Blueprint
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 June 30, 2017
☐ 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,” and “smaller
reporting 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
Number
of shares of common stock outstanding as of August 10, 2017:
4,980,669
Number
of shares of preferred stock outstanding as of August 10, 2017:
2,396,954
WILLAMETTE
VALLEY VINEYARDS, INC.
INDEX
TO FORM 10-Q
|
Part I - Financial Information
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3
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Item 1 - Financial Statements (unaudited)
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3
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Balance Sheets
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3
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Statements of Operations
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4
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Statements of Cash Flows
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5
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|
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Notes to Unaudited Interim Financial Statements
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6
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Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
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11
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Item 3 – Quantitative and Qualitative Disclosures about
Market Risk
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17
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Item 4 - Controls and Procedures
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17
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Part II - Other Information
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17
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Item 1 - Legal Proceedings
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17
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Item 1A – Risk Factors
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17
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Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds
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18
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Item 3 - Defaults Upon Senior Securities
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18
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Item 4 – Mine Safety Disclosures
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18
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Item 5 – Other Information
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18
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Item 6 – Exhibits
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18
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Signatures
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19
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PART I: FINANCIAL INFORMATION
Item 1 – Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
BALANCE SHEETS
(Unaudited)
|
|
|
|
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|
|
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|
|
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CURRENT ASSETS
|
|
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Cash
and cash equivalents
|
$10,004,691
|
$5,706,351
|
|
Accounts
receivable, net
|
1,431,894
|
1,871,450
|
|
Inventories
(Note 2)
|
11,681,214
|
11,970,656
|
|
Prepaid
expenses and other current assets
|
82,558
|
399,740
|
|
Total
current assets
|
23,200,357
|
19,948,197
|
|
|
|
|
|
Investment
in Kore Wine Company
|
49,153
|
59,186
|
|
Vineyard
development costs, net
|
5,515,763
|
4,666,794
|
|
Property
and equipment, net (Note 3)
|
22,587,446
|
20,196,945
|
|
|
|
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TOTAL ASSETS
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$51,352,719
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$44,871,122
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
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CURRENT LIABILITIES
|
|
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Accounts
payable
|
$456,831
|
$505,085
|
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Accrued
expenses
|
680,295
|
995,405
|
|
Investor
deposits for preferred stock (Note 9)
|
2,912,176
|
-
|
|
Current
portion of notes payable
|
1,795,258
|
245,417
|
|
Current
portion of long-term debt
|
376,128
|
380,471
|
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Income
taxes payable
|
459,506
|
389,798
|
|
Current
portion of deferred revenue-distribution agreement
|
142,857
|
142,857
|
|
Unearned
revenue
|
194,956
|
213,612
|
|
Grapes
payable
|
-
|
693,666
|
|
Total
current liabilities
|
7,018,007
|
3,566,311
|
|
|
|
|
|
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|
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Notes
payable, net of current portion
|
137,667
|
-
|
|
Long-term
debt, net of current portion and debt issuance costs
|
6,857,781
|
4,443,685
|
|
Deferred
rent liability
|
97,796
|
113,567
|
|
Deferred
revenue-distribution agreement, net of current portion
|
23,793
|
95,223
|
|
Deferred
gain
|
73,125
|
89,172
|
|
Deferred
income taxes
|
1,931,000
|
1,931,000
|
|
Total
liabilities
|
16,139,169
|
10,238,958
|
|
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COMMITMENTS AND CONTINGENCIES
|
|
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SHAREHOLDERS’ EQUITY
|
|
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Redeemable
preferred stock, no par value, 10,000,000 shares
authorized,
|
|
|
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2,397,954
shares, liquidation preference $10,215,175, issued and
|
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outstanding
at June 30, 2017 and 2,397,954 shares, liquidation
|
|
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preference
$9,947,359 issued and outstanding at December 31,
2016,
|
|
|
|
respectively.
|
9,324,973
|
9,061,307
|
|
Common
stock, no par value, 10,000,000 shares authorized, 4,980,869
and
|
|
|
|
5,016,685
shares issued and outstanding at June 30, 2017 and
|
|
|
|
December
31, 2016, respectively.
