UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

Commission File Number 001-37610

 

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:
x Yes o 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):
x Yes o 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:

 

	o Large accelerated filer	o Accelerated filer
	x Non-accelerated Filer	x Smaller reporting company
		o Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o YES x NO

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock,		WVVI		NASDAQ Capital Market
Series A Redeemable Preferred Stock		WVVIP		NASDAQ Capital Market

 

Number of shares of common stock outstanding as of May 12, 2023: 4,964,529

WILLAMETTE VALLEY VINEYARDS, INC.

INDEX TO FORM 10-Q

 

Part I - Financial Information	3
Item 1 - Financial Statements (unaudited)	3
Condensed Balance Sheets	3
Condensed Statements of Operations	4
Condensed Statements of Shareholders’ Equity	5
Statements of Cash Flows	6
Notes to Unaudited Interim Financial Statements	7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	17
Item 4 - Controls and Procedures	18
Part II - Other Information	18
Item 1 - Legal Proceedings	18
Item 1A - Risk Factors	18
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3 - Defaults Upon Senior Securities	18
Item 4 - Mine Safety Disclosures	18
Item 5 - Other Information	19
Item 6 - Exhibits	19
Signatures	20

PART I: FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED BALANCE SHEETS
(Unaudited)

 

		March 31,				December 31,
		2023				2022
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	154,340			$	338,676
Accounts receivable, net			3,130,092				4,226,948
Inventories			22,569,545				22,201,499
Prepaid expenses and other current assets			595,440				454,085
Income tax receivable			818,732				557,224
Total current assets			27,268,149				27,778,432
Other assets			13,824				13,824
Vineyard development costs, net			8,427,327				8,448,925
Property and equipment, net			53,014,612				53,547,245
Operating lease right of use assets			9,385,346				8,895,556
TOTAL ASSETS		$	98,109,258			$	98,683,982
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,493,759			$	3,067,886
Accrued expenses			1,326,933				1,428,380
Investor deposits for preferred stock			—				147,511
Bank overdraft			316,339				—
Line of credit			1,178,078				166,617
Current portion of note payable			1,176,519				1,201,038
Current portion of long-term debt			503,304				496,970
Current portion of lease liabilities			824,973				768,818
Unearned revenue			1,381,986				1,442,401
Grapes payable			—				1,208,673
Total current liabilities			8,201,891				9,928,294
Long-term debt, net of current portion and debt issuance costs			7,333,173				6,446,447
Lease liabilities, net of current portion			8,966,352				8,506,830
Deferred income taxes			3,440,477				3,440,477
Total liabilities			27,941,893				28,322,048
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS’ EQUITY
Redeemable preferred stock, no par value, 10,000,000 shares authorized, 9,303,988 shares issued and outstanding, liquidation preference $39,123,269, at March 31, 2023 and 9,185,666 shares issued and outstanding, liquidation preference $38,120,514, at December 31, 2022.			39,931,048				38,869,075
Common stock, no par value, 10,000,000 shares authorized, 4,964,529 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively.			8,512,489				8,512,489
Retained earnings			21,723,828				22,980,370
Total shareholders' equity			70,167,365				70,361,934
LIABILITIES AND SHAREHOLDERS’ EQUITY		$	98,109,258			$	98,683,982

  

The accompanying notes are an integral part of this financial statement

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended
		March 31,
		2023				2022
SALES, NET		$	8,308,940			$	6,242,318
COST OF SALES			3,830,477				2,522,289
GROSS PROFIT			4,478,463				3,720,029
OPERATING EXPENSES
Sales and marketing			3,983,580				2,477,727
General and administrative			1,469,833				1,378,534
Total operating expenses			5,453,413				3,856,261
LOSS FROM OPERATIONS			(974,950	)			(136,232	)
OTHER INCOME (EXPENSE)
Interest income			—				2,389
Interest expense			(124,422	)			(91,446	)
Other income			73,586				89,024
LOSS BEFORE INCOME TAXES			(1,025,786	)			(136,265	)
INCOME TAX  BENEFIT			280,963				37,323
NET LOSS			(744,823	)			(98,942	)
Accrued preferred stock dividends			(511,719	)			(466,612	)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS		$	(1,256,542	)		$	(565,554	)
Loss per common share after preferred dividends, basic and diluted		$	(0.25	)		$	(0.11	)
Weighted-average number of common shares outstanding, basic and diluted			4,964,529				4,964,529

