UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December
31, 2021
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
Commission file number: 000-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Exact name of registrant as specified in its charter)
Oregon
93-0981021
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
8800 Enchanted Way , S.E.
Turner , OR 97392
(Address of principal executive offices)
Registrants
telephone number, including area code: (503) 588-9463
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
WVVI
NASDAQ Capital Market
Series A Redeemable Preferred Stock
WVVIP
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act: Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act: Yes o No x
1
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files): Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act:
Large
accelerated filer o Accelerated
filer o Non-accelerated Filer x Smaller
reporting company o
o Emerging
Growth Company
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate
by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x
The aggregate market value of common
stock held by non-affiliates of the registrant as of June 30, 2021 was approximately $ 62,070,250 .
The
number of outstanding shares of the registrants Common Stock as of March 29, 2022 was 4,964,529 .
DOCUMENTS INCORPORATED BY REFERENCE
None
2
WILLAMETTE
VALLEY VINEYARDS, INC.
FORM 10-K
TABLE
OF CONTENTS
PAGE
PART I
Item 1
Business
4
Item 1A
Risk Factors
15
Item 1B
Unresolved Staff Comments
21
Item 2
Properties
21
Item 3
Legal Proceedings
21
Item 4
Mine Safety Disclosures
21
PART II
Item 5
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
22
Item 6
Selected Financial Data
22
Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations
22
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
31
Item 8
Financial Statements and Supplementary Data
32
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
50
Item 9A
Controls and Procedures
50
Item 9B
Other Information
51
PART III
Item 10
Directors, Executive Officers and Corporate Governance
51
Item 11
Executive Compensation
53
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
55
Item 13
Certain Relationships and Related Transactions, and Director Independence
56
Item 14
Principal Accounting Fees and Services
56
Item 15
Exhibits, Financial Statement Schedules
57
3
WILLAMETTE
VALLEY VINEYARDS, INC.
FORM
10-K
As
used in this Annual Report on Form 10-K, we, us, our WVVI and the
Company refer to Willamette Valley Vineyards, Inc.
PART
I
ITEM
1. BUSINESS
Forward
Looking Statements
This
Annual Report on Form 10-K, including any information incorporated by reference, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, referred to as the Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act. These forward-looking statements
involve risks and uncertainties that are based on current expectations, estimates and projections about the Companys 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 this Annual Report on
Form 10-K. We urge you to carefully review the disclosures we make concerning risks and other factors that may affect our business
and operations. 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.
Business
Introduction
– The Company was formed in May 1988 to produce and sell premium, super premium and ultra-premium varietals. The Company was
originally established as a sole proprietorship by Oregon winegrower Jim Bernau in 1983. The Company is headquartered in Turner, Oregon,
which is just south of the state capitol of Salem, Oregon. The Companys 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 Companys winery in Turner, Oregon (the Estate Winery or Winery) and the wines are
sold principally under the Companys Willamette Valley Vineyards label, but also under the Griffin Creek, Tualatin Estate, Pambrun,
Maison Bleue, Natoma, Metis, Pere Ami and Elton labels. The Company also owns the Tualatin Estate Vineyards and Winery, located near
Forest Grove, Oregon (the Tualatin Winery).
Segments
– 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 rooms, wine club sales, online sales, on-site
events, kitchen and catering sales and other sales made directly to the consumer without the use of an intermediary. Distributor sales
include all sales through a third party where prices are given at a wholesale rate.
Products
– Under its Willamette Valley Vineyards label, the Company produces and sells the following
types of wine in 750 ml bottles: Pinot Noir, the brands flagship and its largest selling varietal in 2021, $24 to $100 per bottle;
Chardonnay, $25 to $45 per bottle; Pinot Gris, $17 per bottle; Pinot Blanc, $25 per bottle; Sauvignon Blanc, $28 per bottle;
Gruner Veltliner, $28 per bottle; Rose, $18 to $25 per bottle; Brut, $55 per bottle; Brut Rose, $75; Blanc de Blancs, $75;
and Riesling, $14 per bottle (all bottle prices included herein are the suggested retail prices). The Companys mission for this
brand is to become the premier producer of Pinot Noir in the Pacific Northwest.
4
Under
its Tualatin Estate Vineyards label, the Company currently produces and sells the following type of wine in 750 ml bottles: Semi-Sparkling
Muscat, $20 per bottle.
Under
its Griffin Creek label, the Company produces and sells the following types of wine in 750 ml bottles: Syrah, the brands flagship,
$50 per bottle; Merlot, $48 per bottle; Cabernet Sauvignon, $50 per bottle; Grenache, $50 per bottle; Cabernet
Franc, $50 per bottle; Tempranillo, $50 per bottle; Malbec, $50 per bottle; The Griffin (a Bordeaux style blend), $65
per bottle; and Viognier, $35 per bottle. This brands mission is to be the highest quality producer of Bordeaux and Rhone
varietals in Southern Oregon.
Under
its Elton label, the Company produces and sells the following types of wine in 750 ml bottles: Pinot Noir, $75 per bottle and Chardonnay,
$75 per bottle.
Under
its Pambrun label, the Company produces and sells the following types of wine in 750 ml bottles: Chrysologue, $65 per bottle; Merlot,
$60 per bottle; and Cabernet Sauvignon, $70 per bottle.
Under
its Maison Bleue label, the Company produces and sells the following types of wine in 750 ml bottles: Frontiere Syrah, $75 per bottle;
Graviére Syrah, $65 per bottle; Voyageur Syrah, $50 per bottle; Bourgeois Grenache, $50 per bottle; and Voltigeur Viognier, $40
per bottle and Lisette Rose, $28 per bottle.
