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"
"intends," "plans," "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, changes in consumer spending, the reduction in
consumer demand for premium wines and the impact of the Covid-19 pandemic and
the policies of United States federal, state and local governments in response
to such pandemic. 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, 2019, 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.
14
Critical Accounting Policies
The foregoing discussion and analysis of the Company's financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these 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, 2019. Such
policies were unchanged during the three months ended March 31, 2020.
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 nearby
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, Elton and
Tualatin Estates labels. The Company also owns the Tualatin Estate Vineyards and
Winery, located near Forest Grove, 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 remodeled
35,642 square foot hospitality facility at the Winery and expansion and growth
in wine club membership. Additionally, the Company's preferred stock sales since
August 2015 have resulted in approximately 5,738 new preferred stockholders many
of which the Company believes are wine enthusiasts. When considering joint
ownership, we believe these new stockholders represent approximately 9,000
potential customers of the Company.
15
Periodically, the Company will sell grapes or bulk wine, due to them not meeting
Company standards or being excess to production targets, however this is not a
significant part of the Company's activities. The Company had $28,734 in bulk
wine sales for the three months ended March 31, 2020 and $42,763 in bulk wine
sales in the same period of 2019.
The Company sold approximately 45,035 and 32,429 cases of produced wine during
the three months ended March 31, 2020 and 2019, respectively, an increase of
12,606 cases, or 38.9% 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 distributors.
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, 2020, wine inventory included approximately 117,535 cases of
bottled wine and 386,301 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
approximately 47,773 cases during the three months ended March 31, 2020.
Net income for the three months ended March 31, 2020 and 2019 was $787,082 and
$426,476, respectively, an increase of $360,606, or 84.6%, in the current year
period over the prior year period.
Income applicable to common shareholders for the three months ended March 31,
2020 and 2019 was $530,630 and $170,024, respectively, an increase of $360,606,
or 212.1%, in the current year period over the prior year period.
Overall gross profit for the three months ended March 31, 2020 and 2019 was
$3,912,042 and $3,280,636, respectively, an increase of $631,406, or 19.2%, in
the current year period over the prior year period. Gross profit as a percentage
of net sales for the three months ended March 31, 2020 and 2019 was 60.0% and
65.6% a decrease of 5.6 percentage points, in the current year period over the
prior year period.
The Company generated $0.11 and $0.03 in basic earnings per share after the
accrual of dividends on Preferred Stock during the three months ended March 31,
2020 and 2019, respectively.
Willamette Valley Vineyards continues to receive positive recognition through
national magazines, regional publications, local newspapers and online bloggers.
James Suckling reviewed the Company's Elton wines from the Eola-Amity Hills AVA
and awarded the 2017 Elton Chardonnay with 92 points, the 2017 Elton Self-Rooted
Pinot Noir with 93 points and the 2017 Elton Florine Pinot Noir with 93
points. He also reviewed two of the Company's single-designated Pinot Noirs and
awarded the 2017 Hannah Pinot Noir with 90 points and the 2017 Elton Pinot Noir
with 92 points
Wine Enthusiast reviewed the Company's 2017 Maison Bleue Gravière Syrah from The
Rocks District of Milton-Freewater AVA and awarded it with 91 points.
Jeb Dunnuck reviewed releases from the Company's Maison Bleue brand and awarded
the 2017 Frontère Syrah with 94 points, the 2017 Voyageur Syrah with 91 points,
the 2017 Gravière Syrah with 91 points and the 2017 Bourgeois Grenache with 90
points. He also reviewed the Company's Pambrun wines, sourced from
high-elevation hillside plantings in Walla Walla's SeVein, and awarded the 2016
Pambrun Chrysologue with 93 points, the 2016 Pambrun Cabernet Sauvignon with 91
points and the 2016 Pambrun Merlot with 90 points.
Wine.com awarded the Company's 2018 Whole Cluster Pinot Noir with 92 points, the
2018 Whole Cluster Rosé of Pinot Noir with 90 points and the 2017 Estate Pinot
Noir with 90 points.
The Company's 2018 Pinot Gris was voted Best of Variety at the 2020 TEXSOM
International Wine Awards and was given a Judges' Selection/Platinum Medal.
The Company's Pinot Gris was included in The Wall Street Journal article titled
"Why Wine Remains a Great Connector."
