Willamette Valley Vineyards Inc: Form 10-Q for the period ended Sep 30, 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 September 30, 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 143,286 and 127,007 cases of produced wine during the nine months ended September 30, 2023 and 2022, respectively, an increase of 16,279 cases, or 12.8% in the current year period over the prior year period. The increase in wine case sales was primarily the result of increased case sales through both distributors and direct to the consumer.

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 September 30, 2023, wine inventory included 172,280 cases of bottled wine and 519,138 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 205,486 cases during the nine months ended September 30, 2023.

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

Wine Enthusiast Magazine rated the Company’s 2022 Whole Cluster Pinot Noir 90 points, 2022 White Pinot Noir 91 points, 2022 Maison Bleue Voltigeur Viognier 90 points, 2020 Métis Red Blend 92 points and Cellar Selection.

RESULTS OF OPERATIONS

Revenue

Sales revenue for the three months ended September 30, 2023 and 2022 were $9,348,066 and $7,602,878, respectively, an increase of $1,745,188, or 23.0%, in the current year period over the prior year period. This increase was caused by an increase in sales through distributors of $412,728 and an increase in direct sales of $1,332,460 in the current year three-month period over the prior year period. The increase in revenue from sales through distributors was primarily attributed to more availability of new vintage wines compared to the prior year. The increase in direct sales to consumers was primarily the result of retail sales in new tasting rooms in 2023. Sales revenue for the nine months ended September 30, 2023 and 2022 were $28,383,249 and $22,546,057, respectively, an increase of $5,837,192, or 25.9%, in the current year period over the prior year period. This increase was caused by an increase in revenues from direct sales of $4,134,603 and an increase in revenues from sales through distributors of $1,702,589 in the current year period over the prior year period. The increase in revenues from direct sales to consumers was primarily the result of more tasting room locations in the current year. The increase in sales through distributors was primarily the result of an increase in off-premise sales.

Cost of Sales

Cost of Sales for the three months ended September 30, 2023 and 2022 were $3,663,488 and $3,708,695, respectively, a decrease of $45,207, or 1.2%, in the current period over the prior year period. This change was primarily the result of an increase in direct sales compared to sales through distributors in the third quarter of 2023 compared to the same quarter of 2022. Cost of Sales for the nine months ended September 30, 2023 and 2022 were $11,969,630 and $10,104,588, respectively, an increase of $1,865,042 or 18.5%, in the current period over the prior year period. This change was primarily the result of an increase in both direct and distributor sales in 2023.

Gross Profit

Gross profit as a percentage of net sales for the three months ended September 30, 2023 and 2022 was 60.8% and 51.2%, respectively, an increase of 9.6 percentage points in the current year period over the prior year period, mostly as a result of the change in mix of products compared to the same quarter of 2022. Gross profit as a percentage of net sales for the nine months ended September 30, 2023 and 2022 was 57.8% and 55.2%, respectively, an increase of 2.6 percentage points in the current year period over the prior year period. This increase was primarily the result of an increase in direct sales compared to sales through distributors.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2023 and 2022 was $5,967,346 and $5,120,218 respectively, an increase of $847,128 or 16.5%, in the current quarter over the same quarter in the prior year. This increase was primarily the result of an increase in selling and marketing expenses of $577,384, or 15.3% and an increase in general and administrative expenses of $269,744, or 20.0% in the current quarter compared to the same quarter in the prior year. Selling, general and administrative expense for the nine months ended September 30, 2023 and 2022 was $17,362,498 and $13,359,293, respectively, an increase of $4,003,205 or 30.0%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling and marketing expenses of $3,413,667, or 36.8% combined with an increase in general and administrative expenses of $589,538, or 14.4% in the current year period compared to the same period in 2022. Selling expenses increased primarily as a result of having more tasting room locations in 2023.