Under
its Made in Oregon Cellars label, the Company produces and sells the following type of wine in 750 ml bottles: Oregon Blossom (off-dry
rosé), $14 per bottle.
The
Company holds U.S. federal and/or Oregon state trademark registrations for the trademarks material to the business, including but not
limited to, the WILLAMETTE VALLEY VINEYARDS, DAEDALUS, OREGONS LANDMARK WINERY, TUALATIN, GRIFFIN CREEK, GRIFFIN, ELTON, WILLAMETTE,
WVV, SIP.SAVE, WHOLE CLUSTER, MADE IN OREGON CELLARS, OREGON BLOSSOM, INGRAM ESTATE, ITS WILLAMETTE, DAMMIT, FULLER, TUALATIN,
TUALATIN ESTATE, MAISON BLEUE WINERY, METIS, OBRIEN, WILLAMETTE WINEWORKS, COTE DU BLEUE, PERE AMI, KAYAK and NATOMA
marks. Additionally, the Company has allowed use on PAMBRUN and PIERRE PAMBRUN and PINOT BLACK.
Market
overview – The United States wine industry has seen a rapid increase in the number of wineries that are being established throughout
the country. From 2009 to 2021, U.S. wineries grew in number from 6,357 to 11,053, according to Statista. and is one of the fastest growing
segments in agriculture. U.S. wineries decreased production in 2020, the most recent year such data is available, by 9.7% compared to
2019 according to Statista. The total retail value of wine sales has increased from $26.3 billion in 2000 to $66.8 billion in 2020 according
to Statista. According to the report, the U.S. value of Direct to consumer wine shipments grew by 14.9 percent in 2020. Total wine consumption
in the United States has grown by 46 percent since 2005. In 2020, one billion gallons of wine were consumed, up from 687 million in 2005.
Wine consumption has been increasing in the United States. Since 2005, the average annual consumption per resident has increased by 33
percent to a high of 3.09 gallons in 2020.
According
to a Wine Analytics report at the end of 2021, the total U.S. wine market was worth $78.3 billion, a 17% increase from the previous year,
which Wine Analytics believes were driven by the vaccinated and looser public health restrictions which gave consumers the confidence
and opportunities to return to on-premise venues.
According
to Wine Intelligence Ltd., the total wine drinking population in the U.S. increased to a record high of 118 million in 2019, an increase
of 8 million people drinking wine at least once a year compared with 2015. However, the number of consumers drinking wine at least once
a month declined by 11 million over that same time period. Wine Intelligence reports this trend is driven by 21-34 year olds who
are moderating consumption and switching to other beverages yet Wine Intelligence found that Millennials who are remaining as regular
wine drinkers say they are more highly involved, adventurous and higher spending wine drinkers than more mature consumers.
According to the Wine Market Council, of U.S. wine consumers in 2019, 56% were female and 44% male with 33% of consumers drinking wine
more than once a week. Domestic wine accounted for 66.9%
of U.S. sales in 2019 according to Wines & Vines Analytics Report. The five most popular wines in 2019 were chardonnay, cabernet
sauvignon, red blends, pinot gris and pinot noir, according to Nielsen.
5
In
2018, off-premise sales accounted for roughly 81% of the U.S. market with an average bottle price of $10 according to Nielsen. Although
direct to consumer (DTC) sales continue to be a fast growing channel in the U.S. market, increasing by 12% in 2018 from 2017 according
to Wines & Vines Analytics, DTC sales constituted only a small percentage of overall sales volume representing less than 2% of the
total sales volume in the United States in 2018.
In
a 2018 American Wine Consumer Preference Survey, by Sonoma State University and the Wine Business Institute, American wine consumers
from all 50 states were sampled regarding their wine consumption. Of those sampled, 50% reported they consume wine daily or several times
per week making them High Frequency Wine Drinkers with 17% reporting that they drink wine once per week and the remaining
33% drinking wine less frequently. Respondents demonstrated a preference for red wine, with 69% listing it as one of their favorites,
67% listing white wine as one of their favorites and 40% listing Rose. Price and brand topped the list of decision-making reasons when
purchasing wine for home consumption at 80% and 69% respectively. Of those surveyed 32% listed the most common purchase price being $11
to $15 however 46% indicated that they had paid $50 to $99 a bottle for a special occasion.
Rob
McMillan, EVP and founder of Silicon Valley Banks Wine Division, in his State of The Wine Industry Report 2020, explains that
the wine consumers who fueled the growth of super premium wines, Baby Boomers, are moving into retirement, declining in numbers and per
capita consumption. While younger generations represent a substantial opportunity for wine producers, winemakers must make dramatic adjustments
in their strategies to reach and appeal to these younger consumer groups with different values or face declining sales and profits.
The
Companys Board of Directors and Management believe the winerys focus on integrity in winemaking, small scale, storied estate
vineyards, environmental stewardship, support for community needs and participatory wine experiences are reflective of the values of
a number of prospective, developing wine enthusiasts.
The
Oregon wine industry – Oregon is a relatively new wine-producing region in comparison to California and France. In 1966, there
were only two commercial wineries licensed in Oregon. According to the Oregon Vineyard and Winery Report produced by University of Oregons
Institute for Policy Research and Engagement (UOIPRE) in 2020, the most recent year such data is available, the
overall number of wineries increased from 908 to 995 with the biggest increases coming from the Willamette Valley, which added 60.
Planted acres of wine grape vineyards increased by 2,132 acres from 37,399 to 39,531, an increase of 5.7%, 33,320 acres of which were
harvested. Oregon wine grapes produced a 2020 crop with a total value of $158 million, a decrease of 33.6% from 2019 primarily due to
lower fruit set and wildfires preceding the 2020 harvest according to UOIPRE. Pinot Noir leads all varieties accounting for 60% of planted
acreage and 49% of production. According to UOIPRE, Oregon case sales in 2020 were 4.7 million, which was similar to 2019. UOIPRE reported
case sales in dollars for 2020 were approximately $700 million, a 3.8% increase from 2019.