16
Impact of COVID-19 on Operations
The COVID-19 pandemic has been declared a National Public Health Emergency in
the United States, and on March 8, 2020, Oregon Governor Kate Brown declared a
state of emergency to address the spread of COVID-19 in Oregon. The outbreak in
Oregon and other parts of the United States, as well as the response to COVID-19
by federal, state and local governments could have a continued material adverse
impact on economic and market conditions in the United States, and likely will
negatively affect our business and operations. Although the financial impacts of
COVID-19 to the Company's current quarter have been limited due to the timing of
onset, the COVID-19 pandemic and the government responses to the outbreak
presents uncertainty and risk with respect to the Company and its performance
and financial results.
During March, 2020, with the exception of key operations personnel, we have
shifted our office staff to remote workstations, and we expect we will continue
to operate remotely until state and local government shelter-in-place orders
have been lifted and management determines it is safe for employees to return to
offices.
Although we have not experienced significant disruptions to our supply chain
network, all of the Company's tasting rooms have been closed in March, 2020 in
compliance with shelter-in-place orders imposed by the local state government,
which we expect may negatively impact our direct to consumer sales since as
of the date of this report the Company's tasting rooms remained closed. In
response to the closing of our tasting rooms, the Company launched curbside
pick-ups, complimentary shipping specials with minimum purchase and a new wine
delivery service for locals, which we are hopeful will mitigate some of the
expected declines in direct to consumer sales.
Additionally, the demand for the Company's wine sold directly or through
distributors to restaurants, bars, and other hospitality locations will likely
be significantly reduced in the near-term due to shelter-in-place orders
restricting consumers from visiting, as well as in some cases the temporary
closure of, such establishments.
The extent of the impact of the COVID-19 pandemic on the Company's business is
highly uncertain and difficult to predict, as the response to the pandemic is in
its early stages and information is rapidly evolving. The severity of the impact
of the COVID-19 pandemic on the Company's business will depend on a number of
factors, including, but not limited to, the duration and severity of the
pandemic and the extent and severity of the impact on the Company's customers,
all of which are uncertain and cannot be predicted.
RESULTS OF OPERATIONS
Revenue
Sales for the three months ended March 31, 2020 and 2019 were $6,521,895 and
$4,998,786, respectively, an increase of $1,523,109, or 30.5%, in the current
year period over the prior year period. This increase was mainly caused by an
increase in sales through distributors of $1,290,974 combined with an increase
in direct sales to customers of $232,135 in the current year three month period
over the prior year period. The increase in sales through distributors is
primarily the result of new product placements and growth in the Company's brand
recognition in the first quarter of 2020 when compared to same quarter of 2019.
The increase in sales through direct sales was mostly attributable to an
increase in telephone and internet sales and the opening of the Wineworks
facility in Folsom, California, during the first quarter of 2020.
Cost of Sales
Cost of Sales for the three months ended March 31, 2020 and 2019 were $2,609,853
and $1,718,150, respectively, an increase of $891,703, or 51.9%, in the current
period over the prior year period. This change was primarily the result of
increased case sales in the first quarter of 2020 when compared to the same
period in 2019.
17
Gross Profit
Gross profit for the three months ended March 31, 2020 and 2019 was $3,912,042
and $3,280,636, respectively, an increase of $631,406, or 19.2%, in the current
year period over the prior year period. This increase is primarily the result of
increased sales revenues being partially offset by increased cost of sales in
the first quarter of 2020 compared to the same period in 2019.
Gross profit as a percentage of net sales for the three months ended March 31,
2020 and 2019 was 60.0% and 65.6%, a decrease of 5.6 percentage points, in the
current year period over the prior year period. This decrease was primarily the
result of changes in the mix of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March
31, 2020 and 2019 was $2,829,504 and $2,716,198, respectively, an increase of
$113,306, or 4.2%, in the current year period over the prior year period. This
increase was primarily the result of an increase in administration expenses of
$140,266, or 14.9% being partially offset by a decrease in selling and marketing
expenses of $26,960, or 1.5% in the current quarter compared to the same quarter
in 2019. General and administrative expense increases were primarily related to
increased professional fees, property taxes and insurance cost in the first
quarter of 2020 compared to the same quarter of 2019. Selling expenses decreased
in the first three months of 2020 compared to the same period of 2019, primarily
as a result of lower travel and contract labor costs in the current quarter.
