WILLAMETTE VALLEY VINEYARDS INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

Commission File Number 000-21522

 

WILLAMETTE VALLEY VINEYARDS, INC.

(Exact name of registrant as specified in charter)

 

Oregon	93-0981021
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

8800 Enchanted Way, S.E., Turner, Oregon 97392

(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code: (503) 588-9463

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ☒ YES ☐ NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): ☒ YES ☐ NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

☐ Large accelerated filer	☐ Accelerated filer
☐ Non-accelerated filer	☒ Smaller reporting company
☐ Emerging Growth Company

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ YES ☒ NO

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock,		WVVI		NASDAQ Capital Market
Series A Redeemable Preferred Stock		WVVIP		NASDAQ Capital Market

 

Number of shares of common stock outstanding as of November 13, 2019: 4,964,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  WILLAMETTE VALLEY VINEYARDS, INC.

INDEX TO FORM 10-Q

 

 

Part I - Financial Information	4
Item 1 - Financial Statements (unaudited)	4
Balance Sheets	4
Statements of Operations	5
Statements of Shareholders’ Equity	6
Statements of Cash Flows	7
Notes to Unaudited Interim Financial Statements	8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	21
Item 4 - Controls and Procedures	21
Part II - Other Information	21
Item 1 - Legal Proceedings	21
Item 1A – Risk Factors	21
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3 - Defaults Upon Senior Securities	22
Item 4 – Mine Safety Disclosures	22
Item 5 – Other Information	22
Item 6 – Exhibits	22
Signatures	23

 

 

 

PART I: FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

 

WILLAMETTE VALLEY VINEYARDS, INC.

 BALANCE SHEETS

(Unaudited)

  

The accompanying notes are an integral part of this financial statement

  

 

WILLAMETTE VALLEY VINEYARDS, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

 

	Three months ended		Nine months ended
	September 30,		September 30,
	2019	2018	2019	2018
SALES, NET	$6,758,367	$5,461,039	$17,547,990	$15,814,950
COST OF SALES	2,694,345	1,918,868	6,704,974	5,660,429
GROSS PROFIT	4,064,022	3,542,171	10,843,016	10,154,521
OPERATING EXPENSES
Sales and marketing	1,860,537	1,699,236	5,542,123	4,867,687
General and administrative	929,158	869,993	2,865,697	2,662,643
Total operating expenses	2,789,695	2,569,229	8,407,820	7,530,330
INCOME FROM OPERATIONS	1,274,327	972,942	2,435,196	2,624,191
OTHER INCOME (EXPENSE)
Interest income	25,268	1,964	35,554	10,968
Interest expense	(110,547)	(119,270)	(332,049)	(354,272)
Other income/(expense), net	(18,060)	25,967	103,040	164,009
INCOME BEFORE INCOME TAXES	1,170,988	881,603	2,241,741	2,444,896
INCOME TAX PROVISION	(318,788)	(239,966)	(603,154)	(669,549)
NET INCOME	852,200	641,637	1,638,587	1,775,347
Accrued preferred stock dividends	(256,452)	(256,438)	(769,357)	(767,770)
INCOME APPLICABLE TO COMMON SHAREHOLDERS	$595,748	$385,199	$869,230	$1,007,577
Income per common share after preferred dividends	$0.12	$0.08	$0.18	$0.20
Weighted average number of
common shares outstanding	4,964,529	4,964,529	4,964,529	4,964,529

 

The accompanying notes are an integral part of this financial statement

 

 

 

 

 

 

 

 

 

 

 

WILLAMETTE VALLEY VINEYARDS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

	Nine-Month Period Ended September 30, 2019
	Redeemable
	Preferred Stock		Common Stock		Retained
	Shares	Dollars	Shares	Dollars	Earnings	Total
Balance at December 31, 2018	4,662,768	$18,319,102	4,964,529	$8,512,489	$20,728,677	$47,560,268
Preferred stock dividends accrued	-	256,452	-	-	(256,452)	-
Net income	-	-	-	-	426,476	426,476
Balance at March 31, 2019	4,662,768	$18,575,554	4,964,529	$8,512,489	$20,898,701	$47,986,744
Preferred stock dividends accrued	-	256,452	-	-	(256,452)	-
Net income	-	-	-	-	359,911	359,911
Balance at June 30, 2019	4,662,768	$18,832,006	4,964,529	$8,512,489	$21,002,160	$48,346,655
Preferred stock dividends accrued	-	256,452	-	-	(256,452)	-
Net income	-	-	-	-	852,200	852,200
Balance at September 30, 2019	4,662,768	$19,088,459	4,964,529	$8,512,489	$21,597,907	$49,198,855