|
8,644,330
|
8,971,575
|
|
Retained
earnings
|
17,244,247
|
16,599,282
|
|
Total
shareholders’ equity
|
35,213,550
|
34,632,164
|
|
|
|
|
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$51,352,719
|
$44,871,122
|
The accompanying notes are an integral part of this financial
statement
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
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|
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|
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|
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SALES, NET
|
$5,313,784
|
$4,639,028
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$9,764,329
|
$8,822,797
|
|
COST OF SALES
|
2,124,850
|
1,714,727
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3,832,530
|
3,299,448
|
|
|
|
|
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GROSS PROFIT
|
3,188,934
|
2,924,301
|
5,931,799
|
5,523,349
|
|
|
|
|
|
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|
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
|
2,129,794
|
2,096,097
|
4,369,532
|
3,953,069
|
|
|
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INCOME FROM OPERATIONS
|
1,059,140
|
828,204
|
1,562,267
|
1,570,280
|
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|
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OTHER INCOME (EXPENSE)
|
|
|
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Interest
income
|
3,747
|
2,761
|
11,061
|
4,801
|
|
Interest
expense
|
(122,866)
|
(72,154)
|
(219,566)
|
(145,165)
|
|
Other
income, net
|
51,433
|
35,758
|
134,576
|
126,500
|
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INCOME BEFORE INCOME TAXES
|
991,454
|
794,569
|
1,488,338
|
1,556,416
|
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INCOME TAX PROVISION
|
(397,953)
|
(317,397)
|
(579,708)
|
(591,354)
|
|
|
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|
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NET INCOME
|
593,501
|
477,172
|
908,630
|
965,062
|
|
|
|
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Accrued preferred stock dividends
|
(131,833)
|
(114,691)
|
(263,665)
|
(193,586)
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INCOME APPLICABLE TO COMMON SHAREHOLDERS
|
$461,668
|
$362,481
|
$644,965
|
$771,476
|
|
|
|
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|
|
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Basic income per common share after preferred
dividends
|
$0.09
|
$0.07
|
$0.13
|
$0.15
|
|
|
|
|
|
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|
Diluted income per common share after preferred
dividends
|
$0.09
|
$0.07
|
$0.13
|
$0.15
|
|
|
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Weighted average number of
|
|
|
|
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|
basic common shares outstanding
|
4,994,407
|
4,999,514
|
5,000,046
|
4,993,324
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|
Weighted average number of
|
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|
|
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diluted common shares outstanding
|
4,994,407
|
5,003,583
|
5,000,046
|
4,997,304
|
The accompanying notes are an integral part of this financial
statement
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
|
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CASH FLOWS FROM OPERATING ACTIVITIES
|
|
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Net
income
|
$908,630
|
$965,062
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
from
operating activities:
|
|
|
|
Depreciation
and amortization
|
739,816
|
654,880
|
|
Gain
on disposition of property & equipment
|
(1,243)
|
-
|
|
Stock
based compensation expense
|
-
|
744
|
|
Loss
from investment in Kore Wine Company
|
10,033
|
814
|
|
Deferred
rent liability
|
(15,771)
|
(13,594)
|
|
Deferred
gain
|
(16,048)
|
(16,047)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
439,556
|
549,928
|
|
Inventories
|
289,442
|
226,448
|
|
Prepaid
expenses and other current assets
|
317,182
|
(285,516)
|
|
Income
taxes receivable
|
-
|
142,355
|
|
Unearned
revenue
|
(18,656)
|
1,775
|
|
Deferred
revenue-distribution agreement
|
(71,430)
|
(71,430)
|
|
Grapes
payable
|
(693,666)
|
(816,879)
|
|
Accounts
payable
|
(114,146)
|
(14,740)
|
|
Accrued
expenses
|
(315,110)
|
(120,689)
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Income
taxes payable
|
69,708
|
-
|
|
Net
cash from operating activities
|
1,528,297
|
1,203,111
|
|
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CASH FLOWS FROM INVESTING ACTIVITIES
|
|
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Additions
to vineyard development costs
|
(569,178)
|
(496,903)
|
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Additions
to property and equipment
|
(1,437,639)
|
(1,618,967)
|
|
Proceeds
from sale of property and equipment
|
45,000
|
-
|
|
Net
cash from investing activities
|
(1,961,817)
|
(2,115,870)
|
|
|
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|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
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|
Proceeds
from long-term debt
|
2,672,659
|
-
|
|
Proceeds
from investor deposits held as restricted cash
|
-
|
209,504
|
|
Proceeds
from investor deposits held as liability
|
2,912,176
|
(209,504)
|
|
Payment
on installment note for property purchase
|
(262,825)
|
(245,417)
|
|
Payments
on long-term debt
|
(262,905)
|
(171,885)
|
|
Proceeds
from issuance of preferred stock
|
-
|
3,994,852
|
|
Proceeds
from exercise of stock options
|
21,630
|
194,052
|
|
Repurchase
of common stock
|
(348,875)
|
(341,974)
|
|
Net
cash from financing activities
|
4,731,860
|
3,429,628
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
4,298,340
|
2,516,869
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
5,706,351
|
4,010,664
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$10,004,691
|
$6,527,533
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Purchase
of property and vineyard development costs with notes
payable
|
$1,950,333
|
$-
|
|
Purchases
of property and equipment and vineyard development
|
|
|
|
costs
included in accounts payable
|
$165,788
|
$161,436
|
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 June 30,
2017 and for the three and six months ended June 30, 2017 and 2016
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, 2016 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, 2016. 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, 2016,
as presented in the Company’s Annual Report on Form
10-K.
Operating
results for the three and six months ended June 30, 2017 are not
necessarily indicative of the results that may be expected for the
entire year ending December 31, 2017, 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.