  

The accompanying notes are an integral part of this financial statement

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

		Three-Month Period Ended March 31, 2023
		Redeemable
		Preferred Stock								Common Stock								Retained
		Shares				Dollars				Shares				Dollars				Earnings				Total
Balance at December 31, 2022			9,185,666			$	38,869,075				4,964,529			$	8,512,489			$	22,980,370			$	70,361,934
Issuance of preferred stock, net			118,322				550,254				-				-				-				550,254
Preferred stock dividends accrued			-				511,719				-				-				(511,719	)			-
Net loss			-				-				-				-				(744,823	)			(744,823	)
Balance at March 31, 2023			9,303,988			$	39,931,048				4,964,529			$	8,512,489			$	21,723,828			$	70,167,365
		Three-Month Period Ended March 31, 2022
		Redeemable
		Preferred Stock								Common Stock								Retained
		Shares				Dollars				Shares				Dollars				Earnings				Total
Balance at December 31, 2021			7,523,539			$	30,956,192				4,964,529			$	8,512,489			$	25,493,313			$	64,961,994
Issuance of preferred stock, net			960,323				4,904,330				-				-				-				4,904,330
Preferred stock dividends accrued			-				466,612				-				-				(466,612	)			-
Net loss			-				-				-				-				(98,942	)			(98,942	)
Balance at March 31, 2022			8,483,862			$	36,327,134				4,964,529			$	8,512,489			$	24,927,759			$	69,767,382

 

The accompanying notes are an integral part of this financial statement

WILLAMETTE VALLEY VINEYARDS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three months ended March 31,
		2023				2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(744,823	)		$	(98,942	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization			767,393				449,721
Non-cash lease expense			205,775				148,837
Loan fee amortization			3,312				3,312
Change in operating assets and liabilities:
Accounts receivable			1,096,856				992,727
Inventories			(368,046	)			(1,043,967	)
Prepaid expenses and other current assets			(141,355	)			(12,625	)
Income tax receivable			(261,508	)			(37,323	)
Unearned revenue			(60,415	)			(80,960	)
Lease liabilities			(179,888	)			(82,779	)
Grapes payable			(1,208,673	)			(1,388,601	)
Accounts payable			(287,113	)			602,683
Accrued expenses			(101,447	)			(122,387	)
Net cash from operating activities			(1,279,932	)			(670,304	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to vineyard development costs			(19,232	)			(108,345	)
Additions to property and equipment			(1,480,944	)			(5,030,471	)
Net cash from investing activities			(1,500,176	)			(5,138,816	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on installment note for property purchase			(24,519	)			(23,101	)
Proceeds from bank overdraft			316,339				—
Proceeds from line of credit			1,011,461				—
Payments on long-term debt			(110,252	)			(116,814	)
Proceeds from long-term debt			1,000,000				—
Proceeds from issuance of preferred stock			402,743				769,908
Net cash from financing activities			2,595,772				629,993
NET CHANGE IN CASH AND CASH EQUIVALENTS			(184,336	)			(5,179,127	)
CASH AND CASH EQUIVALENTS, beginning of period			338,676				13,747,285
CASH AND CASH EQUIVALENTS, end of period		$	154,340			$	8,568,158
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchases of property and equipment and vineyard development costs included in accounts payable		$	4,015			$	1,680,560
Reduction in investor deposits for preferred stock		$	147,511			$	4,134,422
Accrued preferred stock dividends		$	511,719			$	466,612
Right of use assets obtained in exchange for operating lease liabilities		$	695,565			$	1,600,552

 

The accompanying notes are an integral part of this financial statement

NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS

 

1) BASIS OF PRESENTATION

 

The accompanying unaudited interim condensed financial statements as of March 31, 2023 and for the three months ended March 31, 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 (the “2022 Report”). 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 unaudited interim condensed 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 months ended March 31, 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 loss 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 loss per share after preferred stock dividends calculation for the periods shown:

 

Schedule of Earnings Per Share

		Three months ended March 31,
		2023				2022
Numerator
Net loss		$	(744,823	)		$	(98,942	)
Accrued preferred stock dividends			(511,719	)			(466,612	)
Net loss applicable to common shareholders		$	(1,256,542	)		$	(565,554	)
Denominator
Weighted-average number of common shares outstanding basic and diluted			4,964,529				4,964,529
Loss per common share after preferred dividends, basic and diluted		$	(0.25	)		$	(0.11	)

  

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.

