RESULTS OF OPERATIONS

Revenue

Net revenue for the three months ended June 30, 2010 increased $43,047 or 1.06%, from the comparable prior year period. Sales to out-of-state distributors in the second quarter of 2010 through our National Sales Department decreased $190,338 or -10.4% but were offset by gains through our other sales departments. Last year, significant sales through a large national chain were not duplicated this year due to retailer product rotation.

Oregon wholesale sales through the department, Bacchus Fine Wines, increased $85,248 and our Direct Sales Department (direct-to-consumer) sales increased by $122,676 or 20.61% versus prior year. These retail gains are due to increased attendance and related sales activity at the on-site and off-site events as well as a substantial increase in Wine Club sales during the quarter. The addition of a new tasting room in McMinnville, OR known as the Wine Center also helped sustain retail tasting room sales in the second quarter 2010 versus 2009.

 

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The Company sold approximately 37,274 cases during the three months ended June 30, 2010.  Of these cases sold, approximately 27,456 cases were produced brands and another 9,818 cases were purchased brands.

Our revenues from winery operations are summarized as follows:

 

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Retail Sales, Rental
Income and Events		$	717,932			$	595,255			$	1,306,900			$	1,128,530
In-state sales			1,977,010				1,825,696				3,393,242				3,398,539
Out-of-state sales			1,536,465				1,774,850				3,160,391				3,387,765
Total Revenue			4,231,407				4,195,801				7,860,533				7,914,834
Less excise taxes			(135,977	)			(143,418	)			(211,528	)			(222,213	)
Net Revenue		$	4,095,430			$	4,052,383			$	7,649,005			$	7,692,621

 

Sales in the state of Oregon, through our wholesale department, Bacchus Fine Wines, increased $151,314 or 8.29%, for the three months ended June 30, 2010, compared to the corresponding prior year period.

Out-of-state sales in the three months ended June 30, 2010 decreased $238,382 or -13.43% versus the comparable prior year period.

Cost of Goods Sold

Our Cost of Goods on produced wines have increased sharply from prior vintages sold resulting in a decrease in Gross Profit of $137,936 over the prior period. Management expects margins to return to historical levels when the ’09 vintage wines are sold.

Gross Profit

Gross profit for the three months ended June 30, 2010 decreased $137,812 or -6.91%, versus the second quarter of 2009.

As a percentage of net revenue, gross profit from winery operations was 45.36% in the three months ended June 30, 2010, compared to 49.25% in the comparable prior year period. The decrease in gross profit as a percentage of net revenue for the three months ended June 31, 2010 is mainly due to the increase in the cost of our produced brands across our product lines.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended June 30, 2010 increased $56,845 or 3.7% compared to the corresponding prior year period.  This increase is due primarily to incremental labor and related taxes and benefits for shared service administrative staff. The Company has experienced significant savings in professional service fees for accounting and legal services and freight costs for outbound shipments. In total, as a percentage of net revenues from winery operations, selling, general and administrative expenses were 38.6% for the three months ended June 30, 2010, as compared to 37.9% for the comparable prior year period.

 

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Interest Income, Interest Expense

Interest income for the second quarter 2010 was $3,310 and for the six months ended June 30, 2010 was $ 6,129. Interest expense for the three months ended June 30, 2010 was $ 56,393 an increase of 20,177 or 55.7% compared to the corresponding prior year period. Interest expense for the six months ended June 30, 2010 was $ 109,697 an increase of $40,819 or 59.3% compared to the corresponding prior year period.  The average interest rate paid for the three months ended June 30, 2010 was 4.9%.

 

Income Taxes

 

The income tax expense in the second quarter 2010 was $83,781 for the three months ended June 30, 2010, compared to income tax expense of $169,846 for the comparable prior year period. Our estimated tax rate for the three months ended June 30, 2010 and 2009 was 40.0% and 40.0%, respectively.

 

Net Income and Earnings per Share

The reduction in gross margin combined with higher selling and administrative costs produced a Net Income for the second quarter ended June 30, 2010 of $128,287 compared to net income of $253,784, a 49.5% decrease over the comparable prior year period. As a result, the Company generated a $0.03 basic earnings per share during the three months ended June 30, 2010, a decrease of $0.02 basic earnings per share versus the comparable prior year period.

