WILLAMETTE VALLEY VINEYARDS INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended September 30, 2022

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

Commission File Number 001-37610

WILLAMETTE VALLEY VINEYARDS, INC.

(Exact name of registrant as specified in charter)

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:
x Yes o 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):
x Yes o 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,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

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. o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o YES x No

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

Number of shares of common stock outstanding as of November 14, 2022: 4,964,529

WILLAMETTE VALLEY VINEYARDS, INC.

INDEX TO FORM 10-Q

PART I: FINANCIAL INFORMATION

Item 1 – Financial Statements

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of this condensed financial statement

The accompanying notes are an integral part of this condensed financial statement

The accompanying notes are an integral part of this condensed financial statement

The accompanying notes are an integral part of this condensed financial statement

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

1) BASIS OF PRESENTATION

The accompanying unaudited interim financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements. The financial information as of December 31, 2021 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, 2021. 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, 2021, as presented in the Company’s Annual Report on Form 10-K.

Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2022, or any portion thereof.

The COVID-19 outbreak in Oregon and other parts of the United States, as well as the response to COVID-19 by federal, state and local governments have had a material adverse impact on economic and market conditions in the United States. Although most restrictive measures have been lifted, the COVID-19 pandemic and the government responses to the outbreak presents continued uncertainty and risk with respect to the Company and its performance and financial results.

We have not yet experienced significant disruptions to our supply chain network; however, any future restrictions imposed by our local or state governments may have a negative impact on our future direct to consumer sales.

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.

Basic earnings (loss) 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 (loss) per share after preferred stock dividends calculation for the periods shown:

Schedule of Earnings Per Share 

Subsequent to the filing of the 2021 Report there were no accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that would have a material effect on the Company’s unaudited interim condensed financial statements.

Reclassifications – Certain immaterial amounts from prior periods have been reclassified to conform to current years’ presentation.

2) INVENTORIES

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

Schedule of Inventories 

3) PROPERTY AND EQUIPMENT, NET

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

Schedule of Property and Equipment, Net 

Depreciation expense for the nine months ended September 30, 2022 and 2021 was $1,384,200 and $1,230,459, respectively. Depreciation expense for the three months ended September 30, 2022 and 2021 was $567,394 and $446,033, respectively.

4) DEBT

Line of Credit Facility – In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000 against eligible accounts receivable and inventories, as defined in the agreement at July 29, 2021. The revolving line bears interest at prime less 0.5%, with a floor of 3.25%, is payable monthly, and is subject to renewal. In July 2021, the Company renewed the credit agreement until July 31, 2023. At September 30, 2022 and December 31, 2021, there was no outstanding balance on this revolving line of credit.

The line of credit agreement includes various covenants, which among other things; require the Company to maintain a minimum current ratio, debt to tangible net worth, and debt service coverage, as defined. As of September 30, 2022, the Company was in compliance with these financial covenants.

Notes Payable – In February 2017, the Company purchased property, including vineyard land, bare land, and structures in the Dundee Hills American Viticultural Area (AVA) under terms that included a 15 year note payable with quarterly payments of $42,534, bearing interest at 6%. The note may be called by the owner, up to the outstanding balance, with 180 days written notice. As of September 30, 2022, the Company had a balance of $1,225,194 due on this note. As of December 31, 2021, the Company had a balance of $1,295,541 due on this note.

Long-Term Debt – The Company has two long-term debt agreements with Farm Credit Services (FCS) with an aggregate outstanding balance of $5,183,190 and $5,535,097 as of September 30, 2022 and December 31, 2021, respectively. The outstanding 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.

Future minimum principal payments of long-term debt mature as follows for the years ending December 31:

Schedule of Long term debt maturity 

As of September 30, 2022, the Company had unamortized debt issuance costs of $122,548. As of December 31, 2021, the Company had unamortized debt issuance costs of $132,484.

The Company believes that cash flow from operations and funds available under the Company’s existing credit facilities and through preferred stock sales will be sufficient to meet the Company’s short-term needs. Due to the uncertainty surrounding the future impact of the COVID-19 pandemic on the Company we will continue to evaluate funding mechanisms to support our long-term funding requirements.

