Willamette Valley Vineyards, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless otherwise noted.
Business context
The company produces and sells wine through direct-to-consumer channels, including tasting rooms and its Wine Club, and through distributors. Management says direct sales generally earn higher prices than wholesale sales. Wine sales volume rose 13.4% to approximately 30,105 cases. Wine Club membership declined by 69 net members, or 1.1%, to 6,301; management believes preferred-stockholder discounts may have reduced Wine Club sign-ups.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $4.184 million | $3.913 million | +6.9% |
| Gross profit | $2.599 million | $2.304 million | +12.8% |
| Gross margin | 62.1% | 58.9% | +3.2 percentage points |
| Operating income | $742,076 | $498,667 | +48.8% |
| Net income | $487,890 | $314,238 | +55.3% |
| Income applicable to common shareholders | $408,995 | $314,238 | +30.2% |
| Basic and diluted EPS after preferred dividends | $0.08 | $0.06 | — |
| Cash from operating activities | $(169,882) | $277,225 | Negative swing |
| Cash used in investing activities | $(364,563) | $(677,455) | Lower outflow |
Distributor sales increased $326,357, while direct sales increased $190,987; the net sales increase was partly offset by a $246,076 decline in bulk wine sales. Cost of sales fell 1.5%, which management attributed primarily to improved margins on vintages sold. SG&A rose 2.9% to $1.857 million. Interest expense declined 5.2% to $73,011 as debt was reduced. Income tax expense rose 44.5% to $273,957.
Financial position and liquidity
- At March 31, cash and cash equivalents were $4.590 million, versus $4.011 million at December 31, 2015. Restricted cash was another $456,326 and related to preferred-stock subscriptions.
- Working capital was $15.8 million and the current ratio was 10.41:1, compared with $14.0 million and 4.43:1 at year-end. The quarter-end current-liability balance included $456,326 of investor deposits, matched by restricted cash.
- Total assets were $38.056 million and total liabilities were $8.955 million. Farm Credit Services debt was $5.087 million, including current maturities; a separate, non-interest-bearing farmland note had $245,417 outstanding, due April 1, 2017.
- The $2.0 million Umpqua Bank revolving credit facility had no borrowings, was renewed through July 31, 2017, and was fully available. The company reported compliance with its financial covenants.
- Operating cash use was attributed primarily to grape-contract payments and other liabilities. Financing activities provided $1.114 million, principally from preferred-stock proceeds and option exercises, partly offset by common-stock repurchases.
Material developments, outlook and risks
- The Series A redeemable preferred offering was fully subscribed at its original $6.0 million limit by year-end 2015. In March 2016, the company proposed up to $4.125 million of additional issuance; $421,107 held in escrow at quarter-end was released to the company in April, when the related shares were issued. Preferred shares carry a stated $0.22 annual dividend per share when declared; accrued unpaid dividends increase liquidation preference. The company recorded $78,895 of preferred dividends in Q1.
- In March, the company extended three long-term grape-purchase contracts through harvest year 2019. The required annual quantities depend on agreed volumes and grapes meeting quality standards, so minimum and maximum payment amounts were not determinable.
- After quarter-end, the board approved restoring the common-stock repurchase plan to $250,000; $128,842 remained unspent at March 31. The board also voted to exercise an option to buy approximately 45 additional acres for $433,000, with closing anticipated in January 2017 and payments in three annual installments.
- No formal financial guidance was provided. Management believes operating cash flow and the available credit facility will meet foreseeable short- and long-term needs, but cautioned that Q1 results are not necessarily indicative of full-year results.
- Risks highlighted include financing availability, access to high-quality grapes, weather, grape disease or reduced supply, distributor relationships, competition and regulation. The company also specifically warned that claims involving potential misstatements or omissions in preferred-stock offering documents could lead to rescission, penalties, litigation costs or repayment liabilities. Management said ordinary-course legal proceedings were not expected to have a material effect, while noting outcomes cannot be predicted with certainty.
Key facts for investors to verify
- Whether sales growth and higher gross margins continue, particularly given the distributor-sales contribution and lower bulk-wine sales.
- How operating cash flow develops after the Q1 cash outflow associated with grape payments and other liabilities.
- The terms, outstanding amount and dividend accumulation of the redeemable preferred stock, including the effect of future issuance on common shareholders.
- Funding and cash-flow implications of the additional Pambrun acreage purchase and the extended grape contracts.
- Any developments regarding the preferred-stock offering risk disclosure or legal proceedings.