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, 2018
☐
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,” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act:
| ☐ Large accelerated filer | ☐ Accelerated filer |
|
|
|
| ☐ Non-accelerated filer | ☒ Smaller reporting company |
|
|
|
| ☐ Emerging Growth Company |
|
Indicate
by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act): ☐ YES
☒ NO
Number
of shares of common stock outstanding as of August 14, 2018:
4,964,529
1
WILLAMETTE
VALLEY VINEYARDS, INC.
INDEX
TO FORM 10-Q
|
Part I - Financial Information
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3
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Item 1 - Financial Statements (unaudited)
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3
|
|
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Balance Sheets
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3
|
|
|
|
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Statements of Operations
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4
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|
|
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Statements of Cash Flows
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5
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|
|
|
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Notes to Unaudited Interim Financial Statements
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6
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|
|
|
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Item 2 - Management's Discussion and Analysis of Financial
Condition and
Results of Operations
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11
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|
|
|
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Item 3 – Quantitative and Qualitative Disclosures about
Market Risk
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17
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Item 4 - Controls and Procedures
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17
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Part II - Other Information
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17
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|
|
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Item 1 - Legal Proceedings
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17
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Item 1A – Risk Factors
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17
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Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds
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18
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Item 3 - Defaults Upon Senior Securities
|
18
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Item 4 – Mine Safety Disclosures
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18
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Item 5 – Other Information
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18
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Item 6 – Exhibits
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18
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Signatures
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19
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2
PART I: FINANCIAL INFORMATION
Item 1 – Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
BALANCE SHEETS
(Unaudited)
|
ASSETS
|
||
|
|
|
|
|
|
June 30,
|
December 31,
|
|
|
2018
|
2017
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash
and cash equivalents
|
$10,998,726
|
$13,776,257
|
|
Accounts
receivable, net
|
1,401,826
|
1,760,039
|
|
Inventories
(Note 2)
|
14,945,481
|
14,793,594
|
|
Prepaid
expenses and other current assets
|
151,324
|
108,102
|
|
Total
current assets
|
27,497,357
|
30,437,992
|
|
|
|
|
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Other
assets
|
34,836
|
49,153
|
|
Vineyard
development costs, net
|
6,628,717
|
6,006,250
|
|
Property
and equipment, net (Note 3)
|
24,822,323
|
23,201,876
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|
|
|
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TOTAL ASSETS
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$58,983,233
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$59,695,271
|
|
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||
|
|
|
|
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CURRENT LIABILITIES
|
|
|
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Accounts
payable
|
$559,871
|
$993,598
|
|
Accrued
expenses
|
779,519
|
871,427
|
|
Investor
deposits for preferred stock (Note 9)
|
-
|
430,305
|
|
Current
portion of notes payable
|
1,722,971
|
1,759,652
|
|
Current
portion of long-term debt
|
407,144
|
397,251
|
|
Income
taxes payable
|
220,581
|
125,297
|
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Deferred
revenue-distribution agreement
|
23,790
|
95,220
|
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Unearned
revenue
|
265,040
|
306,564
|
|
Grapes
payable
|
-
|
1,455,569
|
|
Total
current liabilities
|
3,978,916
|
6,434,883
|
|
|
|
|
|
|
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Notes
payable, net of current portion
|
-
|
137,667
|
|
Long-term
debt, net of current portion and debt issuance costs
|
6,455,427
|
6,655,384
|
|
Deferred
rent liability
|
66,252
|
82,024
|
|
Deferred
gain
|
41,030
|
57,077
|
|
Deferred
income taxes
|
1,587,227
|
1,587,227
|
|
Total
liabilities
|
12,128,852
|
14,954,262
|
|
|
|
|
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COMMITMENTS AND CONTINGENCIES
|
|
|
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SHAREHOLDERS’ EQUITY
|
|
|
|
Redeemable preferred stock, no par value, 10,000,000 shares
authorized,
|
|
|
|
4,662,518 shares, liquidation preference $19,604,343, issued
and
|
|
|
|
outstanding at June 30, 2018 and 4,427,991, liquidation
preference
|
|
|
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$18,375,831
issued and outstanding at December 31, 2017,
|
|
|
|
respectively.
|
18,830,502
|
17,339,508
|
|
Common stock, no par value, 10,000,000 shares authorized, 4,964,529
and
|
|
|
|
4,964,529 shares issued and outstanding at June 30, 2018
and
|
|
|
|
December
31, 2017, respectively.
