UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 000-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Exact name of registrant as specified in charter)
Oregon | 93-0981021 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
8800 Enchanted Way, S.E., Turner, Oregon 97392
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 588-9463
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ☒ YES ☐ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): ☒ YES ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
☐ Large accelerated filer | ☐ Accelerated filer |
☐ Non-accelerated filer | ☒ Smaller reporting company |
☐ Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ YES ☒ NO
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, | WVVI | NASDAQ Capital Market | ||
Series A Redeemable Preferred Stock | WVVIP | NASDAQ Capital Market |
Number of shares of common stock outstanding as of August 14, 2019: 4,964,529
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WILLAMETTE VALLEY VINEYARDS, INC.
INDEX TO FORM 10-Q
Part I - Financial Information | 4 |
Item 1 - Financial Statements (unaudited) | 4 |
Balance Sheets | 4 |
Statements of Operations | 5 |
Statements of Shareholders’ Equity | 6 |
Statements of Cash Flows | 7 |
Notes to Unaudited Interim Financial Statements | 8 |
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations | 14 |
Item 3 – Quantitative and Qualitative Disclosures about Market Risk | 20 |
Item 4 - Controls and Procedures | 20 |
Part II - Other Information | 20 |
Item 1 - Legal Proceedings | 20 |
Item 1A – Risk Factors | 20 |
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
Item 3 - Defaults Upon Senior Securities | 21 |
Item 4 – Mine Safety Disclosures | 21 |
Item 5 – Other Information | 21 |
Item 6 – Exhibits | 21 |
Signatures | 22 |
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PART I: FINANCIAL INFORMATION
Item 1 – Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
BALANCE SHEETS
(Unaudited)
ASSETS | ||
June 30, | December 31, | |
2019 | 2018 | |
CURRENT ASSETS | ||
Cash and cash equivalents | $8,246,642 | $9,737,467 |
Accounts receivable, net | 1,753,549 | 2,352,890 |
Inventories (Note 2) | 16,413,091 | 16,247,109 |
Prepaid expenses and other current assets | 174,962 | 219,800 |
Income tax receivable | 171,947 | 77,063 |
Total current assets | 26,760,191 | 28,634,329 |
Other assets | 34,836 | 34,836 |
Vineyard development costs, net | 7,356,300 | 7,028,920 |
Property and equipment, net (Note 3) | 26,231,199 | 25,784,451 |
Operating lease right of use assets | 4,971,990 | - |
TOTAL ASSETS | $65,354,516 | $61,482,536 |
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
CURRENT LIABILITIES | ||
Accounts payable | $649,226 | $844,820 |
Accrued expenses | 685,921 | 911,129 |
Current portion of notes payable | 1,508,582 | 1,685,181 |
Current portion of long-term debt | 424,832 | 417,293 |
Current portion of lease liabilities | 191,290 | - |
Unearned revenue | 461,438 | 517,710 |
Grapes payable | - | 1,019,129 |
Total current liabilities | 3,921,289 | 5,395,262 |
Long-term debt, net of current portion and debt issuance costs | 6,043,785 | 6,251,316 |
Lease liabilities, net of current portion | 4,833,625 | - |
Deferred rent liability | - | 50,480 |
Deferred gain | 8,935 | 24,983 |
Deferred income taxes | 2,200,227 | 2,200,227 |
Total liabilities | 17,007,861 | 13,922,268 |
COMMITMENTS AND CONTINGENCIES | ||
SHAREHOLDERS’ EQUITY | ||
Redeemable preferred stock, no par value, 10,000,000 shares authorized, | ||
4,662,768 shares issued and outstanding, liquidation preference | ||
$19,863,392 at June 30, 2019 and 4,662,768 shares issued and | ||
outstanding, liquidation preference $19,350,487, at December 31, 2018, | ||
respectively. | 18,832,006 | 18,319,102 |
Common stock, no par value, 10,000,000 shares authorized, 4,964,529 | ||
shares issued and outstanding at June 30, 2019 and | ||
December 31, 2018, respectively. | 8,512,489 | 8,512,489 |
Retained earnings | 21,002,160 | 20,728,677 |
Total shareholders’ equity | 48,346,655 | 47,560,268 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $65,354,516 | $61,482,536 |
The accompanying notes are an integral part of this financial statement
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WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Six months ended | |||
June 30, | June 30, | |||
2019 | 2018 | 2019 | 2018 | |
SALES, NET | $5,790,837 | $5,821,292 | $10,789,623 | $10,353,911 |
COST OF SALES | 2,292,479 | 2,099,186 | 4,010,629 | 3,741,561 |
GROSS PROFIT | 3,498,358 | 3,722,106 | 6,778,994 | 6,612,350 |
OPERATING EXPENSES | ||||
Sales and marketing | 1,906,586 | 1,641,372 | 3,681,586 | 3,168,451 |
General and administrative | 995,341 | 901,829 | 1,936,539 | 1,792,650 |
Total operating expenses | 2,901,927 | 2,543,201 | 5,618,125 | 4,961,101 |
INCOME FROM OPERATIONS | 596,431 | 1,178,905 | 1,160,869 | 1,651,249 |
OTHER INCOME (EXPENSE) | ||||
Interest income | 840 | 2,137 | 10,286 | 9,004 |
Interest expense | (111,088) | (116,284) | (221,502) | (235,002) |
Other income, net | 8,091 | 45,336 | 121,100 | 138,042 |
INCOME BEFORE INCOME TAXES | 494,274 | 1,110,094 | 1,070,753 | 1,563,293 |
INCOME TAX PROVISION | (134,363) | (306,839) | (284,366) | (429,583) |
NET INCOME | 359,911 | 803,255 | 786,387 | 1,133,710 |
Accrued preferred stock dividends | (256,452) | (256,438) | (512,904) | (511,332) |
INCOME APPLICABLE TO COMMON SHAREHOLDERS | $103,459 | $546,817 | $273,483 | $622,378 |
Income per common share after preferred dividends | $0.02 | $0.11 | $0.06 | $0.13 |
Weighted average number of | ||||
common shares outstanding | 4,964,529 | 4,964,529 | 4,964,529 | 4,964,529 |
The accompanying notes are an integral part of this financial statement
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WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
Six-Month Period Ended June 30, 2019 | ||||||
Redeemable | ||||||
Preferred Stock | Common Stock | Retained | ||||
Shares | Dollars | Shares | Dollars | Earnings | Total | |
Balance at December 31, 2018 | 4,662,768 | $18,319,102 | 4,964,529 | $8,512,489 | $20,728,677 | $47,560,268 |
Preferred stock dividends accrued | - | 256,452 | - | - | (256,452) | - |
Net income | - | - | - | - | 426,476 | 426,476 |
Balance at March 31, 2019 | 4,662,768 | $18,575,554 | 4,964,529 | $8,512,489 | $20,898,701 | $47,986,744 |
