WILLAMETTE VALLEY VINEYARDS, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's financial statements and related notes. Some statements and information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements, and of important factors that could cause results to differ materially from the forward-looking statements contained in this report, see Item 1 of Part I, "Business - Forward-Looking Statements."
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Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses
Revenue - The Company's principal sources of revenue are derived from direct sales and sales through distributors of wine. Distributor sales are recognized from wine sales at the time of shipment and passage of title. The Company's payment arrangements with wholesalers provide primarily 30-day terms and, to a limited extent, 45-day, 60-day or longer terms for some international wholesalers. Direct sales from items sold through the Company's retail locations are recognized at the time of sale.
The Company pays depletion allowances to the Company's distributors based on their sales to their customers. The Company sets these allowances on a monthly basis and the Company's distributors bill them back on a monthly basis. All depletion expenses associated with a given month are recognized in that month as a reduction of revenues. The Company also reimburses for samples used by distributors up to 1.5% of product sold to the distributors. Sample expenses are recognized at the time the Company is billed by the distributor as a selling, general and administrative expense.
Amounts paid by customers to the Company for shipping and handling expenses are included in the net revenue. Expenses incurred for outbound shipping and handling charges are included in selling, general and administrative expense.
Inventory - The Company values inventories at the lower of actual cost to produce the inventory or net realizable value. The Company regularly reviews inventory quantities on hand and adjusts its production requirements for the next twelve months based on estimated forecasts of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In the future, if the Company's inventory cost is determined to be greater than the net realizable value of the inventory upon sale, the Company would be required to recognize such excess costs in its cost of goods sold at the time of such determination. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the ultimate selling price and cases sold and, therefore, the carrying value of the Company's inventory and its reported operating results.
Additionally, the Company regularly evaluates inventory for obsolescence and marketability and if it determines that the inventory is obsolete, or no longer suitable for use or marketable, the cost of that inventory is recognized in its cost of sales at the time of such determination.
Income Taxes - The Company accounts for income taxes using the asset and liability approach. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and the tax basis of assets and liabilities at the applicable tax rates. The Company evaluates deferred tax assets, and records a valuation allowance against those assets, if available evidence suggests that some of those assets will not be realized.
The effect of uncertain tax positions would be recorded in the financial statements only after determining a more likely than not probability that the uncertain tax positions would withstand an examination by tax authorities based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As facts and circumstances change, management reassesses these probabilities and would record any changes in the financial statements as appropriate.
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Overview
The Company generates revenue from the sales of wine to wholesalers and direct
to consumers. The Company is experiencing increased levels of competition in
traditional wholesale to retail grocery distribution from large
Periodically, the Company will sell grapes or bulk wine, which primarily consists of inventory that does not meet Company standards or is in excess to production targets. However, this activity is not a significant part of the Company's activities.
The Company sold approximately 180,850 and 156,791 cases of produced wine during
the years ended
Cost of Sales includes grape costs, whether purchased or grown at Company vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs associated with purchased production materials. For grapes grown at Company vineyards, costs include farming expenditures and amortization of vineyard development costs.
At
Impact of COVID-19 on Operations
The COVID-19 pandemic has been declared a National Public Health Emergency in
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 restrictions have been lifted and management
determines it is safe for employees to return to offices. Far exceeding the
required
We have not yet experienced significant disruptions to our supply chain network, however any future stay-at-home orders or other restrictions imposed by our local or state governments may have a negative impact on our future direct to consumer sales. In response to the closure and capacity restrictions on our tasting rooms, the Company launched curbside pick-ups, and complimentary shipping specials with minimum purchase, which have been able to mitigate the expected declines in direct to consumer sales.
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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 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 continuing to evolve. 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 2020 compared to 2019
Net income was
Net income applicable to common shareholders was
The Company had net sales revenues of
The Company has three primary sales channels: direct-to-consumer retail sales, in-state sales to distributors, and out-of-state sales to distributors. During 2020, revenues from retail sales increased 12.6%, revenues from in-state sales increased 27.9%, and revenues from out-of-state sales increased 1.2%, compared to 2019.
