UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM
|
EXCHANGE ACT OF 1934
For
the quarterly period ended
Commission
File Number
(Exact name of registrant as specified in charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| Registrant’s
telephone number, including area code: |
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:
x
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):
x
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,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
| o Large accelerated filer | o Accelerated filer | |
| x |
||
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. o
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): o YES
x
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Number of shares of common stock outstanding as of November 14, 2023:
1
WILLAMETTE VALLEY VINEYARDS, INC.
INDEX TO FORM 10-Q
2
PART I: FINANCIAL INFORMATION
Item 1 – Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
CONDENSED
BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Other assets | ||||||||
| Vineyard development costs, net | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Investor deposits for preferred stock | ||||||||
| Bank overdraft | ||||||||
| Line of credit | ||||||||
| Current portion of note payable | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of lease liabilities | ||||||||
| Unearned revenue | ||||||||
| Grapes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion and debt issuance costs | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Deferred income taxes | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 8) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Redeemable preferred stock, par value, shares authorized, shares issued and outstanding, liquidation preference of $ | ||||||||
| Common stock, par value, shares authorized, shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively. | ||||||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 101,726,092 | $ | 98,683,982 | ||||
The accompanying notes are an integral part of this condensed financial statement
3
| WILLAMETTE VALLEY VINEYARDS, INC. |
| CONDENSED STATEMENTS OF OPERATIONS |
| (Unaudited) |
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| SALES, NET | $ | $ | $ | $ | ||||||||||||
| COST OF SALES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME TAX BENEFIT | ||||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Accrued preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS APPLICABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share after preferred dividends, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted-average number of common shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of this condensed financial statement
4
| WILLAMETTE VALLEY VINEYARDS, INC. |
| CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| (Unaudited) |
| Nine-Month Period Ended September 30, 2023 | ||||||||||||||||||||||||
| Redeemable | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Retained | ||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||
| Issuance of preferred stock, net | - | |||||||||||||||||||||||
| Preferred stock dividends accrued | - | - | ( | ) | ||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Balance at March 31, 2023 | ||||||||||||||||||||||||
| Preferred stock dividends accrued | - | - | ( | ) | ||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||
| Balance at June 30, 2023 | ||||||||||||||||||||||||
| Preferred stock dividends accrued | - | - | ( | ) | ||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ||||||||||||||||||||
| Nine-Month Period Ended September 30, 2022 | ||||||||||||||||||||||||
| Redeemable | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Retained | ||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ||||||||||||||||||||
| Issuance of preferred stock, net | - | |||||||||||||||||||||||
| Preferred stock dividends accrued | - | - | ( | ) | ||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Balance at March 31, 2022 | ||||||||||||||||||||||||
| Preferred stock dividends accrued | - | - | ( | ) | ||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||
| Balance at June 30, 2022 | ||||||||||||||||||||||||
| Preferred stock dividends accrued | - | - | ( | ) | ||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of this condensed financial statement
5
| WILLAMETTE VALLEY VINEYARDS, INC. |
| STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash lease expense | ||||||||
| Loan fee amortization | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Income taxes receivable | ( | ) | ( | ) | ||||
| Unearned revenue | ( | ) | ( | ) | ||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Grapes payable | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Net cash from operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Additions to vineyard development costs | ( | ) | ( | ) | ||||
| Additions to property and equipment | ( | ) | ( | ) | ||||
| Net cash from investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment on installment note for property purchase | ( | ) | ( | ) | ||||
| Proceeds from bank overdraft | ||||||||
| Payments on line of credit | ( | ) | ||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Proceeds from investor deposits held as liability | ||||||||
| Proceeds from long-term debt | ||||||||
| Proceeds from issuance of preferred stock | ||||||||
| Net cash from financing activities | ||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Purchases of property and equipment and vineyard development costs included in accounts payable | $ | $ | ||||||
| Reduction in investor deposits for preferred stock | $ | $ | ||||||
| Accrued preferred stock dividends | $ | $ | ||||||
| Right of use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
The accompanying notes are an integral part of this condensed financial statement
6
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements. The financial information as of December 31, 2022 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, 2022. 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, 2022, as presented in the Company’s Annual Report on Form 10-K.
Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2023, 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.