 

 

	Nine-Month Period Ended September 30, 2018
	Redeemable
	Preferred Stock		Common Stock		Retained
	Shares	Dollars	Shares	Dollars	Earnings	Total
Balance at December 31, 2017	4,427,991	$17,339,508	4,964,529	$8,512,489	$18,889,012	$44,741,009
Preferred stock sold	206,432	435,856				435,856
Preferred stock dividends accrued	-	254,893	-	-	(254,893)	-
Net income	-	-	-	-	330,454	330,454
Balance at March 31, 2018	4,634,423	$18,030,257	4,964,529	$8,512,489	$18,964,573	$45,507,319
Preferred stock sold	28,095	543,807				543,807
Preferred stock dividends accrued	-	256,438	-	-	(256,438)	-
Net income	-	-	-	-	803,255	803,255
Balance at June 30, 2018	4,662,518	$18,830,502	4,964,529	$8,512,489	$19,511,390	$46,854,381
Preferred stock dividends accrued	-	256,438	-	-	(256,438)	-
Net income	-	-	-	-	641,637	641,637
Balance at September 30, 2018	4,662,518	$19,086,940	4,964,529	$8,512,489	$19,896,589	$47,496,018

  

The accompanying notes are an integral part of this financial statement

 

 

WILLAMETTE VALLEY VINEYARDS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

	Nine months ended September 30,
	2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$1,638,587	$1,775,347
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization	1,293,783	1,205,565
Loss on disposition of property & equipment	487	805
Non-cash loss from other assets	21,012	14,317
Loan fee amortization	9,875	9,935
Deferred rent liability	(23,657)	(23,658)
Deferred gain	(24,072)	(24,072)
Change in operating assets and liabilities:
Accounts receivable, net	283,097	191,823
Inventories	(282,199)	(548,950)
Prepaid expenses and other current assets	53,467	(28,366)
Unearned revenue	(90,846)	(61,933)
Deferred revenue-distribution agreement	-	(95,220)
Grapes payable	(733,629)	(1,053,715)
Accounts payable	(206,896)	(206,797)
Accrued expenses	104,039	218,666
Income taxes payable	60,905	177,256
Net cash from operating activities	2,103,953	1,551,003
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to vineyard development costs	(571,065)	(1,121,992)
Additions to property and equipment	(3,250,679)	(3,325,232)
Net cash from investing activities	(3,821,744)	(4,447,224)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on installment note for property purchase	(196,505)	(193,103)
Payments on long-term debt	(311,258)	(295,882)
Proceeds from issuance of preferred stock	-	549,238
Net cash from financing activities	(507,763)	60,253
NET CHANGE IN CASH AND CASH EQUIVALENTS	(2,225,554)	(2,835,968)
CASH AND CASH EQUIVALENTS, beginning of period	9,737,467	13,776,257
CASH AND CASH EQUIVALENTS, end of period	$7,511,913	$10,940,289
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchases of property and equipment and vineyard development
costs included in accounts payable	$154,775	$177,338

 

The accompanying notes are an integral part of this financial statement

 

 

 

 

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

 

1) BASIS OF PRESENTATION

 

The accompanying unaudited interim financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements. The financial information as of December 31, 2018 is derived from the audited financial statements presented in the Willamette Valley Vineyards, Inc. (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2018. Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments necessary (which are of a normal recurring nature) for the fair statement of the results of the interim periods presented. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018, as presented in the Company’s Annual Report on Form 10-K.

 

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2019, or any portion thereof.

 

The Company’s revenues include direct-to-consumer sales and national sales to distributors. These sales channels utilize shared resources for production, selling and distribution.

 

Earnings per share after preferred stock dividends are computed based on the weighted-average number of common shares outstanding each period.