Because
of climate, soil and other growing conditions, we believe the Willamette Valley in western Oregon is ideally suited to growing superior
quality Pinot Noir, Chardonnay, Pinot Gris and Riesling wine grapes. Some of Oregons Pinot Noir, Pinot Gris and Chardonnay wines
have developed outstanding reputations, winning numerous national and international awards.
Oregon
does have certain disadvantages as a wine-producing region. Oregons wines are lesser known to consumers worldwide and the total
wine production of Oregon wineries is small relative to California and French competitors. Greater worldwide label recognition and larger
production levels give Oregons competitors certain financial, marketing, distribution and unit cost advantages.
Furthermore,
Oregons Willamette Valley has an unpredictable rainfall pattern in early autumn. If significantly above-average rains occur just
prior to the autumn grape harvest, the quality of harvested grapes is often materially diminished, thereby affecting that years
wine quality.
6
Finally,
phylloxera, an aphid-like insect that feeds on the roots of grapevines, has been found in several commercial vineyards in Oregon. Contrary
to the California experience, most Oregon phylloxera infestations have expanded very slowly and done only minimal damage. Nevertheless,
phylloxera does constitute a significant risk to Oregon vineyards. Prior to the discovery of phylloxera in Oregon, all vine plantings
in the Companys Estate Vineyard, in Turner, Oregon, were with non-resistant rootstock. In 1997, the Company purchased Tualatin
Vineyards at the Tualatin Winery, which has phylloxera at its site. All current plantings are with, and all future planting will be with,
phylloxera-resistant rootstock at that location. The Company takes commercially reasonable precautions in an effort to prevent the spread
of phylloxera to other vineyards.
As
a result of these factors, subject to the risks and uncertainties identified in this Annual Report, the Company believes that long-term
prospects for growth in the Oregon wine industry are excellent. The Company believes that over the next several years the Oregon wine
industry will grow at a faster rate than the overall domestic wine industry, and that much of this growth will favor producers of premium,
super premium and ultra-premium wines such as the Companys Estate, Elton, Pambrun, Maison Bleue and Griffin Creek brands.
2021
Oregon harvest – There is no official data available on the 2021 Oregon harvest as of the date of this report.
Company
Strategy
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 Companys goal is to continue to build on a
reputation for producing some of Oregons finest, most sought-after wines.
Based
upon several highly regarded surveys of the U.S. wine industry, the Company believes that successful wineries exhibit the following four
key attributes: (i) focus on production of high-quality premium, super premium and ultra-premium varietal wines; (ii) achieve brand positioning
that supports high bottle prices for its high quality wines; (iii) build brand recognition by emphasizing restaurant sales; and (iv)
develop strong marketing advantages (such as a highly visible winery location, successful support of distribution, and life-long customer
service programs).
To
successfully execute this strategy, the Company has assembled a team of accomplished winemaking professionals and has constructed and
equipped the Estate Winery into a 12,784 square foot winery that includes a 12,500 square foot outdoor production area for the harvesting,
pressing and fermentation of wine grapes.
The
Companys marketing and selling strategy is to sell its premium, super premium and ultra-premium cork-finished-wine through a combination
of direct sales at the Estate Winery, the McMinnville Tasting Room in McMinnville, Oregon, the Tualatin Estate Tasting Room in Forest
Grove, Oregon, the Maison Bleue Tasting Room in Walla Walla, Washington, the Tasting Room in Folsom, California and sales through independent
distributors and wine brokers who market the Companys wine in specific targeted areas.
The
Company believes the location of the Estate Winery next to Interstate 5, Oregons major north-south freeway, significantly increases
direct sales opportunities to consumers. The Company believes this location provides high visibility for the Winery to passing motorists,
thus enhancing recognition of the Companys products in retail outlets and restaurants. The Company also believe the remodeled
Hospitality Center, at the Estate Winery, has further increased the Companys direct sales and enhanced public recognition of its
wines.
7
To
remain competitive in the premium, super premium and ultra-premium market, the Company has embarked on a brand expansion project and
is in the process of developing a brand and future winery in the Walla Walla AVA under the names Pambrun, Maison Bleue and Metis. This
future winery is expected to produce small vintages of Cabernet Sauvignon and other Bordeaux-varietals, under the Pambrun brand, and
Syrah and other Rhone-varietals, under the Maison Bleue brand, to compete in the ultra-premium wine market. The Company has released
wines under the Pambrun label beginning with the 2015 vintage year and Maison Bleue label beginning with the 2016 vintage. Additionally,
the Company has developed a single vineyard brand near Hopewell, Oregon adjacent to the current site of Elton Vineyards to produce wine
under the Elton label. This brand produces primarily Pinot Noir and Chardonnay, also for sale in the ultra-premium space. The Company
has released wines under the Elton label beginning with the 2015 vintage year. In January 2017, the Company purchased 17 acres,
with 15 acres of Pinot Noir planted, south of Dundee, Oregon and alongside Highway 99W. The Company added 3 acres to that property through
a lot line adjustment. The Company is in the process of constructing a new sparkling wine facility and tasting room, called Domaine
Willamette, at the Bernau Estate Vineyard that will feature the Companys sparkling wines, as well as its other reserve wines,
and its biodynamic farming practices.
In
December 2016 the Company purchased approximately 40 acres in the Dundee, Oregon area for estate vineyard and winery expansion. In 2020
the Company opened a microwinery featuring wine tasting and a custom blending experience under the name Willamette Wineworks, in
historic Folsom, California, and began selling wine under the brand name Natoma.