2) INVENTORIES

 

The Company’s inventories, by major classification, are summarized as follows, as of the dates shown:

 

 Schedule of Inventory

		March 31, 2023				December 31, 2022
Winemaking and packaging materials		$	1,652,894			$	1,162,850
Work-in-process (costs relating to unprocessed and/or unbottled wine products)			11,569,481				12,047,579
Finished goods (bottled wine and related products)			9,347,170				8,991,070
Total inventories		$	22,569,545			$	22,201,499

 

3) PROPERTY AND EQUIPMENT, NET

 

The Company’s property and equipment consists of the following, as of the dates shown: 

 

Schedule of Property and Equipment, Net

		March 31, 2023				December 31, 2022
Construction in progress		$	2,052,851			$	2,037,128
Land, improvements, and other buildings			14,491,827				14,491,827
Winery buildings and hospitality center			40,893,225				40,806,365
Equipment			18,897,043				18,805,695
Property and equipment, gross			76,334,946				76,141,015
Accumulated depreciation			(23,320,334	)			(22,593,770	)
Property and equipment, net		$	53,014,612			$	53,547,245

 

Depreciation expense for the three months ended March 31, 2023 and 2022 was $726,564 and $378,634, respectively.

 

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 $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 an outstanding line of credit balance of $1,178,078 at March 31, 2023, at an interest rate of 7.25%, and an outstanding balance of $166,617 at December 31, 2022.

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 Umqua 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 March 31, 2023, the Company had a balance of $1,176,519 due on this note. As of December 31, 2022, the Company had a balance of $1,201,038 due on this note.

 

Long-Term Debt – The Company has three long term debt agreements with AgWest with an aggregate outstanding balance of $7,952,402 and $7,062,654 as of March 31, 2023 and December 31, 2022, respectively. The first loan requires monthly principal and interest payments of $15,557 for the life of the loan, at an annual fixed interest rate of 4.75% with a maturity date of 2028, and outstanding balance of $937,535 and $972,940 as of March 31, 2023 and December, 31, 2022, respectively. The second loan requires monthly principal and interest payments of $46,510 for the life of the loan, at an annual fixed interest rate of 5.21% with a maturity date of 2032, and outstanding balance of $4,002,367 and $4,089,714 as of March 31, 2023 and December, 31, 2022, respectively. The general purposes of these loans were to make capital improvements to the winery and vineyard facilities. The third loan bears interest at Northwest Variable base which was 7.00% at March 31, 2023 and 6.50% at December 31,2022, with interest due annually and principal at maturity on November 1, 2025 with an available line of $5,000,000 and outstanding balance of $3,012,500 and $2,000,000 as of March 31, 2023 and December, 31, 2022, respectively.

 

As of March 31, 2023, the Company had unamortized debt issuance costs of $115,925. As of December 31, 2022, the Company had unamortized 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. The Company will continue to evaluate funding mechanisms to support our long-term funding requirements.

 

5) INTEREST AND TAXES PAID

 

Income Taxes – The Company received $19,456 in income taxes for the three months ended March 31, 2023 and paid no income taxes for the 3 months ended March 31, 2022.

 

Interest – The Company paid $93,805 and $87,977 for the three months ended March 31, 2023 and 2022, respectively, in interest on long-term debt.

 

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.

The following table outlines the sales, cost of sales, gross margin, directly attributable selling expenses, and contribution margin of the segments for the three month periods ending March 31, 2023 and 2022. Sales figures are net of related excise taxes.

 

Schedule of Segment reporting

		Three Months Ended March 31,
		Direct Sales								Distributor Sales								Unallocated								Total
		2023				2022				2023				2022				2023				2022				2023				2022
Sales, net		$	4,071,649			$	2,957,308			$	4,237,291			$	3,285,010			$	—			$	—			$	8,308,940			$	6,242,318
Cost of Sales			1,289,933				748,292				2,540,544				1,773,997				—				—				3,830,477				2,522,289
Gross Profit			2,781,716				2,209,016				1,696,747				1,511,013				—				—				4,478,463				3,720,029
Selling and Marketing Expenses			3,214,501				1,852,044				531,741				478,505				237,338				147,178				3,983,580				2,477,727
Contribution Margin		$	(432,785	)		$	356,972			$	1,165,006			$	1,032,508
Percent of Sales			49.0%				47.4%				51.0%				52.6%
General and Administration Expenses																			1,469,833				1,378,534				1,469,833				1,378,534
Loss from Operations																										$	(974,950	)		$	(136,232	)

  

Direct sales include $10,000 in bulk wine sales in the three months ended March 31, 2023 compared to $10,500 bulk wine sales in the three months ended March 31, 2022.