Direct sales included
The following table sets forth certain information regarding the Company's
revenue, excluding excise taxes, from the Winery's operations for the twelve
months ended
Twelve months ended
December 31,
2020 2019
Retail sales $10,560,913 $9,382,155
In-state sales 6,671,743 5,215,251
Out-of-state sales 10,350,708 10,228,132Bulk wine/miscellaneous sales 103,958 156,768
Total revenue 27,687,322 24,982,306 Less excise taxes (372,470) (233,043) Sales, net$27,314,852 $24,749,263 24
Retail sales revenues for the years ended
Bulk Wine/miscellaneous sales revenues for the years ended
In-state sales revenues for the years ended
Out-of-state sales revenues for the years ended
The Company pays alcohol excise taxes to both the OLCC and to the TTB. These
taxes are based on product sales volumes. The Company is liable for the taxes
upon the removal of product from the Company's warehouse on a per gallon basis.
The Company also pays taxes on the grape harvest on a per ton basis to the OLCC
for the Oregon Wine Board. The Company's sales related taxes for the years ended
Cost of Sales was
Gross profit was
The gross margin percentage was 61.2% and 61.8% for the years ended
Selling, general and administrative expenses were
Income from operations was
Interest income was
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Other income, net, was
Provision for income taxes was
Income per common share after preferred dividends was
The Company had cash balances of
EBITDA
In 2020, the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased 22.2% to
EBITDA does not reflect the impact of a number of items that affect our net
income, including financing costs. EBITDA is not a measure of financial
performance under the accounting principles generally accepted in
EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our GAAP results as reported. Because of these limitations, EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein.
The following table provides a reconciliation of net income (the most comparable GAAP measure) to EBITDA for the periods indicated:
Year Ended December 31,
2020 2019
Net Income $3,394,996 $2,510,901
Depreciation and amortization expense 1,812,394 1,812,463
Interest Expense 414,061 440,999
Interest Income (21,022) (48,066)
Income tax expense 1,379,654 952,123
EBITDA $6,980,083 $5,668,420
Sales
Wine case sales for the years ended December 31, 2020 and 2019 and ending
inventory amounts for the year ended December 31, 2020 , are shown on the
following table:
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Cases Sold Cases Sold Cases On-Hand
2020 2019 December 31, 2020
Varietal/Product
Pinot Noir/Estate 15,801 14,696 9,739
Pinot Noir/Barrel Select 17,522 12,713 2,202
Pinot Noir/Founders Reserve 2,613 3,934 7,324
Pinot Noir/Special Designates 6,603 5,217 24,470
Pinot Noir/Whole Cluster 51,387 43,359 14,270
Pinot Gris 33,448 28,810 9,329
Riesling 22,763 19,172 18,314
Chardonnay 3,912 4,244 11,862
Table Wine - 16,320 8,441
Other 26,801 8,326 51,396
Total 180,850 156,791 157,347
Approximately 52% of the Company's case sales during 2020 were of the Company's
flagship varietal, Pinot Noir. Case sales of Pinot Gris and Riesling follow with
approximately 19% and 13% of case sales each, respectively. The Company sold
approximately 180,850 and 156,791 cases of Company-produced wine during the
years ended
The Company has three primary sales channels: direct-to-consumer sales, in-state
sales to distributors, and out-of-state sales to distributors. These three sales
channels represent 38.6%, 24.0% and 37.4%, of net sales for the year ended
The Company's direct-to-consumer sales and national sales to distributors offer comparable products to customers and utilize similar processes and share resources for production, selling and distribution. Direct-to-consumer sales generate a higher gross profit margin than national sales to distributors due to differentiated pricing between these segments.
Wine Inventory
The Company had approximately 157,347 cases of bottled wine on-hand at the end of 2020. Management believes sufficient bulk wine inventory is on-hand to bottle approximately 191,350 cases of wine in 2020 and that sufficient stock is on hand to meet current demand levels until the 2020 vintage becomes available.
