WILLAMETTE VALLEY VINEYARDS INC : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) – Marketscreener.com

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” and “the Company” refer to Willamette Valley Vineyards, Inc.
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, 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, 2021, 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.
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, 2021. Such policies were unchanged during the six months ended June 30, 2022.
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. 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 10,000 new preferred stockholders many of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent approximately 15,000 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 had $10,500 in bulk wine sales for the six months ended June 30, 2022 and zero bulk wine sales for the same period of 2021.
The Company sold 85,133 and 98,420 cases of produced wine during the six months ended June 30, 2022 and 2021, respectively, a decrease of 13,287 cases, or 13.5% in the current year period over the prior year period. The decrease in wine case sales was primarily the result of decreased 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 June 30, 2022, wine inventory included 131,585 cases of bottled wine and 220,459 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 75,078 cases during the six months ended June 30, 2022.
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 2019 Vintage 46 Chardonnay with 94 points, 2019 Vintage 46 Pinot Noir with 93 points and the 2019 Tualatin Estate Chardonnay with 91 points. The 2019 Bernau Block Pinot Noir received 90 points and the 2019 Elton Pinot Noir received 92 points. The inaugural vintage of the 2017 Bernau Estate Méthode Traditionnelle Brut received 91 points and the 2017 Bernau Estate Blanc de Blancs received 90 points.
Wine Enthusiast Magazine rated the 2019 Founders’ Reserve Pinot Noir with 90 points.
The Sunset International Wine Competition rated our 2021 Whole Cluster Rosé of Pinot Noir with 91 points & Gold and our 2021 Pinot Gris with 90 points and Gold.
The Sommeliers Choice Awards rated our 2021 Whole Cluster Rosé of Pinot Noir with Gold and 91 points and our 2021 Pinot Gris with 90 points and Gold.
Wine & Spirits rated the 2021 Whole Cluster Rosé of Pinot Noir with 91 points and Best Buy.
Impact of COVID-19 on Operations
The COVID-19 outbreak in Oregon and other parts of the United States, as well as the response to COVID-19 by federal, state and local governments have had a material adverse impact on economic and market conditions in the United States. Although most restrictive measures have been lifted, the COVID-19 pandemic and the government responses to the outbreak presents continued uncertainty and risk with respect to the Company and its performance and financial results.
Exceeding the required Oregon Healthy Authority protocols, a state-of-the-art UV light filtration has been installed in the Company’s HVAC system to reduce harmful viruses in the air at its tasting room locations and staff offices.
We have not yet experienced significant disruptions to our supply chain network; however, any future restrictions imposed by our local or state governments may have a negative impact on our future direct to consumer sales.
Sales revenue for the three months ended June 30, 2022 and 2021 were $8,700,861 and $8,949,951, respectively, a decrease of $249,090, or 2.8%, in the current year period over the prior year period. This decrease was caused by a decrease in sales through distributors of $929,661 being partially offset by an increase in direct sales of $680,571 in the current year three-month period over the prior year period. The decrease in revenue from sales through distributors was primarily attributed to later availability of new vintage wines compared to the prior year. The increase in direct sales to consumers was primarily the result of retail sales increases in tasting room revenue. Sales revenue for the six months ended June 30, 2022 and 2021 were $14,943,179 and $14,715,289, respectively, an increase of $227,890, or 1.5%, in the current year period over the prior year period. This increase was caused by an increase in revenues from direct sales of $1,331,695 and a decrease in revenues from sales through distributors of $1,103,805 in the current year period over the prior year period. The increase in revenues from direct sales to consumers was primarily the result of increased tasting room sales. The decrease in sales through distributors was primarily the result of an decrease in off-premise sales.
Cost of Sales for the three months ended June 30, 2022 and 2021 were $3,873,604 and $3,810,228, respectively, an increase of $63,376, or 1.7%, in the current period over the prior year period. This change was primarily the result of an increase in product costs in 2022 mostly due to higher fruit and packaging costs. Cost of Sales for the six months ended June 30, 2022 and 2021 were $6,395,893 and $6,081,999, respectively, an increase of $313,894 or 5.2%, in the current period over the prior year period. This change was primarily the result of an increase in fruit and packaging costs in 2022 and the mix of sales channels and vintages sold between the two periods.
Gross profit as a percentage of net sales for the three months ended June 30, 2022 and 2021 was 55.5% and 57.4%, respectively, a decrease of 1.9 percentage points in the current year period over the prior year period mostly as a result of higher fruit and packaging costs in the second quarter of 2022 compared to the same quarter of 2021. Gross profit as a percentage of net sales for the six months ended June 30, 2022 and 2021 was 57.2% and 58.7%, respectively, a decrease of 1.5 percentage points in the current year period over the prior year period. This decrease was primarily the result of higher fruit and labor costs in the first six months of 2022 compared to the same period in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expense for the three months ended June 30, 2022 and 2021 was $4,382,814 and $3,602,129 respectively, an increase of $780,685, or 21.7%, 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 $784,489, or 35.1% being partially offset by a decrease in general and administrative expenses of $3,804, or 0.3% in the current quarter compared to the same quarter last year. Selling, general and administrative expense for the six months ended June 30, 2022 and 2021 was $8,239,075 and $6,919,687, respectively, an increase of $1,319,388, or 19.1%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling expenses of $1,145,551, or 26.3% combined with an increase in general and administrative expenses of $173,837, or 6.8% in the current year period compared to the same period in 2021. Selling expenses increased in both the first half and second quarter of 2022 compared to the same periods in 2021 primarily as a result of more sales coming from tasting rooms which have higher selling costs and from costs related to the development of new locations. Additional selling, general and administrative expenses related to the opening of new locations were $254,744 in the current quarter and $438,873 in the first six months of 2022 compared to the same period in the prior year.