 

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 1,902,155 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 March, 31 2023 for the issuance of Preferred Stock.

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 March 31, 2023 and December 31, 2022 was $967,074 and $1,106,970, respectively and is recorded as unearned revenue on the balance sheets. Revenue from gift cards is recognized when the gift card is redeemed by a customer. When the likelihood of a gift card being redeemed by a customer is determined to be remote and the Company expects to be entitled to the breakage, then the value of the unredeemed gift card is recognized as revenue. We determine the gift card breakage rate based upon Company-specific historical redemption patterns. To date we have determined that no breakage should be recognized related to our gift cards.

 

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 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 - In December 1999, under a sale-leaseback agreement, the Company sold approximately 79 acres of the Tualatin Vineyards property with a net book value of approximately $1,000,000 for approximately $1,500,000 cash and entered into a 20-year operating lease agreement, with three five-year extension options, and contains an escalation provision of 2.5% per year. The Company extended the lease in January 2019 until January 2025.

 

In December 2004, under a sale-leaseback agreement, the Company sold approximately 75 acres of the Tualatin Vineyards property with a net book value of approximately $551,000 for approximately $727,000 cash and entered into a 15-year operating lease agreement, with three five-year extension options, for the vineyard portion of the property. The first five year extension has been exercised. The lease contains a formula-based escalation provision with a maximum increase of 4% every three years.

 

In February 2007, the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyard. In June 2021, the company entered into a new 11 year lease for this property. The lease contains an escalation provision tied to the CPI not to exceed 2% per annum.

 

In July 2008, the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 110 acres adjacent to the existing Elton Vineyards site. These 110 acres are being developed into vineyards. Terms of this agreement contain rent increases, that rises as the vineyard is developed, and contains an escalation provision of CPI plus 0.5% per year capped at 4%.

 

In March 2017, the Company entered into a 25-year lease for approximately 17 acres of agricultural land in Dundee, Oregon. These acres are being developed into vineyards. This lease contains an annual payment that remains constant throughout the term of the lease.

Operating Leases – Non-Vineyard – In September 2018, the Company renewed an existing lease for three years, with two one-year renewal options, for its McMinnville tasting room. In May 2022 the Company amended the lease to extend the lease to August 2025 with one three year renewal option and defined payments over the term of the lease.

 

In January 2018, the Company assumed a lease, through December 2022, for its Maison Bleue tasting room in Walla Walla, Washington. In January 2023, the Company entered into a new lease to December 2027 with one five year renewal option, and defined payments over the term of the lease.

 

In February 2020, the Company entered into a lease for 5 years, with three five-year renewal options for a retail wine facility in Folsom, California, referred to as Willamette Wineworks. The lease contains an escalation provision tied to the CPI not to exceed 3% per annum with increases not allowed in any year being carried forward to the following years.

 

In March 2021, the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Vancouver, Washington. The lease defines the payments over the term of the lease and option periods.

 

In February 2022, the Company entered into a lease for 10 years, with three five-year renewal options for a retail wine facility in Lake Oswego, Oregon. The lease defines the payments over the term of the lease and option periods.

 

In May 2022, the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Happy Valley, Oregon. The lease defines the payments over the term of the lease and option periods.

 

In January 2023, the Company entered into a lease for 10 years, with three five-year renewal options for a retail wine facility in Bend, Oregon. The lease defines the payments over the term of the lease.