|
8,512,489
|
8,512,489
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Retained
earnings
|
19,511,390
|
18,889,012
|
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Total
shareholders’ equity
|
46,854,381
|
44,741,009
|
|
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$58,983,233
|
$59,695,271
|
The accompanying notes are an integral part of this financial
statement
3
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
|
June 30,
|
||
|
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2018
|
2017
|
2018
|
2017
|
|
|
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SALES, NET
|
$5,821,292
|
$5,313,784
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$10,353,911
|
$9,764,329
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COST OF SALES
|
2,099,186
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2,124,850
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3,741,561
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3,832,530
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|
|
|
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GROSS PROFIT
|
3,722,106
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3,188,934
|
6,612,350
|
5,931,799
|
|
|
|
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SELLING, GENERAL & ADMINISTRATIVE EXPENSES
|
2,543,201
|
2,129,794
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4,961,101
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4,369,532
|
|
|
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INCOME FROM OPERATIONS
|
1,178,905
|
1,059,140
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1,651,249
|
1,562,267
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|
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OTHER INCOME (EXPENSE)
|
|
|
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Interest
income
|
2,137
|
3,747
|
9,004
|
11,061
|
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Interest
expense
|
(116,284)
|
(122,866)
|
(235,002)
|
(219,566)
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Other
income, net
|
45,336
|
51,433
|
138,042
|
134,576
|
|
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|
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INCOME BEFORE INCOME TAXES
|
1,110,094
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991,454
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1,563,293
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1,488,338
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INCOME TAX PROVISION
|
(306,839)
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(397,953)
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(429,583)
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(579,708)
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NET INCOME
|
803,255
|
593,501
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1,133,710
|
908,630
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Accrued preferred stock dividends
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(256,438)
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(131,833)
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(511,332)
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(263,665)
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INCOME APPLICABLE TO COMMON SHAREHOLDERS
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$546,817
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$461,668
|
$622,378
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$644,965
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Income per common share after preferred dividends
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$0.11
|
$0.09
|
$0.13
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$0.13
|
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Weighted average number of
|
|
|
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common shares outstanding
|
4,964,529
|
4,994,407
|
4,964,529
|
5,000,046
|
The accompanying notes are an integral part of this financial
statement
4
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six months ended June 30,
|
|
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2018
|
2017
|
|
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CASH FLOWS FROM OPERATING ACTIVITIES
|
|
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Net
income
|
$1,133,710
|
$908,630
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
from
operating activities:
|
|
|
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Depreciation
and amortization
|
801,147
|
739,816
|
|
Loss/(gain)
on disposition of property & equipment
|
72
|
(1,243)
|
|
Non-cash
loss from other assets
|
14,317
|
10,033
|
|
Deferred
rent liability
|
(15,772)
|
(15,771)
|
|
Deferred
gain
|
(16,048)
|
(16,048)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
358,213
|
439,556
|
|
Inventories
|
(151,887)
|
289,442
|
|
Prepaid
expenses and other current assets
|
(43,222)
|
317,182
|
|
Unearned
revenue
|
(41,524)
|
(18,656)
|
|
Deferred
revenue-distribution agreement
|
(71,430)
|
(71,430)
|
|
Grapes
payable
|
(1,455,569)
|
(693,666)
|
|
Accounts
payable
|
(474,940)
|
(114,146)
|
|
Accrued
expenses
|
(91,908)
|
(315,110)
|
|
Income
taxes payable
|
95,284
|
69,708
|
|
Net
cash from operating activities
|
40,443
|
1,528,297
|
|
|
|
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|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Additions
to vineyard development costs
|
(632,647)
|
(569,178)
|
|
Additions
to property and equipment
|
(2,370,272)
|
(1,437,639)
|
|
Proceeds
from sale of property and equipment
|
-
|
45,000
|
|
Net
cash from investing activities
|
(3,002,919)
|
(1,961,817)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from long-term debt
|
-
|
2,672,659
|
|
Proceeds
from investor deposits held as liability
|
-
|
2,912,176
|
|
Payment
on installment note for property purchase
|
(174,348)
|
(262,825)
|
|
Payments
on long-term debt
|
(190,064)
|
(262,905)
|
|
Proceeds
from issuance of preferred stock
|
549,357
|
-
|
|
Proceeds
from exercise of stock options
|
-
|
21,630
|
|
Repurchase
of common stock
|
-
|
(348,875)
|
|
Net
cash from financing activities
|
184,945
|
4,731,860
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
(2,777,531)
|
4,298,340
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
13,776,257
|
5,706,351
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$10,998,726
|
$10,004,691
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Purchase
of property and vineyard development costs with notes
payable
|
$-
|
$1,950,333
|
|
Purchases
of property and equipment and vineyard development
|
|
|
|
costs
included in accounts payable
|
$161,217
|
$165,788
|
The accompanying notes are an integral part of this financial
statement
5
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The
accompanying unaudited interim financial statements as of June 30,
2018 and for the three and six months ended June 30, 2018 and 2017
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, 2017 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, 2017. 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, 2017,
as presented in the Company’s Annual Report on Form
10-K.
