Item
1 – Financial Statements
WILLAMETTE
VALLEY VINEYARDS, INC.
|
CONDENSED BALANCE SHEETS
|
(Unaudited)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,713,068
|
|
|
$
|
7,050,176
|
|
Accounts receivable, net
|
|
|
3,427,120
|
|
|
|
1,814,004
|
|
Inventories (Note 2)
|
|
|
16,617,086
|
|
|
|
17,075,080
|
|
Prepaid expenses and other current assets
|
|
|
116,452
|
|
|
|
202,981
|
|
Income tax receivable
|
|
|
332,589
|
|
|
|
623,568
|
|
Total current assets
|
|
|
31,206,315
|
|
|
|
26,765,809
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
13,824
|
|
|
|
13,824
|
|
Vineyard development costs, net
|
|
|
7,952,480
|
|
|
|
7,624,646
|
|
Property and equipment, net (Note 3)
|
|
|
31,085,195
|
|
|
|
28,648,301
|
|
Operating lease right of use assets
|
|
|
5,017,614
|
|
|
|
4,862,907
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
75,275,428
|
|
|
$
|
67,915,487
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,231,995
|
|
|
$
|
859,215
|
|
Accrued expenses
|
|
|
1,262,676
|
|
|
|
1,004,281
|
|
Investor deposits for preferred stock
|
|
|
5,033,330
|
|
|
|
-
|
|
Current portion of notes payable
|
|
|
1,406,024
|
|
|
|
1,468,473
|
|
Current portion of long-term debt
|
|
|
447,258
|
|
|
|
438,378
|
|
Current portion of lease liabilities
|
|
|
282,819
|
|
|
|
203,482
|
|
Unearned revenue
|
|
|
451,369
|
|
|
|
604,777
|
|
Grapes payable
|
|
|
563,373
|
|
|
|
792,595
|
|
Total current liabilities
|
|
|
10,678,844
|
|
|
|
5,371,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion and debt issuance costs
|
|
|
5,500,977
|
|
|
|
5,826,161
|
|
Lease liabilities, net of current portion
|
|
|
4,787,593
|
|
|
|
4,714,413
|
|
Deferred income taxes
|
|
|
2,958,606
|
|
|
|
2,958,606
|
|
Total liabilities
|
|
|
23,926,020
|
|
|
|
18,870,381
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, no par value, 10,000,000 shares authorized, 4,662,768 shares issued and outstanding, liquidation preference $20,119,843, and $19,350,487, at September 30, 2020 and December 31, 2019, respectively.
|
|
|
19,088,458
|
|
|
|
18,319,102
|
|
Common stock, no par value, 10,000,000 shares
authorized, 4,964,529 shares issued and outstanding at September 30, 2020 and December 31, 2019.
|
|
|
8,512,489
|
|
|
|
8,512,489
|
|
Retained earnings
|
|
|
23,748,461
|
|
|
|
22,213,515
|
|
Total shareholders equity
|
|
|
51,349,408
|
|
|
|
49,045,106
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
75,275,428
|
|
|
$
|
67,915,487
|
|
The accompanying notes are an integral part of this financial statement
WILLAMETTE
VALLEY VINEYARDS, INC.
|
CONDENSED
STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES, NET
|
|
$
|
6,918,131
|
|
|
$
|
6,758,367
|
|
|
$
|
19,008,680
|
|
|
$
|
17,547,990
|
|
COST OF SALES
|
|
|
2,696,934
|
|
|
|
2,694,345
|
|
|
|
7,373,909
|
|
|
|
6,704,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
4,221,197
|
|
|
|
4,064,022
|
|
|
|
11,634,771
|
|
|
|
10,843,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,876,455
|
|
|
|
1,860,537
|
|
|
|
5,238,493
|
|
|
|
5,542,123
|
|
General and administrative
|
|
|
1,040,908
|
|
|
|
929,158
|
|
|
|
3,064,332
|
|
|
|
2,865,697
|
|
Total operating expenses
|
|
|
2,917,363
|
|
|
|
2,789,695
|
|
|
|
8,302,825
|
|
|
|
8,407,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
1,303,834
|
|
|
|
1,274,327
|
|
|
|
3,331,946
|
|
|
|
2,435,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,615
|
|
|
|
25,268
|
|
|
|
17,845
|
|
|
|
35,554
|
|
Interest expense
|
|
|
(103,283
|
)
|
|
|
(110,547
|
)
|
|
|
(314,158
|
)
|
|
|
(332,049
|
)
|
Other income (expense), net
|
|
|
37,097
|
|
|
|
(18,060
|
)
|
|
|
137,899
|
|
|
|
103,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
1,240,263
|
|
|
|
1,170,988
|
|
|
|
3,173,532
|
|
|
|
2,241,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION
|
|
|
(343,464
|
)
|
|
|
(318,788
|
)
|
|
|
(869,230
|
)
|
|
|
(603,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
896,799
|
|
|
|
852,200
|
|
|
|
2,304,302
|
|
|
|
1,638,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued preferred stock dividends
|
|
|
(256,452
|
)
|
|
|
(256,452
|
)
|
|
|
(769,356
|
)
|
|
|
(769,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME APPLICABLE TO COMMON SHAREHOLDERS
|
|
$
|
640,347
|
|
|
$
|
595,748
|
|
|
$
|
1,534,946
|
|
|
$
|
869,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share after preferred dividends, basic and diluted
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
4,964,529
|
|
|
|
4,964,529
|
|
|
|
4,964,529
|
|
|
|
4,964,529
|
|
The
accompanying notes are an integral part of this financial statement
WILLAMETTE
VALLEY VINEYARDS, INC.