Vineyards
The
Company owns and leases approximately 1,018 acres of land, of which 801 acres are currently planted as vineyards or is suitable for future
vineyard planting. The vineyards the Company owns and leases are all certified sustainable by LIVE (Low Input Viticulture and Enology)
and Salmon Safe. At full production, the Company anticipates these vineyards would enable the Company to grow approximately 72% of the
grapes needed to meet the winerys current production capacity, of 615,000 gallons (258,620 cases), at its Estate Winery.
The
following table summarizes the Companys acreage:
ACRES
TONS
Vineyard Name
Total
Producing
Pre-Production
Plantable
Non-
Plantable
Harvest
2021
Harvest
2020
Owned Vineyards
WVV Estate
107
67
2
-
38
242
187
Tualatin Estate Vineyard
107
56
5
-
46
184
146
Ingram Vineyard
86
63
-
-
23
172
112
Pambrun Vineyard
87
20
-
30
37
28
33
Loeza Vineyard
62
15
20
23
4
43
-
Louisa Vineyard
53
-
-
25
28
-
-
Maison Bleue Vineyard
37
5
10
19
3
30
13
Bernau Estate
20
13
-
-
7
35
24
Dayton Vineyard
40
-
-
34
6
-
-
Lafayette Vineyard
36
-
-
36
-
-
-
Jory Claim Vineyard
69
-
-
65
4
-
-
Sub-Total
704
239
37
232
196
734
515
Leased Vineyards
Peter Michael Vineyard
79
69
-
-
10
270
174
Meadowview Vineyard
49
49
-
-
-
189
141
Elton Vineyard
59
54
-
2
3
163
121
Ingram Vineyard
110
93
-
17
-
194
80
Bernau Estate
17
-
9
-
8
-
-
Sub-Total
314
265
9
19
21
816
516
Contracted Vineyards*
Various
381
381
-
-
-
1,522
1,470
Total
1,399
885
46
251
217
3,072
2,501
* Contracted
acreage is estimated
8
WVV
Estate – Established in 1983, the Companys Estate Vineyard (the Estate Vineyard) is located at the
Winery location south of Salem, near Turner, Oregon. The Estate Vineyard uses an elaborate trellis design known as the Geneva Double
Curtain. The Company has incurred the additional expense of constructing this trellis because it doubles the number of canes upon
which grape clusters grow and spreads these canes for additional solar exposure and air circulation. Research and practical
applications of this trellis design indicate that it should improve grape quality through smaller clusters and berries over
traditional designs.
Tualatin
Estate Vineyard – Established in 1973 at the Tualatin Winery location near Forest Grove, Oregon, the Companys Tualatin
Estate Vineyards is one of the oldest vineyards in Oregon. It was purchased by the Company in 1997. A series of sale-leaseback transactions
split the property into two additional vineyards, and the Company continues to lease and manage the Peter Michael Vineyard and Meadowview
Vineyard, located adjacent to the Tualatin Vineyard.
Ingram
Estate and Elton Vineyard – In 2008, the Company purchased 86 acres near Hopewell, Oregon, for vineyard plantings. Adjacent
to the purchased land is an additional 110 leased acres, also for vineyard development. The Company believes the site is ideally situated
to grow premium Pinot Noir. The Ingram site is also adjacent to Elton Vineyards, where the Company leases 54 acres of established vineyards.
Pambrun
Vineyards – In 2015, the Company purchased 42 acres in the Walla Walla AVA near the town of Milton-Freewater, Oregon. Additionally,
the Company purchased an additional 45 adjoining acres in 2017. The Company believes this site is ideal to grow Cabernet Sauvignon and
other Bordeaux-varietals. Wines produced from this vineyard are sold under the Pambrun label.
Loeza
Vineyard – The Company purchased 62 acres near Gaston, Oregon in 2014, for vineyard plantings, and believes the site is ideally
situated to grow premium Pinot Gris and Pinot Noir. The site is close to Tualatin Vineyards which allows the Company to leverage existing
crews for vineyard development and operations.
Louisa
Vineyard – The Company purchased 53 acres in the Ribbon Ridge sub-AVA in 2016 for vineyard plantings and believes the site
is suitable for growing ultra-premium Pinot Noir.
Maison
Bleue Vineyard – The Company purchased approximately 37 acres in the new Rocks District of Milton-Freewater appellation
near Milton-Freewater, Oregon in 2016. Grapes from this vineyard go to the Maison Bleue label.
Bernau
Estate – The Company purchased approximately 17 acres in Dundee, Oregon in January 2017 comprised of 15 acres of producing
Pinot Noir. Additionally, the Company added 3 acres through a lot line adjustment to add to the parcel. The Company leases 17 adjoining
acres.
Dayton
Vineyard – The Company purchased 40 acres in Dayton, Oregon in December 2016. The Company intends to plant vineyards and construct
a new winery at this location.
Lafayette
Vineyard – The Company purchased 36 acres in January 2018.
Jory
Claim Vineyard – The Company purchased 69 acres south of Salem, Oregon in 2019.
Grape
Vines – Beginning in 1997, the Company embarked on a major effort to improve the quality of its flagship varietal by planting new
Pinot Noir clones that originated directly from the cool climate growing region of Burgundy rather than the previous source, Napa, California,
where winemakers believe the variety adapted to the warmer climate over the many years it was grown there.
These
new French clones are called Dijon clones after the University of Dijon in Burgundy, which assisted in their selection
and shipment to a U.S. government authorized quarantine site, and then two years later to Oregon winegrowers. The most desirable of these
new Pinot Noir clones are numbered 113, 114, 115, 667, 777 and 943. In addition to certain flavor advantages, these clones ripen up to
two weeks earlier, allowing growers to pick before heavy autumn rains. Heavy rains can dilute concentrated fruit flavors and promote
bunch rot and spoilage. These Pinot Noir clones were planted at the Tualatin Vineyards with phylloxera-resistant rootstock and the 667
and 777 clones have been grafted onto seven acres of self-rooted, non-phylloxera-resistant vines at the Companys Estate Vineyard.