Preferred stock dividends accrued | - | 256,452 | - | - | (256,452) | - |
Net income | - | - | - | - | 359,911 | 359,911 |
Balance at June 30, 2019 | 4,662,768 | $18,832,006 | 4,964,529 | $8,512,489 | $21,002,160 | $48,346,655 |
Six-Month Period Ended June 30, 2018 | ||||||
Redeemable | ||||||
Preferred Stock | Common Stock | Retained | ||||
Shares | Dollars | Shares | Dollars | Earnings | Total | |
Balance at December 31, 2017 | 4,427,991 | $17,339,508 | 4,964,529 | $8,512,489 | $18,889,012 | $44,741,009 |
Preferred stock sold | 206,432 | 435,856 | 435,856 | |||
Preferred stock dividends accrued | - | 254,893 | - | - | (254,893) | - |
Net income | - | - | - | - | 330,454 | 330,454 |
Balance at March 31, 2018 | 4,634,423 | $18,030,257 | 4,964,529 | $8,512,489 | $18,964,573 | $45,507,319 |
Preferred stock sold | 28,095 | 543,807 | 543,807 | |||
Preferred stock dividends accrued | - | 256,438 | - | - | (256,438) | - |
Net income | - | - | - | - | 803,255 | 803,255 |
Balance at June 30, 2018 | 4,662,518 | $18,830,502 | 4,964,529 | $8,512,489 | $19,511,390 | $46,854,381 |
The accompanying notes are an integral part of this financial statement
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WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30, | ||
2019 | 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES | ||
Net income | $786,387 | $1,133,710 |
Adjustments to reconcile net income to net cash | ||
from operating activities: | ||
Depreciation and amortization | 899,429 | 801,147 |
Loss on disposition of property & equipment | 487 | 72 |
Non-cash loss from other assets | - | 14,317 |
Loan fee amortization | 6,563 | 6,624 |
Deferred rent liability | (50,480) | (15,772) |
Deferred gain | (16,049) | (16,048) |
Change in operating assets and liabilities: | ||
Accounts receivable, net | 599,341 | 358,213 |
Inventories | (165,982) | (151,887) |
Prepaid expenses and other current assets | 44,838 | (43,222) |
Unearned revenue | (56,272) | (41,524) |
Deferred revenue-distribution agreement | - | (71,430) |
Grapes payable | (1,019,129) | (1,455,569) |
Accounts payable | (195,828) | (474,940) |
Accrued expenses | (225,208) | (91,908) |
Income taxes payable/(receivable) | (94,884) | 95,284 |
Net cash from operating activities | 513,213 | 47,067 |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Additions to vineyard development costs | (349,362) | (632,647) |
Additions to property and equipment | (1,271,522) | (2,370,272) |
Net cash from investing activities | (1,620,884) | (3,002,919) |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Payment on installment note for property purchase | (176,599) | (174,348) |
Payments on long-term debt | (206,555) | (196,688) |
Proceeds from issuance of preferred stock | - | 549,357 |
Net cash from financing activities | (383,154) | 178,321 |
NET CHANGE IN CASH AND CASH EQUIVALENTS | (1,490,825) | (2,777,531) |
CASH AND CASH EQUIVALENTS, beginning of period | 9,737,467 | 13,776,257 |
CASH AND CASH EQUIVALENTS, end of period | $8,246,642 | $10,998,726 |
NON-CASH INVESTING AND FINANCING ACTIVITIES | ||
Purchases of property and equipment and vineyard development | ||
costs included in accounts payable | $136,778 | $161,217 |
The accompanying notes are an integral part of this financial statement
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NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements. The financial information as of December 31, 2018 is derived from the audited financial statements presented in the Willamette Valley Vineyards, Inc. (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2018. Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments necessary (which are of a normal recurring nature) for the fair statement of the results of the interim periods presented. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018, as presented in the Company’s Annual Report on Form 10-K.
Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2019, or any portion thereof.
The Company’s revenues include direct-to-consumer sales and national sales to distributors. These sales channels utilize shared resources for production, selling and distribution.
Earnings per share after preferred stock dividends are computed based on the weighted-average number of common shares outstanding each period.
The following table presents the earnings per share after preferred stock dividends calculation for the periods shown:
Three months ended June 30, | Six months ended June 30, | |||
2019 | 2018 | 2019 | 2018 | |
Numerator | ||||
Net income | $359,911 | $803,255 | $786,387 | $1,133,710 |
Accrued preferred stock dividends | (256,452) | (256,438) | (512,904) | (511,332) |
Net income applicable to common shares | $103,459 | $546,817 | $273,483 | $622,378 |
Denominator | ||||
Weighted average common shares | 4,964,529 | 4,964,529 | 4,964,529 | 4,964,529 |
Income per common share | ||||
after preferred dividends | $0.02 | $0.11 | $0.06 | $0.13 |
Recently issued accounting standards (adopted) – In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This update requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include both qualitative and quantitative information. The effective date for ASU 2016-02 is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier adoption permitted. The Company adopted this new standard on its financial statements on January 1, 2019 using the cumulative effect adjustment method and determined right-of-use assets to be approximately $5.0 million as of December 31, 2018 of which approximately $4.8 million, or 96.0%, represent the lease of vineyard property. The Company recognized these right-of-use assets, and their respective liabilities, and began amortizing them prospectively beginning in first quarter 2019. This standard had a material impact on its Balance Sheet but a minimal direct impact on its Statement of Operations. Because 96.0% of the Company’s leases are for vineyard land, lease costs are recognized either as part of capitalized vineyard development costs or inventory valuation depending on the productive or pre-productive nature of the vineyard. Therefore, most changes to lease expenses as a result of this standard flow through inventory and ultimately become part of cost of sales.