Basic earnings (loss) per share after preferred stock dividends are computed based on the weighted-average number of common shares outstanding each period.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Accrued preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss applicable to common shares | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||||
| Loss per common share after preferred dividends, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Subsequent to the filing of the 2022 Report there were no accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that would have a material effect on the Company’s unaudited interim condensed financial statements.
7
2) INVENTORIES
The Company’s inventories, by major classification, are summarized as follows, as of the dates shown:
| September 30, 2023 | December 31, 2022 | |||||||
| Winemaking and packaging materials | $ | $ | ||||||
| Work-in-process (costs relating to unprocessed and/or unbottled wine products) | ||||||||
| Finished goods (bottled wine and related products) | ||||||||
| Total inventories | $ | $ | ||||||
3) PROPERTY AND EQUIPMENT, NET
The Company’s property and equipment consists of the following, as of the dates shown:
| September 30, 2023 | December 31, 2022 | |||||||
| Construction in progress | $ | $ | ||||||
| Land, improvements, and other buildings | ||||||||
| Winery, tasting room buildings, and hospitality center | ||||||||
| Equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense for the three months ended September 30, 2023 and 2022 was $
4) DEBT
Line
of Credit Facility – In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that
allows borrowing up to $
The line of credit agreement includes various covenants, which among other things, requires the Company to maintain minimum amounts of tangible net worth, debt-to-equity, and debt service coverage, as defined, and limits the level of acquisitions of property and equipment. As of December 31, 2022, the Company was out of compliance with a debt covenant. The Company has received a waiver from Umpqua Bank waiving this violation until the next measurement date of December 31, 2023.
Notes
Payable – In February 2017, the Company purchased property, including vineyard land, bare land, and structures in the Dundee
Hills American Viticultural Area (AVA) under terms that included a 15 year note payable with quarterly payments of $42,534, bearing interest
at 6%. The note may be called by the owner, up to the outstanding balance, with 180 days written notice. As of September 30, 2023, the
Company had a balance of $
8
Long-Term
Debt – The Company has three long term debt agreements with AgWest with an aggregate outstanding balance of $
As
of September 30, 2023, the Company had unamortized debt issuance costs of $
The Company believes that cash flow from operations and funds available under the Company’s existing credit facilities will be sufficient to meet the Company’s short-term needs. The Company will continue to evaluate funding mechanisms to support our long-term funding requirements.
5) INTEREST AND TAXES PAID
Income
taxes – The Company paid zero in income taxes for the three months ended September 30, 2023 and 2022. The Company received
$
Interest
– The Company paid $
6) 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 include retail sales in the tasting rooms, wine club sales, internet 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 (loss) 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.
9
The following table outlines the sales, cost of sales, gross profit, directly attributable selling expenses, and contribution margin of the segments for the three and nine month periods ended September 30, 2023 and 2022. Sales figures are net of related excise taxes.
| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
| Direct Sales | Distributor Sales | Unallocated | Total | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Sales, net | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||||||||
| Selling expenses | $ | $ | ||||||||||||||||||||||||||||||
| Contribution margin (deficit) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Percent of total sales | % | % | % | % | ||||||||||||||||||||||||||||
| General and administration expenses | $ | $ | ||||||||||||||||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| Direct Sales | Distributor Sales | Unallocated | Total | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Sales, net | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||||||||
| Selling expenses | $ | $ | ||||||||||||||||||||||||||||||
| Contribution margin (deficit) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||
| Percent of total sales | % | % | % | % | ||||||||||||||||||||||||||||
| General and administration expenses | $ | $ | ||||||||||||||||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
Direct
sales include zero bulk wine sales for the three months ended September 30, 2023 and September 30, 2022. Direct sales include $
7) SALE OF PREFERRED STOCK
On January 24, 2020, the Company filed a shelf Registration Statement on Form S-3 (the “2020 Form S-3”) with the United States Securities and Exchange Commission (the “SEC”) pertaining to the potential future issuance of one or more classes or series of debt, equity, or derivative securities. The maximum aggregate offering amount of securities sold pursuant to the January 2020 Form S-3 was not to exceed $20,000,000. The Company subsequently filed with the SEC prospectus supplement on June 10, 2020, pursuant to which the Company sold an aggregate of shares of its Series A Redeemable Preferred Stock for aggregate proceeds of $8,533,086, net of acquisition costs.
