Willamette Valley Vineyards, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparative periods ended June 30, 2022. The interim financial statements are unaudited. The company sells wine through direct-to-consumer channels and distributors.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $10.73 million | $8.70 million | $19.04 million | $14.94 million |
| Gross profit / gross margin | $6.25 million / 58.3% | $4.83 million / 55.5% | $10.73 million / 56.4% | $8.55 million / 57.2% |
| Operating income (loss) | $309,000 | $444,000 | $(666,000) | $308,000 |
| Net income (loss) | $108,000 | $257,000 | $(636,000) | $158,000 |
| Loss applicable to common shareholders, after preferred dividends | $(403,000) | $(209,000) | $(1.66) million | $(775,000) |
| Loss per common share | $(0.08) | $(0.04) | $(0.33) | $(0.16) |
- Revenue and margins: Sales rose 23.3% in Q2 and 27.4% in the first half. Direct sales increased $1.69 million in Q2 and $2.80 million in the first half; distributor sales increased $338,000 and $1.29 million, respectively. Q2 gross margin improved 2.8 percentage points, primarily on a higher direct-sales mix. First-half margin fell 0.8 points, reflecting higher fruit and labor costs.
- Expenses and earnings: Operating expenses rose 35.6% in Q2 and 38.3% in the first half, led by sales and marketing costs associated primarily with additional tasting room locations. Higher selling expenses drove lower net income compared with the prior periods. Interest expense increased 82.2% in Q2 and 59.0% in the first half, attributed to higher debt and interest rates.
- Cash flow: First-half operating cash outflow was $147,000, versus $979,000 in 2022. Investing cash outflow was $2.11 million, down from $10.13 million, largely reflecting lower property and equipment spending. Financing provided $2.47 million, including borrowing and preferred-stock proceeds. Cash increased to $553,000 from $339,000 at year-end.
- Liquidity and debt: Working capital was $18.8 million and the current ratio was 3.11:1. At June 30, the company had $1.51 million drawn on its line of credit, $1.15 million on a property installment note, and $7.84 million of AgWest debt, including current maturities and before debt issuance costs. Operating lease liabilities totaled $9.99 million.
- Inventory and operations: Inventory was $22.75 million, compared with $22.20 million at year-end. The company sold 96,269 cases in the first half, up 13.1% year over year, and bottled 132,020 cases. Management reported 127,104 cases of bottled wine and 352,326 gallons of bulk wine in inventory at June 30.
Material changes, outlook and risks
- Growth in direct sales was attributed primarily to more tasting room locations; distributor growth reflected greater new-vintage availability and higher off-premise sales. Direct sales were 51.4% of Q2 revenue and 50.4% of first-half revenue, versus 44.0% and 45.4% a year earlier.
- The company issued 118,322 preferred shares in the first half. Preferred dividends accrued were $1.02 million for the period and reduce earnings attributable to common shareholders. Preferred stock had a June 30 liquidation preference of $39.63 million.
- In July 2023, the Umpqua Bank line of credit was renewed for two years; the filing reports a borrowing limit of up to $5 million. The AgWest variable-rate facility’s available line was increased from $5 million to $10 million. Management stated operating cash flow and available credit should meet short-term needs, while continuing to evaluate long-term funding.
- The company was out of compliance with a debt covenant at December 31, 2022; the bank waived the violation through the next measurement date, December 31, 2023. The filing does not report a later covenant test result.
- Management expects near-term results to be negatively affected by preferred dividends, strategic planning and development, and other growth-related costs. No quantified earnings or revenue guidance was provided. Risks cited include financing availability, quality and supply of grapes, weather, disease or wildfire smoke, consumer demand and spending, competition, and distributor relationships.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty. Long-term grape purchase commitments exist, but minimum or maximum payments cannot be calculated; no grape purchases were reported for the periods presented.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher tasting-room and marketing costs translate into sustained direct-sales growth and improved operating profitability.
- The company’s covenant compliance at the December 31, 2023 measurement date and the terms, availability, and costs of its renewed and expanded credit facilities.
- Future cash generation, capital spending, and funding needs given low cash on hand, ongoing investment, and debt and lease obligations.
- The effect of accrued preferred dividends and the preferred stock’s liquidation and redemption terms on value attributable to common shareholders.
- Whether grape supply, crop quality, weather, smoke, and consumer-demand risks affect production costs, inventory, or sales.