Willamette Valley Vineyards, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company produces and sells wine through direct-to-consumer and distributor channels. Results are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $5.57 million | $5.79 million | $12.09 million | $10.79 million |
| Gross profit | $3.50 million | $3.50 million | $7.41 million | $6.78 million |
| Gross margin | 62.9% | 60.4% | 61.3% | 62.8% |
| Operating income | $0.95 million | $0.60 million | $2.03 million | $1.16 million |
| Net income | $0.62 million | $0.36 million | $1.41 million | $0.79 million |
| Income applicable to common shareholders | $0.36 million | $0.10 million | $0.89 million | $0.27 million |
| EPS after preferred dividends | $0.07 | $0.02 | $0.18 | $0.06 |
Q2 sales fell 3.8%, as direct sales declined 6.6% and distributor sales declined 1.9%. First-half sales rose 12.1%, driven mainly by distributor sales, which increased $1.23 million; the company reported wine case sales up 19.1% to approximately 83,435 cases. First-half cost of sales rose 16.6%, outpacing sales growth, and gross margin declined 1.5 percentage points, partly reflecting a higher mix of lower-priced distributor sales. Operating expenses fell 11.9% in Q2 and 4.1% for the half. Management attributed improved net income to higher gross profit and lower selling, general and administrative expenses.
Cash, liquidity, debt and investment
- Cash was $5.90 million at June 30, down from $7.05 million at year-end 2019. First-half operating cash flow was $1.78 million, investing cash outflow was $3.06 million, and financing cash inflow was $0.14 million.
- Working capital was reported at $20.0 million, with a 4.92:1 current ratio. Total assets were $68.98 million; total liabilities were $18.53 million.
- Debt included a $1.43 million property installment note and approximately $6.21 million of Farm Credit Services and Toyota debt, including current maturities and excluding debt issuance costs. The $2.0 million asset-based credit line had no outstanding balance. The company reported compliance with debt covenants.
- In July 2020, a $5 million Farm Credit Services commercial loan commitment became available as a liquidity backstop; it had not been drawn by the filing date. The company said operating cash flow and existing credit facilities should meet short-term needs, while it continued to assess long-term funding given COVID-19 uncertainty.
- Capital spending included construction of a new Dundee tasting room. The project was estimated to cost approximately $13.5 million; about $4.6 million had been incurred by June 30, and construction had been paused in March because of pandemic uncertainty. Management expected funding from cash and the current preferred-stock offering.
Outlook, risks and notable items
The filing provides no numerical earnings or sales guidance. Management warned that COVID-19 restrictions, tasting-room closures, reduced hospitality demand, unemployment and weaker consumer spending could continue to pressure revenue, liquidity and results. It also cited potential employee availability and cost issues and the risk that grape suppliers may not fulfill commitments. The company reported no significant supply-chain disruption to date and described curbside pickup, shipping promotions and local delivery as mitigation efforts. Some planned capital expenditures were delayed to preserve liquidity.
The company obtained and quickly returned a $1.655 million Paycheck Protection Program loan after securing the $5 million Farm Credit Services commitment. It also recorded $390,248 of preferred-stock investor deposits as a current liability pending issuance of shares. Preferred dividends accrued were $512,904 for the first half. A grape-purchase agreement runs through the 2023 harvest; the company could not quantify minimum or maximum payments. Management did not expect ordinary-course litigation to have a material effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Key facts for investors to verify
- Whether pandemic-related tasting-room and hospitality restrictions continue to weigh on direct and distributor sales, and whether alternative sales channels offset the decline.
- Availability, draw conditions and covenant terms of the $5 million credit commitment, along with liquidity needs if operating performance weakens.
- Timing, remaining cost and funding plan for the paused Dundee tasting-room project and other deferred capital spending.
- Preferred-stock issuance and use of the $390,248 investor deposits, as well as the continuing preferred-dividend and redemption obligations.
- Grape supply availability and costs under the agreement extending through the 2023 harvest.