 

The following tables provide lease cost and other lease information:

 

Schedule of Lease Cost and Information

		Three Months Ended
		March 31, 2023
Lease Cost
Operating lease cost - Vineyards		$	114,782
Operating lease cost - Other			219,982
Short-term lease cost			3,575
Total lease cost		$	338,339
Other Information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases - Vineyard		$	113,921
Operating cash flows from operating leases - Other		$	194,955
Weighted-average remaining lease term - Operating leases in years			10.81
Weighted-average discount rate - Operating leases			5.36	%

 

Right-of-use assets obtained in exchange for new operating lease obligations were $695,565 and $1,600,552 for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, maturities of lease liabilities were as follows:

 

Schedule of Maturities of Lease Liabilities

		Operating
Years Ended December 31,		Leases
2023		$	984,539
2024			1,331,274
2025			1,248,775
2026			1,208,161
2027			1,262,347
Thereafter			7,104,070
Total minimal lease payments			13,139,166
Less present value adjustment			(3,347,841	)
Operating lease liabilities			9,791,325
Less current lease liabilities			(824,973	)
Lease liabilities, net of current portion		$	8,966,352

 

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.

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 March 31, 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.

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 42,387 and 33,639 cases of produced wine during the three months ended March 31, 2023 and 2022, respectively, an increase of 8,748 cases, or 26.0% in the current year period over the prior year period.  The increase in wine case sales was primarily the result of having more locations and more availability of some vintages in the quarter when compared to the prior year period.

 

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 March 31, 2023, wine inventory included 106,487 cases of bottled wine and 523,910 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 56,974 cases during the three months ended March 31, 2023.

 

Willamette Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers and online bloggers including the accolades below. 

 

James Suckling rated the Company’s 2021 Estate Pinot Noir 91 points, Dijon Clone Chardonnay 91 points and the 2022 Pinot Gris 90 points.

 

The San Francisco Chronicle Wine Competition 2023 awarded the Company’s White Pinot Noir with a Gold Medal.

 

The Great Northwest Wine Competition awarded the Company’s 2017 Brut with a Double Gold Medal.

 

RESULTS OF OPERATIONS

 

Revenue

 

Sales revenue for the three months ended March 31, 2023 and 2022 was $8,308,940 and $6,242,318, respectively, an increase of $2,066,622, or 33.1%, in the current year period over the prior year period. This increase was caused by an increase in revenues from direct sales of $1,114,341 and an increase in revenues from shipments to distributors of $952,281 in the current year three-month period over the same period in the prior year. The increase in direct sales to consumers was primarily the result of more tasting rooms in 2023 compared to 2022 and an increase in wine club sales. The increase in revenue from the distributors was primarily attributed to more inventory being available to ship in the current year three-month period over the same period in the prior year. 

 

Cost of Sales

 

Cost of sales for the three months ended March 31, 2023 and 2022 was $3,830,477 and $2,522,289, respectively, an increase of $1,308,188, or 51.9%, in the current period over the prior year period. This change was primarily the result of an increase in sales in the first quarter of 2023 compared to the same quarter in 2022 and higher product costs.

Gross Profit

 

Gross profit for the three months ended March 31, 2023 and 2022 was $4,478,463 and $3,720,029, respectively, an increase of $758,434, or 20.4%, in the first quarter of 2023 over the same quarter in the prior year. This increase was primarily the result of an increase in sales in the first three months of the current year compared to the same period in 2022 being partially offset by an increase in product costs.

 

Gross profit as a percentage of net sales for the three months ended March 31, 2023 and 2022 was 53.9% and 59.6%, respectively, a decrease of 5.7 percentage points in the current quarter over the same quarter in the prior year. The decrease was primarily the result of the higher product costs of the more recent vintages sold in the current quarter.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended March 31, 2023 and 2022 was $5,453,413 and $3,856,261, respectively, an increase of $1,597,152, or 41.4%, in the current quarter over the same quarter in the prior year. This increase was primarily the result of an increase in selling expenses of $1,505,853, or 60.8% and an increase in general and administrative expenses of $91,299, or 6.6% in the current quarter compared to the same quarter last year. Selling expenses increased in 2023 compared to 2022 primarily as a result of the higher selling expenses related to the increase in direct sales and having more tasting room locations. General and administrative expenses increased in the first quarter of 2023 compared to the same quarter of 2022 primarily as a result of higher property taxes and labor cost increases.

 

Interest Expense

 

Interest expense for the three months ended March 31, 2023 and 2022 was $124,422 and $91,446, respectively, an increase of $32,976 or 36.1%, in the first quarter of 2023 over the same quarter in the prior year. The increase in interest expense for the first quarter was primarily the result of higher debt and higher interest rates compared to the first quarter of 2022.

