Willamette Valley Vineyards, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 13, 2020. The company produces and sells wine through direct-to-consumer and distributor channels. Results are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $6.52 million | $5.00 million | +30.5% |
| Gross profit / margin | $3.91 million / 60.0% | $3.28 million / 65.6% | Profit +19.2%; margin −5.6 percentage points |
| Operating income | $1.08 million | $564,438 | +91.8% |
| Net income | $787,082 | $426,476 | +84.6% |
| Income attributable to common shareholders | $530,630; $0.11 per share | $170,024; $0.03 per share | +212.1% |
| Operating cash flow | $296,116 | $(657,026) | Improved |
| Cash and cash equivalents | $5.67 million | $7.05 million at Dec. 31, 2019 | Down $1.38 million |
Distributor sales rose to $4.57 million from $3.28 million; direct sales increased to $1.95 million from $1.72 million. Wine cases sold increased 38.9% to approximately 45,035. Cost of sales rose faster than revenue, up 51.9%, primarily reflecting higher case volumes; management attributed the lower gross margin chiefly to product mix. Selling, general and administrative expenses increased 4.2% to $2.83 million.
Liquidity, debt, and investment
Working capital was $20.2 million and the current ratio was 5.01:1 at quarter-end. The company reported $5.67 million cash and no borrowings on its $2 million revolving credit line, which is renewed through July 2021. It was in compliance with the disclosed bank and long-term debt covenants.
Debt included a $1.45 million installment note for Dundee Hills property and approximately $6.32 million of FCS and Toyota debt, before debt issuance costs. The balance sheet also reports operating lease liabilities of $5.22 million, including $273,670 current.
Investing cash use was $1.55 million, mainly for construction and vineyard development. The planned Dundee tasting room project is estimated to cost approximately $13.1 million; about $4.0 million had been incurred by March 31, and construction was paused in March due to pandemic uncertainty. Management expects to fund the project through cash and debt and/or equity financing, but says it has delayed planned capital expenditures to preserve liquidity.
Outlook, risks, and other notable matters
The filing provides no quantified earnings or revenue guidance. Management stated that first-quarter COVID-19 financial effects had been limited by timing, but warned that closed tasting rooms, reduced hospitality demand, unemployment and weaker consumer spending could adversely affect sales, liquidity, financial condition, and results. Tasting rooms were closed; curbside pickup, shipping promotions, and local delivery were introduced. Employee availability, added health and safety costs, and possible grape-supplier disruption are additional risks. The duration and severity of the pandemic and its effects were described as uncertain.
Management said operating cash flow and available credit should meet short-term needs, while the company continues to evaluate funding for longer-term requirements. Preferred stock dividends accrued were $256,452 for the quarter; the Series A preferred stock has a $0.22 annual dividend per share and a liquidation preference of approximately $19.61 million at quarter-end. The company also had a long-term grape purchase agreement extending through the 2023 harvest. Management did not expect ordinary-course litigation to have a material effect.
Most important facts to verify
- Reconcile cash-flow figures: the financial statements report operating cash flow of $296,116 and financing cash use of $128,376, while MD&A cites $355,213 generated from operations and $187,473 used in financing.
- Monitor the effects of COVID-19 on direct sales, distributor and hospitality demand, grape supply, employee availability, and liquidity; the filing gives no quantified forecast.
- Assess funding needs and timing for the paused Dundee tasting room project and other delayed capital expenditures.
- Track gross margin pressure, which management linked to product mix, alongside rapid distributor-sales and case-volume growth.
- Review debt and covenant compliance, the unused credit facility, lease commitments, and preferred-stock dividend and redemption obligations.