On June 11, 2021, the Company filed with the SEC an additional Prospectus Supplement to the 2020 Form S-3, pursuant to which the Company sold an aggregate of 1,918,939 shares of its Series A Redeemable Preferred Stock for aggregate proceeds of $9,008,334 net of acquisition costs.
On July 1, 2022, the Company filed a new shelf Registration Statement on Form S-3 (the “July 2022 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. The maximum aggregate offering amount of securities sold pursuant to the June 2022 Form S-3 is not to exceed $20,000,000. On August 1, 2022 and September 1 2022, the Company filed with the SEC Prospectus Supplements to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 213,158 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,097,765 and up to 284,995 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,467,729, respectively. Each of these Prospectus Supplements established that our shares of preferred stock were to be sold in three offering periods with three separate offering prices beginning with an offering price of $5.15 per share and concluding with an offering of $5.35 per share. On October 3, 2022, the Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 233,564 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,226,211. This Prospectus Supplement established that our shares of preferred stock were to be sold in two offering periods with two separate offering prices beginning with an offering price of $5.25 per share and concluding with an offering of $5.35 per share. On November 1, 2022, the Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 344,861 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,845,009. This Prospectus Supplement established that our shares of preferred stock were to be sold in one offering period with an offering price of $5.35 per share. Net proceeds of $3,558,807 have been received under these offerings as of September, 30 2023 for the issuance of Preferred Stock. On June 30, 2023, the Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 727,835 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $3,530,000. This Prospectus Supplement established that our shares of preferred stock were to be sold in two offering periods with two separate offering prices beginning with an offering price of $4.85 per share and concluding with an offering of $5.35 per share. Net proceeds of $1,935,821 have been received under this offering as of September, 30 2023 for the issuance of Preferred Stock.
On October 27, 2023, the Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 288,659 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,400,000.
10
Shareholders
have the option to receive dividends as cash or as a gift card for purchasing Company products. The amount of unused dividend gift cards
at September 30, 2023 and December 31, 2022 was $
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 plus accrued but unpaid dividends and a redemption premium equal to 3% of the original issue price.
8) COMMITMENTS AND CONTINGENCIES
We determine if an arrangement is a lease at inception. On our condensed balance sheet, our operating leases are included in Operating lease right-of-use assets (ROU), 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 operating 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 -
11
Operating
Leases – Non-Vineyard –
The following tables provide lease cost and other lease information:
| Three Months Ended | Nine Months Ended | |||||||
| September 30, 2023 | September 30, 2023 | |||||||
| Lease Cost | ||||||||
| Operating lease cost - Vineyards | $ | $ | ||||||
| Operating lease cost - Other | ||||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| Other Information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases - Vineyard | $ | $ | ||||||
| Operating cash flows from operating leases - Other | $ | $ | ||||||
| Weighted-average remaining lease term - Operating leases in years | 10.31 | 10.31 | ||||||
| Weighted-average discount rate - Operating leases | % | % | ||||||
12
Right-of-use assets obtained in exchange for new operating lease obligations were $1,090,735 and $3,360,917 for the nine months ended September 30, 2023 and 2022, respectively.
As of September 30, 2023, maturities of lease liabilities were as follows:
| Years Ended December 31, | Leases | |||
| 2023, for remaining 3 months | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total minimal lease payments | ||||
| Less present value adjustment | ( | ) | ||
| Operating lease liabilities | ||||
| Less current lease liabilities | ( | ) | ||
| Lease liabilities, net of current portion | $ | |||
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 long-term grape purchase agreements with a number of Willamette Valley wine grape growers. With these agreements 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. There were $1,904,736 and $1,208,673 in grape purchases for the three and nine months periods ended September 30, 2023 and 2022.
13
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”, “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, and the reduction in consumer demand for premium wines. 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, 2022, 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.
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, 2022. Such policies were unchanged during the three months ended September 30, 2023.
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 and the Domaine Willamette Winery located near Dundee, Oregon. The Company generates revenues from the sales of wine to wholesalers and direct to consumers.
14
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 12,000 new preferred stockholders many of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent approximately 18,000 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 sold 143,286 and 127,007 cases of produced wine during the nine months ended September 30, 2023 and 2022, respectively, an increase of 16,279 cases, or 12.8% in the current year period over the prior year period. The increase in wine case sales was primarily the result of increased case sales through both distributors and direct to the consumer.