Operating
results for the three and six months ended June 30, 2018 are not
necessarily indicative of the results that may be expected for the
entire year ending December 31, 2018, 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,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$803,255
|
$593,501
|
$1,133,710
|
$908,630
|
|
Accrued
preferred stock dividends
|
(256,438)
|
(131,833)
|
(511,332)
|
(263,665)
|
|
|
|
|
|
|
|
Net
income applicable to common shares
|
$546,817
|
$461,668
|
$622,378
|
$644,965
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
4,964,529
|
4,994,407
|
4,964,529
|
5,000,046
|
|
|
|
|
|
|
|
Income per common share
|
|
|
|
|
|
after preferred
dividends
|
$0.11
|
$0.09
|
$0.13
|
$0.13
|
Recently issued accounting standards (adopted) – In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606) (“ASU 2014-09”), a new standard to
achieve a consistent application of revenue recognition within the
U.S., resulting in a single revenue model to be applied by
reporting companies under GAAP. The original effective date for ASU
2014-09 would have required adoption by the Company in the first
quarter of fiscal 2017 with early adoption prohibited. In August
2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers (Topic 606) - Deferral of the Effective Date
(“ASU 2015-14”), which
defers the effective date of ASU 2014-09 for one year and permits
early adoption in accordance with the original effective date of
ASU 2014-09.
The new revenue standard is required to be applied retrospectively
to each prior reporting period presented or prospectively with the
cumulative effect of initially applying the standard recognized at
the date of initial application. The Company adopted the standard
in the first quarter of 2018 using the modified prospective method.
The Company has evaluated the effect of the standard and concluded
it will not be material to the Company’s financial reporting.
Additionally, the Company has concluded that the application of the
standard does not have a material effect that would require a
retrospective adjustment.
6
The
Company recognizes revenue when obligations under the terms of a
contract with its customer are satisfied, generally, this occurs
when the product is shipped and title passes to the customer. The
Company’s standard terms are ‘FOB’ shipping
point, with no customer acceptance provisions. Revenue is measured
as the amount of consideration expected to be received in exchange
for transferring products. The cost of price promotions and rebates
are treated as reductions of revenue. No products are sold on
consignment. Credit sales are recorded as trade accounts receivable
and no collateral is required. Revenue from items sold through the
Company’s retail locations is recognized at the time of sale.
Net revenue reported herein is shown net of sales allowances and
excise taxes. If the conditions for revenue recognition are not
met, the Company defers the revenue until all conditions are met.
As of June 30, 2018 and December 31, 2017, the Company has recorded
deferred revenue in the amount of $128,708 and $103,246,
respectively, which is included in accrued expenses on the balance
sheet.
The
Company has price incentive programs with its distributors to
encourage product placement and depletions. When recording a sale
to the customer, an incentive program liability is recorded to
accrued liabilities and sales are reported net of incentive program
expenses. Incentive program payments are made when completed
incentive program payment requests are received from the customers.
Incentive payments to a customer reduce the incentive program
accrued liability. For the three months ended June 30, 2018 and
2017, the Company recorded incentive program expenses of $397,325
and $213,286, respectively, as a reduction in sales on the
Statements of Operations. For the six months ended June 30, 2018
and 2017, the Company recorded incentive program expenses of
$483,139 and $365,653, respectively, as a reduction in sales on the
income statement. As of June 30, 2018 and December 31, 2017, the
Company has recorded an incentive program liability in the amount
of $44,533 and $49,075, respectively, which is included in accrued
expenses on the balance sheet. Estimates are based on historical and
projected experience for each type of program or customer and have
historically been in line with actual costs
incurred.
Recently issued accounting standards (not yet 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 will require 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 is still evaluating the impact of ASU 2016-02 on its
financial position and results of operations.