5) INTEREST AND TAXES PAID

Income taxes – The Company paid zero and $245,000 in income taxes for the three months ended September 30, 2022 and 2021, respectively. The Company paid $502,000 and $285,000 in income taxes for the nine months ended September 30, 2022 and 2021, respectively.

Interest – The Company paid $88,102 and $93,234 for the three months ended September 30, 2022 and 2021, respectively, in interest on long-term debt. The Company paid $263,326 and $284,017 for the nine months ended September 30, 2021 and 2020, respectively, in interest on long-term debt.

6) 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 include retail sales in the tasting rooms, wine club sales, internet 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 (loss) 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 profit, directly attributable selling expenses, and contribution margin of the segments for the three and nine month periods ending September 30, 2022 and 2021. Sales figures are net of related excise taxes.

Schedule of Revenue by Reporting Segments

Direct sales include zero bulk wine sales for the three months ended September 30, 2022 and September 30, 2021. Direct sales include $10,500 for bulk wine sales for the nine months ended September 30, 2022 and zero bulk wine sales for the nine months ended September 30, 2021.

7) SALE OF PREFERRED STOCK

On January 24, 2020, the Company filed a shelf Registration Statement on Form S-3 (the “January 2020 Form S-3”) with the United States Securities and Exchange Commission (the “SEC”) pertaining to the potential future issuance of one or more classes or series of debt, equity or derivative securities. The maximum aggregate offering amount of securities sold pursuant to the January 2020 Form S-3 is not to exceed $20,000,000. On September 10, 2020, the Company filed with the SEC a Prospectus Supplement to the January 2020 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 1,917,525 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $9,300,000. This Prospectus Supplement established that our shares of preferred stock were to be sold in four offering periods with four separate offering prices beginning with an offering price of $4.85 per share and concluding with an offering of $5.15 per share. As of September 30, 2022, the Company had received aggregate proceeds of $8,533,086 from sales of our Series A Redeemable Preferred Stock, net of acquisition costs, under this offering. No further shares of Series A Redeemable Preferred Stock may be offered or sold under this Prospectus Supplement and all shares sold under this Prospectus Supplement were issued as of December 31, 2021.

On June 11, 2021, the Company filed with the SEC an additional Prospectus Supplement to the January 2020 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 2,118,811 additional shares of Series A Redeemable Preferred Stock having proceeds not to exceed $10,700,000. As of September 30, 2022, the Company had received aggregate proceeds of $9,008,334 from sales of our Series A Redeemable Preferred Stock, net of acquisition costs, under this offering. No further shares of Series A Redeemable Preferred Stock may be offered or sold under this Prospectus Supplement and all shares sold under this Prospectus Supplement were issued as of September 30, 2022.

On June 30, 2022, the Company filed a shelf Registration Statement on Form S-3 (the “June 2020 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. The maximum aggregate offering amount of securities sold pursuant to the June 2022 Form S-3 is not to exceed $20,000,000. On August 1, 2022, the Company filed with the SEC a Prospectus Supplement to the June 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 213,158 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,097,765. This Prospectus Supplement established that our shares of preferred stock were to be sold in three offering periods with three separate offering prices beginning with an offering price of $5.15 per share and concluding with an offering of $5.35 per share. On September 1, 2022, the Company filed with the SEC a Prospectus Supplement to the June 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 284,995 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,467,729. This Prospectus Supplement established that our shares of preferred stock were to be sold in three offering periods with three separate offering prices beginning with an offering price of $5.15 per share and concluding with an offering of $5.35 per share. On October 3, 2022, the Company filed with the SEC a Prospectus Supplement to the June 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 233,564 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,226,211. This Prospectus Supplement established that our shares of preferred stock were to be sold in two offering periods with two separate offering prices beginning with an offering price of $5.25 per share and concluding with an offering of $5.35 per share. Net proceeds of $2,053,468 have been received under these offerings as of September, 30 2022 for the issuance of Preferred Stock.