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, 2023, wine inventory included 172,280 cases of bottled wine and 519,138 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 205,486 cases during the nine months ended September 30, 2023.
Willamette Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers and online bloggers including the accolades below.
Wine Enthusiast Magazine rated the Company’s 2022 Whole Cluster Pinot Noir 90 points, 2022 White Pinot Noir 91 points, 2022 Maison Bleue Voltigeur Viognier 90 points, 2020 Métis Red Blend 92 points and Cellar Selection.
RESULTS OF OPERATIONS
Revenue
Sales revenue for the three months ended September 30, 2023 and 2022 were $9,348,066 and $7,602,878, respectively, an increase of $1,745,188, or 23.0%, in the current year period over the prior year period. This increase was caused by an increase in sales through distributors of $412,728 and an increase in direct sales of $1,332,460 in the current year three-month period over the prior year period. The increase in revenue from sales through distributors was primarily attributed to more availability of new vintage wines compared to the prior year. The increase in direct sales to consumers was primarily the result of retail sales in new tasting rooms in 2023. Sales revenue for the nine months ended September 30, 2023 and 2022 were $28,383,249 and $22,546,057, respectively, an increase of $5,837,192, or 25.9%, in the current year period over the prior year period. This increase was caused by an increase in revenues from direct sales of $4,134,603 and an increase in revenues from sales through distributors of $1,702,589 in the current year period over the prior year period. The increase in revenues from direct sales to consumers was primarily the result of more tasting room locations in the current year. The increase in sales through distributors was primarily the result of an increase in off-premise sales.
Cost of Sales
Cost of Sales for the three months ended September 30, 2023 and 2022 were $3,663,488 and $3,708,695, respectively, a decrease of $45,207, or 1.2%, in the current period over the prior year period. This change was primarily the result of an increase in direct sales compared to sales through distributors in the third quarter of 2023 compared to the same quarter of 2022. Cost of Sales for the nine months ended September 30, 2023 and 2022 were $11,969,630 and $10,104,588, respectively, an increase of $1,865,042 or 18.5%, in the current period over the prior year period. This change was primarily the result of an increase in both direct and distributor sales in 2023.
15
Gross Profit
Gross profit as a percentage of net sales for the three months ended September 30, 2023 and 2022 was 60.8% and 51.2%, respectively, an increase of 9.6 percentage points in the current year period over the prior year period, mostly as a result of the change in mix of products compared to the same quarter of 2022. Gross profit as a percentage of net sales for the nine months ended September 30, 2023 and 2022 was 57.8% and 55.2%, respectively, an increase of 2.6 percentage points in the current year period over the prior year period. This increase was primarily the result of an increase in direct sales compared to sales through distributors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2023 and 2022 was $5,967,346 and $5,120,218 respectively, an increase of $847,128 or 16.5%, in the current quarter over the same quarter in the prior year. This increase was primarily the result of an increase in selling and marketing expenses of $577,384, or 15.3% and an increase in general and administrative expenses of $269,744, or 20.0% in the current quarter compared to the same quarter in the prior year. Selling, general and administrative expense for the nine months ended September 30, 2023 and 2022 was $17,362,498 and $13,359,293, respectively, an increase of $4,003,205 or 30.0%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling and marketing expenses of $3,413,667, or 36.8% combined with an increase in general and administrative expenses of $589,538, or 14.4% in the current year period compared to the same period in 2022. Selling expenses increased primarily as a result of having more tasting room locations in 2023.
Interest Expense
Interest expense for the three months ended September 30, 2023 and 2022 was $171,272 and $87,220, respectively, an increase of $84,052 or 96.4%, in the third quarter of 2023 over the same quarter in the prior year. Interest expense for the nine months ended September 30, 2023 and 2022 was $460,309 and $269,037, respectively, an increase of $191,272 or 71.1%, in the current year period over the prior year period. The increase in interest expense for the third quarter and first nine months of 2023 was primarily the result of increased debt at higher interest rates in the current periods compared to the third quarter and first nine months of 2022.