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, 2018
|
December
31, 2017
|
|
|
|
|
|
Winemaking
and packaging materials
|
$749,011
|
$849,825
|
|
Work-in-process
(costs relating to
|
|
|
|
unprocessed
and/or unbottled wine products)
|
5,432,460
|
8,126,838
|
|
Finished
goods (bottled wine and related products)
|
8,764,010
|
5,816,931
|
|
|
|
|
|
Current
inventories
|
$14,945,481
|
$14,793,594
|
7
3) PROPERTY AND EQUIPMENT
The
Company’s property and equipment consists of the following,
as of the dates shown:
|
|
June
30, 2018
|
December
31, 2017
|
|
|
|
|
|
Construction
in progress
|
$1,991,610
|
$1,036,615
|
|
Land,
improvements and other buildings
|
10,925,953
|
10,197,388
|
|
Winery
building and hospitality center
|
15,146,477
|
15,055,935
|
|
Equipment
|
11,799,172
|
11,221,964
|
|
|
|
|
|
|
39,863,212
|
37,511,902
|
|
|
|
|
|
Accumulated
depreciation
|
(15,040,889)
|
(14,310,026)
|
|
|
|
|
|
Property
and equipment, net
|
$24,822,323
|
$23,201,876
|
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, 2018 and 2017, the Company has recognized revenue
related to this agreement in the amount of $35,715 and $35,715,
respectively, recorded to other income. For the six months ended
June 30, 2018 and 2017, the Company has recognized revenue related
to this agreement in the amount of $71,430 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, 2018 and December 31, 2017. At
June 30, 2018 and December 31, 2017 there was no outstanding
balance on this revolving line of credit.
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, 2018 the Company had a balance of $137,666 due on this note. As
of December 31, 2017 the Company had a balance due of $275,333. No
interest accrues under the terms of this note.
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,
2018 the Company had a balance of $1,585,305 due on this note. As
of December 31, 2017 the Company had a balance of $1,621,986 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 $7,011,777 and $7,202,727 as of June 30, 2018 and
December 31, 2017. 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.
8
The
Company has an outstanding loan with Toyota Credit Corporation
maturing in February 2021, at zero interest, with an outstanding
balance of $29,643 and $35,381 as of June 30, 2018 and December 31,
2017, respectively. The purpose of this loan was to purchase a
vehicle.
As of
June 30, 2018 the Company had unamortized debt issuance costs of
$178,849. As of December 31, 2017 the Company had unamortized debt
issuance costs of $185,472
6) STOCK BASED COMPENSATION
The
Company had a stock incentive plan, originally created in 1992,
most recently amended in 2001. No additional grants may be made
under the plan. All stock options contained an exercise price that
was equal to the fair market value of the Company’s stock on
the date the options were granted. All stock options had been
exercised as of December 31, 2017.
7) INTEREST AND TAXES PAID
Income taxes – The Company paid $334,000 and $510,000
in income taxes for the three months ended June 30, 2018 and 2017,
respectively. The Company paid $334,000 and $510,000 in income
taxes for the six months ended June 30, 2018 and 2017,
respectively.
Interest - The Company paid $115,161 and $121,352 for the
three months ended June 30, 2018 and 2017, respectively, in
interest on long-term debt. The Company paid $229,837 and $191,462
for the six months ended June 30, 2018 and 2017, respectively, in
interest on long-term debt.
8) 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,
2018 and 2017. Sales figures are net of related excise
taxes.
9
|
|
Three Months Ended June 30,
|
|||||
|
|
Direct
Sales
|
Distributor
Sales
|
Total
|
|||
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$2,353,487
|
$1,995,008
|
$3,467,805
|
$3,318,776
|
$5,821,292
|
$5,313,784
|
|
Cost
of Sales
|
650,359
|
589,575
|
1,448,827
|
1,535,275
|
2,099,186
|
2,124,850
|
|
Gross
Margin
|
1,703,128
|
1,405,433
|
2,018,978
|
1,783,501
|
3,722,106
|
3,188,934
|
|
Selling
Expenses
|
1,030,106
|
862,458
|
545,403
|
452,301
|
1,575,509
|
1,314,759
|
|
Contribution
Margin
|
$673,022
|
$542,975
|
$1,473,575
|
$1,331,200
|
$2,146,597
|
$1,874,175
|
|
Percent
of Sales
|
40.4%
|
37.5%
|
59.6%
|
62.5%
|
100.0%
|
100.0%
|
|
|
Six
Months Ended June 30,
|
|||||
|
|
Direct
Sales
|
Distributor
Sales
|
Total
|
|||
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$3,903,643
|
$3,484,127
|
$6,450,268
|
$6,280,202
|
$10,353,911
|
$9,764,329
|
|
Cost
of Sales
|
1,038,543
|
954,186
|
2,703,018
|
2,878,344
|
3,741,561
|
3,832,530
|
|
Gross
Margin
|
2,865,100
|
2,529,941
|
3,747,250
|
3,401,858
|
6,612,350
|
5,931,799
|
|
Selling
Expenses
|
2,016,858
|
1,719,463
|
995,706
|
927,783
|
3,012,564
|
2,647,246
|
|
Contribution
Margin
|
$848,242
|
$810,478
|
$2,751,544
|
$2,474,075
|
$3,599,786
|
$3,284,553
|
|
Percent
of Sales
|
37.7%
|
35.7%
|
62.3%
|
64.3%
|
100.0%
|
100.0%
|
Direct
sales include $134,970 and $155,538 of bulk wine sales in the three
months ended June 30, 2018 and 2017, respectively. Direct sales
include $134,970 and $163,788 of bulk wine sales in the six months
ended June 30, 2018 and 2017, respectively.