9
New
clones of Chardonnay preceded Pinot Noir into Oregon and were planted at the Companys Estate Vineyard on phylloxera-resistant
rootstock.
In
2021, crop yields were below the 7-year average but higher than in 2020 and the Companys producing acres in the Estate Vineyard
and Tualatin Estate yielded approximately 242 tons and 184 tons of grapes, respectively. Leased vineyards produced an aggregate of 816
tons of grapes in 2021. Our Ingram Estate produced 172 tons of grapes in 2021. Bernau Estate produced 35 tons of grapes in 2020. Pambrun
Vineyard produced 28 tons of grapes in 2021. Loeza Vineyard produced 43 tons of grapes in 2021. Maison Bleue Vineyard produced 30 tons
of grapes in 2021.
The
Company fulfills its remaining grape needs by purchasing grapes from other nearby vineyards at competitive prices. In 2021, the Company
purchased an additional 1,522 tons of grapes from other growers. The Company cannot grow enough grapes to meet anticipated production
needs, and therefore contracts grape purchases to make up the difference. Contracted grape purchases are considered an important component
of the Companys long-term growth and risk-management plan. The Company believes high quality grapes will be available for purchase
in sufficient quantity to meet the Companys requirements. Additionally, the Company will continue to evaluate opportunities to
plant more acres and purchase properties for future vineyards.
Management
believes that the grapes grown on the Companys vineyards establish a foundation of quality through the Companys farming
practices, upon which the quality of the Companys wines is built. Wine produced from grapes grown in the Companys own vineyards
may be labeled as Estate Bottled wines. These wines traditionally sell at a premium over non-estate bottled wines.
Viticultural
conditions – Oregons Willamette Valley is recognized as a premier location for growing certain varieties of high-quality
wine grapes, particularly Pinot Noir, Pinot Gris, Chardonnay and Riesling. The Company believes that the Estate Vineyards growing
conditions, including its soil, elevation, slope, rainfall, evening marine breezes and solar orientation are among the most ideal conditions
in the United States for growing certain varieties of high-quality wine grapes. The Estate Vineyards grape growing conditions
compare favorably to those found in some of the famous Viticultural regions of France. Western Oregons latitude (42 o –46 o
North) and relationship to the eastern edge of a major ocean is very similar to certain centuries-old wine grape growing regions
of France.
The
Estate Vineyards soil type is Jory/Nekia, a dark, reddish-brown, silky clay loam over basalt bedrock, noted for being well drained,
acidic, of adequate depth, retentive of appropriate levels of moisture and particularly suited to growing high quality wine grapes.
The
Estate Vineyards elevation ranges from 533 feet to 800 feet above sea level with slopes from 2% to 30% (predominately 12-20%).
The Estate Vineyards slope is oriented to the south, southwest and west. Average annual precipitation at the Estate Vineyard is
41.3 inches; average annual air temperature is 52 to 54 degrees Fahrenheit, and the length of each years frost-free season averages
from 190 to 210 days. These conditions compare favorably with conditions found throughout the Willamette Valley viticultural region and
other domestic and foreign viticultural regions, which produce high quality wine grapes.
In
the Willamette Valley, permanent vineyard irrigation generally is not required. The average annual rainfall provides sufficient moisture
to avoid the need to irrigate the Estate Vineyard. However, if the need should arise, the Companys Estate property contains one
water well which can sustain sufficient volume to meet the needs of the Winery and to provide auxiliary water to the Estate Vineyard
for new plantings and unusual drought conditions. At the Tualatin Vineyard, the Company has water rights to a year-round spring that
feeds an irrigation pond. The Company has water rights at the Pambrun Vineyard and Maison Bleue Vineyards and has no water rights at
Dayton Vineyard, Lafayette Vineyard and Jory Claim Vineyard.
Susceptibility
of vineyards to disease – The Tualatin Estate Vineyard and the adjacent leased vineyards are known to be infested with phylloxera,
an aphid-like insect, which can destroy vines.
It
is not possible to estimate any range of loss that may be incurred due to the phylloxera infestation of the Companys vineyards.
The phylloxera at Tualatin Vineyard is believed to have been introduced on the roots of the vines first planted on the property in the
southern most section Gewurztraminer in 1971 that the Company partially removed in 2004. The remaining vines, and all others infested,
remain productive at low crop levels. The Company is in the process of gradually replacing infested areas with new, phylloxera-resistant
vines.
10
Winery
Wine
production facility – The Companys Estate Winery and production facilities are capable of efficiently producing up to
258,620 cases (615,000 gallons) of wine per year, depending on the type of wine produced. In 2021, the Winery produced approximately
206,954 cases (492,043 gallons) primarily from its 2019 and 2020 harvest.
The
Winery is 12,784 square feet in size and contains areas for processing, fermenting, aging and bottling wine, as well as an underground
wine cellar, and administrative offices. There is a 12,500 square foot outside production area for harvesting, pressing and fermenting
wine grapes The Company also has a 23,000 square foot storage building to store its inventory of bottled product with a capacity of approximately
135,000 cases of wine. The production area is equipped with a settling tank and sprinkler system for disposing of wastewater from the
production process in compliance with environmental regulations.
In
addition to the production capacity discussed above, the Tualatin Winery has 20,000 square feet of production capacity. This adds approximately
28,000 cases (66,000 gallons) of wine production capacity to the Company. The capacity at the Tualatin Winery is available to the Company
to meet any anticipated future production needs.