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The accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.
2) INVENTORIES
The Company’s inventories, by major classification, are summarized as follows, as of the dates shown:
June 30, 2019 | December 31, 2018 | |
Winemaking and packaging materials | $892,945 | $736,902 |
Work-in-process (costs relating to | ||
unprocessed and/or unbottled wine products) | 6,719,383 | 8,527,814 |
Finished goods (bottled wine and related products) | 8,800,763 | 6,982,393 |
Current inventories | $16,413,091 | $16,247,109 |
3) PROPERTY AND EQUIPMENT
The Company’s property and equipment consists of the following, as of the dates shown:
June 30, 2019 | December 31, 2018 | |
Construction in progress | $2,817,584 | $1,747,047 |
Land, improvements and other buildings | 11,135,596 | 11,135,596 |
Winery building and hospitality center | 16,099,378 | 15,993,490 |
Equipment | 12,777,659 | 12,750,152 |
42,830,217 | 41,626,285 | |
Accumulated depreciation | (16,599,018) | (15,841,834) |
Property and equipment, net | $26,231,199 | $25,784,451 |
4) DISTRIBUTION AGREEMENT RECEIVABLE AND DEFERRED REVENUE
Effective September 1, 2011, the Company entered into an agreement with Young’s Market Company for distribution of Company-produced wines in Oregon and Washington. The terms of this contract include exclusive rights to distribute Willamette Valley Vineyard’s wines in Oregon and Washington for seven years expiring September 1, 2018. To facilitate the transition, with as little disruption as possible, Young’s Market Company agreed to compensate Willamette Valley Vineyards for ongoing Oregon sales and branding efforts. As a result, the Company was due to receive $250,000 per year starting on September 2011 for each of the next four years for a total of $1,000,000. In October of 2014, the Company received payment of the final $250,000 under this agreement. The total amount of $1,000,000 received by the Company related to this agreement is being recognized as revenue on a straight-line basis over the seven year life of the agreement. For the three months ended June 30, 2019 and 2018, the Company has recognized revenue related to this agreement in the amount of $0 and $35,715, respectively, recorded to other income. For the six months ended June 30, 2019 and 2018, the Company has recognized revenue related to this agreement in the amount of $0 and $71,430, respectively, recorded to other income.
5) DEBT
Line of Credit Facility – In December of 2005 the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowings of up to $2,000,000 against eligible accounts receivable and inventories as defined in the agreement. The revolving line bears interest at prime, is payable monthly, and is subject to annual renewal. In June of 2018, the Company renewed the credit agreement until July 31, 2019. The interest rate was 4.00% at June 30, 2019 and December 31, 2018. At June 30, 2019 and December 31, 2018 there was no outstanding balance on this revolving line of credit.
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Notes payable –In March of 2017 the Company purchased approximately 45 acres of farmland in the Walla Walla AVA under terms that included paying one third of the price upon closing, one third on March 15, 2018 and one third on March 15, 2019. As of June 30, 2019 the Company did not have a balance due on this note. As of December 31, 2018 the Company had a balance due of $137,667.
In February of 2017 the Company purchased property, including vineyard land, bare land and structures in the Dundee Hills AVA under terms that included a 15 year note payable with quarterly payments of $42,534 at 6%. The note may be called by the owner, up to the outstanding balance, with 180 days written notice. As of June 30, 2019 the Company had a balance of $1,508,582 due on this note. As of December 31, 2018 the Company had a balance of $1,547,514 due on this note.
Long Term Debt –The Company has two long term debt agreements with Farm Credit Services with an aggregate outstanding balance of $6,616,111 and $6,816,928 as of June 30, 2019 and December 31, 2018. These loans require monthly principal and interest payments of $62,067 for the life of the loans, at annual fixed interest rates of 4.75% and 5.21%, and with maturity dates of 2028 and 2032. The general purposes of these loans were to make capital improvements to the winery and vineyard facilities.
The Company has an outstanding loan with Toyota Credit Corporation maturing in February 2021, at zero interest, with an outstanding balance of $18,168 and $23,906 as of June 30, 2019 and December 31, 2018, respectively. The purpose of this loan was to purchase a vehicle.
As of June 30, 2019 the Company had unamortized debt issuance costs of $165,662. As of December 31, 2018 the Company had unamortized debt issuance costs of $172,225.
6) INTEREST AND TAXES PAID
Income taxes – The Company paid $379,250 and $334,000 in income taxes for the three months ended June 30, 2019 and 2018, respectively. The Company paid $379,250 and $334,000 in income taxes for the six months ended June 30, 2019 and 2018, respectively.
Interest - The Company paid $109,009 and $115,161 for the three months ended June 30, 2019 and 2018, respectively, in interest on long-term debt. The Company paid $217,719 and $229,837 for the six months ended June 30, 2019 and 2018, respectively, in interest on long-term debt.
7) SEGMENT REPORTING
The Company has identified two operating segments, Direct Sales and Distributor Sales, based upon their different distribution channels, margins and selling strategies. Direct Sales includes retail sales in the tasting room and remote sites, Wine Club sales, on-site events, kitchen and catering sales and other sales made directly to the consumer without the use of an intermediary, including sales of bulk wine or grapes. Distributor Sales include all sales through a third party where prices are given at a wholesale rate.