9) 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.
10
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.
Lease – The Company has entered a long-term lease to
open Willamette Wine Works in Folsom, California which will include
food and pairings and a unique hands-on blending experience
featuring locally made Natoma wine.
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, 2017, 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 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, 2017. Such policies were unchanged during
the six months ended June 30, 2018.
11
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, Elton, Pambrun, Maison
Bleue 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 5,775 new preferred
stockholders many of which the Company believes are wine
enthusiasts. When considering joint ownership, these new
shareholders represent approximately 9,000 potential customers of
the Company. Additionally, the Company has approximately 8,853
common shareholders representing an estimated 13,700 potential
customers when considering joint ownership. Membership in the
Company’s wine club decreased by approximately 28 net
members, or 0.4%, to a total of 7,400 members during the six months
ending June 30, 2018. The Company believes the increase in
preferred shareholders, who receive enhanced discounts, has reduced
the number of people who would otherwise become Wine Club members.
However, management anticipates that new preferred shareholders
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 $134,970 for the three months
ended June 30, 2018 and $155,538 in bulk wine sales for the same
period of 2017. The Company had bulk wine sales of $134,970 for the
six months ended June 30, 2018 and $163,788 in bulk wine sales for
the same period of 2017.
The
Company sold approximately 67,558 and 65,081 cases of produced wine
during the six months ended June 30, 2018 and 2017, respectively,
an increase of 2,477 cases, or 3.8% in the current year period over
the prior year period. The increase in wine case sales was
the result of increased sales through distributors as well as
increased direct to consumer case sales.
Cases
sold in 2018 or 2017 does not include unfulfilled
“futures”, where a customer prepays for a wine not yet
released. Proceeds from these sales are not recognized as revenue
until shipped and are reflected as unearned revenue. Selling
expenses for these sales are recognized in the period in which the
expense is incurred.
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, 2018, wine inventory included approximately 140,716 cases of
bottled wine and 244,211 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 124,318 cases during the
six months ended June 30, 2018.
Net
income for the three months ended June 30, 2018 and 2017 was
$803,255 and $593,501, respectively, an increase of $209,754, or
35.3%, in the current year period over the prior year period. Net
income for the six months ended June 30, 2018 and 2017 was
$1,133,710 and $908,630, respectively, an increase of $225,080, or
24.8%, in the current year period over the prior year
period.
12
Income
applicable to common shareholders for the three months ended June
30, 2018 and 2017 was $546,817 and $461,668, respectively, an
increase of $85,149, or 18.4%, in the current year period over the
prior year period. Income applicable to common shareholders for the
six months ended June 30, 2018 and 2017 was $622,378 and $644,965,
respectively, a decrease of $22,587, or 3.5%, in the current year
period over the prior year period.
Overall
gross profit for the three months ended June 30, 2018 and 2017 was
$3,722,106 and $3,188,934, respectively, an increase of $533,172,
or 16.7%, in the current year period over the prior year period.
Gross profit as a percentage of net sales for the three months
ended June 30, 2018 and 2017 was 63.9% and 60.0%, respectively, an
increase of 3.9 percentage points in the current year period over
the prior year period. In June 2017 the Company wrote down $112,599
of bulk wine as an expense to cost of sales. This write down
reduced our gross profit as a percentage of net sales for the three
months ended June 30, 2017 by approximately 2.1 percentage points.