Hospitality
facility – The Company has a renovated tasting and hospitality facility of 35,642 square feet (the Hospitality
Center) at the Estate Winery. The main floor of the Hospitality Center includes retail sales space with the Estate Tasting Room,
dining area and mezzanine, which altogether are designed to accommodate approximately 300 persons for tastings, wine and food pairing
meals, public and private events and meetings. An iconic observation tower and tiered decks around the Hospitality Center enable visitors
to enjoy the view of the Willamette Valley and the Companys Estate Vineyard. The tiered decks funnel into an outdoor courtyard
that hosts many seasonal gatherings. To the south side of the tiered decks the Company has two hospitality suites for overnight accommodations.
The Hospitality Center sits above the underground barrel cellar and tunnel that connects with the Winery. The facility includes a basement
cellar, tunnel and barrel room of 11,090 square feet to store up to 1,800 barrels of wine for aging in the proper environment.
Just
outside the Hospitality Center, the Company has a landscaped park setting consisting of terraced lawns for outdoor events. The area between
the Winery and Hospitality Center form a 20,000 square foot quadrangle. As designed, a removable fabric top can cover the quadrangle,
making it an all-weather outdoor facility to promote the sale of the Companys wines through festivals and social events. Above
the Companys working Winery is the Pinot Room and Founders Room, which can accommodate 40 persons and 111 persons, respectively,
for public and private events.
The
Company believes the Hospitality Center and surrounding areas make the Winery an attractive recreational and social destination for tourists
and residents, thereby enhancing the Companys ability to sell its wines.
Mortgages
on properties – The Companys winery facilities at the Estate Winery are subject to two mortgages with an aggregate principal
balance of $5,535,096 at December 31, 2021. The two outstanding loans require monthly principal and interest payments of $62,067 for
the life of the loans, at annual fixed interest rates of 4.75% and 5.21%, and with maturity dates of 2028 and 2032.
Wine
production – The Company operates on the principle that winemaking is a natural but highly technical process requiring the
attention and dedication of the winemaking staff. The Companys Winery is equipped with current technical innovations and uses
modern laboratory equipment and computers to monitor the progress of each wine through all stages of the winemaking process.
11
The
Companys recent annual grape harvest and wine production is as follows:
Tons of
Tons of
Total Tons
Gallons of
Harvest
Grapes
Grapes
of Grapes
Bulk
Production
Cases
Year
Grown
Purchased
Harvested
Purchases
Year
Produced
2005
1,107
25
1,132
-
2005
72,297
2006
1,454
34
1,488
-
2006
81,081
2007
850
896
1,746
-
2007
115,466
2008
551
874
1,425
57,736
2008
121,027
2009
1,033
1,100
2,133
74,954
2009
132,072
2010
674
371
1,045
4,276
2010
110,224
2011
718
609
1,327
9,620
2011
81,357
2012
658
670
1,328
7,910
2012
91,181
2013
755
1,020
1,775
6,257
2013
95,638
2014
1,211
970
2,181
520
2014
108,958
2015
1,266
1,012
2,278
-
2015
120,794
2016
921
1,052
1,973
47,780
2016
141,416
2017
1,631
1,622
3,253
15,900
2017
151,332
2018
1,501
1,063
2,564
800
2018
164,590
2019
1,572
1,046
2,618
-
2019
172,869
2020
1,031
1,470
2,501
13,173
2020
175,357
2021
1,550
1,522
3,072
6,643
2021
206,954
Cases
produced per ton harvested often vary between years mainly due to the timing of when the cases are produced.
Sales
and Distribution
Marketing
strategy – The Company markets and sells its wines through a combination of direct sales at the Winery, directly through mailing
lists, and through distributors and wine brokers. As the Company has increased production volumes and achieved greater brand recognition,
sales to out of state markets have increased, both in terms of absolute dollars and as a percentage of total Company sales.
The
Company uses a variety of marketing channels to generate interest in its wines. The Company has a highly functional website and maintains
social media sites. The Company controls a database of customers for email and direct promotions. The Company continues to submit its
wines to competitions and state, regional and national media for editorials and ratings.
Direct
sales – The Companys Estate Winery is located on a visible hill adjacent to Oregons major north-south freeway
(Interstate 5), approximately 2 miles south of the states second-largest metropolitan area (Salem), and 50 miles in either direction
from the states first and third-largest metropolitan areas (Portland and Eugene). We believe the unique location along Interstate
5 has resulted in generally greater amount of wines sold at the Estate Winery as compared to the Oregon industry standard. Direct sales
from the Winery are a vital sales channel and an effective means of product promotion. The Estate Winery Tasting Room is open daily and
offers wine tasting and education by trained personnel. The Company offers by-appointment private tours offering a behind-the-scenes
look at the production process of the wines. The Company has one of the largest wine club memberships in Oregon.
In
2014, the Company launched daily food pairings to accompany its wines. Led by the Winery Chef, the menu highlights Pacific Northwest
inspired dishes paired with the Companys wines. The culinary offering has now expanded to include Pairings Wine Dinners,
community-style wine dinners hosted regularly throughout each month. In 2019, the Company added a new experience offered throughout
the week called Pairings Exploration that features four wines paired with four small bites to educate guests on food and wine pairing.
In December 2021, the Company debuted a new Pinot Noir Clonal Blending experience giving guests the ability to be a winemaker for a day
be crafting their own custom blends from barrel.
12
The
Winery has developed a Winery Ambassador program, which connects its Ambassadors with customers throughout the United States
and offers personalized wine recommendations and easy ordering by phone or email. The Company sells its wine through its own e-commerce
website and direct ships were permissible.
