WVVI

Business Context and Reporting Period

Company: Willamette Valley Vineyards, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: The Company operates in the wine industry, producing and selling Willamette Valley Vineyards branded wines. Effective Q1 2008, the Company began reporting two operating segments: "Produced Wines" (retail, in-state self-distribution, and out-of-state sales of proprietary brands) and "Bacchus Distribution" (wholesale distribution of purchased wines and glassware). The Company celebrated its 25th anniversary in 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 5.4% ($192,680) year-over-year. This was driven by out-of-state distributors reducing inventory levels despite increased end-consumer sales, and a loss of a key in-state customer placement due to stockouts of specific Pinot Noir products.
• Profitability Compression: Net income dropped 74.3% to $60,102. While gross margin percentage improved slightly to 48.5%, Selling, General, and Administrative (SG&A) expenses increased 16.6% ($218,336) due to added sales staff, government compliance costs, and professional fees.
• Cash Flow: Net cash used in operating activities increased to $811,632 (from $456,008 in Q1 2007), primarily due to a significant build-up of inventory ($1.5 million increase) to support anticipated 2008 sales volumes.
• Segment Reporting: The Company implemented a new accounting system allowing for discrete segment reporting for the first time, separating "Bacchus Distribution" (28.9% gross margin) from "Produced Wines" (57.4% gross margin).

Guidance, Outlook, and Risks

• Outlook: Management anticipates that the lost key customer placement will be renewed in 2008 once the 2007 harvest Pinot Noir is released in the fourth quarter. Distributor order activity is expected to return to historic levels to meet demand, though inventory levels may remain low due to economic conditions.
• Capital Resources: The Company has a $2,000,000 asset-based loan agreement with Umpqua Bank. As of March 31, 2008, $303,977 was utilized with $1,696,023 available. The Company is in compliance with all financial covenants.
• Expansion: The Board approved negotiations to purchase and lease approximately 204 acres of land for additional vineyard plantings; however, the sale had not closed as of the filing date.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of March 31, 2008, due to material weaknesses including inadequate segregation of duties and inadequate documentation of internal controls. Remediation plans are underway.
• Risks: Risks include availability of high-quality grapes, adverse weather, disease, regulatory changes, and general economic slowdowns affecting distributor inventory levels.

Investor Verification Checklist

• Inventory Valuation: Verify the accuracy of the $9.5 million inventory balance, particularly given the recent implementation of a new order fulfillment system and the manual review required to correct cost entries.
• Internal Control Remediation: Monitor the progress of the remediation plan for material weaknesses in internal controls (segregation of duties and documentation) to ensure future financial reporting reliability.
• Customer Concentration: Assess the risk associated with the loss of the key in-state customer and the timeline for the 2007 Pinot Noir release to recover this revenue.
• Cash Burn Rate: Review the sustainability of the current cash burn ($802k decrease in cash in Q1) against the available credit line and projected sales recovery.
• Debt Covenants: Confirm continued compliance with the restrictive financial covenants (equity, debt-to-equity, debt coverage) required by the Umpqua Bank loan agreement.