Overall gross profit for the six months ended June 30, 2018 and
2017 was $6,612,350 and $5,931,799, respectively, an increase of
$680,551, or 11.5%, 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, 2018 and 2017 was 63.9% and 60.7%,
respectively, an increase of 3.2 percentage points in the current
year period over the prior year period. In the six months ended
June 30, 2017 the Company wrote down $188,517 of bulk wine as an
expense to cost of sales. This write down reduced our gross profit
as a percentage of net sales for the six months ended June 30, 2017
by approximately 2.0 percentage points.
The
Company generated $0.11 and $0.09 in basic earnings per share after
preferred dividends during the three months ended June 30, 2018 and
2017, respectively. The Company generated $0.13 and $0.13 in basic
earnings per share after preferred dividends during the six months
ended June 30, 2018 and 2017, respectively.
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
2018.
Wine Enthusiast awarded the
Company’s 2017 Whole Cluster Pinot Noir with a 91-point
score, the 2016 Estate Pinot Noir with a 90-point score and the
2017 Whole Cluster Rosé of Pinot Noir with a 90-point score.
Both the 2017 Whole Cluster Pinot Noir and the 2017 Whole Cluster
Rosé of Pinot Noir were named an Editors’
Choice.
Tastings awarded the
Company’s 2015 Tualatin Estate Pinot Noir with a 94-point
score, the 2015 Elton Pinot Noir with a 91-point score and the 2015
Méthode Champenoise Brut with a 91-point
score.
The Company’s Winery Director, Christine Clair, was featured
in a video and quoted in The
Associated Press article titled
“Wineries Hedge Against Climate Change, Move to Cool
Climates.” This same article was syndicated to various news
networks and appeared in such news outlets
as ABC
News, The National Post, CBS Chicago, The Oregonian, Oregon Public
Broadcasting and The Statesman Journal, among
others.
The Company’s 2015 Tualatin Estate Pinot Noir was featured in
a Yakima
Herald article titled
"Northwest Wine: Oregon Makes Pinot Noir a Dominant Northwest
Grape.”
The Company’s 2017 Whole Cluster Rosé of Pinot Noir was
rated as a “five-star wine” and was awarded 93 points
in the Beverage
Dynamics article titled,
"Our Favorite Rosé Wines for Summer 2018."
Gus Clemens reviewed the Company’s 2016 Whole Cluster Pinot
Noir and described it as “refined, elegant Willamette Valley
Pinot Noir that showcases how Oregon can be in the conversation
about great pinots at great price points.”
The Company’s 2015 Estate Pinot Noir was highlighted on
Delectable’s website and was described as “Very
consistent and true to the varietal.”
The Company’s 2017 Whole Cluster Pinot Noir featured in
a Boise
Weekly article titled
“Chillin’ with Summer Reds” where the tasting
notes and fermentation process were described.
Wine Enthusiast recommended the
Company for a wedding venue in the article titled “7 Wine
Regions for Your Destination Wedding.”
The
Company’s 2017 Whole Cluster Pinot Noir was featured on KGW
Newschannel 8, a local broadcast channel in Oregon, in a segment
about summer wines and the video was shared on Tasting Pour’s website in an
article called “Summer Wines.”
13
The Company was announced as a finalist in the
2018 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 was selected as the Best Vineyard/Tasting Room
Experience by Sunset Magazine in their annual Sunset Travel Awards
in 2016.
The Company was named “Best Winery”
in Willamette
Week’s “Best of
Portland Readers' Poll.”
The Company won Gold in the following categories for the 2018 Best
of the Mid-Valley Awards based on community votes: Best Winery,
Best Place to Buy Wine, Best Date Night, Best Local Chef and Best
Place to Take Out of Town Guests.
RESULTS OF OPERATIONS
Revenue
Sales
for the three months ended June 30, 2018 and 2017 were $5,821,292
and $5,313,784, respectively, an increase of $507,508, or 9.6%, in
the current year period over the prior year period. This increase
was mainly caused by an increase in direct
sales, including bulk wine, of $358,479 and an increase in sales
through distributors of $149,029 in the current year three month
period over the prior year period. The increase in direct
sales to consumers was primarily the result of increased tasting
room, wine club, and kitchen sales in 2018 when compared to 2017.
The increase in sales through distributors was not attributable to
an isolated factor. Sales for the six months ended June 30, 2018
and 2017 were $10,353,911 and $9,764,329, respectively, an increase
of $589,582, or 6.0%, in the current year period over the prior
year period. This increase was mainly caused by an increase in direct
sales, including bulk wine, of $419,516 and an increase in sales
through distributors of $170,066 in the current year period over
the prior year period. The increase in direct sales to
consumers was primarily the result of increased tasting room, wine
club, and kitchen sales in 2018 when compared to 2017. The increase
in sales through distributors was not attributable to an isolated
factor.