Income Taxes
The income tax benefit for the three months ended September 30, 2023 and 2022 was $123,344 and $358,414, respectively, a decrease of $235,070 or 65.6%, in the third quarter of 2023 compared to the same quarter in the prior year mostly as a result of the lower pre-tax loss in the third quarter of 2023, compared to the same quarter in 2022. The Company’s estimated federal and state combined income tax rate was 27.4% for the three months ended September 30, 2023 and 2022, respectively. The income tax benefit for the nine months ended September 30, 2023 and 2022 was $363,396 and $298,517, respectively, an increase of $64,879 or 21.7%, in the current year period over the prior year period, mostly a result of a higher pre-tax loss in the first nine months of 2023, compared to the same period in 2022. The Company’s estimated federal and state combined income tax rate was 27.4% for the nine months ended September 30, 2023 and 2022, respectively.
Net Loss
Net loss for the three months ended September 30, 2023 and 2022 was $326,982 and $949,821, respectively, a decrease of $622,839, or 65.6%, in the third quarter of 2023 over the same quarter in the prior year. Net loss for the nine months ended September 30, 2023 and 2022 was $963,352 and $791,362, respectively, an increase of $171,990, or 21.7%, in the current year period over the prior year period.
16
Net Loss Applicable to Common Shareholders
Net loss applicable to common shareholders for the three months ended September 30, 2023 and 2022 was $838,701 and $1,416,433, respectively, a decrease of $577,732, or 40.8%, in the third quarter of 2023 over the same quarter in the prior year. Net loss applicable to common shareholders for the nine months ended September 30, 2023 and 2022 was $2,498,510 and $2,191,199, respectively, an increase of $307,311, or 14.0%, in the current year period over the prior year period. The decrease in the loss applicable to common shareholders in the third quarter was the result of a lower net loss in the current period. The increase in the loss applicable to common shareholders in the first nine months of 2023, compared to the same period of 2022, was the result of a higher net loss and higher dividend costs in the current period.
Liquidity and Capital Resources
At September 30, 2023, the Company had a working capital balance of $17.7 million and a current working capital ratio of 2.44:1.
At September 30, 2023, the Company had a cash balance of $213,432. At December 31, 2022, the Company had a cash balance of $338,676. This decrease is primarily the result of investments in property and equipment and inventories.
Total cash used for operating activities in the nine months ended September 30, 2023 was $68,089. Cash used in operating activities for the nine months ended September 30, 2023 was primarily associated with increased inventories, being partially offset by decreased accounts receivable and depreciation and amortization.
Total cash used in investing activities in the nine months ended September 30, 2023 was $3,718,612. 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, 2023 was $3,661,457. Cash generated from financing activities for the nine months ended September 30, 2023 primarily consisted of proceeds from the issuance of Preferred Stock, proceeds from the line of credit and long-term debt, being partially offset by the repayment of long-term 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. 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. In November 2022, the Company increased the borrowing line up to $5,000,000. The Company had no outstanding line of credit balance at September 30, 2023, at an interest rate of 8.00%, and an outstanding balance of $166,617 at December 31, 2022. In July 2023 the line of credit was renewed for an additional two years.
The line of credit agreement includes various covenants, which among other things, requires the Company to maintain minimum amounts of tangible net worth, debt-to-equity, and debt service coverage, as defined, and limits the level of acquisitions of property and equipment. As of December 31, 2022, the Company was out of compliance with a debt covenant. The Company has received a waiver from Umpqua Bank waiving this violation until the next measurement date of December 31, 2023.
As of September 30, 2023, the Company had a 15-year installment note payable of $1,126,374, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.
As of September 30, 2023, the Company had a total long-term debt balance of $7,717,435, including the portion due in the next year, owed to AgWest, exclusive of debt issuance costs of $109,301. As of December 31, 2022, the Company had a total long-term debt balance of $7,062,654, exclusive of debt issuance costs of $119,237.
The Company believes that cash flow from operations and funds available under the Company’s existing credit facilities will be sufficient to meet the Company’s short-term needs.
17
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 September 30, 2023 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, 2022, which could materially affect our business, results of operations or financial condition.
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, impact our results of operations or financial condition.
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.
18
Item 6 – Exhibits
19
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: November 14, 2023 | By | /s/ James W. Bernau |
| James W. Bernau | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2023 | By | /s/ John Ferry |
| John Ferry | ||
| Chief Financial Officer | ||
| (Principal Accounting and Financial Officer) | ||
20