UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended September 30, 2021

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

Commission File Number 001-37610

WILLAMETTE VALLEY VINEYARDS, INC.

(Exact name of registrant as specified in charter)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): xYes oNO

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

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

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

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

Number of shares of common stock outstanding as of November 12, 2021: 4,964,529

WILLAMETTE VALLEY VINEYARDS, INC.

INDEX TO FORM 10-Q

PART I: FINANCIAL INFORMATION

Item 1 – Financial Statements

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED BALANCE SHEETS
(Unaudited)

The accompanying notes are an integral part of this financial statement

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of this financial statement

WILLAMETTE VALLEY VINEYARDS, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

The accompanying notes are an integral part of this financial statement

WILLAMETTE VALLEY VINEYARDS, INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

The accompanying notes are an integral part of this financial statement

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

1) BASIS OF PRESENTATION

The accompanying unaudited interim financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements. The financial information as of December 31, 2020 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, 2020 (the “2020 Report”). 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, 2020, as presented in the Company’s Annual Report on Form 10-K.

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2021, or any portion thereof. The COVID-19 pandemic and restrictions imposed by federal, state, and local governments in response to the outbreak have disrupted and will continue to disrupt our business. In the State of Oregon, where we operate the Company’s winery in Turner, Oregon, and most of our vineyards, in response to the COVID-19 pandemic individuals are being encouraged to practice social distancing, which when combined with any future orders could adversely affect our sales revenues and consequently impact our liquidity, financial condition and results of operations. Even after orders are loosened or lifted, the impact of lost wages due to COVID-19 related unemployment may dampen consumer spending for some time in the future.

The Company’s operations could be further disrupted if a significant number of employees are unable or unwilling to work, whether because of illness, quarantine, restrictions on travel or fear of contracting COVID-19, which could further materially adversely affect liquidity, financial position and results of operations. To support employees and protect the health and safety of employees and customers, the Company may offer enhanced health and welfare benefits, provide bonuses to employees, and purchase additional sanitation supplies and personal protective materials. These measures will increase operating costs and adversely affect liquidity.

The COVID-19 pandemic may also adversely affect the ability of grape suppliers to fulfill their obligations, which may negatively affect operations. If suppliers are unable to fulfill their obligation, the Company could face shortages of grapes, and operations and sales could be adversely impacted.

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.

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

Schedule of Earnings Per Share

Subsequent to the filing of the 2020 Report there were no accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that would have a material effect on the Company’s unaudited interim condensed financial statements. The following provides an update of new accounting pronouncements applicable to the Company as of September 30, 2021.

Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740), Update (“ASU”) 2019-12, Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by removing certain Codification exceptions and others to be discussed. This was adopted on January 1, 2021, and Management does not believe there will be a significant impact.

2) INVENTORIES

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

Schedule of Inventories 

3) PROPERTY AND EQUIPMENT, NET

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

Schedule of Property and Equipment, Net

Depreciation expense for the nine months ended September 30, 2021 and 2020 was $1,230,459 and $1,176,207, respectively. Depreciation expense for the 3 months ended September 30, 2021 and 2020 was $446,033 and $394,859, respectively.

4) DEBT

Line of Credit Facility – In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000 against eligible accounts receivable and inventories, as defined in the agreement at July 29, 2021. The revolving line bears interest at prime less 0.5%, with a floor of 3.25%, is payable monthly, and is subject to renewal. In July 2021, the Company renewed the credit agreement until July 31, 2023. At September 30, 2021 and December 31, 2020, there was no outstanding balance on this revolving line of credit.

The line of credit agreement includes various covenants, which among other things; require the Company to maintain a minimum current ratio, debt to tangible net worth, and debt service coverage, as defined. As of September 30, 2021, the Company was in compliance with these financial covenants.