Shareholders have the option to receive dividends as cash or as a gift card for purchasing Company products. The amount of unused dividend gift cards at September 30, 2022 and December 31, 2021 was $474,290 and $682,881, respectively, which are recorded as a component of unearned revenue on the balance sheet.

Dividends accrued but not paid will be added to the liquidation preference of the stock until the dividend is declared and paid. The Company currently has the option, but not the obligation, to redeem all of the outstanding preferred stock in an amount equal to the original issue price plus accrued but unpaid dividends and a redemption premium equal to 3% of the original issue price.

8) COMMITMENTS AND CONTINGENCIES

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 (ROU), 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 operating 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 Company extended the lease in January 2019 until January 2025.

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 first five year extension has been exercised. The lease contains a formula-based escalation provision with a maximum increase of 4% every three years.

In February 2007, the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyards. In June 2021, the Company entered into a new 11 year lease for this property. The lease contains an escalation provision tied to the CPI not to exceed 2% per annum.

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. Terms of this agreement contain rent increases, that rises as the vineyard is developed, and contains an escalation provision of CPI plus 0.5% per year capped at 4%.  

In March 2017, the Company entered into a 25-year lease for approximately 18 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.

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. In May 2022 the Company amended the lease to extend the lease to August 2025 with one three year renewal option and defined payments over the term of the lease.

In January 2019, 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.

In February 2020, the Company entered into a lease for 5 years, with three five-year renewal options for a retail wine facility in Folsom, California, referred to as Willamette Wineworks. The lease contains an escalation provision tied to the CPI not to exceed 3% per annum with increases not allowed in any year being carried forward to following years.

In September 2021, the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Vancouver, Washington. The lease defines the payments over the term of the lease and option periods.

In February 2022, the Company entered into a lease for 10 years, with three five-year renewal options for a retail wine facility in Lake Oswego, Oregon. The lease defines the payments over the term of the lease and option periods.

In May 2022, the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Happy Valley, Oregon. The lease defines the payments over the term of the lease and option periods.

The following tables provide lease cost and other lease information:

Schedule of Lease Cost and Other Lease Information

Right-of-use assets obtained in exchange for new operating lease obligations were $3,360,917 and zero for the nine-months ended September 30, 2022 and 2021, respectively.

The Company has one lease that has not yet commenced as of September 30, 2022, and as such, has not been recognized in the Company’s balance sheet. The operating lease is expected to be in 2023 with lease a term of 10 years.

As of September 30, 2022, maturities of lease liabilities were as follows:

Schedule of Maturities of Lease Liabilities

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 long-term grape purchase agreements with a number of Willamette Valley wine grape growers. With these agreements 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.

9) SUBSEQUENT EVENTS

Loan Agreement – In October 2022, the Company entered into a $5,000,000 loan agreement with FCS. As of the filing date there have been no withdrawals under this agreement.

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”, “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 or smoke from forest fires, changes in consumer spending, the reduction in consumer demand for premium wines, and the impact of the COVID-19 pandemic and the policies of United States federal, state and local governments in response to such pandemic. 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 “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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 unaudited condensed financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed 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, 2021. Such policies were unchanged during the nine months ended September 30, 2022.

Overview

The Company, one of the largest wine producers in Oregon by volume, believes its success is dependent upon its ability to: (1) grow and purchase high quality vinifera wine grapes; (2) vinify the grapes into premium, super premium and ultra-premium wine; (3) achieve significant brand recognition for its wines, first in Oregon, and then nationally and internationally; (4) effectively distribute and sell its products nationally; and (5) continue to build on its base of direct to consumer sales.

The Company’s goal is to continue to build on a reputation for producing some of Oregon’s finest, most sought-after wines. The Company has focused on positioning itself for strategic growth through property purchases, property development and issuance of the Company’s Series A Redeemable Preferred Stock (the “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.