The
Company also operates four additional tasting rooms; one in historic downtown McMinnville, in the heart of Oregon Wine Country, one at
its Tualatin Vineyard (located 30 minutes west of Portland) one in downtown Walla Walla, Washington, and one in Folsom, California.
The
Company usually holds six major festivals at the Winery each year. In addition, open houses are held at the Winery during major holiday
weekends such as Memorial Day and Thanksgiving. Numerous private events, charitable and political events are also held at the Winery.
Direct
sales produce a higher profit margin because the Company can sell its wine directly to consumers at retail prices rather than to distributors
at free-on-board or FOB prices. Sales made directly to consumers at retail prices result in an increased profit margin
equal to the difference between retail prices and distributor prices. For 2021 and 2020, direct sales contributed approximately 41.8%
and 38.6% of the Companys net sales, respectively.
Distributors
and wine brokers – The Company uses both independent distributors and wine brokers primarily to market the Companys
wines in specific targeted areas. Only those distributors and wine brokers who have demonstrated knowledge of and a proven ability to
market premium, super premium, and ultra-premium wines are utilized. The Companys products are distributed in 49 states and the
District of Columbia, and there are 3 non-domestic (export) customers. For 2021 and 2020, sales to distributors and wine brokers contributed
approximately 58.2% and 61.4% of the Companys revenue from operations, respectively.
Tourists
– Oregon wineries are a popular tourist destination with many bed & breakfasts, motels and fine dining restaurants available.
The Willamette Valley, Oregons leading wine region has approximately 68% of the states wineries and vineyards, is home
to approximately 736 wineries and was selected by Wine Enthusiast Magazine as its 2016 Wine Region of the Year. An additional advantage
for Willamette Valley wine tourism is the proximity of the wineries to Portland (Oregons largest city and most popular destination).
From Portland, tourists can visit the Willamette Valley winery of their choice in anywhere from a 45 minute to a two-hour drive.
The
Company believes its convenient location, adjacent to Interstate 5, enables the Winery to attract a significant number of visitors. The
Winery is approximately a 45-minute drive from Portland and less than one mile from The Enchanted Forest, an amusement park which operates
from April through September each year.
Dependence
on Major Customers
Historically,
the Companys revenue has been derived from thousands of customers annually. In 2021, sales to one distributor represented approximately
18.1% of total Company revenue. In 2020, sales to one distributor represented approximately 24.0% of total Company revenue.
Competition
The
wine industry is highly competitive. In a broad sense, wines may be considered to compete with all alcoholic and nonalcoholic beverages.
Within the wine industry, the Company believes that its principal competitors include wineries in Oregon, California and Washington,
which, like the Company, produce premium, super premium, and ultra-premium wines. Wine production in the United States is dominated by
large California wineries that have significantly greater financial, production, distribution and marketing resources than the Company.
Currently, no Oregon winery dominates the Oregon wine market. Several Oregon wineries, however, are older and better established and
have greater label recognition than that of the Company.
13
The
Company believes that the principal competitive factors in the premium, super premium, and ultra-premium segment of the wine industry
are product quality, price, label recognition, and product supply. The Company believes it competes favorably with respect to each of
these factors. The Company has primarily received Excellent to Recommended reviews in tastings of its wines
and believes its prices are competitive with other Oregon wineries. Larger scale production is necessary to satisfy retailers
and restaurants demand and the Company believes that additional production capacity will be needed to meet estimated future demand.
Furthermore, the Company believes that its estimated aggregate production capacity of 681,000 gallons (286,620 cases) per year at its
Estate Vineyards and Tualatin Vineyard locations give it significant competitive advantages over most Oregon wineries in areas such as
marketing, distribution arrangements, grape purchasing, and access to financing. The current production level of most Oregon wineries
is generally much smaller than the estimated production capacity level of the Companys Wineries. With respect to label recognition,
the Company believes that its unique structure as a publicly owned company will give it a significant advantage in gaining market share
in Oregon, as well as penetrating other wine markets.
Governmental
Regulation of the Wine Industry
The
production and sale of wine is subject to extensive regulation by the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade
Bureau and the Oregon Liquor Control Commission. The Company is licensed by and meets the bonding requirements of each of these governmental
agencies. Sale of the Companys wine is subject to federal alcohol tax, payable at the time wine is removed from the bonded area
of the Winery for shipment to customers or for sale in its tasting room.
In
December 2017, the federal government passed comprehensive tax legislation which included the Craft Beverage Modernization and Tax Reform
Act. This legislation modified federal alcohol tax rates by expanding the lower $1.07 per gallon tax rate to wines up to 16.0% alcohol
content with wines containing higher alcohol levels being taxed at $1.57 per gallon. Additionally, the legislation provides for a $1
credit per gallon for the first 30,000 gallons produced; $0.90 for the next 100,000 gallons; and then $0.535 for up to 750,000 gallons.
These modifications were effective January 2020 and have since been made permanent.
The
Company also pays the state of Oregon an excise tax of $0.67 per gallon for wines with alcohol content at or below 14.0% and $0.77 per
gallon for wines with alcohol content above 14.0% on all wine sold in Oregon. In addition, most states in which the Companys wines
are sold impose varying excise taxes on the sale of alcoholic beverages. As an agricultural processor, the Company is also regulated
by the Oregon Department of Agriculture and, as a producer of wastewater, by the Oregon Department of Environmental Quality. The Company
has secured all necessary permits to operate its business.
Prompted
by growing government budget shortfalls and public reaction against alcohol abuse, government entities often consider legislation that
could potentially affect the taxation of alcoholic beverages. Excise tax rates being considered are often substantial. The ultimate effects
of such legislation, if passed, cannot be assessed accurately. Any increase in the taxes imposed on table wines can be expected to have
a potentially adverse impact on overall sales of such products. However, the impact may not be proportionate to that experienced by producers
of other alcoholic beverages and may not be the same in every state.
