WVVI

Business Context and Reporting Period

Company: Willamette Valley Vineyards, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates in the wine industry with two primary segments: "Produced Wines" (Willamette Valley Vineyards branded wine) and "Bacchus Distribution" (in-state wholesale of purchased wines and glassware). The Company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 4.3% for the quarter and 5.6% for the six-month period compared to 2008. Growth was driven by out-of-state sales (up 17.9% for the quarter) and new product placements in national chains. In-state wholesale sales declined slightly due to reduced demand for purchased brands.
• Profitability: Net income surged 61% for the quarter and 93% for the six-month period. Gross profit margins improved due to a favorable sales mix shift toward higher-margin produced wines versus purchased brands.
• Expense Management: Selling, general, and administrative (SG&A) expenses decreased 6.6% for the quarter, primarily due to reduced professional service fees for audits and legal services, partially offset by higher sales labor costs.
• Liquidity: Cash and cash equivalents dropped from $350,361 at year-end 2008 to $0 at June 30, 2009. This depletion was caused by inventory build-up and payments on grape contracts for the 2008 harvest. The Company utilized its revolving credit line to fund operations.
• Interest Expense: Interest expense increased 104% for the quarter and 72% for the six-month period due to higher utilization of the revolving credit line.

Guidance, Outlook, and Risks

Management Commentary: Management attributes improved performance to increased volume in National Sales and better inventory controls reducing shrinkage. The Company secured distribution in Hong Kong following a virtual tasting event. The Company expects capital expenditures to increase in the third quarter for machinery and equipment.

Liquidity Outlook: Management believes cash flow from operations and existing credit facilities (with $957,560 remaining availability on a $2M line) are sufficient to meet short and long-term needs. The Company is in compliance with all financial covenants.

Risks and Contingencies:

• Internal Controls: The Company disclosed that disclosure controls and procedures were not effective as of June 30, 2009, due to material weaknesses identified in the prior year. These include inadequate cash reconciliations, insufficient inventory record controls, and lack of adequate accounting personnel. Remediation efforts are ongoing but not yet complete.
• Market Risks: Risks include availability of financing, grape supply and quality, weather conditions, and general economic conditions affecting consumer demand.

Investor Verification Checklist

• Cash Position: Verify the sustainability of operations with $0 cash on hand and reliance on a $1M+ credit line draw.
• Internal Control Remediation: Monitor progress on fixing material weaknesses regarding cash reconciliations and inventory controls, as these remain unremediated.
• Inventory Levels: Review the $11.6M inventory balance (up from $10.6M) to ensure it aligns with sales velocity and does not indicate obsolescence.
• Debt Covenants: Confirm continued compliance with debt-to-equity and coverage ratios required by the Umpqua Bank loan agreement.
• Revenue Mix: Assess the sustainability of the shift from lower-margin purchased brands to higher-margin produced wines as a driver of profitability.