|
CONDENSED
STATEMENTS OF SHAREHOLDERS EQUITY
|
(Unaudited)
|
|
|
Nine-Month Period Ended September 30, 2020
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Dollars
|
|
|
Shares
|
|
|
Dollars
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
4,662,768
|
|
|
$
|
18,319,102
|
|
|
|
4,964,529
|
|
|
$
|
8,512,489
|
|
|
$
|
22,213,515
|
|
|
$
|
49,045,106
|
|
Preferred stock dividends accrued
|
|
|
-
|
|
|
|
256,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,452
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
787,082
|
|
|
|
787,082
|
|
Balance at March 31, 2020
|
|
|
4,662,768
|
|
|
|
18,575,554
|
|
|
|
4,964,529
|
|
|
|
8,512,489
|
|
|
|
22,744,145
|
|
|
|
49,832,188
|
|
Preferred stock dividends accrued
|
|
|
-
|
|
|
|
256,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,452
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
620,421
|
|
|
|
620,421
|
|
Balance at June 30, 2020
|
|
|
4,662,768
|
|
|
|
18,832,006
|
|
|
|
4,964,529
|
|
|
|
8,512,489
|
|
|
|
23,108,114
|
|
|
|
50,452,609
|
|
Preferred stock dividends accrued
|
|
|
-
|
|
|
|
256,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,452
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
896,799
|
|
|
|
896,799
|
|
Balance at September 30, 2020
|
|
|
4,662,768
|
|
|
$
|
19,088,458
|
|
|
|
4,964,529
|
|
|
$
|
8,512,489
|
|
|
$
|
23,748,461
|
|
|
$
|
51,349,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2019
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Dollars
|
|
|
Shares
|
|
|
Dollars
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
4,662,768
|
|
|
$
|
18,319,102
|
|
|
|
4,964,529
|
|
|
$
|
8,512,489
|
|
|
$
|
20,728,677
|
|
|
$
|
47,560,268
|
|
Preferred stock dividends accrued
|
|
|
-
|
|
|
|
256,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,452
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
426,476
|
|
|
|
426,476
|
|
Balance at March 31, 2019
|
|
|
4,662,768
|
|
|
|
18,575,554
|
|
|
|
4,964,529
|
|
|
|
8,512,489
|
|
|
|
20,898,701
|
|
|
|
47,986,744
|
|
Preferred stock dividends accrued
|
|
|
-
|
|
|
|
256,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,452
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
359,911
|
|
|
|
359,911
|
|
Balance at June 30, 2019
|
|
|
4,662,768
|
|
|
|
18,832,006
|
|
|
|
4,964,529
|
|
|
|
8,512,489
|
|
|
|
21,002,160
|
|
|
|
48,346,655
|
|
Preferred stock dividends accrued
|
|
|
-
|
|
|
|
256,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,452
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
852,200
|
|
|
|
852,200
|
|
Balance at September 30, 2019
|
|
|
4,662,768
|
|
|
$
|
19,088,458
|
|
|
|
4,964,529
|
|
|
$
|
8,512,489
|
|
|
$
|
21,597,908
|
|
|
$
|
49,198,855
|
|
The
accompanying notes are an integral part of this financial statement
WILLAMETTE
VALLEY VINEYARDS, INC.
|
STATEMENTS
OF CASH FLOWS
|
(Unaudited)
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,304,302
|
|
|
$
|
1,638,587
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,346,008
|
|
|
|
1,293,783
|
|
Loss on disposition of property and equipment
|
|
|
-
|
|
|
|
487
|
|
Non-cash loss from other assets
|
|
|
|
|
|
|
21,012
|
|
Loan fee amortization
|
|
|
9,875
|
|
|
|
9,875
|
|
Deferred gain
|
|
|
-
|
|
|
|
(24,072
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,613,116
|
)
|
|
|
283,097
|
|
Inventories
|
|
|
457,994
|
|
|
|
(282,199
|
)
|
Prepaid expenses and other current assets
|
|
|
86,529
|
|
|
|
53,467
|
|
Unearned revenue
|
|
|
(153,408
|
)
|
|
|
(90,846
|
)
|
Grapes payable
|
|
|
(229,222
|
)
|
|
|
(733,629
|
)
|
Accounts payable
|
|
|
150,632
|
|
|
|
(206,896
|
)
|
Accrued expenses
|
|
|
258,395
|
|
|
|
80,382
|
|
Income taxes payable
|
|
|
-
|
|
|
|
60,905
|
|
Income taxes receivable
|
|
|
290,979
|
|
|
|
-
|
|
Net cash from operating activities
|
|
|
2,908,968
|
|
|
|
2,103,953
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Additions to vineyard development costs
|
|
|
(468,774
|
)
|
|
|
(571,065
|
)
|
Additions to property and equipment
|
|
|
(3,422,004
|
)
|
|
|
(3,250,679
|
)
|
Net cash from investing activities
|
|
|
(3,890,778
|
)
|
|
|
(3,821,744
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from Paycheck Protection Program
|
|
|
1,655,200
|
|
|
|
-
|
|
Payments on Paycheck Protection Program
|
|
|
(1,655,200
|
)
|
|
|
-
|
|
Proceeds from investor deposits held as liability
|
|
|
5,033,330
|
|
|
|
-
|
|
Payment on installment note for property purchase
|
|
|
(62,449
|
)
|
|
|
(196,505
|
)
|
Payments on long-term debt
|
|
|
(326,179
|
)
|
|
|
(311,258
|
)
|
Net cash from financing activities
|
|
|
4,644,702
|
|
|
|
(507,763
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
3,662,892
|
|
|
|
(2,225,554
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
7,050,176
|
|
|
|
9,737,467
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
10,713,068
|
|
|
$
|
7,511,913
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment and vineyard
development costs included in accounts payable
|
|
$
|
276,519
|
|
|
$
|
154,775
|
|
Accrued preferred stock dividends
|
|
$
|
769,356
|
|
|
$
|
769,357
|
|
The
accompanying notes are an integral part of this financial statement
NOTES
TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1)
BASIS OF PRESENTATION
The
accompanying unaudited interim condensed financial statements as of September 30, 2020 and for the three and nine months ended
September 30, 2020 and 2019 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, 2019 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, 2019. 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
condensed financial statements should be read in conjunction with the Companys audited financial statements for the year
ended December 31, 2019, as presented in the Companys Annual Report on Form 10-K.