 

The following table presents the earnings per share after preferred stock dividends calculation for the periods shown:

 

	Three months ended September 30,		Nine months ended September 30,
	2019	2018	2019	2018
Numerator
Net income	$852,200	$641,637	$1,638,587	$1,775,347
Accrued preferred stock dividends	(256,452)	(256,438)	(769,357)	(767,770)
Net income applicable to common shares	$595,748	$385,199	$869,230	$1,007,577
Denominator
Weighted average common shares	4,964,529	4,964,529	4,964,529	4,964,529
Income per common share
after preferred dividends	$0.12	$0.08	$0.18	$0.20

 

Recently issued accounting standards (adopted) – In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This update requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include both qualitative and quantitative information. The effective date for ASU 2016-02 is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier adoption permitted. The Company adopted this new standard on its financial statements on January 1, 2019 using the cumulative effect adjustment method and determined right-of-use assets to be approximately $5.0 million as of December 31, 2018 of which approximately $4.8 million, or 96.0%, represent the lease of vineyard property. The Company recognized these right-of-use assets, and their respective liabilities, and began amortizing them prospectively beginning in first quarter 2019. This standard had a material impact on its Balance Sheet but a minimal direct impact on its Statement of Operations. Because 96.0% of the Company’s leases are for vineyard land, lease costs are recognized either as part of capitalized vineyard development costs or inventory valuation depending on the productive or pre-productive nature of the vineyard. Therefore, most changes to lease expenses as a result of this standard flow through inventory and ultimately become part of cost of sales.

 

 

 

The accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

 

2) INVENTORIES

 

The Company’s inventories, by major classification, are summarized as follows, as of the dates shown:

 

	September 30, 2019	December 31, 2018
Winemaking and packaging materials	$637,332	$736,902
Work-in-process (costs relating to
unprocessed and/or unbottled wine products)	6,128,079	8,527,814
Finished goods (bottled wine and related products)	9,763,897	6,982,393
Current inventories	$16,529,308	$16,247,109

  

3) PROPERTY AND EQUIPMENT

 

The Company’s property and equipment consists of the following, as of the dates shown:

 

	September 30, 2019	December 31, 2018
Construction in progress	$4,156,742	$1,747,047
Land, improvements and other buildings	11,764,811	11,135,596
Winery building and hospitality center	16,099,297	15,993,490
Equipment	12,843,875	12,750,152
	44,864,725	41,626,285
Accumulated depreciation	(16,995,896)	(15,841,834)
Property and equipment, net	$27,868,829	$25,784,451

   

4) DISTRIBUTION AGREEMENT RECEIVABLE AND DEFERRED REVENUE

 

Effective September 1, 2011, the Company entered into an agreement with Young’s Market Company for distribution of Company-produced wines in Oregon and Washington. The terms of this contract include exclusive rights to distribute Willamette Valley Vineyard’s wines in Oregon and Washington for seven years expiring September 1, 2018. To facilitate the transition, with as little disruption as possible, Young’s Market Company agreed to compensate Willamette Valley Vineyards for ongoing Oregon sales and branding efforts. As a result, the Company was due to receive $250,000 per year starting on September 2011 for each of the next four years for a total of $1,000,000. In October of 2014, the Company received payment of the final $250,000 under this agreement. The total amount of $1,000,000 received by the Company related to this agreement is being recognized as revenue on a straight-line basis over the seven year life of the agreement. For the three months ended September 30, 2019 and 2018, the Company has recognized revenue related to this agreement in the amount of $0 and $23,790, respectively, recorded to other income. For the nine months ended September 30, 2019 and 2018, the Company has recognized revenue related to this agreement in the amount of $0 and $95,220, respectively, recorded to other income.

 

 

 

5) DEBT

 

Line of Credit Facility – In December of 2005 the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowings of up to $2,000,000 against eligible accounts receivable and inventories as defined in the agreement. The revolving line bears interest at prime, is payable monthly, and is subject to annual renewal. In July of 2019, the Company renewed the credit agreement until July 31, 2021. The interest rate was 5.00% at September 30, 2019 and 4.00% at December 31, 2018. At September 30, 2019 and December 31, 2018 there was no outstanding balance on this revolving line of credit.

 

Notes payable –In March of 2017 the Company purchased approximately 45 acres of farmland in the Walla Walla AVA under terms that included paying one third of the price upon closing, one third on March 15, 2018 and one third on March 15, 2019. As of September 30, 2019 the Company did not have a balance due on this note. As of December 31, 2018 the Company had a balance due of $137,667.

 

In February of 2017 the Company purchased property, including vineyard land, bare land and structures in the Dundee Hills AVA under terms that included a 15 year note payable with quarterly payments of $42,534 at 6%. The note may be called by the owner, up to the outstanding balance, with 180 days written notice. As of September 30, 2019 the Company had a balance of $1,488,674 due on this note. As of December 31, 2018 the Company had a balance of $1,547,514 due on this note.