The two segments reflect how the Company’s operations are evaluated by senior management and the structure of its internal financial reporting. The Company evaluates performance based on the gross profit of the respective business segments. Selling expenses that can be directly attributable to the segment, including depreciation of segment specific assets, are included, however, centralized selling expenses and general and administrative expenses are not allocated between operating segments. Therefore, net income information for the respective segments is not available. Discrete financial information related to segment assets, other than segment specific depreciation associated with selling, is not available and that information continues to be aggregated.
The following table outlines the sales, cost of sales, gross margin, directly attributable selling expenses, and contribution margin of the segments for the three and six month periods ending June 30, 2019 and 2018. Sales figures are net of related excise taxes.
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Three Months Ended June 30, | ||||||
Direct Sales | Distributor Sales | Total | ||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |
Sales, net | $2,359,444 | $2,353,487 | $3,431,393 | $3,467,805 | $5,790,837 | $5,821,292 |
Cost of Sales | 689,204 | 650,359 | 1,603,275 | 1,448,827 | 2,292,479 | 2,099,186 |
Gross Margin | 1,670,240 | 1,703,128 | 1,828,118 | 2,018,978 | 3,498,358 | 3,722,106 |
Selling Expenses | 1,156,397 | 1,030,106 | 578,391 | 545,403 | 1,734,788 | 1,575,509 |
Contribution Margin | $513,843 | $673,022 | $1,249,727 | $1,473,575 | $1,763,570 | $2,146,597 |
Percent of Sales | 40.7% | 40.4% | 59.3% | 59.6% | 100.0% | 100.0% |
Six Months Ended June 30, | ||||||
Direct Sales | Distributor Sales | Total | ||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |
Sales, net | $4,079,621 | $3,903,643 | $6,710,002 | $6,450,268 | $10,789,623 | $10,353,911 |
Cost of Sales | 1,032,643 | 1,038,543 | 2,977,986 | 2,703,018 | 4,010,629 | 3,741,561 |
Gross Margin | 3,046,978 | 2,865,100 | 3,732,016 | 3,747,250 | 6,778,994 | 6,612,350 |
Selling Expenses | 2,230,768 | 2,016,858 | 1,131,059 | 995,706 | 3,361,827 | 3,012,564 |
Contribution Margin | $816,210 | $848,242 | $2,600,957 | $2,751,544 | $3,417,167 | $3,599,786 |
Percent of Sales | 37.8% | 37.7% | 62.2% | 62.3% | 100.0% | 100.0% |
Direct sales include $2,800 and $134,970 of bulk wine sales in the three months ended June 30, 2019 and 2018, respectively. Direct sales include $45,563 and $134,970 of bulk wine sales in the six months ended June 30, 2019 and 2018, respectively.
8) SALE OF PREFERRED STOCK
In August 2015, the Company commenced a public offering of our Series A Redeemable Preferred Stock pursuant to a registration statement filed with the Securities and Exchange Commission. The preferred stock under this issue is non-voting and ranks senior in rights and preferences to the Company’s common stock. Shareholders of this issue are entitled to receive dividends, when and as declared by the Company’s Board of Directors, at a rate of $0.22 per share. Dividends accrued but not paid will be added to the liquidation preference of the stock until the dividend is declared and paid. At any time after June 1, 2021, the Company has the option, but not the obligation, to redeem all of the outstanding preferred stock in an amount equal to the original issue price of $4.15 per share plus accrued but unpaid dividends and a redemption premium equal to 3% of the original issue price of $4.15 per share. The Company registered this transaction with the securities authorities of the States of Oregon and Washington and subsequently obtained a listing on the NASDAQ under the trading symbol WVVIP. This issue had an aggregate initial offering price not to exceed $6,000,000 and was fully subscribed as of December 31, 2015.
On December 23, 2015 the Company filed a Registration Statement on Form S-3 with the SEC pertaining to the potential future issuance of one or more classes or series of debt, equity or derivative securities. On February 28, 2016 shareholders of the Series A Redeemable Preferred Stock approved an increase in shares designated as Series A Redeemable Preferred Stock, from 1,445,783 to 2,857,548 shares, and amended the certificate of designation for those shares to allow the Company’s Board of Directors to make future increases.
On March 10, 2016 the Company filed a Prospectus Supplement to the December 2015 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 970,588 additional shares of Series A Redeemable Preferred stock having proceeds not to exceed $4,125,000. This stock was established to be sold in four offering periods beginning with an offering price of $4.25 per share and concluding at $4.55 per share. The Company sold all preferred stock available under this offering.
On May 3, 2017, the Company filed with the SEC a Prospectus Supplement to the December 2015 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 2,298,851 additional shares of Series A Redeemable Preferred stock having proceeds not to exceed $10,000,000. This stock was established to be sold in four offering periods beginning with an offering price of $4.35 per share and concluding at $4.65 per share. The Company sold all preferred stock available under this offering.
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9) LEASES
In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use (ROU) asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement and presentation of expenses and cash flows from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. We adopted this guidance using the cumulative-effect adjustment method on January 1, 2019, meaning we did not restate prior periods. Current year financial information is presented under the guidance in Topic 842, while prior year information will continue to be presented under Topic 840. Adoption of the standard resulted in the recognition of an operating ROU asset of approximately $5.0 million, of which $4.8 million, or 96.0%, represent the lease of vineyard property. Vineyard lease costs are recognized either as part of capitalized vineyard development costs or inventory valuation depending on the productive or pre-productive nature of the vineyard. As such, adoption of the standard did not have a material impact on our Statement of Operations or Statement of Cash flows but did have a material impact on our Balance Sheet.
We determine if an arrangement is a lease at inception. On our balance sheet, our operating leases are included in Operating lease right-of-use assets, Current portion of lease liabilities and Lease liabilities, net of current portion. The Company does not currently have any finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. For leases that do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Significant judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration in a contract between lease and non-lease components, and the determination of the discount rate included in our leases. We review the underlying objective of each contract, the terms of the contract, and consider our current and future business conditions when making these judgments.