Basic
earnings per share after preferred stock dividends are computed
based on the weighted-average number of common shares outstanding
each period. Diluted earnings per share are computed using the
weighted average number of shares of common stock and dilutive
common shares outstanding during the period. Dilutive shares from
stock options and other instruments are excluded from the
computation when their effect is anti-dilutive. There were no
anti-dilutive shares outstanding as of June 30, 2017 and 2016. 0
and 4,069 potentially dilutive shares are included in the
computation of dilutive earnings per share for the three month
periods ended June 30, 2017 and 2016, respectively. 0 and 3,980
potentially dilutive shares are included in the computation of
dilutive earnings per share for the six month periods ended June
30, 2017 and 2016, respectively.
The
following table presents the earnings per share after preferred
stock dividends calculation for the periods shown:
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$593,501
|
$477,172
|
$908,630
|
$965,062
|
|
Accrued
preferred stock dividends
|
(131,833)
|
(114,691)
|
(263,665)
|
(193,586)
|
|
|
|
|
|
|
|
Net
income applicable to common shares
|
$461,668
|
$362,481
|
$644,965
|
$771,476
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
|
4,994,407
|
4,999,514
|
5,000,046
|
4,993,324
|
|
Dilutive
stock options
|
-
|
4,069
|
-
|
3,980
|
|
|
|
|
|
|
|
Diluted
weighted average common shares
|
4,994,407
|
5,003,583
|
5,000,046
|
4,997,304
|
|
|
|
|
|
|
|
Basic income per common share
|
|
|
|
|
|
after preferred
dividends
|
$0.09
|
$0.07
|
$0.13
|
$0.15
|
|
|
|
|
|
|
|
Diluted income per common share
|
|
|
|
|
|
after preferred
dividends
|
$0.09
|
$0.07
|
$0.13
|
$0.15
|
Recently issued accounting standards – In May 2014, the FASB
issued ASU No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (“ASU
2014-09”), a new standard to achieve a consistent application
of revenue recognition within the U.S., resulting in a single
revenue model to be applied by reporting companies under GAAP. The
original effective date for ASU 2014-09 would have required
adoption by the Company in the first quarter of fiscal 2017 with
early adoption prohibited. In August 2015, the FASB issued ASU No.
2015-14, Revenue
from Contracts with Customers (Topic 606) - Deferral of the
Effective Date (“ASU
2015-14”), which defers the effective date of ASU 2014-09 for
one year and permits early adoption in accordance with the original
effective date of ASU 2014-09.
The new revenue standard is required to be applied retrospectively
to each prior reporting period presented or retrospectively with
the cumulative effect of initially applying the standard recognized
at the date of initial application. The Company anticipates
adopting the standard in the first quarter of 2018 and is still
evaluating the method of application. The Company has evaluated the
effect of the standard and does not believe it will be material o
the Company’s financial reporting.
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 will require
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 is still evaluating the impact of ASU 2016-02 on its
financial position and results of operations.
2) INVENTORIES
The
Company’s inventories, by major classification, are
summarized as follows, as of the dates shown:
|
|
|
|
|
|
|
|
|
Winemaking
and packaging materials
|
$801,141
|
$817,836
|
|
Work-in-process
(costs relating to
|
|
|
|
unprocessed
and/or unbottled wine products)
|
4,780,515
|
6,634,014
|
|
Finished
goods (bottled wine and related products)
|
6,099,558
|
4,518,806
|
|
|
|
|
|
Current
inventories
|
$11,681,214
|
$11,970,656
|
3) PROPERTY AND EQUIPMENT
The
Company’s property and equipment consists of the following,
as of the dates shown:
|
|
|
|
|
|
|
|
|
Construction
in progress
|
$919,754
|
$449,409
|
|
Land,
improvements and other buildings
|
10,008,215
|
8,063,716
|
|
Winery
building and hospitality center
|
14,861,505
|
14,458,309
|
|
Equipment
|
10,366,935
|
10,122,593
|
|
|
|
|
|
|
36,156,409
|
33,094,027
|
|
|
|
|
|
Accumulated
depreciation
|
(13,568,963)
|
(12,897,082)
|
|
|
|
|
|
Property
and equipment, net
|
$22,587,446
|
$20,196,945
|
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. In an effort 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 June 30, 2017 and
2016, the Company has recognized revenue related to this agreement
in the amount of $35,715 and $35,715, respectively, recorded to
other income. For the six months ended June 30, 2017 and 2016, the
Company has recognized revenue related to this agreement in the
amount of $71,430 and $71,430, 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 April of 2017, the
Company renewed the credit agreement until July 31, 2018. The
interest rate was 3.5% at June 30, 2017 and 3.75% at December 31,
2016. At June 30, 2017 and December 31, 2016 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 minimum amounts of
tangible net worth, debt/worth ratio, and debt service coverage as
defined. As of June 30, 2017, the Company was in compliance with
these financial covenants.
Notes payable – In April of 2015 the Company purchased
approximately 42 acres of farmland in the Walla Walla AVA under
terms that included paying one third of the price upon closing and
one third in each of the two subsequent years. As of June 30, 2017
the Company had no balance due on this note. As of December 31,
2016 the Company had a balance due of $245,417.