 

Long Term Debt –The Company has two long term debt agreements with Farm Credit Services with an aggregate outstanding balance of $6,514,278 and $6,816,928 as of September 30, 2019 and December 31, 2018. These loans require monthly principal and interest payments of $62,067 for the life of the loans, at annual fixed interest rates of 4.75% and 5.21%, and with maturity dates of 2028 and 2032. The general purposes of these loans were to make capital improvements to the winery and vineyard facilities.

 

The Company has an outstanding loan with Toyota Credit Corporation maturing in February 2021, at zero interest, with an outstanding balance of $15,300 and $23,906 as of September 30, 2019 and December 31, 2018, respectively. The purpose of this loan was to purchase a vehicle.

 

As of September 30, 2019 the Company had unamortized debt issuance costs of $162,350. As of December 31, 2018 the Company had unamortized debt issuance costs of $172,225.

 

6) INTEREST AND TAXES PAID

 

Income taxes – The Company paid $163,000 and $158,000 in income taxes for the three months ended September 30, 2019 and 2018, respectively. The Company paid $542,250 and $492,250 in income taxes for the nine months ended September 30, 2019 and 2018, respectively.

 

Interest - The Company paid $106,996 and $113,889 for the three months ended September 30, 2019 and 2018, respectively, in interest on long-term debt. The Company paid $324,715 and $343,726 for the nine months ended September 30, 2019 and 2018, respectively, in interest on long-term debt.

 

7) SEGMENT REPORTING

 

The Company has identified two operating segments, Direct Sales and Distributor Sales, based upon their different distribution channels, margins and selling strategies. Direct Sales includes retail sales in the tasting room and remote sites, Wine Club sales, on-site events, kitchen and catering sales and other sales made directly to the consumer without the use of an intermediary, including sales of bulk wine or grapes. Distributor Sales include all sales through a third party where prices are given at a wholesale rate.

 

The two segments reflect how the Company’s operations are evaluated by senior management and the structure of its internal financial reporting. The Company evaluates performance based on the gross profit of the respective business segments. Selling expenses that can be directly attributable to the segment, including depreciation of segment specific assets, are included, however, centralized selling expenses and general and administrative expenses are not allocated between operating segments. Therefore, net income information for the respective segments is not available. Discrete financial information related to segment assets, other than segment specific depreciation associated with selling, is not available and that information continues to be aggregated.

 

 

 

The following table outlines the sales, cost of sales, gross margin, directly attributable selling expenses, and contribution margin of the segments for the three and nine month periods ending September 30, 2019 and 2018. Sales figures are net of related excise taxes.

 

	Three Months Ended September 30,
	Direct Sales		Distributor Sales		Total
	2019	2018	2019	2018	2019	2018
Sales, net	$2,383,256	$2,333,721	$4,375,111	$3,127,318	$6,758,367	$5,461,039
Cost of Sales	703,331	542,154	1,991,014	1,376,714	2,694,345	1,918,868
Gross Margin	1,679,925	1,791,567	2,384,097	1,750,604	4,064,022	3,542,171
Selling Expenses	1,175,802	1,073,089	545,617	554,408	1,721,419	1,627,497
Contribution Margin	$504,123	$718,478	$1,838,480	$1,196,196	$2,342,603	$1,914,674
Percent of Sales	35.3%	42.7%	64.7%	57.3%	100.0%	100.0%

 

	Nine Months Ended September 30,
	Direct Sales		Distributor Sales		Total
	2019	2018	2019	2018	2019	2018
Sales, net	$6,458,908	$6,237,364	$11,089,082	$9,577,586	$17,547,990	$15,814,950
Cost of Sales	1,735,974	1,580,697	4,969,000	4,079,732	6,704,974	5,660,429
Gross Margin	4,722,934	4,656,667	6,120,082	5,497,854	10,843,016	10,154,521
Selling Expenses	3,406,569	3,089,948	1,676,676	1,550,114	5,083,245	4,640,062
Contribution Margin	$1,316,365	$1,566,719	$4,443,406	$3,947,740	$5,759,771	$5,514,459
Percent of Sales	36.8%	39.4%	63.2%	60.6%	100.0%	100.0%

 

Direct sales include $418 and $66,420 of bulk wine sales in the three months ended September 30, 2019 and 2018, respectively. Direct sales include $45,981 and $201,390 of bulk wine sales in the nine months ended September 30, 2019 and 2018, respectively.