Notes Payable – In February 2017, the Company purchased property, including vineyard land, bare land, and structures in the Dundee Hills American Viticultural Area (AVA) under terms that included a 15 year note payable with quarterly payments of $42,534, bearing interest at 6%. The note may be called by the owner, up to the outstanding balance, with 180 days written notice. As of September 30, 2021, the Company had a balance of $1,318,301 due on this note. As of December 31, 2020, the Company had a balance of $1,384,581 due on this note.

Long-Term Debt – The Company has two long-term debt agreements with Farm Credit Services (FCS) with an aggregate outstanding balance of $5,649,703 and $5,984,272 as of September 30, 2021 and December 31, 2020, respectively. The outstanding loans require monthly principal and interest payments of $62,067 for the life of the loans, at annual fixed interest rates of 4.75% and 5.21%, and with maturity dates of 2028 and 2032. The general purposes of these loans were to make capital improvements to the winery and vineyard facilities.

The loan agreements contain covenants, which require the Company to maintain certain financial ratios and balances. At September 30, 2021, the Company was in compliance with these covenants. In the event of future noncompliance with the Company’s debt covenants, FCS would have the right to declare the Company in default, and at FCS option without notice or demand, the unpaid principal balance of the loan, plus all accrued unpaid interest thereon and all other amounts due would immediately become due and payable.

As of September 30, 2021, the Company had unamortized debt issuance costs of $135,796. As of December 31, 2020, the Company had unamortized debt issuance costs of $145,731.

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.

5) INTEREST AND TAXES PAID

Income taxes – The Company paid $245,000 and $578,000 tax in income taxes for the three months ended September 30, 2021 and 2020, respectively. The Company paid $285,000 and $578,000 in income taxes for the nine months ended September 30, 2021 and 2020, respectively.

Interest – The Company paid $93,234 and $90,165 for the three months ended September 30, 2021 and 2020, respectively, in interest on long-term debt. The Company paid $284,017 and $294,620 for the nine months ended September 30, 2021 and 2020, respectively, in interest on long-term debt.

6) SEGMENT REPORTING

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

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

The following table outlines the sales, cost of sales, gross margin, directly attributable selling expenses, and contribution margin of the segments for the three and nine month periods ending September 30, 2021 and 2020. Sales figures are net of related excise taxes.

Schedule of Revenue by Reporting Segments

Direct sales include no bulk wine sales in the three months ended September 30, 2021 and 2020. Direct sales include zero and $28,734 of bulk wine sales in the nine months ended September 30, 2021 and 2020, respectively.

7) SALE OF PREFERRED STOCK

On January 24, 2020, the Company filed a shelf Registration Statement on Form S-3 with the United States Securities and Exchange Commission (the “SEC”) pertaining to the potential future issuance of one or more classes or series of debt, equity or derivative securities. The maximum aggregate offering amount of securities sold pursuant to the January 2020 Form S-3 is not to exceed $20,000,000. On June 10, 2020, the Company filed with the SEC a Prospectus Supplement to the January 2020 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 1,917,525 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $9,300,000. This Prospectus Supplement established that our shares of preferred stock were to be sold in four offering periods with four separate offering prices beginning with an offering price of $4.85 per share and concluding with an offering of $5.15 per share. As of September 30, 2021, the Company had received aggregate proceeds of $8,533,086 from sales of our Series A Redeemable Preferred Stock, net of acquisition costs, under this offering.

On June 11, 2021, the Company filed with the SEC an additional Prospectus Supplement to the January 2020 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 2,118,811 additional shares of Series A Redeemable Preferred Stock having proceeds not to exceed $10,700,000. Net proceeds of $2,899,346 have been received under this offering as of September, 30 2021 for the issuance of Preferred Stock.

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 plus accrued but unpaid dividends and a redemption premium equal to 3% of the original issue price.

8) LEASES

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

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

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

Operating Leases – Vineyard - In December 1999, under a sale-leaseback agreement, the Company sold approximately 79 acres of the Tualatin Vineyards property with a net book value of approximately $1,000,000 for approximately $1,500,000 cash and entered into a 20-year operating lease agreement, with three five-year extension options, and contains an escalation provision of 2.5% per year. The Company extended the lease in January 2019 until January 2025.