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 June 30, 2017 the Company
had a balance of $275,333 due on this note. No interest accrues
under the terms of this note.
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 June 30,
2017 the Company had a balance of $1,657,591 due on this
note.
Long Term Debt – In March 2017 the Company secured a
loan with Farm Credit Services that involved the refinancing of
three of its four outstanding loans. The Company subsequently has
two long term debt agreements with Farm Credit Services with an
aggregate outstanding balance of $7,387,904 as of June 30, 2017. At
December 31, 2016, the Company had four long term debt arrangements
with Farm Credit Services with an aggregate outstanding balance of
$4,824,096. The two 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.
The
Company has an outstanding loan with Toyota Credit Corporation
maturing in February 2021, at zero interest, with an outstanding
balance of $41,118 and $45,899 as of June 30, 2017 and December 31,
2016, respectively. The purpose of this loan was to purchase a
vehicle.
As of
June 30, 2017 and December 31, 2016, the Company had unamortized
debt issuance costs of $195,113 and $45,839,
respectively.
6) STOCK BASED COMPENSATION
The
Company has a stock incentive plan, originally created in 1992, and
most recently amended in 2001. No additional grants may be made
under the plan. All stock options had an exercise price that was
equal to the estimated fair market value of the Company’s
stock on the date the options were granted. Administration of the
plan, including determination of the number, term, and type of
options to be granted, was with the Board of Directors or a duly
authorized committee of the Board of Directors. Options were
generally granted based on employee performance with vesting
periods ranging from date of grant to seven years. At the date of
the grant, the maximum term before expiration was ten
years.
The
following table presents information related to the value of
outstanding stock options during the period shown:
|
|
|
|
|
|
|
|
|
|
Weighted
Average Exercise
|
Weighted
Average Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
-
|
$-
|
7,000
|
$3.09
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
$-
|
(7,000)
|
3.09
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
-
|
$-
|
-
|
$-
|
At June
30, 2017, the Company had no outstanding stock options. Stock
options exercised during the three months ended June 30, 2017 and
2016 were 0 and 23,157, respectively. Stock options exercised
during the six months ended June 30, 2017 and 2016 were 7,000 and
60,000, respectively. The Company had no unrecognized stock
compensation expense as of June 30, 2017.
7) INTEREST AND TAXES PAID
Income taxes – The Company paid $510,000 and $74,000
in income taxes for the three months ended June 30, 2017 and 2016,
respectively. The Company paid $510,000 and $449,250 in income
taxes for the six months ended June 30, 2017 and 2016,
respectively.
Interest - The Company paid $121,352 and $72,964 for the
three months ended June 30, 2017 and 2016, respectively, in
interest on long-term debt. The Company paid $191,462 and $146,467
for the six months ended June 30, 2017 and 2016, respectively, in
interest on long-term debt.
8) 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 six month periods ending June 30,
2017 and 2016. Sales figures are net of related excise
taxes.
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$1,995,008
|
$1,565,355
|
$3,318,776
|
$3,073,673
|
$5,313,784
|
$4,639,028
|
|
Cost
of Sales
|
589,575
|
368,546
|
1,535,275
|
1,346,181
|
2,124,850
|
1,714,727
|
|
Gross
Margin
|
1,405,433
|
1,196,809
|
1,783,501
|
1,727,492
|
3,188,934
|
2,924,301
|
|
Selling
Expenses
|
862,458
|
835,714
|
452,301
|
451,558
|
1,314,759
|
1,287,272
|
|
Contribution
Margin
|
$542,975
|
$361,095
|
$1,331,200
|
$1,275,934
|
$1,874,175
|
$1,637,029
|
|
Percent
of Sales
|
37.5%
|
33.7%
|
62.5%
|
66.3%
|
100.0%
|
100.0%
|
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$3,484,127
|
$2,966,830
|
$6,280,202
|
$5,855,967
|
$9,764,329
|
$8,822,797
|
|
Cost
of Sales
|
954,186
|
695,712
|
2,878,344
|
2,603,736
|
3,832,530
|
3,299,448
|
|
Gross
Margin
|
2,529,941
|
2,271,118
|
3,401,858
|
3,252,231
|
5,931,799
|
5,523,349
|
|
Selling
Expenses
|
1,719,463
|
1,523,342
|
927,783
|
828,345
|
2,647,246
|
2,351,687
|
|
Contribution
Margin
|
$810,478
|
$747,776
|
$2,474,075
|
$2,423,886
|
$3,284,553
|
$3,171,662
|
|
Percent
of Sales
|
35.7%
|
33.6%
|
64.3%
|
66.4%
|
100.0%
|
100.0%
|
Direct
sales include $155,538 and $0 of bulk wine sales in the three
months ended June 30, 2017 and 2016, respectively. Direct sales
include $163,788 and $0 of bulk wine sales in the six months ended
June 30, 2017 and 2016, respectively.
9) 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.