Cost of Sales
Cost of
Sales for the three months ended June 30, 2018 and 2017 were
$2,099,186 and $2,124,850, respectively, a decreaes of $25,664, or
1.2%, in the current period over the prior year period. This change
was primarily the result of an increase in cases sold in the
current period more than offset by a write off of $112,599 of bulk
wine inventory to cost of sales in June 2017 that did not reoccur
in 2018. Cost of Sales for the six months ended June 30, 2018 and
2017 were $3,741,561 and $3,832,530, respectively, a decrease of
$90,969, or 2.4%, 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 more than offset by a write
down of bulk wine inventory of $188,517 in 2017 that did not
reoccur in 2018.
Gross Profit
Gross
profit for the three months ended June 30, 2018 and 2017 was
$3,722,106 and $3,188,934, respectively, an increase of $533,172,
or 16.7%, in the current year period over the prior year period.
Gross profit for the six months ended June 30, 2018 and 2017 was
$6,612,350 and $5,931,799, respectively, an increase of $680,551,
or 11.5%, in the current year period over the prior year period.
These increases were primarily the result of an overall increase in
wine sales as well as by the write off of bulk wine inventory in
2017 discussed above.
Gross
profit as a percentage of net sales for the three months ended June
30, 2018 and 2017 was 63.9% and 60.0%, respectively, an increase of
3.9 percentage points in the current year period over the prior
year period, of which 2.1 percentage points was attributable to the
write down of bulk wine in 2017 discussed above. Gross profit as a
percentage of net sales for the six months ended June 30, 2018 and
2017 was 63.9% and 60.7%, respectively, an increase of 3.2
percentage points in the current year period over the prior year
period, of which 2.0 percentage points was attributable to the
write down of bulk wine in 2017 discussed above.
14
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended June
30, 2018 and 2017 was $2,543,201and $2,129,794 respectively, an
increase of $413,407, or 19.4%, in the current year period over the
prior year period. This increase was primarily the result of an
increase in selling expenses of $267,957, or 19.5% in addition to
an increase in general and administrative expenses of $145,450, or
19.2% in the current quarter. Selling, general and administrative
expense for the six months ended June 30, 2018 and 2017 was
$4,961,101 and $4,369,532, respectively, an increase of $591,569,
or 13.5%, in the current year period over the prior year period.
This increase was primarily the result of an increase in selling
expenses of $390,971, or 14.1% and an increase in general and
administrative expenses of $200,598, or 12.6% in the current year.
Selling expenses increased in the first half, and second quarter,
of 2018 compared to the same period in 2017 primarily as a result of
increases in sales staffing and incentive costs, product
demonstrations and marketing, among other selling related
activities, as well as costs associated with operating a new retail
outlet in Walla Walla in 2018. General and administrative expenses
increased in both the second quarter and first half of 2018
compared to the same periods in 2017 primarily a result of
increased staffing and professional fees driven mostly by long-term
term development activities in 2018.
Interest Expense
Interest
expense for the three months ended June 30, 2018 and 2017 was
$116,284 and $122,866, respectively, a decrease of $6,582 or 5.4%,
in the current year period over the prior year period. Interest
expense for the six months ended June 30, 2018 and 2017 was
$235,002 and $219,566, respectively, an increase of $15,436 or
7.0%, in the current year period over the prior year period. The
decrease in interest expense for the second quarter of 2018 was
primarily the result of decreased debt compared to the second
quarter of 2017. The increase in interest expense for the first
half 2018 was primarily the result of additional interest
associated with a new note payable used to finance a property
purchase and additional debt incurred as part of a refinancing
transaction in the first quarter of 2017.
Income Taxes
The
income tax expense for the three months ended June 30, 2018 and
2017 was $306,839 and $397,953, respectively, a decrease of $91,114
or 22.9%, in the current year period over the prior year period
mostly as a result of higher pre-tax income in the second quarter
of 2018, compared to the same quarter in 2017, being more than
offset by a decrease in the effective tax rate in 2018. The
Company’s estimated federal and state combined income tax
rate was 27.6% and 40.1% for the three months ended June 30, 2018
and 2017, respectively. The income tax expense for the six months
ended June 30, 2018 and 2017 was $429,583 and $579,708,
respectively, a decrease of $150,125 or 25.9%, in the current year
period over the prior year period mostly a result of higher pre-tax
income in the first six months of 2018, compared to the same period
in 2017, being more than offset by a decrease in the effective tax
rate in 2018. The Company’s estimated federal and state
combined income tax rate was 27.6% and 39.0% for the three months
ended June 30, 2018 and 2017, respectively. The decrease in the
Company’s tax rate is primarily the result of the enactment
of the Tax Cuts and Jobs Act in December 2017.