 

Income Tax Benefit

 

The income tax benefit for the three months ended March 31, 2023 and 2022 was $280,963 and $37,323, respectively, an increase of $243,640 or 652.8%, in the first quarter of 2023 over the same quarter in the prior year, primarily as a result of a higher pre-tax loss in the first quarter of 2023, compared to the same quarter in 2022. The Company’s estimated federal and state combined income tax rate for the three months ended March 31, 2023 and 2022 was 27.4%.

 

Net Loss

 

Net loss for the three months ended March 31, 2023 and 2022 was $744,823 and $98,942, respectively, an increase of $645,881, or 652.8%, in the first quarter of 2023 over the same quarter in the prior year. The increase in net loss for the first quarter of 2023, compared to the comparable period in 2022, was primarily the result of higher selling expenses and higher product costs.

 

Net Loss Applicable to Common Shareholders

 

Net loss applicable to common shareholders for the three months ended March 31, 2023 and 2022 was $1,256,542 and $565,554, respectively, an increase of $690,988, or 122.2%, in the first quarter of 2023 over the same quarter in the prior year. The increase in loss applicable to common shareholders in the first quarter of 2023, compared to the same period of 2022, was the result of a higher net loss and a higher accrued preferred stock dividend in the current period.

Liquidity and Capital Resources

 

At March 31, 2023, the Company had a working capital balance of $19.1 million and a current working capital ratio of 3.32:1.

 

At March 31, 2023, the Company had a cash balance of $154,340. At December 31, 2022, the Company had a cash balance of $338,676. This decrease is primarily the result of the payment of grapes payable and accounts payable being partially offset by a reduction in accounts receivable.

 

Total cash used for operating activities in the three months ended March 31, 2023 was $1,279,932. Cash used in operating activities for the three months ended March 31, 2023 was primarily associated with reduced grapes payable, accounts payable and increased inventories, being partially offset by decreased accounts receivable.

 

Total cash used in investing activities in the three months ended March 31, 2023 was $1,500,176. Cash used in investing activities for the three months ended March 31, 2023 primarily consisted of cash used on construction activity and vineyard development costs.

 

Total cash generated from financing activities in the three months ended March 31, 2023 was $2,595,772. Cash generated from financing activities for the three months ended March 31, 2023 primarily consisted of proceeds from the issuance of Preferred Stock, long and short term debt being partially offset by the repayment of debt.

 

In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000 against eligible accounts receivable and inventories, as defined in the agreement. 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 an outstanding line of credit balance of $1,178,078 at March 31, 2023, at an interest rate of 7.25%, and an outstanding balance of $166,617 at December 31, 2022.

 

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 Umqua Bank waiving this violation until the next measurement date of December 31, 2023.

 

As of March 31, 2023, the Company had a 15-year installment note payable of $1,176,519, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.

 

As of March 31, 2023, the Company had a total long-term debt balance of $7,952,402, including the portion due in the next year, owed to AgWest, exclusive of debt issuance costs of $115,925. 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.

 

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 March 31, 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 Item 5 - Other Information

 

Not applicable.

 

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)

 

3.2	Articles of Amendment, dated August 22, 2000 (incorporated herein by reference to Exhibit 3.4 to the Company’s Form 10-Q for the quarterly period ended June 30, 2008, filed on August 14, 2008, File No. 000-21522)

 

3.3	Articles of Amendment to the Articles of Incorporation of Willamette Valley Vineyards, Inc. dated August 9, 2022 (incorporated herein by reference to Exhibit 3.3 to the Company’s Form 10-Q for the quarterly period ended June 30, 2022, filed on August 11, 2022, File No. 001-37610).

 

3.4	Amended and Restated Bylaws of Willamette Valley Vineyards, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed on November 20, 2015, File No. 001-37610)

 

31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (Filed herewith)

 

31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (Filed herewith)

 

32.1	Certification of James W. Bernau pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

 

32.2	Certification of John Ferry pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

 

101

The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations; (iii) Condensed Statements of Shareholders’ Equity; (iv) Statements of Cash Flows; and (iv) Notes to Financial Statements, tagged as blocks of text. (Filed herewith)

 

104	The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 has been formatted in Inline XBRL

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: May 12, 2023	By	/s/ James W. Bernau
	James W. Bernau
	Chief Executive Officer
	(Principal Executive Officer)
Date: May 12, 2023	By	/s/ John Ferry
	John Ferry
	Chief Financial Officer
	(Principal Accounting and Financial Officer)