Proceeds from the sale of preferred stock for the three months
ended June 30, 2017 were received by the Company and included as
unrestricted cash. For the three months ended June 30, 2017 the
Company processed $2,912,176 in stock sales, net of acquisition
costs, under this agreement and recorded it as a current liability,
“Investor deposits for preferred stock”, until the
stock was issued effective July 1, 2017.
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 three
long-term grape purchase agreements with one of its Willamette
Valley wine grape growers. These contracts, entered into in 2004,
2006 and 2007, were extended through harvest year 2019. With these
contracts, the Company is obligated to purchase, at pre-determined
prices, 100% of the crop produced within the strict quality
standards and crop loads, equating to maximum payments of
approximately $1,500,000 per year. The Company cannot calculate the
minimum payment as such a calculation is dependent in large part on
an unknown – the amount 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.
Asset Purchase Agreement – In May 2017 the Company
agreed to buy the assets of an existing Company for approximately
$142,000. The purchase is scheduled to close in January 2018 and
the Company will also assume two contracts.
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, 2016, 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, 2016. Such policies were unchanged during
the three months ended June 30, 2017.
Overview
The
Company continues to position itself for strategic growth through
property purchases, refinancing of long-term debt and issuance of
our 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 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 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 3,591 new preferred
stockholders many of which the Company believes are wine
enthusiasts. When considering joint ownership, these new
shareholders represent approximately 5,000 potential customers of
the Company. Membership in the Company’s wine club increased
by approximately 163 net members, or 2.4%, to a total of 6,877
members during the six months ending June 30, 2017. The Company
believes the increase in preferred shareholders, who receive
enhanced discounts, has reduced the number of people who would
otherwise become Wine Club members. However, management anticipates
that new preferred shareholders 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 $155,538 for the three months
ended June 30, 2017 and no bulk wine sales in the same period of
2016. The Company had bulk wine sales of $163,788 for the six
months ended June 30, 2017 and no bulk wine sales in the same
period of 2016.
The
Company sold approximately 65,081 and 64,547 cases of produced wine
during the six months ended June 30, 2017 and 2016, respectively,
an increase of 534 cases, or 0.8% 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
partially offset by decreased direct to consumer case
sales.
Cases
sold in 2017 does not include unfulfilled “futures”,
where a customer prepays for a wine not yet released. Proceeds from
these sales are not recognized as revenue until shipped and are
reflected as unearned revenue. Selling expenses for these sales are
recognized in the period in which the expense is
incurred.
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 June
30, 2017, wine inventory included approximately 92,352 cases of
bottled wine and 196,950 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 85,524 cases during the
six months ended June 30, 2017.
Net income for the three months
ended June 30, 2017 and 2016 was $593,501 and $477,172,
respectively, an increase of $116,329, or 24.4%, in the current
year period over the prior year period. Net income for the six
months ended June 30, 2017 and 2016 was $908,630 and $965,062,
respectively, a decrease of $56,432, or 5.8%, in the current year
period over the prior year period.
Income
applicable to common shareholders for the three months ended June
30, 2017 and 2016 was $461,668 and $362,481, respectively, an
increase of $99,187, or 27.4%, in the current year period over the
prior year period. Income applicable to common shareholders for the
six months ended June 30, 2017 and 2016 was $644,965 and $771,476,
respectively, a decrease of $126,511, or 16.4%, in the current year
period over the prior year period.
Overall
gross profit for the three months ended June 30, 2017 and 2016 was
$3,188,934 and $2,924,301, respectively, an increase of $264,633,
or 9.0%, in the current year period over the prior year period.
Gross profit as a percentage of net sales for the three months
ended June 30, 2017 and 2016 was 60.0% and 63.0%, respectively, a
decrease of 3.0 percentage points in the current year period over
the prior year period. In June 2017 the Company wrote down $112,599
of bulk wine as an expense to cost of sales. This write down
reduced our gross profit as a percentage of net sales for the three
months ended June 30, 2017 by approximately 2.1 percentage points.
Overall gross profit for the six months ended June 30, 2017 and
2016 was $5,931,799 and $5,523,349, respectively, an increase of
$408,450, or 7.4%, in the current year period over the prior year
period. Gross profit as a percentage of net sales for the six
months ended June 30, 2017 and 2016 was 60.7% and 62.6%,
respectively, a decrease of 1.9 percentage points in the current
year period over the prior year period. In the six months ended
June 30, 2017 the Company wrote down $188,517 of bulk wine as an
expense to cost of sales. This write down reduced our gross profit
as a percentage of net sales for the six months ended June 30, 2017
by approximately 2.0 percentage points.
The
Company generated $0.09 and $0.07 in basic earnings per share after
preferred dividends during the three months ended June 30, 2017 and
2016, respectively. The Company generated $0.13 and $0.15 in basic
earnings per share after preferred dividends during the six months
ended June 30, 2017 and 2016, respectively.
Willamette
Valley Vineyards continues to receive positive recognition through
national magazines, regional publications, local newspapers and
online bloggers.
