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, 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.
13
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, 2021. Such policies were unchanged
during the nine months ended September 30, 2022.
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. 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 nine months ended September 30, 2022 and zero bulk wine sales
for the same period of 2021.
The Company sold 127,007 and 145,143 cases of produced wine during the nine
months ended September 30, 2022 and 2021, respectively, a decrease of 18,136
cases, or 12.5% 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 due to a lack of available product.
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, 2022, wine inventory included 154,525 cases of bottled wine and
123,543 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 141,619 cases during the
nine months ended September 30, 2022.
Willamette Valley Vineyards continues to receive positive recognition through
national magazines, regional publications, local newspapers and online bloggers
including the accolades below.
14
Wine Enthusiast rated the Company's 2020 Riesling with 90 points & Best Buy, and
in the Top 100 Best Buy Wines for 2022.
Jeremy Young from International Wine Report rated the Company's 2019 Bernau
Block Pinot Noir 90 points, 2019 Bernau Block Chardonnay 92 points, 2019 Elton
Pinot Noir 92 points. The Company's Elton wines the 2019 Florine Pinot Noir 90
points, 2019 Self-Rooted Pinot Noir 91 points and 2019 Chardonnay 91 points. The
Company's Pambrun wines the 2019 Cabernet Sauvignon 92 points, 2019 Merlot 92
points and 2019 Chrysologue 91 points. The Company's Maison Bleue wines the 2019
Gravière Syrah 92 points, 2019 Voyageur Syrah 93 points, 2019 Frontière Syrah 92
points and 2021 Lisette Rosé 91 points.
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.
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.
RESULTS OF OPERATIONS
Revenue
Sales revenue for the three months ended September 30, 2022 and 2021 were
$7,602,878 and $7,641,228, respectively, a decrease of $38,350, or 0.5%, in the
current year period over the prior year period. This decrease was caused by a
decrease in sales through distributors of $133,386 being partially offset by an
increase in direct sales of $95,036 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 from the opening of new tasting rooms in 2022.
Three new locations in Dundee, Oregon, Lake Oswego, Oregon and Vancouver,
Washington have opened in 2022. Sales revenue for the nine months ended
September 30, 2022 and 2021 were $22,546,057 and $22,356,517, respectively, an
increase of $189,540, or 0.8%, in the current year period over the prior year
period. This increase was caused by an increase in revenues from direct sales of
$1,426,731 being partially offset by a decrease in revenues from sales through
distributors of $1,237,191 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 from the opening of three new
locations in 2022. The decrease in sales through distributors was primarily the
result of a decrease in off-premise sales.
Cost of Sales
Cost of Sales for the three months ended September 30, 2022 and 2021 were
$3,708,695 and $3,179,590, respectively, an increase of $529,105, or 16.6%, 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 nine months ended September 30, 2022 and
2021 were $10,104,588 and $9,261,589, respectively, an increase of $842,999 or
9.1%, 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
Gross profit as a percentage of net sales for the three months ended September
30, 2022 and 2021 was 51.2% and 58.4%, respectively, a decrease of 7.2
percentage points in the current year period over the prior year period mostly
as a result of higher fruit and packaging costs in the third quarter of 2022
compared to the same quarter of 2021. Gross profit as a percentage of net sales
for the nine months ended September 30, 2022 and 2021 was 55.2% and 58.6%,
respectively, a decrease of 3.4 percentage points in the current year period
over the prior year period. This decrease was primarily the result of higher
fruit, packaging and labor costs in the first nine months of 2022 compared to
the same period in the prior year.
15
Selling, General and Administrative Expenses
Selling, general and administrative expense for the three months ended September
30, 2022 and 2021 was $5,120,218 and $3,768,765 respectively, an increase of
$1,351,453, or 35.9%, 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 $1,438,872 or 61.6% in the third quarter of 2022 compared to the same quarter
of 2022 being partially offset by a decrease in general and administrative
expenses of $87,419, or 6.1% in the current quarter compared to the same quarter
last year. Selling, general and administrative expense for the nine months ended
September 30, 2022 and 2021 was $13,359,293 and $10,688,452, respectively, an
increase of $2,670,841, or 25.0%, in the current year period over the prior year
period. This increase was primarily the result of an increase in selling
expenses of $2,584,423, or 38.6% combined with an increase in general and
administrative expenses of $86,418, or 2.2% in the current year period compared
to the same period in 2021. Selling expenses increased in both the third quarter
and nine months 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 four new tasting room and
restaurant locations. The contribution loss related to the opening of the four
new locations were $654,518 in the current quarter and $1,089,380 in the first
nine months of 2022. The contribution loss included lease, labor and selling
costs related to the new locations in 2022.