Operating
results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected
for the entire year ending December 31, 2020, or any portion thereof. The COVID-19 pandemic and restrictions
imposed by federal, state, and local governments in response to the outbreak have disrupted and will continue to disrupt our business.
In the State of Oregon where we operate the Winery and most of our vineyards, in response to the COVID-19 pandemic individuals
are being encouraged to practice social distancing and are restricted from gathering in groups, which when combined with any future
stay-at-home orders could adversely affect our sales revenues and consequently impact our liquidity, financial condition and results
of operations. Even after orders are loosened or lifted, the impact of lost wages due to COVID-19 related unemployment may dampen
consumer spending for some time in the future.
The
Companys operations could be further disrupted if a significant number of employees are unable or unwilling to work, whether
because of illness, quarantine, restrictions on travel or fear of contracting COVID-19, which could further materially adversely
affect liquidity, financial position and results of operations. To support employees and protect the health and safety of employees
and customers, the Company may offer enhanced health and welfare benefits, provide bonuses to employees, and purchase additional
sanitation supplies and personal protective materials. These measures will increase operating costs and adversely affect liquidity.
The
COVID-19 pandemic may also adversely affect the ability of grape suppliers to fulfill their obligations, which may negatively
affect operations. If suppliers are unable to fulfill their obligation, the Company could face shortages of grapes, and operations
and sales could be adversely impacted.
The
Companys revenues include direct to consumer sales and national sales to distributors. These sales channels utilize shared
resources for production, selling, and distribution.
Basic
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 September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
896,799
|
|
|
$
|
852,200
|
|
|
$
|
2,304,302
|
|
|
$
|
1,638,587
|
|
Accrued preferred stock dividends
|
|
|
(256,452
|
)
|
|
|
(256,452
|
)
|
|
|
(769,356
|
)
|
|
|
(769,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
640,347
|
|
|
$
|
595,748
|
|
|
$
|
1,534,946
|
|
|
$
|
869,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
4,964,529
|
|
|
|
4,964,529
|
|
|
|
4,964,529
|
|
|
|
4,964,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share after preferred
dividends
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
|
$
|
0.18
|
|
Subsequent
to the filing of the 2019 Report there were no accounting pronouncements issued by the Financial Accounting Standards Board
(FASB) that would have a material effect on the Companys unaudited interim condensed financial
statements. The following provides an update of accounting pronouncements applicable to the Company that are not yet adopted
as of September 30, 2020. No new accounting pronouncements were adopted during the quarter ended September 30,
2020.
Accounting
Standard Update (ASU) 2019-12, Income Taxes (Topic 740), Update (ASU) 2019-12, Income Taxes (Topic
740). This standard simplifies the accounting for income taxes by removing certain Codification exceptions and others to be discussed.
Date of adoption is January 1, 2021, early adoption is permitted for the Company. Management is currently evaluating the potential
impact of this guidance on the Companys unaudited interim condensed financial statements and does not predict there to
be a material impact.
2)
INVENTORIES
The
Companys inventories, by major classification, are summarized as follows, as of the dates shown:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Winemaking and packaging materials
|
|
$
|
756,634
|
|
|
$
|
704,736
|
|
Work-in-process (costs relating to unprocessed
and/or unbottled wine products)
|
|
|
6,385,542
|
|
|
|
8,313,313
|
|
Finished goods (bottled wine and related products)
|
|
|
9,474,910
|
|
|
|
8,057,031
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
16,617,086
|
|
|
$
|
17,075,080
|
|
3)
PROPERTY AND EQUIPMENT, NET
The
Companys property and equipment consists of the following, as of the dates shown:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
$
|
5,988,766
|
|
|
$
|
4,193,467
|
|
Land, improvements, and other buildings
|
|
|
11,767,701
|
|
|
|
11,764,811
|
|
Winery, tasting room buildings and hospitality center
|
|
|
17,694,466
|
|
|
|
16,319,704
|
|
Equipment
|
|
|
14,222,526
|
|
|
|
13,751,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,673,459
|
|
|
|
46,029,306
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(18,588,264
|
)
|
|
|
(17,381,005
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
31,085,195
|
|
|
$
|
28,648,301
|
|
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 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 less 0.5%, with a floor of 3.25%, is payable monthly, and is subject to renewal. In
July 2019, the Company renewed the credit agreement until July 31, 2021. At September 30, 2020 and December 31, 2019, there was
no outstanding balance on this revolving line of credit.