M. Shaken Communications, the parent company of Wine Spectator,
selected the Company as the 2016 Hot Prospect Impact Brand. The
criteria for this prestigious award was the Company's strong
depletion rates and consistent growth in the past three years. The
Company will be featured in the September 1st and
15th Global Impact Newsletter and be the featured story in the
October issue of Market Watch.
The Company's Winery Director Christine Collier was selected by
Portland Business Journal as a Top 40 Under 40 award winner. The
publication featured a profile of her and hosted an awards banquet
in June.
Wine Enthusiast Magazine rated the Company's 2015 Vintage 42
Chardonnay wine a 92 point score.
The Company's 2015 Estate Pinot Noir earned a Double Gold Medal and
95 point score and 2016 Whole Cluster Rose of Pinot Noir earned a
Gold Medal and 91 point score at the San Francisco Chronicle Wine
Competition, the largest wine competition in North
America.
The Company's 2015 Riesling was featured in Southern Living
Magazine in the article titled, "Treaty of
Paris."
The Company's Memorial Day Weekend Celebration was featured in a
Food and Wine online article featuring "Memorial Day Weekend
Getaways and Day Trips Across the Country."
The Company's 2013 Estate Pinot Noir was included in a list of
"Great Wines from the West" by quench.me.
The Company's overnight accommodations, guest experiences and wines
were featured in an online article by Elizabeth Rose of Wander with
Wonder called, "A Luxurious Overnight in Oregon Wine
Country."
The Company partnered with Tillamook Diary Co-op on in-store
displays and promotions featuring Tillamook Cheese and the
Company's wine in Safeway and Albertson's
stores.
The Company participated in the Sunset Magazine Celebration
Weekend, Five Star Sensation, and San Diego Wine
Classic.
RESULTS OF OPERATIONS
Revenue
Sales
for the three months ended June 30, 2017 and 2016 were $5,313,784
and $4,639,028, respectively, an increase of $674,756, or 14.5%, in
the current year period over the prior year period. This increase
was mainly caused by an increase in direct
sales, including bulk wine, of $429,653 and an increase in sales
through distributors of $245,103 in the current year three month
period over the prior year period. The increase in direct
sales to consumers is primarily the result of increased tasting
room, wine club, hospitality and kitchen sales in 2017 when
compared to 2016. The
increase in sales through distributors was not attributable to an
isolated factor. Sales for the six months ended June 30,
2017 and 2016 were $9,764,329 and $8,822,797, respectively, an
increase of $941,532, or 10.7%, in the current year period over the
prior year period. This increase was mainly caused by an increase in direct
sales, including bulk wine, of $517,297 and an increase in sales
through distributors of $424,235 in the current year period over
the prior year period. The increase in direct sales to
consumers is primarily the result of increased tasting room, wine
club, hospitality and kitchen sales in 2017 when compared to
2016.
Cost of Sales
Cost of
Sales for the three months ended June 30, 2017 and 2016 were
$2,124,850 and $1,714,727, respectively, an increase of $410,123,
or 23.9%, in the current period over the prior year period. This
change was primarily the result of an increase in cost of product
sales in addition to a write off of $112,599 of bulk wine inventory
to cost of sales in June 2017. Cost of Sales for the six months
ended June 30, 2017 and 2016 were $3,832,530 and $3,299,448,
respectively, an increase of $533,082, or 16.2%, in the current
period over the prior year period. This change was primarily the
result of an increase in cost of product sales of $344,565 in
addition to a write down of bulk wine inventory of $188,517 in
2017. The write down of bulk wine inventory was the result of the
Company agreeing to sell wine, which did not meet the
Company’s quality standard, at a price below its carrying
cost as well as the disposal of some wine.
Gross Profit
Gross
profit for the three months ended June 30, 2017 and 2016 was
$3,188,934 and $2,924,301, respectively, an increase of $264,633,
or 9.0%, in the current year period over the prior year period.
Gross profit for the six months ended June 30, 2017 and 2016 was
$5,931,799 and $5,523,349, respectively, an increase of $408,450,
or 7.4%, in the current year period over the prior year period.
These increases were primarily the result of an overall increase in
wine sales partially offset by the write off of bulk wine inventory
discussed above.