In December 2004, under a sale-leaseback agreement, the Company sold approximately 75 acres of the Tualatin Vineyards property with a net book value of approximately $551,000 for approximately $727,000 cash and entered into a 15-year operating lease agreement, with three five-year extension options, for the vineyard portion of the property. The first five year extension has been exercised. The lease contains a formula-based escalation provision with a maximum increase of 4% every three years.

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

In July 2008, the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 110 acres adjacent to the existing Elton Vineyards site. These 110 acres are being developed into vineyards. Terms of this agreement contain rent increases, that rises as the vineyard is developed, and contains an escalation provision of CPI plus 0.5% per year capped at 4%.

In March 2017, the Company entered into a 25-year lease for approximately 18 acres of agricultural land in Dundee, Oregon. These acres are being developed into vineyards. This lease contains an annual payment that remains constant throughout the term of the lease.

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

In January 2019, the Company assumed a lease, with four remaining years, for its Maison Bleue tasting room in Walla Walla, Washington. The lease contains fixed payments that increase over the term of the agreement.

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

The following tables provide lease cost and other lease information:

Schedule of Lease Cost and Other Lease Information

As of September 30, 2021, maturities of lease liabilities were as follows:

Schedule of Maturities of Lease Liabilities

9) 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 long-term grape purchase agreements with a number of Willamette Valley wine grape growers. With these agreements the Company purchases an annually agreed upon quantity of fruit, at pre-determined prices, within strict quality standards and crop loads. The Company cannot calculate the minimum or maximum payment as such a calculation is dependent in large part on unknowns such as the quantity of fruit needed by the Company and the availability of grapes produced that meet the strict quality standards in any given year. If no grapes are produced that meet the contractual quality levels, the grapes may be refused, and no payment would be due.

ITEM 2:

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

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

Forward Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company’s business, and beliefs and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”, “predicts,” “potential,” “should,” or “will” or the negative thereof and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease or smoke from forest fires, changes in consumer spending, the reduction in consumer demand for premium wines, and the impact of the COVID-19 pandemic and the policies of United States federal, state and local governments in response to such pandemic. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Many of these risks as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 nine months ended September 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 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, Domaine Willamette and Tualatin Estates labels. The Company also owns the Tualatin Estate Vineyards and Winery, located near Forest Grove, Oregon. The Company generates revenues from the sales of wine to wholesalers and direct to consumers.

Direct to consumer sales primarily include sales through the Company’s tasting rooms, telephone, internet and wine club. Direct to consumer sales are at a higher unit price than sales through distributors due to prices received being closer to retail than those prices paid by wholesalers. The Company continues to emphasize growth in direct to consumer sales through the Company’s 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 current and potential customers of the Company.

Periodically, the Company will sell grapes or bulk wine, due to them not meeting Company standards or being in excess of production targets, however this is not a significant part of the Company’s activities. The Company had no bulk wine sales for the nine months ended September 30, 2021 and $28,734 in bulk wine sales for the same period of 2020.

The Company sold 145,153 and 130,705 cases of produced wine during the nine months ended September 30, 2021 and 2020, respectively, an increase of 14,448 cases, or 11.1% 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 September 30, 2021, wine inventory included 135,129 cases of bottled wine and 326,685 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 173,319 cases during the nine months ended September 30, 2021.

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

The International Wine Report awarded the Company’s 2018 Bernau Block Pinot Noir with 90 points, 2019 Estate Pinot Noir with a 90 points, 2019 Estate Chardonnay with 91 points and Estate Rose of Pinot Noir with 91 points, 

The Wine Panel awarded the Company’s 2019 Estate Pinot Noir with 91 points, 2020 Pinot Gris with 93 points and 2019 White Pinot Noir with 90 points, 

Wine Press Northwest described the 2020 Whole Cluster Rose of Pinot Noir with a “Unanimously Outstanding!”