 

8) SALE OF PREFERRED STOCK

 

In August 2015, the Company commenced a public offering of our Series A Redeemable Preferred Stock pursuant to a registration statement filed with the Securities and Exchange Commission. The preferred stock under this issue is non-voting and ranks senior in rights and preferences to the Company’s common stock. Shareholders of this issue are entitled to receive dividends, when and as declared by the Company’s Board of Directors, at a rate of $0.22 per share. Dividends accrued but not paid will be added to the liquidation preference of the stock until the dividend is declared and paid. At any time after June 1, 2021, the Company has the option, but not the obligation, to redeem all of the outstanding preferred stock in an amount equal to the original issue price of $4.15 per share plus accrued but unpaid dividends and a redemption premium equal to 3% of the original issue price of $4.15 per share. The Company registered this transaction with the securities authorities of the States of Oregon and Washington and subsequently obtained a listing on the NASDAQ under the trading symbol WVVIP. This issue had an aggregate initial offering price not to exceed $6,000,000 and was fully subscribed as of December 31, 2015.

 

On December 23, 2015 the Company filed a Registration Statement on Form S-3 with the SEC pertaining to the potential future issuance of one or more classes or series of debt, equity or derivative securities. On February 28, 2016 shareholders of the Series A Redeemable Preferred Stock approved an increase in shares designated as Series A Redeemable Preferred Stock, from 1,445,783 to 2,857,548 shares, and amended the certificate of designation for those shares to allow the Company’s Board of Directors to make future increases.

 

On March 10, 2016 the Company filed a Prospectus Supplement to the December 2015 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 970,588 additional shares of Series A Redeemable Preferred stock having proceeds not to exceed $4,125,000. This stock was established to be sold in four offering periods beginning with an offering price of $4.25 per share and concluding at $4.55 per share. The Company sold all preferred stock available under this offering.

 

 

 

On May 3, 2017, the Company filed with the SEC a Prospectus Supplement to the December 2015 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 2,298,851 additional shares of Series A Redeemable Preferred stock having proceeds not to exceed $10,000,000. This stock was established to be sold in four offering periods beginning with an offering price of $4.35 per share and concluding at $4.65 per share. The Company sold all preferred stock available under this offering.

 

9) LEASES

 

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use (ROU) asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement and presentation of expenses and cash flows from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. We adopted this guidance using the cumulative-effect adjustment method on January 1, 2019, meaning we did not restate prior periods. Current year financial information is presented under the guidance in Topic 842, while prior year information will continue to be presented under Topic 840. Adoption of the standard resulted in the recognition of an operating ROU asset of approximately $5.0 million, of which $4.8 million, or 96.0%, represent the lease of vineyard property. Vineyard lease costs are recognized either as part of capitalized vineyard development costs or inventory valuation depending on the productive or pre-productive nature of the vineyard. As such, adoption of the standard did not have a material impact on our Statement of Operations or Statement of Cash flows but did have a material impact on our Balance Sheet.

 

We determine if an arrangement is a lease at inception. On our balance sheet, our operating leases are included in Operating lease right-of-use assets, Current portion of lease liabilities and Lease liabilities, net of current portion. The Company does not currently have any finance leases.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. For leases that do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

Significant judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration in a contract between lease and non-lease components, and the determination of the discount rate included in our leases. We review the underlying objective of each contract, the terms of the contract, and consider our current and future business conditions when making these judgments.

 

Operating leases – Vineyard - In December 1999, under a sale-leaseback agreement, the Company sold approximately 79 acres of the Tualatin Vineyards property with a net book value of approximately $1,000,000 for approximately $1,500,000 cash and entered into a 20-year operating lease agreement, with three five-year extension options, and contains an escalation provision of 2.5% per year. The gain of approximately $500,000 is being amortized over the life of the lease. This property is referred to as the Peter Michael Vineyard and includes approximately 66 acres of producing vineyards.

 

In December 2004, under a sale-leaseback agreement, the Company sold approximately 75 acres of the Tualatin Vineyards property with a net book value of approximately $551,000 for approximately $727,000 cash and entered into a 15-year operating lease agreement, with three five-year extension options, for the vineyard portion of the property. The lease contains a formula-based escalation provision with a maximum increase of 4% every three years. Approximately $99,000 of the total gain of $176,000 has been deferred and is being amortized over the life of the lease. This property is referred to as the Meadowview Vineyard, and includes approximately 49 acres of producing vineyards.

 

The amortization of the deferred gain is recorded as an offset to expense in selling, general and administrative expenses.

 

 

 

In February 2007, the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyards. This lease is for a 10-year term with four five-year renewals at the Company’s option. The lease contains an escalation provision tied to the CPI not to exceed 2% per annum. In 2017, the Company exercised its option to renew the lease until December 31, 2022.