Gross
profit as a percentage of net sales for the three months ended June
30, 2017 and 2016 was 60.0% and 63.0%, respectively, a decrease of
3.0 percentage points in the current year period over the prior
year period, of which 2.1 percentage points was attributable to the
write down of bulk wine in 2017 discussed above. Gross profit as a
percentage of net sales for the six months ended June 30, 2017 and
2016 was 60.7% and 62.6%, respectively, a decrease of 1.9
percentage points in the current year period over the prior year
period of which a 2.0 percentage point decrease was attributable to
the write down of bulk wine in 2017 discussed above.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended June
30, 2017 and 2016 was $2,129,794 and $2,096,097, respectively, an
increase of $33,697, or 1.6%, in the current year period over the
prior year period. This increase was primarily the result of a
decrease in selling expenses of $41,664, or 2.9% being more than
offset by an increase in general and administrative expenses of
$75,361, or 11.1% in the current quarter. Selling, general and
administrative expense for the six months ended June 30, 2017 and
2016 was $4,369,532 and $3,953,069, respectively, an increase of
$416,463, or 10.5%, in the current year period over the prior year
period. This increase was primarily the result of an increase in
selling expenses of $224,224, or 8.8% and an increase in general
and administrative expenses of $192,239, or 13.7% in the current
year. Selling expenses increased in the first half of 2017 compared
to the same period in 2016 primarily as a result of increases in
sales staffing and incentive costs, product demonstrations and
sales travel among other selling related activities in the first
quarter of 2017. General and administrative expenses increased in
both the second quarter and first half of 2017 compared to the same
periods in 2016 primarily as a result of increased resources
invested in facilities maintenance and long-term planning
activities in 2017.
Interest Expense
Interest
expense for the three months ended June 30, 2017 and 2016 was
$122,866 and $72,154, respectively, an increase of $50,712 or
70.3%, in the current year period over the prior year period.
Interest expense for the six months ended June 30, 2017 and 2016
was $219,566 and $145,165, respectively, an increase of $74,401 or
51.3%, in the current year period over the prior year period. The
increase in interest expense in 2017 was primarily the result of
additional interest associated with a new note payable used to
finance a property purchase and additional debt incurred as part of
a refinancing transaction in the first quarter of
2017.
Income Taxes
The
income tax expense for the three months ended June 30, 2017 and
2016 was $397,953 and $317,397, respectively, an increase of
$80,556 or 25.4%, in the current year period over the prior year
period mostly as a result of higher pre-tax income in the second
quarter of 2017 compared to the same quarter in 2016. The
Company’s estimated federal and state combined income tax
rate was 40.1% and 39.9% for the three months ended June 30, 2017
and 2016, respectively. The income tax expense for the six months
ended June 30, 2017 and 2016 was $579,708 and $591,354,
respectively, a decrease of $11,646 or 2.0%, in the current year
period over the prior year period mostly as a result of lower
pre-tax income in the first six months of 2017 compared to the same
period in 2016. The Company’s estimated federal and state
combined income tax rate was 39.0% and 38.0% for the three months
ended June 30, 2017 and 2016, respectively.
Net Income
Net
income for the three months ended June 30, 2017 and 2016 was
$593,501 and $477,172, respectively, an increase of $116,329, or
24.4%, in the current year period over the prior year period. Net
income for the six months ended June 30, 2017 and 2016 was $908,630
and $965,062, respectively, a decrease of $56,432, or 5.8%, in the
current year period over the prior year period. The increase in net
income for the second quarter of 2017 compared to the second
quarter of 2016 was primarily the result of increased gross profits
being partially offset by higher selling, general &
administrative expenses in the second quarter of 2017, while the
decrease in net income in the first half of 2017 compared to the
same period in 2016 was primarily the result of increased gross
profits being more than offset by higher selling, general &
administrative expenses in the first half 2017.
Income Applicable to Common Shareholders
Income
applicable to common shareholders for the three months ended June
30, 2017 and 2016 was $461,668 and $362,481, respectively, an
increase of $99,187, or 27.4%, in the current year period over the
prior year period. Income applicable to common shareholders for the
six months ended June 30, 2017 and 2016 was $644,965 and $771,476,
respectively, a decrease of $126,511, or 16.4%, in the current year
period over the prior year period. The increase in income
applicable to common shareholders in the second quarter of 2017
compared to the same quarter of 2016 was primarily the result of
higher gross profit in the current quarter, while the decrease in
the first half of 2017 compared to the same period of 2016 was
primarily the result of increased gross profit being more than
offset by an inventory write down discussed above, increases in
selling and administrative expenses, and increased accrued
preferred stock dividends in 2017.
Liquidity and Capital Resources
At June
30, 2017, the Company had a working capital balance of $16.2
million and a current working capital ratio of 3.31:1. At December
31, 2016, the Company had a working capital balance of $16.4
million and a current working capital ratio of 5.59:1.
At June
30, 2017, the Company had a cash balance of $10,004,691, while at
December 31, 2016, the Company had a cash balance of $5,706,351.
The increase in our cash balance during the first half of 2017 was
primarily the result of proceeds from additional long-term debt
obtained as part of the Company’s refinancing of three
existing loans and proceeds from the sale of preferred stock in
2017.
Total
cash provided by operating activities in the six months ended June
30, 2017 was $1,528,297. Cash provided by operating activities for
the six months ended June 30, 2017 was primarily associated with
income from operations adjusted for depreciation
expense.
Total
cash used in investing activities in the six months ended June 30,
2017 was $1,961,817. Cash used in investing activities for the six
months ended June 30, 2017 primarily consisted of property and
equipment purchases and vineyard development.
Total
cash provided by financing activities in the six months ended June
30, 2017 was $4,731,860. Cash provided by financing activities for
the six months ended June 30, 2017 consisted primarily of proceeds
from additional debt acquired through the refinance of three of the
Company’s long term loans as well as the sale of preferred
stock.