The
line of credit agreement includes various covenants, which among other things; require the Company to maintain minimum amounts
of tangible net worth, debt/worth ratio, and debt service coverage, as defined. As of September 30, 2020, the Company was in compliance
with these financial covenants.
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 being interest at
6%. The note may be called by the owner, up to the outstanding balance, with 180 days written notice. As of September 30, 2020,
the Company had a balance of $1,406,024 due on this note. As of December 31, 2019, the Company had a balance of $1,468,473 due
on this note.
Long-Term
Debt – The Company has two long-term debt agreements with Farm Credit Services (FCS) with an aggregate outstanding
balance of $6,093,452 and $6,411,086 as of September 30, 2020 and December 31, 2019, respectively. The outstanding loans
require monthly principal and interest payments of $62,067 for the life of the loans, at annual fixed interest rates of 4.75%
and 5.21%, and with maturity dates of 2028 and 2032. The general purposes of these loans were to make capital improvements to
the winery and vineyard facilities.
The
loan agreements contain covenants, which require the Company to maintain certain financial ratios and balances. At September 30,
2020, the Company was in compliance with these covenants. In the event of future noncompliance with the Companys debt covenants,
FCS would have the right to declare the Company in default, and at FCS option without notice or demand, the unpaid principal
balance of the loan, plus all accrued unpaid interest thereon and all other amounts due would immediately become due and payable.
The
Company has an outstanding loan with Toyota Credit Corporation maturing in February 2021, at zero interest, with an outstanding
balance of $3,825 and $12,431 as of September 30, 2020 and December 31, 2019, respectively. The purpose of this loan was to purchase
a vehicle.
As
of September 30, 2020, the Company had unamortized debt issuance costs of $149,042. As of December 31, 2019, the Company had unamortized
debt issuance costs of $158,978.
The
Company qualified and obtained a PPP loan for $1,655,200, but quickly returned the funds after obtaining a $5,000,000 commercial
loan commitment from Farm Credit Services, which is intended to provide the Company with additional liquidity in the event the
Company was to experience operating losses from sales disruptions due to the COVID-19 pandemic. This Commitment came into
effect in July 2020 and as of the filing date the Company has not drawn down any funds on this commitment.
5)
INTEREST AND TAXES PAID
Income
taxes – The Company paid $578,000 and $163,000 in income taxes for the three months ended September 30, 2020 and 2019,
respectively. The Company paid $578,000 and $542,250 in income taxes for the nine months ended September 30, 2020 and 2019, respectively.
Interest
– The Company paid $90,165 and $106,996 for the three months ended September 30, 2020 and 2019, respectively, in interest
on long-term debt. The Company paid $294,620 and $324,715 for the nine months ended September 30, 2020 and 2019, 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 room and remote sites, 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 Companys 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 nine month periods ending September 30, 2020 and 2019. Sales figures are net of related excise
taxes.
|
|
Three Months Ended September 30,
|
|
|
|
Direct Sales
|
|
|
Distributor Sales
|
|
|
Total
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
2,648,274
|
|
|
$
|
2,383,256
|
|
|
$
|
4,269,857
|
|
|
$
|
4,375,111
|
|
|
$
|
6,918,131
|
|
|
$
|
6,758,367
|
|
Cost of Sales
|
|
|
711,172
|
|
|
|
703,331
|
|
|
|
1,985,762
|
|
|
|
1,991,014
|
|
|
|
2,696,934
|
|
|
|
2,694,345
|
|
Gross Margin
|
|
|
1,937,102
|
|
|
|
1,679,925
|
|
|
|
2,284,095
|
|
|
|
2,384,097
|
|
|
|
4,221,197
|
|
|
|
4,064,022
|
|
Selling Expenses
|
|
|
1,342,550
|
|
|
|
1,175,802
|
|
|
|
360,867
|
|
|
|
545,617
|
|
|
|
1,703,417
|
|
|
|
1,721,419
|
|
Contribution Margin
|
|
$
|
594,552
|
|
|
$
|
504,123
|
|
|
$
|
1,923,228
|
|
|
$
|
1,838,480
|
|
|
$
|
2,517,780
|
|
|
$
|
2,342,603
|
|
Percent of Sales
|
|
|
38.3
|
%
|
|
|
35.3
|
%
|
|
|
61.7
|
%
|
|
|
64.7
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
Direct Sales
|
|
|
Distributor Sales
|
|
|
Total
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
6,803,228
|
|
|
$
|
6,458,908
|
|
|
$
|
12,205,452
|
|
|
$
|
11,089,082
|
|
|
$
|
19,008,680
|
|
|
$
|
17,547,990
|
|
Cost of Sales
|
|
|
1,678,400
|
|
|
|
1,735,974
|
|
|
|
5,695,509
|
|
|
|
4,969,000
|
|
|
|
7,373,909
|
|
|
|
6,704,974
|
|
Gross Margin
|
|
|
5,124,828
|
|
|
|
4,722,934
|
|
|
|
6,509,943
|
|
|
|
6,120,082
|
|
|
|
11,634,771
|
|
|
|
10,843,016
|
|
Selling Expenses
|
|
|
3,639,648
|
|
|
|
3,406,569
|
|
|
|
1,181,113
|
|
|
|
1,676,676
|
|
|
|
4,820,761
|
|
|
|
5,083,245
|
|
Contribution Margin
|
|
$
|
1,485,180
|
|
|
$
|
1,316,365
|
|
|
$
|
5,328,830
|
|
|
$
|
4,443,406
|
|
|
$
|
6,814,010
|
|
|
$
|
5,759,771
|
|
Percent of Sales
|
|
|
35.8
|
%
|
|
|
36.8
|
%
|
|
|
64.2
|
%
|
|
|
63.2
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Direct
sales include $418 of bulk wine sales in the three months ended September 30, 2019 compared to no bulk wine sales in the three
months ended September 30, 2020. Direct sales include $28,734 and $45,981 of bulk wine sales in the nine months ended September
30, 2020 and 2019, respectively.
