2022 and an increase in wine club sales. The increase in revenue from the distributors was primarily attributed to more inventory being available to ship in the current year three-month period over the same period in the prior year.

Cost of Sales

Cost of sales for the three months ended March 31, 2023 and 2022 was $3,830,477 and $2,522,289, respectively, an increase of $1,308,188, or 51.9%, in the current period over the prior year period. This change was primarily the result of an increase in sales in the first quarter of 2023 compared to the same quarter in 2022 and higher product costs.

Gross Profit

Gross profit for the three months ended March 31, 2023 and 2022 was $4,478,463 and $3,720,029, respectively, an increase of $758,434, or 20.4%, in the first quarter of 2023 over the same quarter in the prior year. This increase was primarily the result of an increase in sales in the first three months of the current year compared to the same period in 2022 being partially offset by an increase in product costs.

Gross profit as a percentage of net sales for the three months ended March 31, 2023 and 2022 was 53.9% and 59.6%, respectively, a decrease of 5.7 percentage points in the current quarter over the same quarter in the prior year. The decrease was primarily the result of the higher product costs of the more recent vintages sold in the current quarter.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2023 and 2022 was $5,453,413 and $3,856,261, respectively, an increase of $1,597,152, or 41.4%, in the current quarter over the same quarter in the prior year. This increase was primarily the result of an increase in selling expenses of $1,505,853, or 60.8% and an increase in general and administrative expenses of $91,299, or 6.6% in the current quarter compared to the same quarter last year. Selling expenses increased in 2023 compared to 2022 primarily as a result of the higher selling expenses related to the increase in direct sales and having more tasting room locations. General and administrative expenses increased in the first quarter of 2023 compared to the same quarter of 2022 primarily as a result of higher property taxes and labor cost increases.

Interest Expense

Interest expense for the three months ended March 31, 2023 and 2022 was $124,422 and $91,446, respectively, an increase of $32,976 or 36.1%, in the first quarter of 2023 over the same quarter in the prior year. The increase in interest expense for the first quarter was primarily the result of higher debt and higher interest rates compared to the first quarter of 2022.

Income Tax Benefit

The income tax benefit for the three months ended March 31, 2023 and 2022 was $280,963 and $37,323, respectively, an increase of $243,640 or 652.8%, in the first quarter of 2023 over the same quarter in the prior year, primarily as a result of a higher pre-tax loss in the first quarter of 2023, compared to the same quarter in 2022. The Company’s estimated federal and state combined income tax rate for the three months ended March 31, 2023 and 2022 was 27.4%.

Net Loss

Net loss for the three months ended March 31, 2023 and 2022 was $744,823 and $98,942, respectively, an increase of $645,881, or 652.8%, in the first quarter of 2023 over the same quarter in the prior year. The increase in net loss for the first quarter of 2023, compared to the comparable period in 2022, was primarily the result of higher selling expenses and higher product costs.

Net Loss Applicable to Common Shareholders

Net loss applicable to common shareholders for the three months ended March 31, 2023 and 2022 was $1,256,542 and $565,554, respectively, an increase of $690,988, or 122.2%, in the first quarter of 2023 over the same quarter in the prior year. The increase in loss applicable to common shareholders in the first quarter of 2023, compared to the same period of 2022, was the result of a higher net loss and a higher accrued preferred stock dividend in the current period.

Liquidity and Capital Resources

At March 31, 2023, the Company had a working capital balance of $19.1 million and a current working capital ratio of 3.32:1.

At March 31, 2023, the Company had a cash balance of $154,340. At December 31, 2022, the Company had a cash balance of $338,676. This decrease is primarily the result of the payment of grapes payable and accounts payable being partially offset by a reduction in accounts receivable.

Total cash used for operating activities in the three months ended March 31, 2023 was $1,279,932. Cash used in operating activities for the three months ended March 31, 2023 was primarily associated with reduced grapes payable, accounts payable and increased inventories, being partially offset by decreased accounts receivable.

Total cash used in investing activities in the three months ended March 31, 2023 was $1,500,176. Cash used in investing activities for the three months ended March 31, 2023 primarily consisted of cash used on construction activity and vineyard development costs.

Total cash generated from financing activities in the three months ended March 31, 2023 was $2,595,772. Cash generated from financing activities for the three months ended March 31, 2023 primarily consisted of proceeds from the issuance of Preferred Stock, long and short term debt being partially offset by the repayment of debt.

In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000 against eligible accounts receivable and inventories, as defined in the agreement. The revolving line bears interest at prime less 0.5%, with a floor of 3.25%, is payable monthly, and is subject to renewal. In July 2021, the Company renewed the credit agreement until July 31, 2023. In November 2022, the Company increased the borrowing line up to $5,000,000. The Company had an outstanding line of credit balance of $1,178,078 at March 31, 2023, at an interest rate of 7.25%, and an outstanding balance of $166,617 at December 31, 2022.

The line of credit agreement includes various covenants, which among other things, requires the Company to maintain minimum amounts of tangible net worth, debt-to-equity, and debt service coverage, as defined, and limits the level of acquisitions of property and equipment. As of December 31, 2022, the Company was out of compliance with a debt covenant. The Company has received a waiver from Umqua Bank waiving this violation until the next measurement date of December 31, 2023.

As of March 31, 2023, the Company had a 15-year installment note payable of $1,176,519, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.

As of March 31, 2023, the Company had a total long-term debt balance of $7,952,402, including the portion due in the next year, owed to AgWest, exclusive of debt issuance costs of $115,925. As of December 31, 2022, the Company had a total long-term debt balance of $7,062,654, exclusive of debt issuance costs of $119,237.

The Company believes that cash flow from operations and funds available under the Company’s existing credit facilities will be sufficient to meet the Company’s short-term needs.

Disclosure Controls and Procedures – The Company carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15 and 15d-5 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that review, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed by the Company in the reports the Company files or submit under the Exchange Act (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting – There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which could materially affect our business, results of operations or financial condition.

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, impact our results of operations or financial condition.