The winery bottled approximately 56,400 cased in the Second Quarter of 2010, mainly 2009 vintage Pinot Gris, 2009 vintage Pinot Noir-Whole Cluster and 2009 vintage Riesling.

 

The record ’09 harvest has significantly added to produced wine inventory and work-in-progress. However, purchased wine and merchandise inventories are being brought into balance through tighter sales and purchasing management – a reduction of $ 882,657 in this carried inventory value since June 30, 2009.

 

Liquidity and Capital Resources

At June 30, 2010, we had a working capital balance of $11.3 million and a current working capital ratio of 7.45:1. At December 31, 2009, we had a working capital balance of $11.4 million and a current working capital ratio of 4.98:1.  We had a cash balance of $0 at June 30, 2010, compared to a cash balance of $0 at December 31, 2009.

Total cash provided by operating activities in the six months ended June 30, 2010 was $606,602 compared to cash used in operating activities of $1,147,308 for the same period in the prior year.  The decrease in cash used in operating activities versus prior year was primarily due to the reduction in on-hand inventory.

Total cash used in investing activities in the six months ended June 30, 2010 was $131,048, compared to $198,930 used in the comparable prior year period.  The decrease was due to a reduction in the current period of capital expenditures for property and equipment and vineyard development costs versus the prior year.

 

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Total cash used in financing activities in the six months ended June 30, 2010 was $475,554 compared to $995,877 provided by financing activities in the comparable prior year period. Cash provided by financing activities in the current year primarily consists of revolving credit line advances needed to support working capital requirements.

The Company has an asset-based loan agreement with Umpqua Bank that allows it to borrow up to $2,000,000. The maturity date on this loan agreement is June 2011. At June 30, 2010, the Company had a credit line balance of $134,474 and $1,865,526 of available credit. The interest rate charged in the quarter was 3.25%. The interest rate on this note is a variable interest rate and is subject ot change from time to time based on changes in an independent index which is the Prime Rate as published in the Wall Street Journal (the “Index”). The index rate at June 30, 2010 is 3.25%. The loan agreement contains, among other things, certain restrictive financial covenants with respect to total equity, debt-to-equity

As of June 30, 2010, we had a total long-term debt balance of $3,507,506, including the portion due in the next year, owed to Farm Credit Services, GMAC and Kubota. There was no new long-term debt incurred in the quarter ended June 30, 2010. The remaining debt balance mainly represents the debt service with Farm Credit Services which was used to acquire vineyard land, finance our Hospitality Center, invest in new winery equipment to increase our winemaking capacity, and complete a larger warehouse storage facility.

At June 30, 2010, we owed $0 on grape contracts. For the 2010 harvest, there are grape purchase contracts in place with local growers that will be accrued when the grapes are received, typically in October.

We believe that cash flow from operations and funds available under our existing credit facilities will be sufficient to meet our foreseeable short and long-term needs.

Segment Reporting

The Company has identified two operating segments, Produced Wine and Bacchus Distribution. Bacchus Distribution (dba Bacchus Fine Wines), is the Company’s in-state distribution department. Bacchus distributes produced wine, purchased wine and Riedel glassware at wholesale prices to in-state customers. Produced wine represents all Willamette Valley Vineyard branded wine which is produced at the winery. Purchased wines and Riedel glassware are brands purchased from other wine distributors and wineries for sale to in-state customers. For segment reporting, the produced wines distributed by Bacchus are consolidated with Retail and Out-of-State sales and shown as Produced Wines.

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 segment.  Sales, 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 inventory, is not available and that information continues to be aggregated.