Interest expense for the three months ended June 30, 2022 and 2021 was $90,371 and $97,499, respectively, a decrease of $7,128 or 7.3%, in the second quarter of 2022 over the same quarter in the prior year. Interest expense for the six months ended June 30, 2022 and 2021 was $181,817 and $197,075, respectively, a decrease of $15,258 or 7.7%, in the current year period over the prior year period. The decrease in interest expense for the second quarter and first six months of 2022 was primarily the result of decreased debt in the current periods compared to the second quarter and first six months of 2021.
The income tax expense for the three months ended June 30, 2022 and 2021 was $97,220 and $406,304, respectively, a decrease of $309,084 or 76.1%, in the second quarter of 2022 over the same quarter in the prior year mostly as a result of the lower pre-tax income in the second quarter of 2022, compared to the same quarter in 2021. The Company’s estimated federal and state combined income tax rate was 27.4% and 27.4% for the three months ended June 30, 2022 and 2021, respectively. The income tax expense for the six months ended June 30, 2022 and 2021 was $59,897 and $452,583, respectively, a decrease of $392,686 or 86.8%, in the current year period over the prior year period mostly a result of lower pre-tax income in the first six months of 2022, compared to the same period in 2021. The Company’s estimated federal and state combined income tax rate was 27.4% for the six months ended June 30, 2022 and 2021.
Net income for the three months ended June 30, 2022 and 2021 was $257,401 and $1,077,551, respectively, a decrease of $820,150, or 76.1%, in the second quarter of 2022 over the same quarter in the prior year. Net income for the six months ended June 30, 2022 and 2021 was $158,459 and $1,200,236, respectively, a decrease of $1,041,777, or 86.8%, in the current year period over the prior year period. The decrease in net income for the second quarter and decrease in net income for the first half of 2022, compared to the comparable periods in 2021, was primarily the result of changes in the gross profits and operating expenses.
Net Income (Loss) Applicable to Common Shareholders
Net income (loss) applicable to common shareholders for the three months ended June 30, 2022 and 2021 was $(209,212) and $715,045, respectively, a decrease of $924,257, or 129.3%, in the second quarter of 2022 over the same quarter in the prior year. Net income (loss) applicable to common shareholders for the six months ended June 30, 2022 and 2021 was $(774,766) and $478,094, respectively, a decrease of $1,252,860, or 262.1%, in the current year period over the prior year period. The decrease in income applicable to common shareholders in the second quarter and the first six months of 2022, compared to the same periods of 2021, was the result of lower net income and higher dividend costs in the current period.
Liquidity and Capital Resources
At June 30, 2022, the Company had a working capital balance of $20.0 million and a current working capital ratio of 3.99:1.
At June 30, 2022, the Company had a cash balance of $3,128,407, while at December 31, 2021, the Company had a cash balance of $13,747,285. This decrease in cash was primarily the result of investments in construction activity, the payment of grapes payable and an increase in inventories. The construction of a new tasting room and winery in Dundee, Oregon is expected to cost approximately $15.6 million, which will be funded through a combination of cash on hand as well as equity financing through Preferred Stock offerings. Construction began in July 2019 and was paused in March 2020 as a result of the uncertainty surrounding the COVID-19 pandemic and has now been restarted. As of June 30, 2022, we had incurred approximately $13.6 million on the project.
Total cash used in operating activities in the six months ended June 30, 2022 was $979,069. Cash used in operating activities for the six months ended June 30, 2022 was primarily associated with increased inventory, and payment of grapes payable, partially offset by non-cash lease expense, and depreciation and amortization.
Total cash used in investing activities in the six months ended June 30, 2022 was $10,129,564. Cash used in investing activities for the six months ended June 30, 2022 consisted of cash used on construction activity and vineyard development costs.
Total cash generated from financing activities in the six months ended June 30, 2022 was $489,755. Cash generated from financing activities for the six months ended June 30, 2022 consisted of proceeds from the issuance of Preferred Stock, 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 at July 29, 2021. 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. At June 30, 2022 and December 31, 2021, there was no outstanding balance on this revolving line of credit.
As of June 30, 2022, the Company had a 15-year installment note payable of $1,248,993, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.
As of June 30, 2022, the Company had a total long-term debt balance of $5,301,492, including the portion due in the next year, owed to Farm Credit Services, exclusive of debt issuance costs of $125,860. As of December 31, 2021, the Company had a total long-term debt balance of $5,535,097, exclusive of debt issuance costs of $132,484.
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. We will continue to evaluate funding mechanisms to support our long-term funding requirements.
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