Willamette Valley Vineyards, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; comparisons are with Q1 2022 unless otherwise stated.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $8.31 million | $6.24 million | +33.1% |
| Gross profit | $4.48 million | $3.72 million | +20.4% |
| Gross margin | 53.9% | 59.6% | -5.7 percentage points |
| Operating loss | $974,950 | $136,232 | Loss increased |
| Net loss | $744,823 | $98,942 | Loss increased |
| Net loss applicable to common shareholders | $1.26 million | $565,554 | Loss increased 122.2% |
| Loss per common share, after preferred dividends | $0.25 | $0.11 | Greater loss per share |
| Cash from operating activities | $(1.28) million | $(670,304) | More cash used |
Sales growth reflected more tasting-room locations and wine-club sales, along with increased distributor shipments as more inventory was available. Produced-wine cases sold rose 26.0% to 42,387. Cost of sales increased 51.9%, attributed to higher sales and higher product costs, including costs of more recent vintages. Sales and marketing expense rose 60.8% to $3.98 million; general and administrative expense increased 6.6% to $1.47 million. Management attributed higher selling costs to increased direct sales and additional tasting rooms, and higher administrative costs to property taxes and labor.
Direct-sales revenue was $4.07 million and distributor-sales revenue was $4.24 million. Direct-sales contribution margin was negative $432,785, compared with positive $356,972 a year earlier; distributor-sales contribution margin increased to $1.17 million from $1.03 million. These segment contribution figures are before unallocated expenses and general and administrative costs.
Cash, liquidity and debt
- Cash was $154,340 at March 31, 2023, down from $338,676 at year-end 2022. Working capital was $19.1 million and the current ratio was 3.32:1.
- Investing activities used $1.50 million, primarily for construction and vineyard development. Financing activities provided $2.60 million, including preferred-stock proceeds and new borrowing.
- Outstanding AgWest long-term debt was $7.95 million, including current maturities, versus $7.06 million at December 31, 2022. The company also had a $1.18 million property installment note and $1.18 million drawn on its revolving credit line. The line balance was $166,617 at year-end; its stated interest rate was 7.25% at quarter-end.
- The revolving line was increased to a $5 million borrowing limit and is scheduled to renew July 31, 2023. The company disclosed a covenant violation at December 31, 2022 and said the bank waived it through the next measurement date, December 31, 2023.
- Redeemable preferred shares outstanding increased to 9.30 million from 9.19 million at year-end. Q1 preferred dividends accrued were $511,719.
Outlook, risks and other notable items
No quantitative revenue or earnings guidance is provided. Management said operating cash flow and available credit facilities should be sufficient for short-term needs, while it continues to evaluate funding for longer-term requirements. Management also cautioned that near-term results may be negatively affected by preferred-stock dividends, strategic planning and development, and other growth-related costs.
Risks identified include financing availability, access to high-quality grapes, operational execution, competition and distributor relationships, adverse weather, disease or wildfire smoke affecting grape supply or quality, and changes in consumer spending or premium-wine demand. Grape-purchase commitments have no determinable minimum or maximum payment because quantities and qualifying crop availability are uncertain. Management does not expect ordinary-course litigation to materially affect the company, though outcomes cannot be predicted with certainty. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth can be sustained while direct-sales contribution margin is negative and overall gross margin is declining.
- How product costs, selling expenses and additional tasting-room operations affect profitability in coming quarters.
- Renewal terms and availability of the revolving credit line, and compliance with debt covenants at the next measurement date.
- Cash needs for capital investment, lease obligations and grape purchases, given low quarter-end cash and negative operating cash flow.
- The continuing effect of preferred dividends and preferred-stock issuance on losses attributable to common shareholders and shareholder claims.