Interest Expense
Interest expense for the three months ended March 31, 2020 and 2019 was $105,742
and $110,414, respectively, a decrease of $4,672 or 4.2%, in the current year
period over the prior year period. The decrease in interest expense was
primarily the result of a lower amount of debt in the first quarter of 2020
compared to the same quarter in 2019.
Income Taxes
The income tax expense for the three months ended March 31, 2020 and 2019 was
$294,233 and $150,003, respectively, an increase of $144,230 or 96.2%, in the
current year period over the prior year period. The Company's estimated federal
and state combined income tax rate was 27.2% and 26.0% for the three months
ended March 31, 2020 and 2019, respectively. The increase in income tax
provision was primarily the result of higher pre-tax income before taxes in 2020
when compared to the same quarter in the prior year.
Net Income
Net income for the three months ended March 31, 2020 and 2019 was $787,082 and
$426,476, respectively, an increase of $360,606, or 84.6%, in the current year
period over the prior year period. This increase is primarily the result of an
increase in income from operations being partially offset by an increase in the
income tax provision in the first quarter of 2020 compared to the same quarter
in 2019.
Income Applicable to Common Shareholders
Income applicable to common shareholders for the three months ended March 31,
2020 and 2019 was $530,630 and $170,024, respectively, an increase of $360,606,
or 212.1%, in the current year period over the prior year period. This increase
is primarily the result of increased net income.
Liquidity and Capital Resources
At March 31, 2020, the Company had a working capital balance of $20.2 million
and a current working capital ratio of 5.01:1.
At March 31, 2020, the Company had a cash balance of $5,667,393. At December 31,
2019, the Company had a cash balance of $7,050,176. This decrease is primarily
the result of increased cash used in investing activities primarily on the
construction of a new tasting room in Dundee, Oregon. The total construction
costs for the project is expected to be approximately $13.1 million, which we
expect will be funded through a combination of cash on hand as well as debt
and/or equity financing. Construction began in July, 2019 and was paused in
March 2020 as a result of the uncertainty on the impact of the COVID-19 pandemic
on the Company's business. As of March 31, 2020, we had incurred approximately
$4.0 million on the project.
18
Total cash generated from operating activities in the three months ended March
31, 2020 was $355,213. Cash generated in operating activities for the three
months ended March 31, 2020 was primarily associated with cash received from
increased net income and reduced inventory, being partially offset by cash used
in connection with an increase in accounts receivable and a decrease in grapes
payables.
Total cash used in investing activities in the three months ended March 31, 2020
was $1,550,523. Cash used in investing activities for the three months ended
March 31, 2020 primarily consisted of cash used on construction activity on a
new tasting room and vineyard development costs.
Total cash used in financing activities in the three months ended March 31, 2020
was $187,473. Cash used in financing activities for the three months ended March
31, 2020 primarily consisted of repayment of debt.
The Company has an asset-based loan agreement (the "line of credit") with Umpqua
Bank that allows it to borrow up to $2,000,000. The Company renewed this
agreement, in July 2019, until July, 2021. The interest rate is prime less 0.5%,
with a floor of 3.25%. The loan agreement contains certain restrictive financial
covenants with respect to total equity, debt-to-equity and debt coverage that
must be maintained by the Company on a quarterly basis. As of March 31, 2020,
the Company was in compliance with all of the financial covenants.
As of March 31, 2020 and December 31, 2019 the Company had no balance
outstanding on the line of credit.
As of March 31, 2020 the Company had a 15-year installment note payable of
$1,447,966, due in quarterly payments of $42,534, associated with the purchase
of property in the Dundee Hills AVA.
As of March 31, 2020, the Company had a total long-term debt balance of
$6,315,588, including the portion due in the next year, owed to Farm Credit
Services and Toyota Credit Corporation, exclusive of debt issuance costs of
$155,666. As of December 31, 2019, the Company had a total long-term debt
balance of $6,423,517, exclusive of debt issuance costs of $158,978.
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. Due to the uncertainty surrounding the future impact
of the COVID-19 pandemic on the Company we will continue to evaluate funding
mechanisms to support our long-term funding requirements.
Off Balance Sheet Arrangements
As of March 31, 2020 and December 31, 2019, the Company had no off-balance sheet
arrangements.
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WILLAMETTE VALLEY VINEYARDS, INC. 