Interest Expense

Interest expense for the three months ended September 30, 2023 and 2022 was $171,272 and $87,220, respectively, an increase of $84,052 or 96.4%, in the third quarter of 2023 over the same quarter in the prior year. Interest expense for the nine months ended September 30, 2023 and 2022 was $460,309 and $269,037, respectively, an increase of $191,272 or 71.1%, in the current year period over the prior year period. The increase in interest expense for the third quarter and first nine months of 2023 was primarily the result of increased debt at higher interest rates in the current periods compared to the third quarter and first nine months of 2022.

Income Taxes

The income tax benefit for the three months ended September 30, 2023 and 2022 was $123,344 and $358,414, respectively, a decrease of $235,070 or 65.6%, in the third quarter of 2023 compared to the same quarter in the prior year mostly as a result of the lower pre-tax loss in the third quarter of 2023, compared to the same quarter in 2022. The Company’s estimated federal and state combined income tax rate was 27.4% for the three months ended September 30, 2023 and 2022, respectively. The income tax benefit for the nine months ended September 30, 2023 and 2022 was $363,396 and $298,517, respectively, an increase of $64,879 or 21.7%, in the current year period over the prior year period, mostly a result of a higher pre-tax loss in the first nine months of 2023, compared to the same period in 2022. The Company’s estimated federal and state combined income tax rate was 27.4% for the nine months ended September 30, 2023 and 2022, respectively.

Net Loss

Net loss for the three months ended September 30, 2023 and 2022 was $326,982 and $949,821, respectively, a decrease of $622,839, or 65.6%, in the third quarter of 2023 over the same quarter in the prior year. Net loss for the nine months ended September 30, 2023 and 2022 was $963,352 and $791,362, respectively, an increase of $171,990, or 21.7%, in the current year period over the prior year period.

Net Loss Applicable to Common Shareholders

Net loss applicable to common shareholders for the three months ended September 30, 2023 and 2022 was $838,701 and $1,416,433, respectively, a decrease of $577,732, or 40.8%, in the third quarter of 2023 over the same quarter in the prior year. Net loss applicable to common shareholders for the nine months ended September 30, 2023 and 2022 was $2,498,510 and $2,191,199, respectively, an increase of $307,311, or 14.0%, in the current year period over the prior year period. The decrease in the loss applicable to common shareholders in the third quarter was the result of a lower net loss in the current period. The increase in the loss applicable to common shareholders in the first nine months of 2023, compared to the same period of 2022, was the result of a higher net loss and higher dividend costs in the current period.

Liquidity and Capital Resources

At September 30, 2023, the Company had a working capital balance of $17.7 million and a current working capital ratio of 2.44:1.

At September 30, 2023, the Company had a cash balance of $213,432. At December 31, 2022, the Company had a cash balance of $338,676. This decrease is primarily the result of investments in property and equipment and inventories.

Total cash used for operating activities in the nine months ended September 30, 2023 was $68,089. Cash used in operating activities for the nine months ended September 30, 2023 was primarily associated with increased inventories, being partially offset by decreased accounts receivable and depreciation and amortization.

Total cash used in investing activities in the nine months ended September 30, 2023 was $3,718,612. Cash used in investing activities for the nine months ended September 30, 2022 consisted of cash used on property and equipment and vineyard development costs.

Total cash generated from financing activities in the nine months ended September 30, 2023 was $3,661,457. Cash generated from financing activities for the nine months ended September 30, 2023 primarily consisted of proceeds from the issuance of Preferred Stock, proceeds from the line of credit and long-term debt, being partially offset by the repayment of long-term 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 no outstanding line of credit balance at September 30, 2023, at an interest rate of 8.00%, and an outstanding balance of $166,617 at December 31, 2022. In July 2023 the line of credit was renewed for an additional two years.

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 Umpqua Bank waiving this violation until the next measurement date of December 31, 2023.

As of September 30, 2023, the Company had a 15-year installment note payable of $1,126,374, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.

As of September 30, 2023, the Company had a total long-term debt balance of $7,717,435, including the portion due in the next year, owed to AgWest, exclusive of debt issuance costs of $109,301. 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 September 30, 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.