The following tables outline the sales, cost of sales and gross profit, for the three and six month period ended June 30, 2010 and 2009 by operating segment:

 

 

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		Three months ended June 30, 2010
		Bacchus				Produced
		Distribution				Wine				Total
Net Sales		$	1,131,368			$	2,964,062			$	4,095,430
Cost of Sales		$	792,949			$	1,444,594			$	2,237,543
Gross Profit		$	338,419			$	1,519,468			$	1,857,887
% of sales			29.9	%			51.3	%			45.4	%

 

		Six months ended June 30, 2010
		Bacchus				Produced
		Distribution				Wine				Total
Net Sales		$	2,096,449			$	5,552,556			$	7,649,005
Cost of Sales		$	1,573,187			$	2,749,205			$	4,322,392
Gross Profit		$	523,262			$	2,803,351			$	3,326,613
% of sales			24.9	%			50.5	%			43.5	%

Total inventory for Bacchus Distribution was $1,461,997 of purchased wines and $342,522 of non-wine merchandise at June 30, 2010.  At June 30, 2009 total inventory for Bacchus Distribution was $2,546,373 of purchased wines and $413,279 of non-wine merchandise, a reduction of $ 1,084,376 of purchased wines and $ 70,757 of non-wine merchandise from 2009 to 2010. Total inventory for produced wine inventory was $6,429,662 and $3,373,092 of non-wine merchandise and work-in-process at June 30, 2010. At June 30, 2009 total produced wine inventory of $4,942,035 and $3,717,976 of non-wine merchandise and work-in-process for the same period, an increase of $ 1,487,627 for produced wine inventory and a reduction of $ 344,884 in work-in-process from 2009 to 2010.

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

Item 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure.  For the period ended June 30, 2010, management performed an evaluation, under the supervision and with the participation of the Chief Executive Officer, and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of June 30, 2010 were not effective in ensuring that information required to be disclosed in our Exchange Act reports is (1)recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s conclusions are based upon the continued existence of the material weakness identified in our annual report on Form 10-K for period ended December 31, 2010, the nature of which is summarized below.

 

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As of December 31, 2009, the Company had identified the following material weakness. Management has determined this material weakness continued to exist as of June 30, 2010.

·

Lack of sufficient procedures and controls related to the allocation of costs to our produced wine. This weakness was identified during the 2008 year-end audit by management and accounting staff present at the time of the audit, in conjunction with our independent auditors, Moss Adams LLP. During the 2009 year-end audit significant analysis and review were completed and ultimately resulted in an adjustment to inventory and cost of goods sold of $373,691.

The Company does not expect that its disclosure controls and procedures will prevent all errors and instances of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company considered these limitations during the development of its disclosure controls and procedures, and will continually reevaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.

Changes in Internal Control over Financial Reporting

In our Management’s Report on Internal Control Over Financial Reporting included in the Company’s Form 10-K for the year ended December 31, 2009, management concluded that our internal control over financial reporting was not effective due to the existence of the material weakness identified above.

In an attempt to remediate this material weakness, the Company implemented the following remedial actions during the first six months of 2010:

·

The Company has added additional accounting resources to develop, implement and maintain procedures and controls related to the costing of our produced wines.  As of June 30, 2010, these controls and procedures are in the process but had not been fully developed or implemented and the material weakness identified above had not been fully remediated.

 

 

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PART II.               OTHER INFORMATION

 

Item 1.

Legal Proceedings.

From time to time, we are a party to various judicial and administrative proceedings arising in the ordinary course of business.  Our 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 our insurance coverage, and our established liabilities.  While the outcome of legal proceedings cannot be predicted with certainty, based on our review, we believe that any unrecorded liability that may result as a result of any legal proceedings is not likely to have a material effect on our liquidity, financial condition or results from operations.

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information

None.

 

 

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Item 6.

Exhibits

Exhibit No.    Description

 

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 August 14, 2008, File No. 000-21522)

3.3   Bylaws of Willamette Valley Vineyards, Inc. (incorporated herein by reference to Exhibit 3.5 to the Company’s Form 10-Q for the quarterly period ended June 30, 2008, filed August 14, 2008 File No. 000-21522)

31.1  Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (Filed herewith)

31.2  Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (Filed herewith)

32.1  Certification of James W. Bernau pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

32.2  Certification of R. Steven Caldwell pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

 

 

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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.

 

Date: August 16, 2010	By /s/ James W. Bernau
	James W. Bernau
	President
Date: August 16, 2010	By /s/ R. Steven Caldwell
	R. Steven Caldwell
	Chief Financial Officer

 

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