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, 2020, 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 U.S. GAAP. 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, 2020. Such policies were unchanged during the six months ended June 30, 2021.
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 nearby 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, Elton 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
35,642 square foot hospitality facility at the Winery, expansion of our operations, and growth in wine club membership. Additionally,
the Company’s Preferred Stock sales since August 2015 have resulted in approximately 8,000 new preferred stockholders many
of which the Company believes are wine enthusiasts. When considering joint ownership, we believe these new stockholders represent
approximately 12,000 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 no bulk wine sales for the six months
ended June 30, 2021 and $28,734 in bulk wine sales for the same period of 2020.
The
Company sold 98,420 and 83,435 cases of produced wine during the six months ended June 30, 2021 and 2020, respectively, an increase
of 14,985 cases, or 18.0% in the current year period over the prior year period. The increase in wine case sales was primarily
the result of increased direct case sales as well as increased case sales through distributors.
Cost
of sales includes grape costs, whether purchased or grown at Company vineyards, winemaking and processing costs, bottling, packaging,
warehousing, and shipping and handling costs. For grapes grown at Company vineyards, costs include farming expenditures and amortization
of vineyard development costs.
At June 30, 2021, wine inventory included 118,885 cases
of bottled wine and 198,585 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 110,674 cases during the six months ended
June 30, 2021.
Willamette
Valley Vineyards continues to receive positive recognition through national magazines, regional publications, local newspapers
and online bloggers.
Wine
Enthusiast awarded the Company’s 2020 Whole Cluster Pinot Noir with 91 points and Editors’ Choice, the 2020
Whole Cluster Rosé of Pinot Noir with 90 points and the 2019 Founders’ Reserve Pinot Noir with 90 points.
James Suckling awarded the Company’s 2018 Elton Pinot Noir with 93 points,
the 2018 Fuller Pinot Noir with 93 points, the 2018 Estate Pinot Noir with 91 points, the 2018 Tualatin Estate Pinot Noir with
91 points, the 2018 O’Brien Pinot Noir with 91 points and the 2018 Bernau Block Pinot Noir with 90 points.
Wine & Spirits awarded the Company’s 2019 Estate Chardonnay with 90 points and the 2018 Dijon Clone Chardonnay
with 90 points.
The Company’s 2018 Estate Pinot Noir was awarded a gold medal and 91 points from the
2021 Sunset International Wine Competition.
The Company’s Estate Pinot Noir, Whole Cluster Pinot Noir, Whole Cluster Rosé
of Pinot Noir, Pinot Gris and Méthode Champenoise Brut were featured in various episodes of Season 18 of Bravo’s Top
Chef, and the season finale was hosted at the Company’s Estate in the Salem Hills.
Impact
of COVID-19 on Operations
The
COVID-19 pandemic has been declared a National Public Health Emergency in the United States, and on March 8, 2020, Oregon Governor
Kate Brown declared a state of emergency to address the spread of COVID-19 in Oregon. The outbreak in Oregon and other parts
of the United States, as well as the response to COVID-19 by federal, state and local governments could have a continued material
adverse impact on economic and market conditions in the United States, which may negatively affect our business and operations.
Although the administration of vaccines in Oregon and throughout the United States contributed to the lifting of certain restrictive
measures, there remains ongoing uncertainty about the impact of COVID-19 variations on infection levels. The re-emergence of significant
increases in infection rates could result in governments re-imposing restrictive measures that could reduce or impair economic
activity. Consequently, 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.
With
the exception of key operations personnel, we have shifted our office staff to remote workstations, and we expect we will continue
to operate remotely until state and local government restrictions have been lifted and management determines it is safe for employees
to return to offices. Far exceeding the required Oregon Healthy Authority protocols, a new state-of-the-art UV light filtration
has been installed in the Company’s HVAC system to reduce harmful viruses in the air at its tasting room locations and staff
offices.
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. In response to the previous closure
and capacity restrictions on our tasting rooms, the Company launched curbside pick-ups, and complimentary shipping specials with
minimum purchase, which have been able to more than mitigate the expected declines in direct to consumer sales.
Additionally,
the demand for the Company’s wine sold directly or through distributors to restaurants, bars, and other hospitality locations
could be reduced in the near-term due to the re-imposition of orders from state and local governments restricting consumers from
visiting, as well as in some cases the temporary closure of such establishments.
The
extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as
the response to the pandemic, and in particular the response to the COVID-19 variants that have emerged, is continuing to evolve.