7)
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 Companys common stock. Shareholders of this issue are entitled to receive dividends, when and as
declared by the Companys Board of Directors, at a rate of $0.22 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 shelf 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 Companys Board of Directors
to make future increases.
On
March 10, 2016, 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 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.
On
January 24, 2020, the Company filed a shelf 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. The maximum aggregate offering amount of securities
sold pursuant to the January 2020 Form S-3 is not to exceed
$20,000,000. On June 10, 2020, the Company filed with the SEC a Prospectus Supplement to
the January 2020 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 1,917,525
additional shares of Series A Redeemable Preferred Stock having proceeds not to exceed $9,300,000. This stock was established
to be sold in four offering periods beginning with an offering price of $4.85 per share and concluding at $5.15 per share. Proceeds
from the sale of preferred stock for the three and nine months ended September 30, 2020, were received by the Company and
included as unrestricted cash. As of September 30, 2020, the Company concluded $5,033,330 in stock sales, net of acquisition costs,
under this agreement and recorded it as a current liability, Investor deposits for preferred stock. Proceeds received
will convert from a liability to equity when preferred stock is issued to investors.
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)
LEASES
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 Vineyards. This lease is for
a 10-year term with four five-year renewals at the Companys option. The lease contains an escalation provision tied to
the CPI not to exceed 2% per annum. In 2017, the Company exercised its option to renew the lease until December 31, 2022.
In
July 2008, the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 110 acres
adjacent to the existing Elton Vineyards site. These 110 acres are being developed into vineyards. Terms of this agreement contain
rent increases, that rises as the vineyard is developed, and contains an escalation provision of CPI plus 0.5% per year capped
at 4%.
In
March 2017, the Company entered into a 25-year lease for approximately 18 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. The lease contains an escalation provision with a cap at 3% per year.
In
January 2018, the Company assumed a lease, with four remaining years, for its Maison Bleue tasting room in Walla Walla, Washington.
The lease contains fixed payments that increase over the term of the agreement.
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 following years.
The
following tables provide lease cost and other lease information:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Lease Cost
|
|
|
|
|
|
|
|
|
Operating lease cost - Vineyards
|
|
$
|
113,685
|
|
|
$
|
341,055
|
|
Operating lease cost - Other
|
|
|
38,224
|
|
|
|
100,909
|
|
Short-term lease cost
|
|
|
8,853
|
|
|
|
25,236
|
|
Total Lease Cost
|
|
$
|
160,762
|
|
|
$
|
467,200
|
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases - Vineyard
|
|
$
|
108,023
|
|
|
$
|
323,678
|
|
Operating cash flows from operating leases - Other
|
|
$
|
38,118
|
|
|
$
|
101,537
|
|
Weighted-average remaining lease term - Operating leases in years
|
|
|
16.69
|
|
|
|
16.69
|
|
Weighted-average discount rate - Operating leases
|
|
|
6.21
|
%
|
|
|
6.21
|
%
|
As
of September 30, 2020, maturities of lease liabilities were as follows:
|
|
Operating
|
|
Years Ended December 31,
|
|
Leases
|
|
2020
|
|
$
|
146,141
|
|
2021
|
|
|
578,438
|
|
2022
|
|
|
553,777
|
|
2023
|
|
|
534,954
|
|
2024
|
|
|
540,365
|
|
Thereafter
|
|
|
5,962,188
|
|
Total minimal lease payments
|
|
|
8,315,862
|
|
Less present value adjustment
|
|
|
(3,245,450
|
)
|
Operating lease liabilities
|
|
|
5,070,412
|
|
Less current lease liabilities
|
|
|
(282,819
|
)
|
Lease liabilities, net of current portion
|
|
$
|
4,787,593
|
|
9)
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 Companys 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 and purchases 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.