Non-cash
investing and financing activities in the six months ended June 30,
2017 was $2,116,121. This was primarily the result of the financing
of two parcels of land using seller financed notes.
The
Company has an asset-based loan agreement (the “line of
credit”) with Umpqua Bank that allows it to borrow up to
$2,000,000. The Company renewed this agreement, in April of 2017,
until July 31, 2018. The index rate of prime plus zero, with a
floor of 3.25%, at June 30, 2017 is 3.5%. The loan agreement
contains certain restrictive financial covenants with respect to
total equity, debt-to-equity and debt coverage that must be
maintained by the Company on a quarterly basis. As of June 30,
2017, the Company was in compliance with all of the financial
covenants.
At June
30, 2017 and December 31, 2016 the Company had no balance
outstanding on the line of credit. At June 30, 2017, the Company
had $2,000,000 available on the line of credit.
As of
June 30, 2017 the Company had an installment note payable of
$275,333, due in payments of $137,667 on March 15, 2018 and 2019,
associated with the purchase of 45 acres of farmland in the Walla
Walla AVA.
As of
June 30, 2017 the Company had a 15 year installment note payable of
$1,657,591, due in quarterly payments of $42,534, associated with
the purchase of property in the Dundee Hills AVA.
As of
June 30, 2017, the Company had a total long-term debt balance of
$7,429,022, including the portion due in the next year, owed to
Farm Credit Services and Toyota Credit Corporation, exclusive of
debt issuance costs of $195,113. As of December 31, 2016, the
Company had a total long-term debt balance of
$4,869,994.
The
Company believes that cash flow from operations and funds available
under the Company’s existing credit facilities will be
sufficient to meet the Company’s foreseeable short and
long-term needs.
Off Balance Sheet Arrangements
As of
June 30, 2017 and December 31, 2016, the Company had no off-balance
sheet arrangements.
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 June 30, 2017
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, 2016 (the “2016
Annual Report”), which could materially affect our business,
results of operations or financial condition.
The risk factors have not materially changed as of June 30, 2017
from those disclosed in the 2016 Annual Report. However, it is important to note that the risks
described in our 2016 Annual Report are not the only risks facing
us. 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, results of operations
or financial condition.
Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
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|
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|
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Period
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Total Number of Shares (or Units) Purchased
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Average Price Paid per Share (or Unit)
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Total Number of Shares (or Units) Purchased as Part of Publicly
Announced Plans or Programs
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Maximum Number (or Approximate Dollar Value) of Shares that May Yet
be Purchased Under the Plans or Programs
|
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Month #1
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|
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April 2017
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-
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$-
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-
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$278,913
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Month #2
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May 2017
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14,088
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$8.12
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14,088
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$160,476
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Month #3
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|
|
|
|
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June 2017
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6,670
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$8.12
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6,670
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$110,395
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Total
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20,758
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$8.12
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20,758
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$110,395
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In
November of 2015 the Company’s Board of Directors (the
“Board”) approved a program to repurchase common stock
of the Company. Under the November 2015 Board action, the Company
funded a plan to repurchase up to $250,000 of our common stock
through the open market. Subsequently, the Board added a total of
$600,000 in funds to this plan in 2016. On February 2, 2017, the
Board approved adding an additional $250,000 to the repurchase
plan. This plan is intended to remain in place until all funding
for the plan is depleted or the plan is expanded or terminated by
the Board. As of June 30, 2017, $110,395 remained unspent under
this plan.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Mine Safety Disclosures.
Not
applicable.
Item 5 – Other Information.
None.
Item 6 – Exhibits.
3.1
Articles of
Incorporation of Willamette Valley Vineyards, Inc. (incorporated by
reference from the Company's Regulation A Offering Statement on
Form 1-A, File No. 24S-2996)
3.2
Articles of
Amendment, dated August 22, 2000 (incorporated herein by reference
to Exhibit 3.4 to the Company’s Form 10-Q for the quarterly
period ended June 30, 2008, filed on August 14, 2008, File No.
000-21522)
3.3
Amended and Restated
Bylaws of Willamette Valley Vineyards, Inc. (incorporated by
reference from the Company's Current Reports on Form 8-K filed on
November 20, 2015, File No. 001-37610)
101
The following
financial information from the Corporation’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2017, furnished
electronically herewith, and formatted in XBRL (Extensible Business
Reporting Language): (i) Balance Sheets, (ii) Statements of
Operations; (iii) Statements of Cash Flows; and (iv) Notes to
Financial Statements, tagged as blocks of text. (Filed
herewith).
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.
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Date:
August 10, 2017 |
By:
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/s/
James
W. Bernau
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James W.
Bernau
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Chief
Executive Officer
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(Principal
Executive Officer) |
|
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Date:
August 10, 2017 |
By:
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/s/
Richard
F. Goward Jr.
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Richard F. Goward
Jr.
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Chief
Financial Officer
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(Principal
Accounting and Financial Officer)
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