Interest Expense
Interest expense for the three months ended September 30, 2022 and 2021 was
$87,220 and $96,473, respectively, a decrease of $9,253 or 9.6%, in the third
quarter of 2022 over the same quarter in the prior year. Interest expense for
the nine months ended September 30, 2022 and 2021 was $269,037 and $293,548,
respectively, a decrease of $24,511 or 8.3%, in the current year period over the
prior year period. The decrease in interest expense for the third quarter and
first nine months of 2022 was primarily the result of decreased debt in the
current periods compared to the third quarter and first nine months of 2021.
Income Taxes
The income tax (expense) benefit for the three months ended September 30, 2022
and 2021 was $358,414 and $(172,256), respectively, a decrease of $530,670 or
308.1%, in the third quarter of 2022 over the same quarter in the prior year
mostly as a result of the lower pre-tax income in the third 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
September 30, 2022 and 2021, respectively. The income tax (expense) benefit for
the nine months ended September 30, 2022 was $298,517 and a $(624,839) for
September 30, 2021, respectively, a decrease of $923,356 or 147.8%, in the
current year period over the prior year period mostly a result of lower pre-tax
income in the first nine 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 nine months ended September 30, 2022 and 2021.
Net Income (Loss)
Net income (loss) for the three months ended September 30, 2022 and 2021 was
$(949,821) and $456,191, respectively, a decrease of $1,406,012, or 308.2%, in
the third quarter of 2022 over the same quarter in the prior year. Net income
(loss) for the nine months ended September 30, 2022 and 2021 was $(791,362) and
$1,656,427, respectively, a decrease of $2,447,789, or 147.8%, in the current
year period over the prior year period. The decrease in net income for the third
quarter and for the first nine months of 2022, compared to the comparable
periods in 2021, was primarily the result of higher product costs and additional
costs related to the opening of three new locations in 2022.
Net Income (Loss) Applicable to Common Shareholders
Net income (loss) applicable to common shareholders for the three months ended
September 30, 2022 and 2021 was $(1,416,433,) and $95,120, respectively, a
decrease of $1,511,553, in the third quarter of 2022 over the same quarter in
the prior year. Net income (loss) applicable to common shareholders for the nine
months ended September 30, 2022 and 2021 was $(2,191,199) and $573,214,
respectively, a decrease of $2,764,413, in the current year period over the
prior year period. The decrease in net income applicable to common shareholders
in the third quarter and the first nine 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.
16
Liquidity and Capital Resources
At September 30, 2022, the Company had a working capital balance of $16.5
million and a current working capital ratio of 2.84:1.
At September 30, 2022, the Company had a cash balance of $363,363, 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 property and equipment of
$13,117,674, the payment of grapes payable and an increase in inventories.
Total cash used in operating activities in the nine months ended September 30,
2022 was $2,139,961. Cash used in operating activities for the nine months ended
September 30, 2022 was primarily associated with increased inventory, and
payment of grapes payable, being partially offset by non-cash lease expense, and
depreciation and amortization.
Total cash used in investing activities in the nine months ended September 30,
2022 was $13,645,084. 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, 2022 was $2,401,123. Cash generated from financing activities for
the nine months ended September 30, 2022 consisted of proceeds from the deposits
for and issuance of preferred stock, 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 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 September 30, 2022
and December 31, 2021, there was no outstanding balance on this revolving line
of credit.
As of September 30, 2022, the Company had a 15-year installment note payable of
$1,225,194, due in quarterly payments of $42,534, associated with the purchase
of property in the Dundee Hills AVA.
As of September 30, 2022, the Company had a total long-term debt balance of
$5,183,190, including the portion due in the next year, owed to Farm Credit
Services, exclusive of debt issuance costs of $122,548. 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 and through preferred stock sales 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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WILLAMETTE VALLEY VINEYARDS, INC. 