Operating leases – Vineyard - In December 1999, under a sale-leaseback agreement, the Company sold approximately 79 acres of the Tualatin Vineyards property with a net book value of approximately $1,000,000 for approximately $1,500,000 cash and entered into a 20-year operating lease agreement, with three five-year extension options, and contains an escalation provision of 2.5% per year. The gain of approximately $500,000 is being amortized over the life of the lease. This property is referred to as the Peter Michael Vineyard and includes approximately 66 acres of producing vineyards.
In December 2004, under a sale-leaseback agreement, the Company sold approximately 75 acres of the Tualatin Vineyards property with a net book value of approximately $551,000 for approximately $727,000 cash and entered into a 15-year operating lease agreement, with three five-year extension options, for the vineyard portion of the property. The lease contains a formula-based escalation provision with a maximum increase of 4% every three years. Approximately $99,000 of the total gain of $176,000 has been deferred and is being amortized over the life of the lease. This property is referred to as the Meadowview Vineyard, and includes approximately 49 acres of producing vineyards.
The amortization of the deferred gain is recorded as an offset to expense in selling, general and administrative expenses.
In February 2007, the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyards. This lease is for a 10-year term with four five-year renewals at the Company’s option. The lease contains an escalation provision tied to the CPI not to exceed 2% per annum. In 2017, the Company exercised its option to renew the lease until December 31, 2022.
In July 2008, the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 110 acres adjacent to the existing Elton Vineyards site. These 110 acres are being developed into vineyards. Terms of this agreement contain rent increases, that rises as the vineyard is developed, and contains an escalation provision of CPI plus .5% per year capped at 4%. This property is referred to as part of Ingram Vineyard.
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In March 2017, the Company entered into a 25-year lease for approximately 20 acres of agricultural land in Dundee, Oregon. These acres are being developed into vineyards. This lease contains an annual payment that remains constant throughout the term of the lease. This property is referred to as part of Bernau Estate Vineyard.
Operating Leases – Non-Vineyard - In September 2018, the Company renewed an existing lease for three years, with two one-year renewal options, for its McMinnville tasting room. The lease contains an escalation provision with a cap at 3% per year.
In January 2018, the Company assumed a lease, with four remaining years, for its Maison Bleue tasting room in Walla Walla, Washington. The lease contains fixed payments that increase over the term of the agreement.
Operating leases – Not yet commenced – The Company has entered into a contract to build and lease a retail wine facility in Folsom, California, referred to as Willamette Wineworks, and anticipates this lease commencing in fourth quarter 2019.
The following tables provide lease cost and other lease information for the three and six months ended June 30, 2019:
Three Months Ended | Six Months Ended | |
June 30, 2019 | June 30, 2019 | |
Lease Cost | ||
Operating Lease cost - Vineyards | $113,685 | $227,370 |
Operating Lease cost - Other | 17,580 | 35,160 |
Short-term lease cost | 9,273 | 17,900 |
Total Lease Cost | $140,538 | $280,430 |
Other information | ||
(Gains) and losses on sale and leaseback transactions, net | $(8,024) | $(16,048) |
Cash paid for amounts included in the measurement | ||
of lease liabilities | ||
Operating cash flows from operating leases - Vineyard | 104,948 | 209,514 |
Operating cash flows from operating leases - Other | 17,400 | 34,800 |
Weighted-average remaining lease term - operating leases | 18.42 | 18.42 |
Weighted-average discount rate - operating leases | 6.24% | 6.24% |
As of June 30, 2019, maturities of lease liabilities were as follows:
Operating | |
Years Ended December 31, | Leases |
2019 | $107,019 |
2020 | 222,420 |
2021 | 210,307 |
2022 | 197,651 |
2023 | 190,730 |
Thereafter | 4,096,788 |
Present value of operational lease liabilities | $5,024,915 |
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10) COMMITMENTS AND CONTINGENCIES
Litigation – From time to time, in the normal course of business, the Company is a party to legal proceedings. Management believes that these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows, but, due to the nature of litigation, the ultimate outcome of any potential actions cannot presently be determined.
Grape Purchases - The Company has entered into a long-term grape purchase agreement with one of its Willamette Valley wine grape growers. This contract amended and extended three separate contracts for the purchase of fruit through the 2023 harvest year. With this agreement the Company purchases an annually agreed upon quantity of fruit, at pre-determined prices, within strict quality standards and crop loads. The Company cannot calculate the minimum or maximum payment as such a calculation is dependent in large part on unknowns such as the quantity of fruit needed by the Company and the availability of grapes produced that meet the strict quality standards in any given year. If no grapes are produced that meet the contractual quality levels, the grapes may be refused, and no payment would be due.
11) SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued.
Line of Credit Facility – In July of 2019, the Company renewed the credit agreement until July 31, 2021. The interest rate at renewal was 5.00%.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 governmental regulatory decisions. 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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.
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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 accounting principles generally accepted in the United States of America. 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, 2018. Such policies were unchanged during the six months ended June 30, 2019.
Overview
The Company continues to position itself for strategic growth through property purchases, property development and issuance of 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 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, Pere Mi 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 and wine club. Direct to consumer sales are more profitable to the Company 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 5,744 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. Membership in the Company’s wine club increased by approximately 211 net members, or2.8%, to a total of 7,679 members during the six months ending June 30, 2019. The Company believes the increase in preferred stockholders, who receive enhanced discounts, has reduced the number of people who would otherwise become Wine Club members. However, management anticipates that new preferred stockholders will purchase the Company’s wines over a longer period of time, than the average Wine Club member, making their enhanced winery status beneficial to the Company.
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 bulk wine sales of $2,800 for the three months ended June 30, 2019 and $134,970 in bulk wine sales for the same period of 2018. The Company had bulk wine sales of $45,563 for the six months ended June 30, 2019 and $134,970 in bulk wine sales for the same period of 2018.