The Company’s 2020 Whole Cluster Pinot Noir was featured in an article by Wine Enthusiast called, “In Oregon’s Willamette Valley, Elegant Pinot Noir for Less than $40,” with the wine’s 90 point score included.

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 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 of, and capacity restrictions in, our tasting rooms, the Company launched curbside pick-ups, and complimentary shipping specials with minimum purchase, which were able to more than offset 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 September 30, 2021 and 2020 were $7,641,228 and $6,918,131, respectively, an increase of $723,097, or 10.5%, in the current year period over the prior year period. This increase was caused by an increase in direct sales of $699,172 and an increase in direct sales through distributors of $23,925 in the current year three-month period over the prior year period. The increase in direct sales to consumers was primarily the result of increased revenue from tasting room sales, phone sales and wine club sales. Sales revenue for the nine months ended September 30, 2021 and 2020 were $22,356,517 and $19,008,680, respectively, an increase of $3,347,837, or 17.6%, in the current year period over the prior year period. This increase was mainly caused by an increase in revenues from direct sales of $2,000,026 and an increase in revenues from sales through distributors of $1,347,811 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 September 30, 2021 and 2020 were $3,179,590 and $2,696,934, respectively, an increase of $482,656, or 17.9%, 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 nine months ended September 30, 2021 and 2020 were $9,261,589 and $7,373,909, respectively, an increase of $1,887,680 or 25.6%, 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 September 30, 2021 and 2020 was 58.4% and 61.0%, respectively, a decrease of 2.6 percentage points in the current year period over the prior year period mostly as a result of higher cost vintages produced in 2020 that were sold in 2021. Gross profit as a percentage of net sales for the nine months ended September 30, 2021 and 2020 was 58.6% and 61.2%, 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 higher cost vintages produced in 2020 and sold in 2021 combined with the mix of products sold in the period.

Selling, General and Administrative Expenses

Selling, general and administrative expense for the three months ended September 30, 2021 and 2020 was $3,768,765 and $2,917,363 respectively, an increase of $851,402, or 29.2%, 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 $459,168, or 24.5% and an increase in general and administrative expenses of $392,234, or 37.7% in the current quarter compared to the same quarter last year. Selling, general and administrative expense for the nine months ended September 30, 2021 and 2020 was $10,688,452 and $8,302,825, respectively, an increase of $2,385,627, or 28.7%, in the current year period over the prior year period. This increase was primarily the result of an increase in selling expenses of $1,448,919, or 27.7% and an increase in general and administrative expenses of $936,708, or 30.6% in the current year period compared to the same period in 2020. Selling expenses increased in both the third quarter and nine months of 2021 compared to the same periods in 2020 primarily as a result of our tasting rooms being open for more days in 2021 compared to 2020 resulting in higher labor and related costs associated with operating the tasting rooms. General and administrative expenses increased in the third quarter of 2021 compared to the same quarter of 2020 primarily a result of more maintenance costs and professional fees and increased for the nine months ended September 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 September 30, 2021 and 2020 was $96,473 and $103,283, respectively, a decrease of $6,810 or 6.6%, in the third quarter of 2021 over the same quarter in the prior year. Interest expense for the nine months ended September 30, 2021 and 2020 was $293,548 and $314,158, respectively, a decrease of $20,610 or 6.6%, in the current year period over the prior year period. The decrease in interest expense for the third quarter and nine months of 2021 compared to the same periods in 2020 was primarily the result of decreased debt in the current period compared to the third quarter and nine months of 2020.

Income Taxes

The income tax expense for the three months ended September 30, 2021 and 2020 was $172,256 and $343,464, respectively, a decrease of $171,208 or 49.8%, in the third quarter of 2021 compared to the same quarter in the prior year as a result of lower pre-tax income in the third 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 27.7% for the three months ended September 30, 2021 and 2020, respectively. The income tax expense for the nine months ended September 30, 2021 and 2020 was $624,839 and $869,230, respectively, a decrease of $244,391 or 28.1%, in the current year period over the prior year period mostly a result of lower pre-tax income in the first nine months of 2021, compared to the same period in 2020. The Company’s estimated federal and state combined income tax rate was 27.4% for both the nine months ended September 30, 2021 and 2020, respectively.