ITEM
2:
|
MANAGEMENTS
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
Managements 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 Companys
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 or smoke from forest fires,
changes in consumer spending, the reduction in consumer demand for premium wines and the impact of the COVID-19 pandemic and the
policies of United States federal, state and local governments in response to such pandemic. 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 Companys Annual Report on Form 10-K for the year ended December 31, 2019, as well as
in the Companys 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 Companys financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the
Companys 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 Companys critical accounting policies and related judgments and estimates that affect
the preparation of the Companys financial statements is set forth in the Companys Annual Report on Form 10-K for
the year ended December 31, 2019. Such policies were unchanged during the nine months ended September 30, 2020.
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
Companys goal is to continue to build on a reputation for producing some of Oregons finest, most sought-after wines.
The Company has focused on positioning itself for strategic growth through property purchases, property development and issuance
of the Companys 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
Companys 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 primarily at the Companys winery in
Turner Oregon (the Winery) and the wines are sold principally under the Companys Willamette Valley Vineyards
label, but also under the Griffin Creek, Pambrun, Elton, Maison Bleue, Metis, Natoma, Elton 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 Companys 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 Companys
35,642 square foot hospitality facility at the Winery, expansion of our operations, and growth in wine club membership. Additionally,
the Companys Preferred Stock sales since August 2015 have resulted in approximately 5,738 new preferred stockholders many
of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent
approximately 9,000 potential customers of the Company.
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 Companys activities. The Company had no bulk wine sales the three months
ended September 30, 2020 and $418 in bulk wine sales for the same period of 2019. The Company had bulk wine sales of $28,734 for
the nine months ended September 30, 2020 and $45,981 in bulk wine sales for the same period of 2019.
The
Company sold 130,705 and 112,501 cases of produced wine during the nine months ended September 30, 2020 and 2019, respectively,
an increase of 18,204 cases, or 16.2% in the current year period over the prior year period. The increase in wine case sales was
primarily the result of increased case sales through distributors.
Cost
of sales includes grape costs, whether purchased or grown at Company vineyards, winemaking and processing costs, bottling, packaging,
warehousing, and shipping and handling costs. For grapes grown at Company vineyards, costs include farming expenditures and amortization
of vineyard development costs.
At
September 30, 2020, wine inventory included 161,157 cases of bottled wine and 206,998 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 156,137 cases during the nine months ended September 30, 2020.
Willamette
Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers
and online bloggers.
The
Companys 2019 Whole Cluster Rosé of Pinot Noir received a Double Gold award and 96 points from Sunset Magazines
International Wine Competition.
The
Companys 2018 Riesling was featured in Wine Enthusiast Magazines Top 100 Best Buys for 2020 and was awarded
90 points.
Wine
& Spirits Magazine awarded the Companys 2017 Estate Chardonnay with 90 points and a Best Buy.
Vinous awarded
the Companys 2017 Elton Pinot Noir with 93 points, the 2017 Bernau Block Pinot Noir with 92 points, the 2017 Tualatin Estate
Pinot Noir with 92 points, the 2018 Estate Pinot Noir with 91 points and both the 2017 Elton Self-Rooted Pinot Noir and 2017 Elton
Florine Pinot Noir with 93 points.
The
Company began deploying UV light in its estate vineyards to kill powdery mildew as a substitute for its use of organic
sulfur after discovering research conducted by Cornell University, Oregon State University, and Washington State University. As
the first commercial vineyard to use this new technology, the Company was featured in numerous media articles.
The
Company was named one of Greater Portlands top 10 most-generous companies in the Portland Business Journals 2020
Corporate Philanthropy Awards.
Willamette
Wineworks, the Companys first microwinery outpost featuring wine tasting, food pairings and a barrel blending system to
create custom wine blends was featured in numerous media articles.
The
Companys Whole Cluster Rosé of Pinot Noir was named a top vegan beverage for the summer on BeVegan and Jane
Unchained.
The
Company was named Best Winery to Visit in Oregon by TripSavvy, a travel website. The Company was also named Best Winery
in Willamette Weeks Best of Greater Portlands 2020 Readers Poll.
Impact
of COVID-19 on Operations
The
COVID-19 pandemic has been declared a National Public Health Emergency in the United States, and on March 8, 2020, Oregon Governor
Kate Brown declared a state of emergency to address the spread of COVID-19 in Oregon. The outbreak in Oregon and other parts
of the United States, as well as the response to COVID-19 by federal, state and local governments could have a continued material
adverse impact on economic and market conditions in the United States, which may negatively affect our business and operations.
The COVID-19 pandemic and the government responses to the outbreak presents continued uncertainty and risk with respect to the
Company and its performance and financial results.
With
the exception of key operations personnel, we have shifted our office staff to remote workstations, and we expect we will continue
to operate remotely until state and local government restrictions have been lifted and management determines it is safe for employees
to return to offices. Far exceeding the required Oregon Healthy Authority protocols, a new state-of-the-art UV light filtration
has been installed in the Companys HVAC system to reduce harmful viruses in the air at its tasting room locations and staff
offices.
We
have not yet experienced significant disruptions to our supply chain network, however any future stay-at-home orders or other
restrictions imposed by our local or state governments may have a negative impact on our future direct to consumer sales. In response
to the closure and then [capacity] restrictions on our tasting rooms, the Company launched curbside pick-ups, and complimentary
shipping specials with minimum purchase, which have been able to mitigate the expected declines in direct to consumer sales.