The Company’s wines are made from grapes grown in vineyards owned, leased or contracted by the Company, and from grapes purchased from other vineyards. The grapes are harvested, fermented and made into wine primarily 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, Metis, Natoma, Pere Ami, Elton, Domaine Willamette 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, telephone, internet and wine club. Direct to consumer sales are at a higher unit price 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 existing tasting rooms and the opening of new locations, and growth in wine club membership. Additionally, the Company’s Preferred Stock sales since August 2015 have resulted in approximately 10,000 new preferred stockholders many of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent approximately 15,000 current and potential customers of the Company.

Periodically, the Company will sell grapes or bulk wine, due to them not meeting Company standards or being in excess of production targets, however this is not a significant part of the Company’s activities. The Company had $10,500 in bulk wine sales for the nine months ended September 30, 2022 and zero bulk wine sales for the same period of 2021.

The Company sold 127,007 and 145,143 cases of produced wine during the nine months ended September 30, 2022 and 2021, respectively, a decrease of 18,136 cases, or 12.5% in the current year period over the prior year period. The decrease in wine case sales was primarily the result of decreased case sales through distributors due to a lack of available product.

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, 2022, wine inventory included 154,525 cases of bottled wine and 123,543 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 141,619 cases during the nine months ended September 30, 2022.

Willamette Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers and online bloggers including the accolades below. 

Wine Enthusiast rated the Company’s 2020 Riesling with 90 points & Best Buy, and in the Top 100 Best Buy Wines for 2022.

Jeremy Young from International Wine Report rated the Company’s 2019 Bernau Block Pinot Noir 90 points, 2019 Bernau Block Chardonnay 92 points, 2019 Elton Pinot Noir 92 points. The Company’s Elton wines the 2019 Florine Pinot Noir 90 points, 2019 Self-Rooted Pinot Noir 91 points and 2019 Chardonnay 91 points. The Company’s Pambrun wines the 2019 Cabernet Sauvignon 92 points, 2019 Merlot 92 points and 2019 Chrysologue 91 points. The Company’s Maison Bleue wines the 2019 Gravière Syrah 92 points, 2019 Voyageur Syrah 93 points, 2019 Frontière Syrah 92 points and 2021 Lisette Rosé 91 points.

Impact of COVID-19 on Operations 

The COVID-19 outbreak in Oregon and other parts of the United States, as well as the response to COVID-19 by federal, state and local governments have had a material adverse impact on economic and market conditions in the United States. Although most restrictive measures have been lifted, the COVID-19 pandemic and the government responses to the outbreak presents continued uncertainty and risk with respect to the Company and its performance and financial results.

We have not yet experienced significant disruptions to our supply chain network; however, any future restrictions imposed by our local or state governments may have a negative impact on our future direct to consumer sales.

RESULTS OF OPERATIONS

Revenue

Sales revenue for the three months ended September 30, 2022 and 2021 were $7,602,878 and $7,641,228, respectively, a decrease of $38,350, or 0.5%, in the current year period over the prior year period. This decrease was caused by a decrease in sales through distributors of $133,386 being partially offset by an increase in direct sales of $95,036 in the current year three-month period over the prior year period. The decrease in revenue from sales through distributors was primarily attributed to later availability of new vintage wines compared to the prior year. The increase in direct sales to consumers was primarily the result of retail sales increases from the opening of new tasting rooms in 2022. Three new locations in Dundee, Oregon, Lake Oswego, Oregon and Vancouver, Washington have opened in 2022. Sales revenue for the nine months ended September 30, 2022 and 2021 were $22,546,057 and $22,356,517, respectively, an increase of $189,540, or 0.8%, in the current year period over the prior year period. This increase was caused by an increase in revenues from direct sales of $1,426,731 being partially offset by a decrease in revenues from sales through distributors of $1,237,191 in the current year period over the prior year period. The increase in revenues from direct sales to consumers was primarily the result of increased tasting room sales from the opening of three new locations in 2022. The decrease in sales through distributors was primarily the result of a decrease in off-premise sales.

