Willamette Valley Vineyards, Inc. — Q3 2023 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2023. The company produces and sells wine through direct-to-consumer channels, including tasting rooms and wine club, and through distributors. Comparisons below are with the corresponding 2022 periods unless noted.
Financial performance
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Net sales | $9.35 million, up 23.0% | $28.38 million, up 25.9% |
| Gross profit / margin | $5.68 million / 60.8% (51.2% in 2022) | $16.41 million / 57.8% (55.2% in 2022) |
| Operating expenses | $5.97 million, up 16.5% | $17.36 million, up 30.0% |
| Operating loss | $283,000, versus $1.23 million loss | $949,000, versus $918,000 loss |
| Net loss | $327,000, versus $950,000 loss | $963,000, versus $791,000 loss |
| Loss applicable to common shareholders / diluted loss per share | $839,000 / $0.17 | $2.50 million / $0.50 |
| Operating cash flow | Not separately presented | Use of $68,000, versus use of $2.14 million |
| Investing cash flow | Not separately presented | Use of $3.72 million, including $3.38 million for property and equipment |
| Financing cash flow | Not separately presented | Source of $3.66 million |
Q3 revenue growth reflected higher direct sales, principally from additional tasting rooms, and distributor sales, partly attributed to better availability of new-vintage wines. Nine-month sales increased in both channels. Direct sales represented 51.1% of Q3 sales and 50.6% of nine-month sales. Nine-month wine case sales rose 12.8% to 143,286 cases.
Gross margin improved in both periods, with management citing sales mix and a higher proportion of direct sales. However, selling and marketing expense increased 15.3% in Q3 and 36.8% for the nine months, primarily due to more tasting-room locations. General and administrative expense also increased. Interest expense rose 96.4% in Q3 and 71.1% year to date, reflecting increased debt and higher rates.
Liquidity, debt and balance sheet
- At September 30, 2023, cash was $213,432, down from $338,676 at December 31, 2022. Working capital was $17.7 million and the current ratio was 2.44:1.
- Inventory increased to $26.1 million from $22.2 million at year-end, including finished goods of $14.4 million. Management attributed operating cash use mainly to increased inventory, partly offset by lower receivables and noncash depreciation and amortization.
- Reported debt included $1.13 million on a property installment note and $7.72 million of AgWest debt, including current maturities and before debt issuance costs. The Umpqua revolving line had no balance at quarter-end; it was renewed for two years in July 2023, with borrowing capacity reported as up to $5 million. Lease liabilities totaled $9.78 million and are separate from borrowings.
- AgWest debt included a $3.03 million variable-rate loan at 7.80% at quarter-end; the other two loans carried fixed rates of 4.75% and 5.21%. The company also reported a $909,000 bank overdraft as a current liability.
- Redeemable preferred stock had a $40.15 million liquidation preference. Preferred dividends accrued during the first nine months were $1.54 million and are included in the loss applicable to common shareholders, not net loss. Preferred stock issuance and investor deposits were among the sources of financing.
Outlook, risks and notable items
Management stated that cash flows from operations and available credit facilities should meet short-term needs, while it continues to evaluate funding for longer-term requirements. It provided no quantified earnings or revenue guidance. Management expects near-term results to be negatively affected by preferred dividends, strategic planning and development, and other growth-related costs.
Risks highlighted include financing availability, access to high-quality grapes, operating execution, competition and distributor relationships, adverse weather, grape disease or wildfire smoke, consumer spending, and demand for premium wine. The company was out of compliance with a line-of-credit covenant at December 31, 2022; the lender waived that violation through the next measurement date, December 31, 2023. The filing reports ordinary-course legal proceedings and grape-purchase agreements, but says management does not expect the legal matters to materially affect the company. Contractual grape-payment amounts cannot be reliably quantified.
The filing says disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. The company cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales growth and improved gross margins persist, particularly as direct-to-consumer locations and related selling costs expand.
- Inventory levels, conversion to sales, and the effect of inventory investment on operating cash flow.
- Compliance with debt covenants at the December 31, 2023 measurement date, and the cost and availability of borrowing as rates and debt balances change.
- Future preferred-stock issuance, accrued dividends, and their effect on common shareholders’ returns and potential funding needs.
- Execution and funding of growth plans, including tasting-room expansion and vineyard or winery investment, amid grape-supply, weather, and premium-wine demand risks.