The Company sold approximately 68,997 and 67,558 cases of produced wine during the six months ended June 30, 2019 and 2018, respectively, an increase of 1,439 cases, or 2.1% in the current year period over the prior year period. The increase in wine case sales was the result of increased 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, 2019, wine inventory included approximately 132,222 cases of bottled wine and 255,167 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 102,576 cases during the six months ended June 30, 2019.
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Willamette Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers, online articles and broadcast networks in the second quarter of 2019.
Josh Raynolds from Vinous awarded the Company’s 2016 Elton Self-Rooted Pinot Noir with 94 points, the 2016 Elton Florine Pinot Noir with 93 points, the 2016 the O'Brien Pinot Noir with 93 points, the 2016 Hannah Pinot Noir with 91 points and 2016 Estate Pinot Noir with 90 points.
The Company’s Maison Bleue 2016 Graviere Syrah, sourced from The Rocks District in the Walla Walla AVA, was rated 92 points by Wine Spectator. The 2016 Graviere Syrah also received a score of 92 points from Jeb Dunnuck, 92 points from the International Wine Report and 90 points from Wine Enthusiast. Maison Bleue’s 2016 Voyageur Syrah received a score of 93 points from Jeb Dunnuck, 93 points from theInternational Wine Report and 91 points and Editors’ Choice from Wine Enthusiast. Maison Bleue’s 2016 Voltigeur Viognier received 92 points from the International Wine Report.
Wine Enthusiast awarded the Company’s 2016 Pambrun Cabernet Sauvignon, sourced from high-elevation hillside plantings in Walla Walla’s SeVein, with 90 points.
The Company’s 2016 Estate Pinot received 92 points from Wine Spectator. The Barrel Cellar also reviewed the Company’s 2016 Estate Pinot Noir and gave it 91 points and awarded the Company’s 2017 Whole Cluster Pinot Noir with 92 points.
Wine & Spirits awarded the Company's 2017 Whole Cluster Rosé of Pinot with 90 points, named a "Best Buy" and named one of the Year’s Best Rosés. They also named the Company’s 2016 Méthode Champenoise Brut as one of the “Year’s Best Summer Sparklers” and received a score of 90 points.
James Suckling awarded the Company’s 2017 Estate Chardonnay with 91 points. It was also awarded 91 points and received a Gold medal from SavorNW.
The company was selected as a finalist in the 2019 Sunset Magazine Travel Awards. The awards honor excellence and innovation in the tourism industry across the 13 Western states, British Columbia and Alberta.
The Company won “Gold” in the following categories for the 2019 Best of the Mid-Valley Awards based on community votes: Best Winery, Best Place to Buy Wine, Best Date Night, Best Local Chef, Best Fine Dining and Best Place to Take Out of Town Guests.
The Company’s 2017 Whole Cluster Pinot Noir and McMinnville Tasting Room were featured in the April issue of Alaska Beyond, Alaska Airlines onboard magazine.
The Company’s 2016 Dijon Clone Chardonnay was featured on KATU Newschannel 2 (Portland ABC-affiliated television station) for Oregon Wine Month.
The Company’s Estate Pinot Noir, Tualatin Estate Chardonnay, Bernau Block Chardonnay, Grüner Veltliner, Pinot Gris, Whole Cluster Pinot Noir, Whole Cluster Rosé of Pinot Noir, Riesling and Maison Bleue wines were featured in articles by Paste Magazine, Boston Herald, Lowell Sun, Fitchburg Sentinel, Wine & Spirits,Oregon Wine Press, Washington Tasting Room Magazine, Charleston Gazette-Mail, Costco Wine Blog, Vine Pair, Market Watch, Chuck Hill, The Bemidji Pioneer, 12BY6, Wine-searcher and the Cigar Dave Show.
Eastern Oregonian and Union-Bulletin covered the Company’s partnership with the city of Milton-Freewater to build a shared winemaking and tasting room facility at the Maison Bleue Estate Vineyard in The Rocks District.
The Company was included in a Yahoo Finance article titled "21 Stock Perks That Will Blow Your Mind."
The Company’s Estate Tasting Room and Winery Suites were featured in articles by Travel Oregon, Oregon Wine Press, Travel Salem and Wine 4 Food.
The Company’s Consulting Winemaker, Bill Fuller, and Tualatin Estate Vineyard were included in an article titled, "5 Oregon wineries that bring the state’s wine history to life" featured in The Oregonian. Bill Fuller was also featured in an article by The Oregonian about Oregon's first White Pinot Noir.
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The Company was included in several articles for hosting the Women in Wine: Fermenting Change in Oregon conference, including Oregon Wine Press, Eugene Register-Guard, Wine Business Monthly and Portland Business Journal.
The Company’s Estate Tasting Room earned the TripAdvisor Excellence Hall of Fame for winning the Certificate of Excellence for 5+ years in a row. It also won the 2019 "People Love us on Yelp" Award. The Company’s McMinnville Tasting Room received the 2019 Certificate of Excellence from TripAdvisor.
The Sacramento Bee included the Company’s Willamette Wineworks, opening later this year in Folsom, California, in a feature article about tasting rooms in the Folsom area.
Oregon Solidarity, the Company’s joint winemaking project with King Estate Winery, Silvan Ridge Winery and The Eyrie Vineyards whose proceeds benefit the Rogue Valley winegrowers whose contracts were abruptly canceled by a large California wine producer, was featured in numerous articles, including The Washington Post, NPR, Associated Press, Forbes, Bloomberg (2 articles), Wine Enthusiast, Financial Advisor, Yahoo! Finance, The Oregonian (5 articles), Oregon Wine Press (2 articles), Food & Wine,Statesman Journal (2 articles), Eugene Register-Guard (3 articles), Eugene Weekly, Portland Mercury, Wine Business Monthly (4 articles), Capital Press (2 articles), Great Northwest Wine, Southern Oregon Wine Scene, Bend Bulletin, Wine Advisor (2 articles), Mail Tribune (2 articles), The Manual, Union-Bulletin, Lake Oswego Review (2 articles), Ashland Tidings, Newport News Times, Wine-Searcher, PDX Food Press, Travel Oregon, Fermentation Wine Blog, Fine Dining Lovers Blog, Yale Climate Connections, Wine Trail Traveler Blog, Howard W. Hewitt Wine Blog and the website of Pat the Wine Guy.