Cost of Sales

Cost of Sales for the three months ended September 30, 2022 and 2021 were $3,708,695 and $3,179,590, respectively, an increase of $529,105, or 16.6%, in the current period over the prior year period. This change was primarily the result of an increase in product costs in 2022 mostly due to higher fruit and packaging costs. Cost of Sales for the nine months ended September 30, 2022 and 2021 were $10,104,588 and $9,261,589, respectively, an increase of $842,999 or 9.1%, in the current period over the prior year period. This change was primarily the result of an increase in fruit and packaging costs in 2022 and the mix of sales channels and vintages sold between the two periods.

Gross Profit

Gross profit as a percentage of net sales for the three months ended September 30, 2022 and 2021 was 51.2% and 58.4%, respectively, a decrease of 7.2 percentage points in the current year period over the prior year period mostly as a result of higher fruit and packaging costs in the third quarter of 2022 compared to the same quarter of 2021. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 and 2021 was 55.2% and 58.6%, respectively, a decrease of 3.4 percentage points in the current year period over the prior year period. This decrease was primarily the result of higher fruit, packaging and labor costs in the first nine months of 2022 compared to the same period in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expense for the three months ended September 30, 2022 and 2021 was $5,120,218 and $3,768,765 respectively, an increase of $1,351,453, or 35.9%, in the current quarter over the same quarter in the prior year. This increase was primarily the result of an increase in selling expenses of $1,438,872 or 61.6% in the third quarter of 2022 compared to the same quarter of 2022 being partially offset by a decrease in general and administrative expenses of $87,419, or 6.1% in the current quarter compared to the same quarter last year. Selling, general and administrative expense for the nine months ended September 30, 2022 and 2021 was $13,359,293 and $10,688,452, respectively, an increase of $2,670,841, or 25.0%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling expenses of $2,584,423, or 38.6% combined with an increase in general and administrative expenses of $86,418, or 2.2% in the current year period compared to the same period in 2021. Selling expenses increased in both the third quarter and nine months of 2022 compared to the same periods in 2021 primarily as a result of more sales coming from tasting rooms which have higher selling costs and from costs related to the development of four new tasting room and restaurant locations. The contribution loss related to the opening of the four new locations were $654,518 in the current quarter and $1,089,380 in the first nine months of 2022. The contribution loss included lease, labor and selling costs related to the new locations in 2022.

Interest Expense

Interest expense for the three months ended September 30, 2022 and 2021 was $87,220 and $96,473, respectively, a decrease of $9,253 or 9.6%, in the third quarter of 2022 over the same quarter in the prior year. Interest expense for the nine months ended September 30, 2022 and 2021 was $269,037 and $293,548, respectively, a decrease of $24,511 or 8.3%, in the current year period over the prior year period. The decrease in interest expense for the third quarter and first nine months of 2022 was primarily the result of decreased debt in the current periods compared to the third quarter and first nine months of 2021.

Income Taxes

The income tax (expense) benefit for the three months ended September 30, 2022 and 2021 was $358,414 and $(172,256), respectively, a decrease of $530,670 or 308.1%, in the third quarter of 2022 over the same quarter in the prior year mostly as a result of the lower pre-tax income in the third quarter of 2022, compared to the same quarter in 2021. The Company’s estimated federal and state combined income tax rate was 27.4% and 27.4% for the three months ended September 30, 2022 and 2021, respectively. The income tax (expense) benefit for the nine months ended September 30, 2022 was $298,517 and a $(624,839) for September 30, 2021, respectively, a decrease of $923,356 or 147.8%, in the current year period over the prior year period mostly a result of lower pre-tax income in the first nine months of 2022, compared to the same period in 2021. The Company’s estimated federal and state combined income tax rate was 27.4% for the nine months ended September 30, 2022 and 2021. 

Net Income (Loss)

Net income (loss) for the three months ended September 30, 2022 and 2021 was $(949,821) and $456,191, respectively, a decrease of $1,406,012, or 308.2%, in the third quarter of 2022 over the same quarter in the prior year. Net income (loss) for the nine months ended September 30, 2022 and 2021 was $(791,362) and $1,656,427, respectively, a decrease of $2,447,789, or 147.8%, in the current year period over the prior year period. The decrease in net income for the third quarter and for the first nine months of 2022, compared to the comparable periods in 2021, was primarily the result of higher product costs and additional costs related to the opening of three new locations in 2022.