The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including,
but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s
customers, all of which are uncertain and cannot be predicted.
RESULTS OF OPERATIONS
Revenue
Sales
revenue for the three months ended June 30, 2021 and 2020 were $8,949,951 and $5,568,654, respectively, an increase of $3,381,297,
or 60.7%, in the current year period over the prior year period. This increase was caused by an
increase in sales through distributors of $2,434,315 and an increase in direct sales of $946,982 in the current year three-month
period over the prior year period. The increase in direct sales to consumers was primarily the result of retail sales increases
in tasting room revenue, phone sales and wine club sales. The increase in revenue from sales through distributors was primarily
attributed to higher chain sales and the timing of orders between the first and second quarters. Sales revenue for the six months
ended June 30, 2021 and 2020 were $14,715,289 and $12,090,549, respectively, an increase of $2,624,740, or 21.7%, in the current
year period over the prior year period. This increase was mainly caused by an
increase in revenues from direct sales of $1,300,854 and an increase in revenues from sales through distributors of $1,323,886
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 phone sales, wine club and internet sales. The increase in sales through distributors was primarily the
result of an increase in off-premise sales.
Cost
of Sales
Cost
of Sales for the three months ended June 30, 2021 and 2020 were $3,810,228 and $2,067,122, respectively, an increase of $1,743,106,
or 84.3%, in the current period over the prior year period. This change was primarily the result of an increase in sales and the
mix of vintages sold in 2021. Cost of Sales for the six months ended June 30, 2021 and 2020 were $6,081,999 and $4,676,975, respectively,
an increase of $1,405,024 or 30.0%, in the current period over the prior year period. This change was primarily the result of
an increase in sales in 2021 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 June 30, 2021 and 2020 was 57.4% and 62.9%, respectively, a decrease
of 5.5 percentage points in the current year period over the prior year period mostly as a result of the mix of sales and an increased
percentage of total sales coming from sales to distributors in the second quarter of 2021 compared to the same quarter of 2020.
Gross profit as a percentage of net sales for the six months ended June 30, 2021 and 2020 was 58.7% and 61.3%, respectively, a
decrease of 2.6 percentage points in the current year period over the prior year period. This decrease was primarily the result
of the mix of sales between direct sales channels in the periods
Selling,
General and Administrative Expenses
Selling,
general and administrative expense for the three months ended June 30, 2021 and 2020 was $3,602,129 and $2,555,958 respectively,
an increase of $1,046,171, or 40.9%, 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 $621,126, or 38.5% and an increase in general and administrative expenses of
$425,045, or 45.1% in the current quarter compared to the same quarter last year. Selling, general and administrative expense
for the six months ended June 30, 2021 and 2020 was $6,919,687 and $5,385,462, respectively, an increase of $1,534,225, or 28.5%,
in the current year period over the prior year period. This increase was primarily the result of an increase in selling expenses
of $989,751, or 29.4% and an increase in general and administrative expenses of $544,474, or 26.9% in the current year period
compared to the same period in 2020. Selling expenses increased in both the first half and second quarter of 2021 compared to
the same periods in 2020 primarily as a result of more sales coming from tasting rooms which were open for more days in 2021,
combined with higher labor costs. General and administrative expenses increased in the second quarter of 2021 compared to the
same quarter of 2020 primarily a result of more maintenance costs and professional fees and increased for the six months ended
June 30, 2021 compared to the same period in 2020, primarily as a result of increased maintenance and compensation related costs
compared to the same period in 2020.
Interest
Expense
Interest
expense for the three months ended June 30, 2021 and 2020 was $97,499 and $105,133, respectively, a decrease of $7,634 or 7.3%,
in the second quarter of 2021 over the same quarter in the prior year. Interest expense for the six months ended June 30, 2021
and 2020 was $197,075 and $210,875, respectively, a decrease of $13,800 or 6.5%, in the current year period over the prior year
period. The decrease in interest expense for the second quarter and first six months of 2021 was primarily the result of decreased
debt in the current period compared to the second quarter and first six months of 2020.