Additionally,
the demand for the Companys wine sold directly or through distributors to restaurants, bars, and other hospitality locations
will likely be significantly reduced in the near-term due to orders restricting consumers from visiting, as well as in some cases
the temporary closure of such establishments.
The
extent of the impact of the COVID-19 pandemic on the Companys business is highly uncertain and difficult to predict, as
the response to the pandemic is continuing to evolve. The severity of the impact of the COVID-19 pandemic on the Companys
business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the
extent and severity of the impact on the Companys customers, all of which are uncertain and cannot be predicted.
RESULTS
OF OPERATIONS
Revenue
Sales
revenue for the three months ended September 30, 2020 and 2019 were $6,918,131 and $6,758,367, respectively, an increase of $159,764,
or 2.4%, in the current year period over the prior year period. This increase was mainly caused by an
increase in direct sales of $265,018 being partially offset by a decrease in sales through distributors of $105,254 in the current
year three-month period over the same period in the prior year. The increase in revenue from direct sales to consumers
was primarily the result of increased retail sales revenues from our brand ambassador program and increased wine sales made over
the internet, which more than offset lower revenues from hospitality and kitchen sales mostly due to the restrictions on the operation
of our tasting rooms resulting from the COVID-19 pandemic in 2020. The decrease in revenue from sales through distributors was
primarily attributed to lower sales to restaurants and similar businesses as many of these establishments have been closed or
had other restrictions placed on them due to the COVID-19 pandemic in 2020. Sales revenue for the nine months ended September
30, 2020 and 2019 were $19,008,680 and $17,547,990, respectively, an increase of $1,460,690, or 8.3%, in the current year period
over the prior year period. This increase was mainly caused by an increase
in revenues from direct sales of $344,320 and an increase in revenues from sales through distributors of $1,116,370 in the current
year period over the prior year period. The increase in revenues from direct sales to consumers was primarily the result
of increased phone sales and sales made over the internet. The increase in sales through distributors was primarily the result
of an increase in sales through chain stores.
Cost
of Sales
Cost
of sales for the three months ended September 30, 2020 and 2019 were $2,696,934 and $2,694,345, respectively, an increase of $2,589,
or 0.1%, in the current period over the prior year period. This change was primarily the result of an increase in sales and the
vintages sold in 2020. Cost of sales for the nine months ended September 30, 2020 and 2019 were $7,373,909 and $6,704,974, respectively,
an increase of $668,935, or 10.0%, in the current period over the prior year period. This change was primarily the result of an
increase in sales in 2020.
Gross
Profit
Gross
profit for the three months ended September 30, 2020 and 2019 was $4,221,197 and $4,064,022, respectively, an increase of $157,175,
or 3.9%, in the third quarter of 2020 over the same quarter in the prior year. Gross profit for the nine months ended September
30, 2020 and 2019 was $11,634,771 and $10,843,016, respectively, an increase of $791,755, or 7.3%, in the current year period
over the prior year period. This increase was primarily the result of an increase in case sales over the first nine months of
the current year compared to the same period in 2019.
Gross
profit as a percentage of net sales for the three months ended September 30, 2020 and 2019 was 61.0% and 60.1%, respectively,
an increase of 0.9 percentage points in the current quarter over the same quarter in the prior year. Gross profit as a percentage
of net sales for the nine months ended September 30, 2020 and 2019 was 61.2% and 61.8%, respectively, a decrease of 0.6 percentage
points in the current year period over the prior year period. This decrease was primarily the result of more sales coming from
distribution sales which have a lower selling price.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the three months ended September 30, 2020 and 2019 was $2,917,363 and $2,789,695 respectively,
an increase of $127,668, or 4.6%, 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 $15,918, or 0.9% and an increase in general and administrative expenses of $111,750,
or 12.0% in the current quarter compared to the same quarter last year. Selling, general and administrative expenses for the nine
months ended September 30, 2020 and 2019 was $8,302,825 and $8,407,820, respectively, a decrease of $104,995, or 1.2%, in the
current year period over the prior year period. This decrease was primarily the result of a decrease in selling expenses of $303,630,
or 5.5% being partially offset by an increase in general and administrative expenses of $198,635, or 6.9% in the current year
period compared to the same period in 2019. Selling expenses decreased in 2020 compared to 2019 mostly as a result of more sales
coming from distributors which have lower selling costs, combined with reduced travel and the temporary closure and reduced capacity
of tasting rooms as a result of the COVID-19 pandemic. General and administrative expenses increased in the third quarter of 2020
compared to the same quarter of 2019 primarily as a result of more professional fees and donations and increased for the nine
months ended September 30, 2020 compared to the same period in 2019 primarily as a result of increased insurance and compensation
related costs.
Interest
Expense
Interest
expense for the three months ended September 30, 2020 and 2019 was $103,283 and $110,547, respectively, a decrease of $7,264 or
6.6%, in the third quarter of 2020 over the same quarter in the prior year. Interest expense for the nine months ended September
30, 2020 and 2019 was $314,158 and $332,049, respectively, a decrease of $17,891 or 5.4%, in the current year period over the
prior year period. The decrease in interest expense for the third quarter and first nine months of 2020 was primarily the result
of lower debt compared to the third quarter and first nine months of 2019.