Net Income

Net income for the three months ended September 30, 2021 and 2020 was $456,191 and $896,799, respectively, a decrease of $440,608, or 49.1%, in the third quarter of 2021 over the same quarter in the prior year. Net income for the nine months ended September 30, 2021 and 2020 was $1,656,427 and $2,304,302, respectively, a decrease of $647,875, or 28.1%, in the current year period over the prior year period. The decrease in net income for the third quarter and nine months of 2021, compared to the comparable periods in 2020, was primarily the result higher gross profits in 2021 being more than offset by increased operating expenses mostly as a result of increased costs associated with our tasting rooms being open for more days in 2021 compared to 2020.

Income Applicable to Common Shareholders

Income applicable to common shareholders for the three months ended September 30, 2021 and 2020 was $95,120 and $640,347, respectively, a decrease of $545,227, or 85.1%, in the third quarter of 2021 over the same quarter in the prior year. Income applicable to common shareholders for the nine months ended September 30, 2021 and 2020 was $573,214 and $1,534,946, respectively, a decrease of $961,732, or 62.7%, in the current year period over the prior year period. The decrease in income applicable to common shareholders in the third quarter and nine months of 2021, compared to the same periods of 2020, was the result of lower net income and higher dividend costs associated with the increased number of shares of Preferred Stock in the current periods compared to the same periods in 2020.

Liquidity and Capital Resources

At September 30, 2021, the Company had a working capital balance of $23.9 million and a current working capital ratio of 3.25:1.

At September 30, 2021, the Company had a cash balance of $13,891,696. At December 31, 2020, the Company had a cash balance of $13,999,755. This decrease is primarily the result of cash used in construction activities being partially offset with the proceeds from Preferred Stock subscriptions. The construction of a new tasting room and winery in Dundee, Oregon is expected to cost approximately $15.6 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 September 30, 2021, we had incurred approximately $8.7 million on the project.

Total cash generated from operating activities in the nine months ended September 30, 2021 was $3,770,784. Cash from operating activities for the nine months ended September 30, 2021 was primarily associated with net income, reduced receivables, increased grapes payable and income tax receivable, being partially offset by increased inventory and a reduction in accrued expenses.

Total cash used in investing activities in the nine months ended September 30, 2021 was $6,867,420. Cash used in investing activities for the nine months ended September 30, 2021 primarily consisted of cash used on construction activity and vineyard development costs.

Total cash generated from financing activities in the nine months ended September 30, 2021 was $2,988,577. Cash generated from financing activities for the nine months ended September 30, 2021 primarily consisted of proceeds from investor deposits related to the Preferred Stock offering as well as the issuance of Preferred Stock, being partially offset by the repayment of debt.

In December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000 against eligible accounts receivable and inventories, as defined in the agreement at July 29, 2021. The revolving line bears interest at prime less 0.5%, with a floor of 3.25%, is payable monthly, and is subject to renewal. In July 2021, the Company renewed the credit agreement until July 31, 2023. At September 30, 2021 and December 31, 2020, there was no outstanding balance on this revolving line of credit.

As of September 30, 2021, the Company had a 15-year installment note payable of $1,318,301, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.

As of September 30, 2021, the Company had a total long-term debt balance of $5,649,703, including the portion due in the next year, owed to Farm Credit Services, exclusive of debt issuance costs of $135,796. 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 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 September 30, 2021, and December 31, 2020, 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 September 30, 2021 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, 2020, which could materially affect our business, results of operations or financial condition.

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

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

None.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits

SIGNATURES

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

Willamette Valley Vineya... (NASDAQ:WVVI)
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