Willamette Valley Vineyards, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results compared with Q1 2017; balance-sheet figures compared with December 31, 2017.
Financial performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $4.53 million | $4.45 million; up 1.8% |
| Gross profit / margin | $2.89 million / 63.8% | $2.74 million / 61.6% |
| SG&A | $2.42 million | $2.24 million; up 8.0% |
| Operating income | $472,344 | $503,127 |
| Net income | $330,454 | $315,130; up 4.9% |
| Income applicable to common shareholders | $75,561; $0.02 per share | $183,297; $0.04 per share |
| Operating cash flow | $(1.34) million | $352,243 |
| Cash and cash equivalents | $11.16 million | $13.78 million at Dec. 31, 2017 |
- Wine cases sold fell 2.7% to approximately 28,832, although revenue increased. Management attributed the revenue gain mainly to higher direct-to-consumer and distributor sales.
- Direct sales generated $1.55 million in revenue and $175,219 contribution margin, versus $1.49 million and $267,503 a year earlier. Distributor sales generated $2.98 million and $1.28 million contribution margin, versus $2.96 million and $1.14 million.
- Cash used in operations was primarily associated with purchased-grape payments. Investing cash outflow was $1.26 million, mainly for property and equipment; financing cash outflow was $8,907.
- Working capital was $23.8 million and the current ratio was 6.62:1, compared with $24.0 million and 4.73:1 at year-end.
- Farm Credit Services and Toyota debt totaled $7.14 million, including current maturities and excluding debt issuance costs. Separate property-purchase notes totaled approximately $1.74 million. The $2 million Umpqua line of credit had no outstanding balance; the company reported covenant compliance.
Material changes and notable items
- Gross margin improved, primarily because a $75,918 bulk-wine inventory write-down in Q1 2017 did not recur. SG&A increased 8.0%, including higher selling costs for retail staffing and incentives; operating income consequently declined.
- Net income rose, but common-shareholder income fell 58.8%, as accrued preferred dividends increased to $254,893 from $131,833. The company reported 4.63 million preferred shares outstanding with a $19.49 million liquidation preference at March 31.
- The company adopted the new revenue-recognition standard in Q1 2018 using the modified prospective method and said the impact was not material. It was still evaluating the forthcoming lease-accounting standard.
- Preferred-stock subscriptions of $236,824 were received and recorded as a current liability pending share issuance effective April 1, 2018.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management said strategic property purchases, development, preferred-stock activity and related costs are expected to weigh on near-term results. It believed operating cash flow and available credit would meet foreseeable needs.
- Management cited risks including financing availability, high-quality grape supply, weather, grape disease or quality, competition, distributor relationships, consumer demand and regulatory decisions. It cautioned that Q1 results are not necessarily indicative of full-year results.
- A long-term grape-purchase agreement runs through the 2023 harvest; its payment range cannot be quantified because amounts depend on grape availability, quality and company needs. Management did not expect pending legal matters to have a material adverse effect, while noting outcomes cannot be predicted.
- The filing’s statements of operations report a Q1 tax provision of $122,744. The MD&A gives a different figure ($118,718) while stating a year-over-year decrease of $59,011; the narrative amount does not reconcile with the financial statements.
Important facts for investors to verify
- Confirm the tax-provision discrepancy between the statements and MD&A.
- Track whether operating cash flow recovers after the grape-payment outflow and whether cash continues to decline with capital spending.
- Monitor direct-sales contribution margin, case volumes and SG&A growth, given weaker direct-sales contribution and lower unit sales.
- Review preferred-stock issuance, accrued dividends and the resulting claim ahead of common shareholders.
- Check renewal or replacement of the Umpqua credit facility, which was scheduled to renew by July 31, 2018, and progress on property-development spending.