 

In July 2008, the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 110 acres adjacent to the existing Elton Vineyards site. These 110 acres are being developed into vineyards. Terms of this agreement contain rent increases, that rises as the vineyard is developed, and contains an escalation provision of CPI plus .5% per year capped at 4%. This property is referred to as part of Ingram Vineyard.

 

In March 2017, the Company entered into a 25-year lease for approximately 20 acres of agricultural land in Dundee, Oregon. These acres are being developed into vineyards. This lease contains an annual payment that remains constant throughout the term of the lease. This property is referred to as part of Bernau Estate Vineyard.

 

Operating Leases – Non-Vineyard - In September 2018, the Company renewed an existing lease for three years, with two one-year renewal options, for its McMinnville tasting room. The lease contains an escalation provision with a cap at 3% per year.

 

In January 2018, the Company assumed a lease, with four remaining years, for its Maison Bleue tasting room in Walla Walla, Washington. The lease contains fixed payments that increase over the term of the agreement.

 

Operating leases – Not yet commenced – The Company has entered into a contract to build and lease a retail wine facility in Folsom, California, referred to as Willamette Wineworks, and anticipates this lease commencing in the fourth quarter 2019.

 

The following tables provide lease cost and other lease information for the three and nine months ended September 30, 2019:

 

	Three Months Ended	Nine Months Ended
	September 30, 2019	September 30, 2019
Lease Cost
Operating Lease cost - Vineyards	$113,685	$341,055
Operating Lease cost - Other	17,580	52,740
Short-term lease cost	9,005	26,905
Total Lease Cost	$140,270	$420,700
Other information
(Gains) and losses on sale and leaseback transactions, net	$(8,024)	$(24,071)
Cash paid for amounts included in the measurement
of lease liabilities
Operating cash flows from operating leases - Vineyard	104,948	314,461
Operating cash flows from operating leases - Other	17,400	52,200
Weighted-average remaining lease term - operating leases	18.24	18.24
Weighted-average discount rate - operating leases	6.24%	6.24%

 

 

 

As of September 30, 2019, maturities of lease liabilities were as follows:

 

	Operating
Years Ended December 31,	Leases
2019	$45,959
2020	203,481
2021	210,307
2022	197,651
2023	190,730
Thereafter	4,096,788
Present value of operational lease liabilities	$4,944,916

 

10) COMMITMENTS AND CONTINGENCIES

 

Litigation – From time to time, in the normal course of business, the Company is a party to legal proceedings. Management believes that these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows, but, due to the nature of litigation, the ultimate outcome of any potential actions cannot presently be determined.

 

Grape Purchases - The Company has entered into a long-term grape purchase agreement with one of its Willamette Valley wine grape growers. This contract amended and extended three separate contracts for the purchase of fruit through the 2023 harvest year. With this agreement the Company purchases an annually agreed upon quantity of fruit, at pre-determined prices, within strict quality standards and crop loads. The Company cannot calculate the minimum or maximum payment as such a calculation is dependent in large part on unknowns such as the quantity of fruit needed by the Company and the availability of grapes produced that meet the strict quality standards in any given year. If no grapes are produced that meet the contractual quality levels, the grapes may be refused, and no payment would be due.

 

NOTE 11 – SUBSEQUENT EVENTS

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued.

 

 

 

 

 

 

 

 

 

 

ITEM 2:

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” and “the Company” refer to Willamette Valley Vineyards, Inc.

 

Forward Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company’s business, and beliefs and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” “intends,” “plans,” “predicts,” “potential,” “should,” or “will” or the negative thereof and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease, changes in consumer spending, the reduction in consumer demand for premium wines and the impact of governmental regulatory decisions. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Many of these risks as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as in the Company’s other Securities and Exchange Commission filings and reports. The forward-looking statements in this report are made as of the date hereof, and, except as otherwise required by law, the Company disclaims any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.

 

Critical Accounting Policies

 

The foregoing discussion and analysis of the Company’s financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, collection of accounts receivable, valuation of inventories, and amortization of vineyard development costs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of the Company’s critical accounting policies and related judgments and estimates that affect the preparation of the Company’s financial statements is set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Such policies were unchanged during the nine months ended September 30, 2019.

