Willamette Valley Vineyards, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2022. The Oregon wine producer sells through direct-to-consumer channels, including tasting rooms and wine clubs, and through distributors. Results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $7.60 million | $7.64 million | $22.55 million | $22.36 million |
| Gross profit | $3.89 million | $4.46 million | $12.44 million | $13.09 million |
| Gross margin | 51.2% | 58.4% | 55.2% | 58.6% |
| Operating income (loss) | $(1.23) million | $0.69 million | $(0.92) million | $2.41 million |
| Net income (loss) | $(0.95) million | $0.46 million | $(0.79) million | $1.66 million |
| Net income (loss) applicable to common shareholders | $(1.42) million | $0.10 million | $(2.19) million | $0.57 million |
| Basic and diluted EPS after preferred dividends | $(0.29) | $0.02 | $(0.44) | $0.12 |
Cash flow and liquidity. For the first nine months, operating activities used $2.14 million, investing activities used $13.65 million, and financing activities provided $2.40 million. Capital spending included $13.12 million for property and equipment and $0.53 million for vineyard development. Cash fell to $363,363 from $13.75 million at December 31, 2021. Working capital was $16.5 million and the current ratio was 2.84:1.
Debt and capital. At September 30, the company had $5.18 million of Farm Credit Services long-term debt and a $1.23 million property installment note. There were no borrowings under its $2 million revolving credit line, which runs through July 31, 2023; the company reported compliance with its covenants. Lease liabilities totaled $9.45 million. Preferred stock had a $36.61 million liquidation preference, and $1.40 million of preferred dividends accrued during the nine-month period.
Material changes and management commentary
- Nine-month sales increased 0.8%, while Q3 sales decreased 0.5%. Direct-to-consumer sales rose $1.43 million for the nine-month period, offset by a $1.24 million decline in distributor sales. Q3 direct sales increased modestly, while distributor sales declined, partly due to later availability of new vintages.
- Wine case sales fell 12.5% in the first nine months, to 127,007 cases, primarily because of limited product availability for distributors.
- Higher fruit, packaging and labor costs reduced gross margin. Cost of sales rose 9.1% year to date, despite nearly flat sales.
- Operating expenses rose 25.0% year to date, mainly from higher selling costs, more tasting-room sales and the development of new tasting-room and restaurant locations. The four new locations generated a combined contribution loss of $1.09 million during the first nine months, including $0.65 million in Q3.
- Management attributes the deterioration in net results to higher product costs and expenses related to new locations. It expects near-term results to be affected by growth and development costs and preferred dividends.
Outlook, risks and unusual items
Management said cash flow from operations, existing credit facilities and preferred-stock sales should cover short-term needs, while it continues to evaluate funding for long-term requirements. In October 2022, the company entered into a $5 million loan agreement with Farm Credit Services; no funds had been drawn by the filing date. No specific revenue or earnings guidance was provided.
Risks cited include financing availability, grape supply and quality, adverse weather, smoke or disease impacts, consumer demand and spending, distributor relationships, competition, and continued uncertainty related to COVID-19 and government responses. The company reported no significant supply-chain disruption to date, but future restrictions could affect direct sales. Long-term grape purchase commitments have variable quantities and costs that the company could not quantify. Management said ordinary-course litigation was not expected to materially affect financial condition or results, while noting outcomes cannot be predicted.
Important facts for investors to verify
- Whether cash generation and available financing can support the company’s substantial investment program, given the $363,363 cash balance and negative operating cash flow.
- Whether new tasting rooms can improve contribution after the reported $1.09 million nine-month loss, and how quickly related costs may be absorbed.
- Whether distributor sales and case volumes recover as product availability improves, and whether direct-sales growth can offset weaker wholesale demand.
- How fruit, packaging and labor costs affect margins, and whether the October 2022 $5 million loan is drawn and on what terms.
- The effect of preferred-stock dividends, redemptions and further issuance on common shareholders; accrued preferred dividends reduced nine-month common-shareholder results by $1.40 million.