WVVI

Business Context and Reporting Period

Company: Willamette Valley Vineyards, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: The Company operates in two primary segments: "Produced Wines" (retail, out-of-state sales, and in-state sales of proprietary brands) and "Bacchus Distribution" (in-state wholesale of purchased wines and glassware). The Company is classified as a smaller reporting company.

Key Financial Metrics

Debt and Liquidity:

• Line of Credit: $803,255 outstanding of a $2,000,000 facility with Umpqua Bank. Interest rate was 3.25% (variable based on Prime Rate). Maturity date is June 2010.
• Long-Term Debt: $3,182,318 (excluding current portion), primarily owed to Farm Credit Services.
• Cash Balance: $0 at March 31, 2010.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 2.1% ($75,671) year-over-year. This was driven by an 8.9% drop in in-state wholesale revenue due to reduced order activity from key chain store customers. Retail sales increased 10.4% due to a new tasting room in McMinnville, OR.
• Profitability Reversal: The Company reported a net loss of $188,344 compared to net income of $165,156 in the prior year, a 214% decrease. Net operating income swung from a profit of $304,369 to a loss of $272,756.
• Margin Compression: Gross margin declined from 51.4% to 41.3%. This was caused by higher costs for produced wines (due to 2007-2008 input costs) and a shift in sales mix toward lower-margin purchased wines in the in-state wholesale channel.
• Inventory Adjustments: An inventory obsolescence reserve of $54,303 was established for slow-moving, aged purchased wine inventory.
• Expense Increase: Selling, general, and administrative (SG&A) expenses increased 11.5% primarily due to incremental labor costs and benefits, partially offset by savings in professional fees.

Outlook, Risks, and Management Commentary

• Outlook: Management expects operating income from produced wines to improve with the release of the 2009 vintage (starting June 2010), which benefits from lower per-case production costs due to a record 2009 harvest. However, the Company faces a challenge with approximately 25,000 case equivalents of excess bulk wine that may need to be bottled if not sold, requiring additional cash resources.
• Cost Reduction: Management is cutting expenses by reducing staffing, discontinuing the 401k employer match, and renegotiating packaging and freight costs.
• Debt Renewal Risk: The revolving line of credit expires in June 2010. While the Company is in compliance with all covenants, terms for refinancing (amounts and rates) may be less favorable than the current arrangement.
• Internal Control Weakness: The Company disclosed a material weakness in internal controls regarding the allocation of costs to produced wines. This weakness, identified in the 2009 audit, resulted in a $373,691 adjustment to inventory and cost of goods sold. Remediation efforts (adding accounting resources) were ongoing but not fully completed as of March 31, 2010.
• Customer Concentration: Sales to the largest in-state wholesale customer dropped significantly as a percentage of total wholesale sales (decreased 53.7% relative to the prior year), highlighting reliance on retailers that rotate stock.

Investor Verification Checklist

• Credit Facility Renewal: Verify the status of the $2,000,000 line of credit renewal with Umpqua Bank, given the June 2010 maturity date and potential for less favorable terms.
• Inventory Valuation: Monitor the resolution of the $54,303 obsolescence reserve and the strategy for disposing of the 25,000 case equivalents of excess bulk wine.
• Internal Controls: Confirm the timeline for fully remediating the material weakness in cost allocation procedures to ensure future financial statement accuracy.
• Customer Concentration: Assess the stability of in-state wholesale relationships, particularly with chain stores, given the recent volatility in order activity.
• Cash Flow Management: Review the Company's ability to fund operations and potential bottling costs for excess inventory given the $0 cash balance and reliance on the credit line.