 

Overview

 

The Company’s wines are made from grapes grown in vineyards owned, leased or contracted by the Company, and from grapes purchased from other nearby vineyards. The grapes are harvested, fermented and made into wine at the Company’s winery in Turner Oregon (the “Winery”) and the wines are sold principally under the Company’s Willamette Valley Vineyards label, but also under the Griffin Creek, Pambrun, Elton, Maison Bleue, Pere Mi and Tualatin Estates labels. The Company also owns the Tualatin Estate Vineyards and Winery, located near Forest Grove, Oregon. The Company generates revenues from the sales of wine to wholesalers and direct to consumers.

 

 

 

Direct to consumer sales primarily include sales through the Company’s tasting rooms and wine club. Direct to consumer sales are more profitable to the Company than sales through distributors due to prices received being closer to retail than those prices paid by wholesalers. The Company continues to emphasize growth in direct to consumer sales through the Company’s remodeled 35,642 square foot hospitality facility at the Winery and expansion and growth in wine club membership. Additionally, the Company’s preferred stock sales since August 2015 have resulted in approximately 5,744 new preferred stockholders many of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent approximately 9,000 potential customers of the Company. Membership in the Company’s wine club increased by approximately 145 net members, or 1.9%, to a total of 7,653 members during the nine months ending September 30, 2019. The Company believes the increase in preferred stockholders, who receive enhanced discounts, has reduced the number of people who would otherwise become wine club members. However, management anticipates that new preferred stockholders will purchase the Company’s wines over a longer period of time, than the average wine club member, making their enhanced winery status beneficial to the Company.

 

Periodically, the Company will sell grapes or bulk wine, due to them not meeting Company standards or being excess to production targets, however this is not a significant part of the Company’s activities. The Company had bulk wine sales of $418 for the three months ended September 30, 2019 and $66,420 in bulk wine sales for the same period of 2018. The Company had bulk wine sales of $45,981 for the nine months ended September 30, 2019 and $201,390 in bulk wine sales for the same period of 2018.

 

The Company sold approximately, 111,778 and 102,155 cases of produced wine during the nine months ended September 30, 2019 and 2018, respectively, an increase of 9,623 cases, or 9.4% in the current year period over the prior year period.  The increase in wine case sales was primarily the result of increased sales through distributors.

 

Cost of sales includes grape costs, whether purchased or grown at Company vineyards, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs. For grapes grown at Company vineyards, costs include farming expenditures and amortization of vineyard development costs.

 

At September 30, 2019, wine inventory included approximately 146,091 cases of bottled wine and 286,383 gallons of bulk wine in various stages of the aging process. Case wine is expected to be sold over the next 12 to 24 months and generally before the release date of the next vintage. The Winery bottled approximately 159,926 cases during the nine months ended September 30, 2019.

 

​The Company continues to position itself for strategic growth through property purchases, property development and issuance of Preferred Stock. Management expects near term financial results to be negatively impacted by these activities as a result of incurring costs of accrued preferred stock dividends, strategic planning and development costs and other growth associated costs.

Willamette Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers, online articles and broadcast networks in the third quarter of 2019.

​​Wine Enthusiast awarded the Company’s 2016 Griffin Creek Merlot with 91 points, the 2016 Griffin Creek Syrah with 90 points, the 2018 Whole Cluster Rosé of Pinot Noir with 90 points and Editors' Choice, the 2016 Méthode Champenoise Brut with 90 points and 2018 Estate Rosé of Pinot Noir with 90 points.

 

Wine & Spirits awarded the Company’s 2016 Tualatin Estate Chardonnay with 92 points and was named "Year's Best Chardonnays", the 2017 Estate Chardonnay with 91 points and named a “Best Buy”, the 2016 Bernau Block Chardonnay with 90 points and named the 2016 Dijon Clone Chardonnay a “Best Buy”.

 

The Company’s 2016 Méthode Champenoise Brut won Double Gold and was named Best Sparkling in the Northwest by Sip Northwest Magazine. The Company’s 2016 Père Ami won a gold medal in Sip Northwest Magazine’s Best of the Northwest Wine Competition.

 

The Company’s 2015 Méthode Champenoise Brut won Double Gold in the Six Nations Wine Challenge, a global competition where wineries from the United States received a small percentage of the awards, a total of 14 Double Gold awards, including the Company’s Brut.

 

The Company’s 2018 Whole Cluster Rosé won Double Gold at the American Fine Wine Rosé Competition.

