Willamette Valley Vineyards, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. The company produces and sells wine through direct-to-consumer and distributor channels. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $4.45 million | $4.18 million | +6.4% |
| Gross profit | $2.74 million | $2.60 million | +5.5% |
| Gross margin | 61.6% | 62.1% | -0.5 percentage points |
| Income from operations | $503,127 | $742,076 | -32.2% |
| Net income | $315,130 | $487,890 | -35.4% |
| Income applicable to common shareholders | $183,297 | $408,995 | -55.2% |
| Basic and diluted EPS after preferred dividends | $0.04 | $0.08 | Down from $0.08 |
| Operating cash flow | $352,243 | $(169,882) | Improved |
Revenue rose in both channels: direct sales increased about $88,000 and distributor sales about $179,000. The company sold 29,639 cases, down 1.5%; management attributed lower direct case sales mainly to inclement weather and said retail revenue benefited from a focus on higher-priced wines. Segment contribution margin was $267,503 for direct sales versus $386,681 a year earlier, and $1.14 million for distributor sales versus $1.15 million.
Cost of sales increased 7.8%, including a $75,918 write-down of bulk wine sold below carrying cost; management said this reduced gross margin by 1.7 percentage points. Selling, general and administrative expense rose 20.6% to $2.24 million, reflecting higher sales staffing, incentives, demonstrations and travel, as well as strategic-planning, legal and preferred-stock administration costs. Interest expense increased 32.4% to $96,700, primarily due to a new property-purchase note.
Cash, liquidity and debt
- Cash was $7.64 million at March 31, 2017, up from $5.71 million at year-end, primarily due to financing proceeds.
- Working capital was $17.1 million; the current ratio was 4.92:1, compared with $16.4 million and 5.59:1 at December 31, 2016.
- Investing activities used $513,165, mainly for property, equipment and vineyard development. Financing activities provided $2.09 million. Capital additions included $2.00 million of non-cash purchases financed with notes payable.
- Long-term debt owed to Farm Credit Services and Toyota, including current maturities, was reported as $7.52 million, compared with $4.87 million at year-end, excluding debt issuance costs. The company also reported seller-financed notes of $1.95 million related to property purchases. Farm Credit refinancing in March replaced three of four prior loans; the two resulting loans carry fixed rates of 4.75% and 5.21% and mature in 2028 and 2032.
- No balance was drawn on the $2 million Umpqua Bank credit line, which was scheduled for renewal by July 31, 2017. The company said it complied with its financial covenants and expected operating cash flow and available credit to meet foreseeable needs.
Outlook, risks and notable items
- No specific numerical earnings or revenue guidance was provided. Management said near-term results may be negatively affected by preferred dividends, strategic planning, development and other growth-related costs.
- Management is pursuing growth through property purchases, debt refinancing and preferred-stock issuance, while emphasizing direct sales, the hospitality facility and wine-club growth. Wine-club membership increased by about 30 net members to 6,744 in the quarter.
- Key identified risks include financing availability, grape supply and quality, adverse weather or disease, competition, distributor relationships, consumer demand and regulation. The company said risk factors were not materially changed from its 2016 Form 10-K.
- Long-term grape-purchase agreements run through the 2019 harvest and may require payments of up to approximately $1.5 million annually; minimum payments depend on qualifying crop production. Management said ordinary-course litigation was not expected to materially affect the company, though outcomes remain uncertain.
- In May 2017, the company filed a prospectus supplement for a potential offering of up to 2,298,851 Series A redeemable preferred shares, with a maximum stated amount of $10 million. Preferred dividends accrue at $0.22 per share; accrued unpaid dividends increase liquidation preference.
- Disclosure controls were reported effective, and management reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether increased SG&A and interest costs, together with preferred dividends, continue to pressure common earnings despite sales growth.
- Review the bulk-wine inventory write-down, inventory valuation and expected timing of sales of bottled and aging wine.
- Confirm total obligations from Farm Credit and seller-financed property notes, scheduled payments, and the status of the Umpqua credit-line renewal.
- Reconcile preferred-share counts: the balance-sheet text reports 2,397,954 shares outstanding, while the cover page reports 2,396,954; verify the correct figure and the terms and outcome of the subsequent offering.
- Monitor grape availability and quality, weather-related visitation and sales, and performance of direct and distributor channels.