Business context and reporting period
Willamette Valley Vineyards, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2021. The Oregon-based wine producer sells through direct-to-consumer channels and third-party distributors.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Net sales | $5.77 million | $6.52 million |
| Gross profit / margin | $3.49 million / 60.6% | $3.91 million / 60.0% |
| Operating income | $176,009 | $1.08 million |
| Net income | $122,685 | $787,082 |
| Income (loss) applicable to common shareholders | ($236,951); loss per share of $0.05 | $530,630; earnings per share of $0.11 |
| Operating cash flow | ($402,165) | $296,116 |
| Cash and cash equivalents | $13.29 million | $14.00 million at December 31, 2020 |
At March 31, 2021, working capital was $28.2 million and the current ratio was 6.18:1. Total assets were $78.67 million and total liabilities were $18.64 million. Principal debt included a $1.36 million property note and $5.87 million of Farm Credit Services debt; there was no balance on the $2.0 million bank credit line. Operating lease liabilities totaled $4.93 million. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales fell 11.6%; management attributed the decrease primarily to distributor shipments, partly offset by direct sales growth. Wine case sales declined 15.5%, mainly due to lower distributor sales.
- Direct sales rose $353,872, while distributor sales declined $1.11 million. Distributor depletions to accounts reportedly increased 9% year over year, and orders through April were ahead of the prior year.
- Gross margin improved 0.6 percentage points, which management attributed to a higher direct-sales mix. Selling, general and administrative expenses increased 17.2% to $3.32 million, including higher shipping, labor and maintenance costs.
- Net income declined 84.4%. Preferred dividends accrued rose to $359,636 from $256,452, resulting in a loss applicable to common shareholders despite positive net income.
- Cash decreased $709,980 from year-end. Operating cash use was driven in part by payment of grapes payable and lower accrued expenses; financing cash inflow included preferred-stock proceeds.
Outlook, risks and unusual items
- No quantified earnings or sales guidance was provided. Management expects near-term results to bear costs related to growth and strategic development, including preferred dividends.
- Construction of a new Dundee tasting room and winery has restarted after a pandemic-related pause. Estimated project cost is approximately $14.9 million; approximately $5.3 million had been incurred by March 31, 2021. Funding is expected from cash and preferred-stock offerings.
- Management said cash from operations and existing credit facilities should meet short-term needs, while it continues to assess long-term funding. A separate $5.0 million Farm Credit Services commitment intended as pandemic-related liquidity support remained undrawn. The Umpqua line of credit was scheduled to renew by July 2021.
- COVID-19 restrictions and consumer-spending effects may weigh on tasting-room, hospitality and distributor demand; employee availability and grape-supplier performance are also risks. Other cited risks include financing availability, competition, distributor relations, weather, grape quality or supply, and smoke or disease impacts.
- Preferred stock is redeemable at the company’s option after June 1, 2021, subject to the stated redemption terms. Its liquidation preference was $27.50 million at quarter-end; accrued unpaid dividends add to that preference.
- Management said ordinary-course litigation was not expected to have a material adverse effect, though outcomes are uncertain. Long-term grape purchase commitments exist, but the filing does not quantify minimum or maximum payments.
Important facts for investors to verify
- Whether distributor orders and depletions translated into sustained shipments and revenue after quarter-end.
- Progress, remaining funding needs and timing for the Dundee construction project, including the status of preferred-stock financing.
- Renewal and availability of the Umpqua credit line, and continued compliance with lender covenants.
- The continuing impact of COVID-19 on direct sales, hospitality demand, employees and grape supply.
- Preferred-stock dividend accruals, redemption terms and their effect on value attributable to common shareholders.