 

 

The Company’s 2015 Bernau Block Pinot Noir, 2018 Whole Cluster Rosé, 2017 Whole Cluster Pinot Noir, 2017 Pinot Blanc, 2017 Pinot Gris, 2017 Griffin Creek Viognier, 2015 Griffin Creek Grenache, 2015 Yamhill-Carlton AVA Series Pinot Noir, 2014 Dijon Clone Chardonnay, 2018 Riesling and 2016 Maison Bleue Voltigeur Viognier were featured in articles by Medium, Great Northwest Wine, Capital Gazette, South Florida Reporter, Marshall Independent, Passing the Vine, The Barrel Cellar, Nittany Epicurean, Chuck Hill Wine Reviews and the New Hampshire Wine-man blog.

The Company’s Winery Director, Christine Clair, was selected by Wine Enthusiast as one of their 2019 40 Under 40 Tastemakers and was featured in a full-page article.

The Company’s Winery Director, Christine Clair, was quoted in a USA Today article about the ways in which climate change is affecting the wine industry. An image of the Company’s Estate Vineyard graced the front cover of USA Today Weekend. The Company was also included in a USA Today Travel article about harvests on the west coast with a picture of the Estate.

The Company’s Founder/CEO, Jim Bernau, was named a 2019 Top Wine Industry Leader and was featured on the cover of Wine Business Monthly with an article describing his contributions to the growing Oregon wine industry, describing him as a “champion of Oregon wine.”

The Company’s Founder/CEO, Jim Bernau, was quoted in an Oregonian article about the booming Oregon Wine Industry, which was also shared on Yahoo News.

Oregon Solidarity, the Company’s joint winemaking project with King Estate Winery, Silvan Ridge Winery and The Eyrie Vineyards whose proceeds benefit the Rogue Valley winegrowers whose contracts were abruptly canceled by a large California wine producer, was featured in numerous articles, including Portland Monthly, Oregon Wine Press, The Growler, Newport News Times, Eugene Register-Guard, Growing Produce and CU4 Wine Blog.

 

Wine Enthusiast selected Oregon Solidarity as the winner of the Wine Star Award for Innovator of the Year and featured the Company’s Founder/CEO, Jim Bernau, in an article announcing the finalists and a follow-up article announcing the winners. The Eugene Register-Guard, The Columbian, Statesman Journal, Yahoo Finance News and Wine Business Monthly shared that the Oregon Solidarity collaboration won the Wine Enthusiast Wine Star Award

 

The Company was named the 13th fastest-growing company (2016-2018) in Oregon & SW Washington by the Portland Business Journal. The Company was also featured in the Portland Business Journal Corporate Philanthropy Awards, honoring companies that excel in community service and corporate giving.

 

Eastern Oregonian, Union-Bulletin and My Columbia Basin covered the Company’s partnership with the city of Milton-Freewater to build a shared winemaking and tasting room facility at the Maison Bleue Estate Vineyard in The Rocks District.

 

The Company’s Walla Walla wine brands, Maison Bleue and Pambrun, were included in an Associated Press article about Walla Walla wines. The article was shared on more than 120 major news outlets including The Washington Post, The New York Times, ABC News, Yahoo News, Chicago Tribune, Union-Bulletin, Federal News Radio, Daily Herald, The Sentinel, SFGate, Kansas City Star, Napa Valley Register and Edge Media Network.

The Company’s wines were highlighted in an MSN Lifestyle article about Vegan spirits, beer and wine.

The Company’s Estate Tasting Room, food pairing offerings and yoga events were featured with images in Travel + Leisure Magazine. The Company’s Estate Tasting Room was featured in other travel articles, including Sip Northwest Magazine, Travel Oregon and Travel Salem.

The Statesman Journal, Wine Business Monthly, Oregon Wine Press and The Oregonian included the Company in coverage about the first Women in Wine conference held at the Company’s Estate in Turner, Oregon.

The Company’s Winemaker, Joe Ibrahim, was featured in an in-depth article in The Barrel Cellar.

Statesman Journal did a featured article on Salem Dining Month and included the Company as the presenting sponsor.

 

 

The Company was included in a Yahoo News article about a new Oregon wine quiz with Alexa developed by Travel Oregon.

The Company’s Founder/CEO, Jim Bernau, was quoted in several articles regarding wine legislation and the OLCC Listening Sessions, including the Capital Press, Market Screener, The Seattle Times, Statesman Journal, Eugene Register-Guard, Miami Herald, Bend Bulletin, Washington Times and Sacramento Bee.

 

The Company’s 29th Annual Grape Stomp Championship & Harvest Celebration was the only Oregon event featured in a Budget Travel article about harvest festivals in the United States. The Company’s event was also featured on KPTV Fox Channel 12 (Portland network affiliate), Thrillist, Statesman Journal, Oregon Travel Daily, Winged M and Travel Salem.