Net Income (Loss) Applicable to Common Shareholders

Net income (loss) applicable to common shareholders for the three months ended September 30, 2022 and 2021 was $(1,416,433,) and $95,120, respectively, a decrease of $1,511,553, in the third quarter of 2022 over the same quarter in the prior year. Net income (loss) applicable to common shareholders for the nine months ended September 30, 2022 and 2021 was $(2,191,199) and $573,214, respectively, a decrease of $2,764,413, in the current year period over the prior year period. The decrease in net income applicable to common shareholders in the third quarter and the first nine months of 2022, compared to the same periods of 2021, was the result of lower net income and higher dividend costs in the current period.

Liquidity and Capital Resources

At September 30, 2022, the Company had a working capital balance of $16.5 million and a current working capital ratio of 2.84:1.

At September 30, 2022, the Company had a cash balance of $363,363, while at December 31, 2021, the Company had a cash balance of $13,747,285. This decrease in cash was primarily the result of investments in property and equipment of $13,117,674, the payment of grapes payable and an increase in inventories.

Total cash used in operating activities in the nine months ended September 30, 2022 was $2,139,961. Cash used in operating activities for the nine months ended September 30, 2022 was primarily associated with increased inventory, and payment of grapes payable, being partially offset by non-cash lease expense, and depreciation and amortization.

Total cash used in investing activities in the nine months ended September 30, 2022 was $13,645,084. Cash used in investing activities for the nine months ended September 30, 2022 consisted of cash used on property and equipment and vineyard development costs.

Total cash generated from financing activities in the nine months ended September 30, 2022 was $2,401,123. Cash generated from financing activities for the nine months ended September 30, 2022 consisted of proceeds from the deposits for and issuance of preferred stock, being partially offset by the repayment of debt.

In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000 against eligible accounts receivable and inventories, as defined in the agreement at July 29, 2021. The revolving line bears interest at prime less 0.5%, with a floor of 3.25%, is payable monthly, and is subject to renewal. In July 2021, the Company renewed the credit agreement until July 31, 2023. At September 30, 2022 and December 31, 2021, there was no outstanding balance on this revolving line of credit.

As of September 30, 2022, the Company had a 15-year installment note payable of $1,225,194, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.

As of September 30, 2022, the Company had a total long-term debt balance of $5,183,190, including the portion due in the next year, owed to Farm Credit Services, exclusive of debt issuance costs of $122,548. As of December 31, 2021, the Company had a total long-term debt balance of $5,535,097, exclusive of debt issuance costs of $132,484.

The Company believes that cash flow from operations and funds available under the Company’s existing credit facilities and through preferred stock sales will be sufficient to meet the Company’s short-term needs. We will continue to evaluate funding mechanisms to support our long-term funding requirements.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Company is not required to provide the information required by this item.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – The Company carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15 and 15d-5 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that review, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed by the Company in the reports the Company files or submit under the Exchange Act (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting – There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1 – Legal Proceedings

From time to time, the Company is a party to various judicial and administrative proceedings arising in the ordinary course of business. The Company’s management and legal counsel have reviewed the probable outcome of any proceedings that were pending during the period covered by this report, the costs and expenses reasonably expected to be incurred, the availability and limits of the Company’s insurance coverage, and the Company’s established liabilities. While the outcome of legal proceedings cannot be predicted with certainty, based on the Company’s review, the Company believes that any unrecorded liability that may result as a result of any legal proceedings is not likely to have a material effect on the Company’s liquidity, financial condition or results from operations.

Item 1A – Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which could materially affect our business, results of operations or financial condition.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, impact our results of operations or financial condition.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits

SIGNATURES

Pursuant to the requirements of the Security Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WILLAMETTE VALLEY VINEYARDS, INC.