Production Capacity
Current production volumes are within the current production capacity
constraints of the Winery when including storage capacity at the
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Grape Supply
For the 2020 and 2019 vintages, the Company grew approximately 41% and 60% of all grapes harvested, respectively. The remaining grapes harvested were purchased from other growers. In 2020 and 2019, 50% and 37% of grapes harvested were purchased under short-term contracts, and 9% and 3% of grapes harvested were purchased under long-term contracts, respectively. The Company considers short-term contracts to be for single vintage years and long-term contracts to cover multiple vintage years.
Grapes are typically harvested and received in October of the vintage year. Upon receipt, the grapes are weighed, and a quality analysis is performed to ensure the grapes meet the standards set forth in the purchase contract. Based on the quantity of qualifying grapes received, the full amount payable to the grower is recorded to the grapes payable liability account. Approximately 50% of the grapes payable amount is due in November of the vintage year. The remaining amount is due in March of the following year. The grapes are processed into wine, which is typically bottled and available for sale between five months and two years from date of harvest.
The Company received
The Company plans to address long-term grape supply needs by developing new vineyards on properties currently owned or secured by lease. The Company has approximately 56 acres of vineyards that have been planted but are in the pre-productive stage. We anticipate that these vineyards will begin producing grapes within the next one to three years. The Company has approximately 252 acres of land that is suitable for future vineyard development. Management currently has plans to plant approximately 22 acres in 2021, which we anticipate will begin producing grapes in 2025. Additionally, the Company intends to seek out opportunities to acquire land for future grape plantings in order to continue to increase available quantities, maintain control over farming practices, more effectively manage grape costs and mitigate uncertainty associated with long-term contracts.
Wine Quality
Continued awareness of the Willamette Valley Vineyards brand and the quality of its wines was enhanced by national and regional media coverage throughout 2020.
Wine Enthusiast awarded the Company's 2018 Fuller Pinot Noir with 93 points and
was named a Cellar Selection, 2018 Vintage 45 Pinot Noir with 92 points, 2018
White Pinot Noir with 92 points and Editors' Choice, 2018 Bernau Block Pinot
Noir with 91 points, 2018 Tualatin Estate Pinot Noir with 91 points, 2017 Dijon
Clone Chardonnay with 91 points and Editors' Choice, 2019 Whole
The Company's 2018 Estate Pinot Noir received a score of 90 points from
Vinous'
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The Company's 2019 Whole Cluster Rosé of Pinot Noir was awarded a Double Gold
medal and received a score of 96 points at
The Company's 2017 Métis, a red blend from the Walla Walla Valley AVA, received
a Platinum Medal & was named "Best Proprietary Red Blend in the Northwest"
by
Seasonality
The Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenue and net income. Typically, first quarter sales are the lowest of any given year, and sales volumes increase progressively through the fourth quarter mostly because of consumer buying habits.
Liquidity and Capital Resources
At
Total cash provided from operating activities for the year ended
Total cash used in investing activities for the year ended
Total cash provided from financing activities for the year ended
In 2019, the Company's Board of Directors approved the construction of a new
tasting room at the
In December of 2005 the Company entered into a revolving line of credit
agreement with
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As of
As of
The Company believes that cash flow from operations and funds available under its existing credit facilities and preferred stock program will be sufficient to meet the Company's foreseeable short and long-term operating needs.
The Company's contractual obligations as of
Payments Due by Period
Less than 1 2 -3 4 - 5 After 5
Total Year Years Years Years
Long-term debt $5,985,228 $450,040 $969,380 $1,072,758 $3,493,050
Notes payable 1,384,581 89,040 194,806 219,447 881,288
Grape payables 1,307,165 1,307,165 - - -
Operating leases 8,169,721 578,438 1,088,731 1,012,737 5,489,815
Total contractual obligations
Inflation
The Company's management does not believe inflation has had a material impact on the Company's revenues or income during 2020 or 2019.
Off Balance Sheet Arrangements
At
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