Income
Taxes
The
income tax expense for the three months ended June 30, 2021 and 2020 was $406,304 and $231,533, respectively, an increase of $174,771
or 75.5%, in the second quarter of 2021 over the same quarter in the prior year mostly as a result of higher pre-tax income in
the second quarter of 2021, compared to the same quarter in 2020. The Company’s estimated federal and state combined income
tax rate was 27.4% and 27.2% for the three months ended June 30, 2021 and 2020, respectively. The income tax expense for the six
months ended June 30, 2021 and 2020 was $452,583 and $525,766, respectively, a decrease of $73,183 or 13.9%, in the current year
period over the prior year period mostly a result of lower pre-tax income in the first six months of 2021, compared to the same
period in 2020. The Company’s estimated federal and state combined income tax rate was 27.4% and 27.2% for the six months
ended June 30, 2021 and 2020, respectively.
Net
Income
Net
income for the three months ended June 30, 2021 and 2020 was $1,077,551 and $620,421, respectively, an increase of $457,130, or
73.7%, in the second quarter of 2021 over the same quarter in the prior year. Net income for the six months ended June 30, 2021
and 2020 was $1,200,236 and $1,407,503, respectively, a decrease of $207,267, or 14.7%, in the current year period over the prior
year period. The increase in net income for the second quarter and decrease in net income for the first half of 2021, compared
to the comparable periods in 2020, was primarily the result of changes in the gross profits and operating expenses.
Income
Applicable to Common Shareholders
Income
applicable to common shareholders for the three months ended June 30, 2021 and 2020 was $715,045 and $363,969, respectively, an
increase of $351,076, or 96.5%, in the second quarter of 2021 over the same quarter in the prior year. Income applicable to common
shareholders for the six months ended June 30, 2021 and 2020 was $478,094 and $894,599, respectively, a decrease of $416,505,
or 46.6%, in the current year period over the prior year period. The increase in income applicable to common shareholders in the
second quarter was the result of higher net income and the decrease in the first six months of 2021, compared to the same periods
of 2020, was the result of lower net income and higher dividend costs in the current period.
Liquidity
and Capital Resources
At
June 30, 2021, the Company had a working capital balance of $26.9 million and a current working capital ratio of 5.87:1.
At
June 30, 2021, the Company had a cash balance of $13,117,492. At December 31, 2020, the Company had a cash balance of $13,999,755.
This decrease is primarily the result of investing activities in construction activity and the payment of grapes payable. The
construction of a new tasting room and winery in Dundee, Oregon is expected to cost approximately $14.9 million, which will be
funded through a combination of cash on hand as well as equity financing through Preferred Stock offerings. Construction began
in July 2019 and was paused in March 2020 as a result of the uncertainty surrounding the COVID-19 pandemic and has now been restarted.
As of June 30, 2021, we had incurred approximately $7.3 million on the project.
Total
cash generated from operating activities in the six months ended June 30, 2021 was $2,192,760. Cash from operating activities
for the six months ended June 30, 2021 was primarily associated with net income, reduced inventory, and income tax
receivable, being partially offset by
reduced grapes payable and a reduction in accrued expenses.
Total
cash used in investing activities in the six months ended June 30, 2021 was $3,412,836. Cash used in investing activities for
the six months ended June 30, 2021 primarily consisted of cash used on construction activity and vineyard development costs.
Total
cash generated from financing activities in the six months ended June 30, 2021 was $337,813. Cash generated from financing activities
for the six months ended June 30, 2021 primarily consisted of proceeds from the issuance of Preferred Stock, being partially offset
by the repayment of debt.
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 July 2019, until
July 2021. The interest rate is prime less 0.5%, with a floor of 3.25%. 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, 2021, the Company was in compliance with all of the financial covenants. The line of credit has subsequently been renewed for an additional
two years.
As
of June 30, 2021, and December 31, 2020, the Company had no balance outstanding on the line of credit.
As
of June 30, 2021, the Company had a 15-year installment note payable of $1,340,724, due in quarterly payments of $42,534, associated
with the purchase of property in the Dundee Hills AVA.
As
of June 30, 2021, the Company had a total long-term debt balance of $5,762,086, including the portion due in the next year, owed
to Farm Credit Services, exclusive of debt issuance costs of $139,107. As of December 31, 2020, the Company had a total long-term
debt balance of $5,984,272, exclusive of debt issuance costs of $145,731.
The
Company obtained a $5,000,000 commercial loan commitment from Farm Credit Services, which is intended to provide the Company with
additional liquidity in the event the Company was to experience operating losses from sales disruptions due to the COVID-19 pandemic. This
Commitment came into effect in July 2020 and was closed in May 2021.
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 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.
Off
Balance Sheet Arrangements
As
of June 30, 2021, and December 31, 2020, the Company had no off-balance sheet arrangements.
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