Income
Taxes
The
income tax expense for the three months ended September 30, 2020 and 2019 was $343,464 and $318,788, respectively, an increase
of $24,676 or 7.7%, in the third quarter of 2020 over the same quarter in the prior year, primarily as a result of higher pre-tax
income in the third quarter of 2020, compared to the same quarter in 2019. The Companys estimated federal and state combined
income tax rate for the three months ended September 30, 2020 and 2019 was 27.7% and 27.2%, respectively. The income tax expense
for the nine months ended September 30, 2020 and 2019 was $869,230 and $603,154, respectively, an increase of $266,076 or 44.1%,
in the current year period over the prior year period, primarily a result of higher pre-tax income in the first nine months of
2020, compared to the same period in 2019. The Companys estimated federal and state combined income tax rate was 27.4%
and 26.9% for the nine months ended September 30, 2020 and 2019, respectively.
Net
Income
Net
income for the three months ended September 30, 2020 and 2019 was $896,799 and $852,200, respectively, an increase of $44,599,
or 5.2%, in the third quarter of 2020 over the same quarter in the prior year. Net income for the nine months ended September
30, 2020 and 2019 was $2,304,302 and $1,638,587, respectively, an increase of $665,715, or 40.6%, in the current year period over
the prior year period. The increase in net income for the third quarter and nine months of 2020, compared to the comparable periods
in 2019, was primarily the result of increased gross profits in addition to lower selling expenses.
Income
Applicable to Common Shareholders
Income
applicable to common shareholders for the three months ended September 30, 2020 and 2019 was $640,347 and $595,748, respectively,
an increase of $44,599, or 7.5%, in the third quarter of 2020 over the same quarter in the prior year. Income applicable to common
shareholders for the nine months ended September 30, 2020 and 2019 was $1,534,946 and $869,230, respectively, an increase of $665,716,
or 76.6%, in the current year period over the prior year period. The increase in income applicable to common shareholders in the
third quarter and first nine months of 2020, compared to the same periods of 2019, was the result of higher net income in the
current periods.
Liquidity
and Capital Resources
At
September 30, 2020, the Company had a working capital balance of $20.5 million and a current working capital ratio of 2.92:1.
At
September 30, 2020, the Company had a cash balance of $10,713,068. At December 31, 2019, the Company had a cash balance of $7,050,176.
This increase is primarily the result of funds received from an offering of Preferred Stock during the first nine months of 2020
being partially offset with cash used in investing activities primarily related to the construction of a new tasting room in Dundee,
Oregon. The total construction costs for the project is expected to be approximately $13.5 million, which we expect will be funded
through a combination of cash on hand as well as equity financing through the current Preferred Stock offering. Construction began
in July 2019 and was paused in March 2020 as a result of the uncertainty surrounding the potential impact of the COVID-19 pandemic
on the Companys business. As of September 30, 2020, we had incurred approximately $4.7 million on the project.
Total
cash generated from operating activities in the nine months ended September 30, 2020 was $2,902,345. Cash generated in operating
activities for the nine months ended September 30, 2020 was primarily associated with cash received from increased net income,
reduced inventory, increased accounts payable and accrued expenses and reduced income taxes receivable, being partially offset
by cash used in connection with an increase in accounts receivable and a decrease in grapes payables.
Total
cash used in investing activities in the nine months ended September 30, 2020 was $3,890,778. Cash used in investing activities
for the nine months ended September 30, 2020 primarily consisted of cash used on construction activity on a new tasting room and
vineyard development costs.
Total
cash generated from financing activities in the nine months ended September 30, 2020 was $4,651,325. Cash generated from financing
activities for the nine months ended September 30, 2020 primarily consisted of proceeds from investor deposits in connection with
our offering of Preferred Stock, being partially offset by the repayment of debt.
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 July 2019, until July 2021. The interest rate is prime less 0.5%, with a floor of 3.25%.
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 September 30, 2020, the Company was in compliance with all
of the financial covenants.
As
of September 30, 2020, and December 31, 2019, the Company had no balance outstanding on the line of credit.
As
of September 30, 2020, the Company had a 15-year installment note payable of $1,406,024, due in quarterly payments of $42,534,
associated with the purchase of property in the Dundee Hills AVA.
As
of September 30, 2020, the Company had a total long-term debt balance of $6,097,277, including the portion due in the next year,
owed to Farm Credit Services and Toyota Credit Corporation, exclusive of debt issuance costs of $149,042. As of December 31, 2019,
the Company had a total long-term debt balance of $6,423,517, exclusive of debt issuance costs of $158,978.
The
Company qualified for and obtained a PPP loan for $1.655 million, but quickly returned the funds after obtaining a $5 million
commercial loan commitment from Farm Credit Services, which is intended to provide the Company with additional liquidity in the
event the Company was to experience operating losses from any sales disruptions due to the COVID-19 pandemic. This Commitment
came into effect in July 2020 and as of the filing date the Company has not drawn down any funds on this commitment.
The
Company believes that cash flow from operations and funds available under the Companys existing credit facilities will
be sufficient to meet the Companys short-term needs. Due to the uncertainty surrounding the future impact of the COVID-19
pandemic on the Company we will continue to evaluate funding mechanisms to support our long-term funding requirements.
Off
Balance Sheet Arrangements
As
of September 30, 2020, and December 31, 2019, the Company had no off-balance sheet arrangements.