The Company was mentioned in Oregon Solidarity stories on KGW Newschannel 8 (Portland NBC affiliate),KDRV News Channel 12 (Southern Oregon ABC affiliate station), KTCL Channel 10 (Southern Oregon CBS affiliate station), KMTR Channel 6 (Eugene NBC affiliate station), KVAL Channel 13 (Eugene CBS affiliate station) and KBND Newstalk 100.1 FM. Additionally, Southern Oregon Wine Scene did a cover story on Oregon Solidarity and Travel Oregon incorporated a bottle of Oregon Solidarity into their promotional video produced by Weiden + Kennedy that was featured on the home page of AdWeek as their Ad of the Day.
The Company’s Founder/CEO was quoted in several articles about legislation to protect the Oregon wine industry and make out-of-state wine producers making Oregon-labeled wines pay their fair share of Oregon wine grape taxes, including The Oregonian (3 articles), Portland Business Journal (9 articles), Oregon Wine Press, Capital Press (2 articles), Food and Travel News, Salem Reporter, Wine-Searcher, the website of KGW Newschannel 8 (Portland NBC affiliate) and on KYKN 1430 AM in Salem.
RESULTS OF OPERATIONS
Revenue
Sales revenue for the three months ended June 30, 2019 and 2018 were $5,790,837 and $5,821,292, respectively, a decrease of $30,455, or 0.5%, in the current year period over the prior year period. This decrease was mainly caused by an increase in direct sales of $5,957 more than offset by a decrease in sales through distributors of $36,455 in the current year three-month period over the prior year period. The increase in direct sales to consumers was primarily the result of retail sales increases of $138,127, including increases in wine club and kitchen sales, partially offset by a decrease in bulk wine sales of $132,170. The decrease in revenue from sales through distributors was primarily attributed to lower sales to the Company’s Oregon/Washington distributor in May and June of 2019, as a result of the distributor not reordering stocked wine due to software conversion issues. Sales revenue for the six months ended June 30, 2019 and 2018 were $10,789,623 and $10,353,911, respectively, an increase of $435,712, or 4.2%, in the current year period over the prior year period. This increase was mainly caused by an increase in revenues from direct sales of $175,978 and an increase in revenues from sales through distributors of $259,734 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 wine club and kitchen sales combined with a decrease in bulk wine sales in 2019 when compared to 2018. The increase in sales through distributors was not attributable to an isolated factor.
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Cost of Sales
Cost of Sales for the three months ended June 30, 2019 and 2018 were $2,292,479 and $2,099,186, respectively, an increase of $196,293, or 9.2%, in the current period over the prior year period. This change was primarily the result of an increase in cost per case of newly released vintages. These increased costs are believed to be unique to the 2017 vintage. The Company continues to evaluate its cost structure to minimized product costs wherever possible. Cost of Sales for the six months ended June 30, 2019 and 2018 were $4,010,629 and $3,741,561, respectively, an increase of $269,068, or 4.2%, in the current period over the prior year period. This change was primarily the result of an increase in cost of product sales in the current period as well as increased case sales.
Gross Profit
Gross profit for the three months ended June 30, 2019 and 2018 was $3,498,358 and $3,722,106, respectively, a decrease of $223,748, or 6.0%, in the current year period over the prior year period. This decrease was primarily the result of higher cost of product sales combined with lower overall case sales in the second quarter when compared to the corresponding period in the prior year. Gross profit for the six months ended June 30, 2019 and 2018 was $6,778,994 and $6,612,350, respectively, an increase of $166,644, or 2.5%, in the current year period over the prior year period. This increase was primarily the result of an increase in case sales over the first six months of the year compared to the same period in 2018, being partially offset by higher cost of product sales in the current period compared to the same period in 2018.
Gross profit as a percentage of net sales for the three months ended June 30, 2019 and 2018 was 60.4% and 63.9%, respectively, a decrease of 3.5 percentage points in the current year period over the prior year period. Gross profit as a percentage of net sales for the six months ended June 30, 2019 and 2018 was 62.8% and 63.9%, respectively, a decrease of 1.1 percentage points in the current year period over the prior year period.
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended June 30, 2019 and 2018 was $2,901,927 and $2,543,201 respectively, an increase of $358,726, or 14.1%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling expenses of $265,214, or 16.2% in addition to an increase in general and administrative expenses of $93,512, or 10.4% in the current quarter. Selling, general and administrative expense for the six months ended June 30, 2019 and 2018 was $5,618,125 and $4,961,101, respectively, an increase of $657,024, or 13.2%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling expenses of $513,135, or 16.2% and an increase in general and administrative expenses of $143,889, or 8.0% in the current year. Selling expenses increased in the first half, and second quarter, of 2019 compared to the same period in 2018 primarily as a result of increases in sales staffing and incentive costs, shipping, product demonstrations and marketing, among other selling related activities. General and administrative expenses increased in both the second quarter and first half of 2019 compared to the same periods in 2018 primarily a result of increased staffing and professional fees driven mostly by long-term term development and brand protection activities in 2019.
Interest Expense
Interest expense for the three months ended June 30, 2019 and 2018 was $111,088 and $116,284, respectively, a decrease of $5,196 or 4.5%, in the current year period over the prior year period. Interest expense for the six months ended June 30, 2019 and 2018 was $221,502 and $235,002, respectively, a decrease of $13,500 or 5.7%, in the current year period over the prior year period. The decrease in interest expense for the second quarter and first six months of 2019 was primarily the result of decreased debt compared to the second quarter and first six months of 2018.