Net Income
Net
income for the three months ended June 30, 2018 and 2017 was
$803,255 and $593,501, respectively, an increase of $209,754, or
35.3%, in the current year period over the prior year period. Net
income for the six months ended June 30, 2018 and 2017 was
$1,133,710 and $908,630, respectively, an increase of $225,080, or
24.8%, in the current year period over the prior year period. The
increase in net income for the second quarter and first half of
2018, compared to the comparable periods in of 2017, was primarily
the result of increased gross profits being partially offset by
higher selling, general & administrative expenses combined with
a decrease in taxes associated with the implementation of the Tax
Cuts and Jobs Act in December 2017.
15
Income Applicable to Common Shareholders
Income
applicable to common shareholders for the three months ended June
30, 2018 and 2017 was $546,817 and $461,668, respectively, an
increase of $85,149, or 18.4%, in the current year quarter over the
prior year period. Income applicable to common shareholders for the
six months ended June 30, 2018 and 2017 was $622,378 and $644,965,
respectively, a decrease of $22,587, or 3.5%, in the current year
quarter over the prior year period. The increase in income
applicable to common shareholders in the second quarter of 2018
compared to the same quarter of 2017 was primarily the result of
higher net income in the current quarter, while the decrease in the
first half of 2018 compared to the same period of 2017 was
primarily the result of increased net income being more than offset
by an increased accrued preferred stock dividends in 2018 primarily
driven by an increased number of preferred stock shares
outstanding.
Liquidity and Capital Resources
At June
30, 2018, the Company had a working capital balance of $23.5
million and a current working capital ratio of 6.91:1. At December
31, 2017, the Company had a working capital balance of $24.0
million and a current working capital ratio of 4.73:1.
At June
30, 2018, the Company had a cash balance of $10,998,726, while at
December 31, 2017, the Company had a cash balance of $13,776,257.
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, 2018 was $40,443. Cash provided by operating activities for the
six months ended June 30, 2018 was primarily associated with income
from operations adjusted for depreciation expense and payment of
grape contracts and other accounts payable.
Total
cash used in investing activities in the six months ended June 30,
2018 was $3,002,919. Cash used in investing activities for the six
months ended June 30, 2018 primarily consisted of property and
equipment purchases and vineyard development.
Total
cash provided by financing activities in the six months ended June
30, 2018 was $184,945. Cash provided by financing activities for
the six months ended June 30, 2018 consisted primarily of proceeds
from the issuance of preferred stock partially offset by the
payment of debt.
Non-cash
investing and financing activities in the six months ended June 30,
2018 was $161,217. 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, 2018 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, 2018, the Company
was in compliance with all of the financial covenants.
At June
30, 2018 and December 31, 2017 the Company had no balance
outstanding on the line of credit. At June 30, 2018, the Company
had $2,000,000 available on the line of credit.
As of
June 30, 2018 the Company had an installment note payable of
$137,666, due on March 15, 2019 associated with the purchase of 45
acres of farmland in the Walla Walla AVA. No interest accrues under
the terms of this note.
As of
June 30, 2018 the Company had a 15 year installment note payable of
$1,585,305, due in quarterly payments of $42,534, associated with
the purchase of property in the Dundee Hills AVA.
As of
June 30, 2018, the Company had a total long-term debt balance of
$6,862,571, including the portion due in the next year, owed to
Farm Credit Services and Toyota Credit Corporation, net of debt
issuance costs of $178,849. As of December 31, 2017, the Company
had a total long-term debt balance of $7,238,108, exclusive of debt
issuance costs of $185,473.
16
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, 2018 and December 31, 2017, 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, 2018
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, 2017 (the “2017
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, 2018
from those disclosed in the 2017 Annual Report. However, it is important to note that the risks
described in our 2017 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.
17
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, 2018, 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).
18
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.
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Date: August 14,
2018
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By:
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/s/ James W.
Bernau
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James W.
Bernau
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Chief Executive
Officer
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(Principal
Executive Officer)
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Date: August 14,
2018
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By:
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/s/ Richard F.
Goward Jr.
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Richard F. Goward
Jr.
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Chief Financial
Officer
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(Principal
Accounting and Financial Officer)
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