Willamette Valley Vineyards(WVVI) - 2019 Q2 - Quarterly Report

Part I - Financial Information Financial Statements The unaudited interim financial statements show increased assets due to a new lease standard but significantly decreased net income Balance Sheets Total assets grew to $65.4 million, driven by the adoption of a new lease accounting standard which also increased liabilities Balance Sheet Summary (Unaudited) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $26,760,191 | $28,634,329 | | Total Assets | $65,354,516 | $61,482,536 | | Total Current Liabilities | $3,921,289 | $5,395,262 | | Total Liabilities | $17,007,861 | $13,922,268 | | Total Shareholders' Equity | $48,346,655 | $47,560,268 | - The company adopted a new lease accounting standard (ASU 2016-02) on January 1, 2019, resulting in the recognition of approximately $5.0 million in right-of-use assets and corresponding lease liabilities on the balance sheet[8][10][22] Statements of Operations Net income for Q2 and the first six months of 2019 declined significantly due to lower gross profit and higher operating expenses Key Operating Results (Unaudited) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Sales, Net | $5,790,837 | $5,821,292 | $10,789,623 | $10,353,911 | | Gross Profit | $3,498,358 | $3,722,106 | $6,778,994 | $6,612,350 | | Income from Operations | $596,431 | $1,178,905 | $1,160,869 | $1,651,249 | | Net Income | $359,911 | $803,255 | $786,387 | $1,133,710 | | Income per Common Share | $0.02 | $0.11 | $0.06 | $0.13 | Statements of Shareholders' Equity Shareholders' equity increased to $48.3 million, primarily driven by net income partially offset by preferred stock dividends - For the six months ended June 30, 2019, retained earnings increased by $273,483, reflecting net income of $786,387 less preferred stock dividends of $512,904[14][16] Statements of Cash Flows Positive operating cash flow was offset by investing and financing activities, resulting in a $1.5 million net decrease in cash Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $513,213 | $47,067 | | Net cash from investing activities | ($1,620,884) | ($3,002,919) | | Net cash from financing activities | ($383,154) | $178,321 | | Net change in cash | ($1,490,825) | ($2,777,531) | | Cash at end of period | $8,246,642 | $10,998,726 | Notes to Unaudited Interim Financial Statements Notes detail the material impact of a new lease standard, segment performance, and outstanding long-term debt agreements - The company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing a right-of-use asset of approximately $5.0 million, which had a material impact on the Balance Sheet[22][42] - The company operates two segments: Direct Sales and Distributor Sales, which accounted for 37.8% and 62.2% of total sales, respectively, for the first six months of 2019[34][37] - As of June 30, 2019, the company had two long-term debt agreements with Farm Credit Services with an aggregate outstanding balance of $6,616,111[30] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 55.2% drop in Q2 net income due to lower gross profit and higher SG&A, despite six-month revenue growth Overview The company is pursuing strategic growth which may impact near-term results, while wine sales and club memberships show growth - The company is positioning for strategic growth, which is expected to negatively impact near-term financial results due to costs of accrued preferred stock dividends and development activities[61] - Direct-to-consumer sales are more profitable than sales through distributors, and wine club membership grew by 2.8% to 7,679 members in the first six months of 2019[63] - Total wine sales increased by 2.1% to approximately 68,997 cases for the six months ended June 30, 2019, compared to the same period in 2018[65] Results of Operations Q2 revenue dipped slightly due to a distributor issue, while higher product costs and SG&A expenses drove down net income Q2 2019 vs Q2 2018 Performance | Metric | Q2 2019 | Q2 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Sales Revenue | $5,790,837 | $5,821,292 | -0.5% | | Gross Profit | $3,498,358 | $3,722,106 | -6.0% | | SG&A Expense | $2,901,927 | $2,543,201 | +14.1% | | Net Income | $359,911 | $803,255 | -55.2% | - The decrease in Q2 revenue from distributor sales was primarily attributed to a distributor not reordering wine due to software conversion issues[82] - The increase in cost of sales was primarily due to higher costs associated with the newly released 2017 vintage[83] Liquidity and Capital Resources The company maintains a strong liquidity position with $22.8 million in working capital despite a cash decrease from investments - The company had a working capital balance of $22.8 million and a cash balance of $8,246,642 as of June 30, 2019[91] - Cash used in investing activities totaled $1,620,884 for the first six months of 2019, primarily for property, equipment, and vineyard development[93] - The company has a $2,000,000 line of credit with Umpqua Bank, which had no outstanding balance as of June 30, 2019[95][96] Quantitative and Qualitative Disclosures about Market Risk The company is exempt from this disclosure requirement as it qualifies as a smaller reporting company - The company is not required to provide quantitative and qualitative disclosures about market risk because it qualifies as a smaller reporting company[100] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[101] - No material changes to the company's internal control over financial reporting occurred during the quarter ended June 30, 2019[102] Part II - Other Information Legal Proceedings Ongoing legal proceedings are not expected to have a material adverse effect on the company's financial condition - Management believes that any potential liability from ongoing legal proceedings is not likely to have a material effect on the company's financial condition or results[103] Risk Factors No material changes have been made to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K - The risk factors have not materially changed as of June 30, 2019, from those disclosed in the 2018 Annual Report on Form 10-K[105] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities during the period - None[106] Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None[107] Mine Safety Disclosures This disclosure requirement is not applicable to the company's operations - Not applicable[108] Other Information The company has no other information to report for the period - None[109] Exhibits This section lists all exhibits filed with the report, including required CEO and CFO certifications - The report includes required certifications from the CEO and CFO (Rule 13a-14(a) and Section 906 of Sarbanes-Oxley) and financial data formatted in XBRL[110]