Income Taxes
The income tax expense for the three months ended June 30, 2019 and 2018 was $134,363 and $306,839, respectively, a decrease of $172,476 or 56.2%, in the current year period over the prior year period mostly as a result of lower pre-tax income in the second quarter of 2019, compared to the same quarter in 2018. The Company’s estimated federal and state combined income tax rate was 27.2% and 27.6% for the three months ended June 30, 2019 and 2018, respectively. The income tax expense for the six months ended June 30, 2019 and 2018 was $284,366 and $429,583, respectively, a decrease of $145,217 or 33.8%, in the current year period over the prior year period mostly a result of lower pre-tax income in the first six months of 2019, compared to the same period in 2018. The Company’s estimated federal and state combined income tax rate was 26.5% and 27.5% for the three months ended June 30, 2019 and 2018, respectively.
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Net Income
Net income for the three months ended June 30, 2019 and 2018 was $359,911 and $803,255, respectively, a decrease of $443,344, or 55.2%, in the current year period over the prior year period. Net income for the six months ended June 30, 2019 and 2018 was $786,387 and $1,133,710, respectively, a decrease of $347,323, or 30.6%, in the current year period over the prior year period. The decrease in net income for the second quarter and first half of 2019, compared to the comparable periods in of 2018, was primarily the result of decreased gross profits in addition to higher selling, general & administrative expenses.
Income Applicable to Common Shareholders
Income applicable to common shareholders for the three months ended June 30, 2019 and 2018 was $103,459 and $546,817, respectively, a decrease of $443,358, or 81.1%, in the current year quarter over the prior year period. Income applicable to common shareholders for the six months ended June 30, 2019 and 2018 was $273,483 and $622,378, respectively, a decrease of $348,896, or 56.1%, in the current year period over the prior year period. The decrease in income applicable to common shareholders in the second quarter and first six months of 2019, compared to the same periods of 2018, was primarily the result of lower net income in the current periods partially offset by a decrease in tax provision.
Liquidity and Capital Resources
At June 30, 2019, the Company had a working capital balance of $22.8 million and a current working capital ratio of 6.82:1.
At June 30, 2019, the Company had a cash balance of $8,246,642, while at December 31, 2018, the Company had a cash balance of $9,737,467. The decrease in our cash balance during the first half of 2018 was primarily the result of investment in vineyard development and property and equipment.
Total cash provided by operating activities in the six months ended June 30, 2019 was $513,213. Cash provided by operating activities for the six months ended June 30, 2019 was primarily associated with income from operations adjusted for depreciation expense and payment of grape contracts and accounts receivable.
Total cash used in investing activities in the six months ended June 30, 2019 was $1,620,884. Cash used in investing activities for the six months ended June 30, 2019 primarily consisted of property and equipment purchases and vineyard development.
Total cash used in financing activities in the six months ended June 30, 2019 was $383,154. Cash used in financing activities for the six months ended June 30, 2019 consisted primarily of the payment of debt.
Non-cash investing and financing activities in the six months ended June 30, 2019 was $136,778. This was primarily the result of the vineyard development and property and equipment acquisition costs in accounts payable.
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 June 2018, until July 31, 2019. The index rate of prime plus zero, with a floor of 3.25%, at June 30, 2019 was 4.0%. 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 June 30, 2019, the Company was in compliance with all of the financial covenants.
At June 30, 2019 and December 31, 2018 the Company had no balance outstanding on the line of credit. At June 30, 2019, the Company had $2,000,000 available on the line of credit.
As of June 30, 2019 the Company had a 15 year installment note payable of $1,508,582, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.
As of June 30, 2019, the Company had a total long-term debt balance of $6,468,617, including the portion due in the next year, owed to Farm Credit Services and Toyota Credit Corporation, net of debt issuance costs of $165,662. As of December 31, 2018, the Company had a total long-term debt balance of $6,840,834, exclusive of debt issuance costs of $172,225.
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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 foreseeable short and long-term needs.
Off Balance Sheet Arrangements
As of June 30, 2019 and December 31, 2018, the Company had no off-balance sheet arrangements.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information required by this item.
ITEM 4:
CONTROLS AND PROCEDURES
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 June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings.
From time to time, the Company is a party to various judicial and administrative proceedings arising in the ordinary course of business. The Company’s management and legal counsel have reviewed the probable outcome of any proceedings that were pending during the period covered by this report, the costs and expenses reasonably expected to be incurred, the availability and limits of the Company’s insurance coverage, and the Company’s established liabilities. While the outcome of legal proceedings cannot be predicted with certainty, based on the Company’s review, the Company believes that any unrecorded liability that may result as a result of any legal proceedings is not likely to have a material effect on the Company’s liquidity, financial condition or results from operations.
Item 1A - Risk Factors.
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, 2018 (the “2018 Annual Report”), which could materially affect our business, results of operations or financial condition.
The risk factors have not materially changed as of June 30, 2019 from those disclosed in the 2018 Annual Report. However, it is important to note that the risks described in our 2018 Annual Report are not the only risks facing us. 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, results of operations or financial condition.
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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Mine Safety Disclosures.
Not applicable.
Item 5 – Other Information.
None.
Item 6 – Exhibits.
3.1 Articles of Incorporation of Willamette Valley Vineyards, Inc. (incorporated by reference from the Company's Regulation A Offering Statement on Form 1-A, File No. 24S-2996)
101 The following financial information from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Operations; (iii) Statements of Cash Flows; and (iv) Notes to Financial Statements, tagged as blocks of text. (Filed herewith).
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SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
Date: August 14, 2019 | By | /s/ James W. Bernau |
James W. Bernau | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: August 14, 2019 | By | /s/ Richard F. Goward Jr. |
Richard F. Goward Jr. | ||
Chief Financial Officer | ||
(Principal Accounting and Financial Officer) |
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