Costs
and Effects of Compliance with Local, State and Federal Environmental Laws
The
Company management is strongly focused on environmental stewardship and maintains a variety of policies and processes designed to protect
the environment, the public and consumers of its wine. Although much of the Companys expenses for protecting the environment are
voluntary, the Company is regulated by various local, state and federal agencies regarding environmental laws. However, these regulatory
costs and processes are effectively integrated into the Companys regular operations and consequently do not generally cause significant
alternative processes or costs.
Employees
As
of December 31, 2021 the Company had approximately 177 full-time employees and 89 part-time, on call or seasonal employees. In addition,
the Company hires additional employees for seasonal work as required. The Companys employees are not represented by any collective
bargaining unit. The Company believes it maintains positive relations with its employees.
14
Additional
Information
The
Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and proxy statements with the
Securities and Exchange Commission (SEC). The SEC maintains an internet site that contains reports, proxy and information
statements, and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov. You
may learn more about the Company by visiting the Companys website at www.wvv.com . All
of the reports we file with the SEC are available from this website. All websites referred to herein are inactive textual references
only, meaning that the information contained in such websites is not incorporated by reference herein.
ITEM
1A. RISK FACTORS
The
following disclosures should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results
of Operations of this Annual Report on Form 10-K. These disclosures are intended to discuss certain material risks of the Companys
business as they appear to Management at this time. However, this list is not exhaustive. Other risks may, and likely will, arise from
time to time.
Agricultural
risks could adversely affect the Company
Winemaking
and grape growing are subject to a variety of agricultural risks. Various diseases, pests, fungi, viruses, including Grapevine Red Blotch
Disease (GRBV), drought, frost and certain other weather conditions can affect the quantity of grapes available to the Company, decreasing
the supply of the Companys products and negatively impacting profitability. In particular, certain of the Companys vines
are not resistant to phylloxera; accordingly, those vines are particularly at risk to the effects from an infestation of phylloxera.
Phylloxera is a pest that attacks the rootstocks of wine grape plants. Vineyards in the United States, including some in Oregon and some
owned by us, have been infested in recent years with phylloxera. In particular, Tualatin Estate Vineyards have phylloxera. There can
be no assurance that the Companys existing vineyards, or the rootstocks the Company is now using in its planting programs, will
not become susceptible to current or new strains of phylloxera or that the phylloxera present at the Tualatin Vineyards will not spread
to our other vineyards. Pierces Disease is a vine bacterial disease. It kills grapevines and there is no known cure. Small insects
called Sharpshooters spread this disease. A new strain of the Sharpshooter was discovered in Southern California and is believed to be
migrating north. The Company is actively supporting the efforts of the agricultural industry to control this pest and is making every
reasonable effort to prevent an infestation in its own vineyards. The Company cannot, however, guarantee that it will succeed in preventing
contamination in its vineyards. Additionally, any future government restrictions created in connection with government attempts to combat
phylloxera, GRBV or other pests or viruses may increase vineyard costs and/or reduce production.
Our
operations are susceptible to changing weather patterns and other environmental factors
Over
the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural
disasters, such as hail storms, wildfires and wind, snow and ice storms. Any such extreme weather condition could negatively impact the
harvest of grapes at our vineyards and/or the other vineyards that supply us with grapes for our wine. In particular, Oregons
Willamette Valley has an unpredictable rainfall pattern particularly in early autumn. If significantly above-average rains occur just
prior to the autumn grape harvest, the quality of harvested grapes is often materially diminished, thereby affecting that years
wine quality.
Additionally,
long-term changes in weather patterns could adversely affect the Company, especially if such changes impacted the amount or quality of
grapes harvested. We cannot anticipate changes in weather patterns/conditions, and we cannot predict their impact on our operations if
they were to occur.
As
weather patterns evolve, the Companys vineyards, and contracted vineyards, have become susceptible to potential smoke damage as
a result of wildfires within the region. In extreme events, smoke can produce effects on grapes that make them unusable in the production
of wine. The Company cannot predict smoke events or their potential impact were they to occur.
We
may not be able to economically insure certain risks
The
Company maintains insurance policies to cover certain risks. However not all risks can be insured, or insured economically, and there
may be gaps in coverage that could expose the Company to liability should an event occur. Additionally, we cannot be certain that coverage
levels are adequate or that all of our insurers will be financially viable if we make a claim.
15
Loss
of key employees could harm the Companys reputation and business
The
Companys success depends to some degree upon the continued service of a number of key employees. The loss of the services of one
or more of these key employees, including James W. Bernau, our President and Chief Executive Officer, John Ferry, our Chief Financial
Officer and Christine Clair, our Winery Director could harm the Company and its reputation and negatively impact its profitability, particularly
if one or more of the Companys key employees resigns to join a competitor or to form a competing company.
The
Companys ability to operate requires adequate funding
The
Companys cash flow from operations historically has not been sufficient to provide all funds necessary for the Companys
operations. The Company has entered into a line of credit agreement to provide such funds and entered into term loan arrangements, the
proceeds of which were used to acquire the Tualatin Winery and the Tualatin Vineyards, construct and remodel the Hospitality Center and
pay down the Companys revolving line of credit. There is no assurance that the Company will be able to comply with all conditions
under its credit facilities in the future or that the amount available under its line of credit facility or capital raises will be adequate
for the Companys future needs. Failure to comply with all conditions of the credit facilities, or to have sufficient funds for
operations could adversely affect the Companys results of operations and shareholder value.
As
of December 31, 2021, the Companys outstanding long-term debt was approximately $5.5 million but it did not have any outstanding
borrowings under its lines of credit. Additionally, the Company had notes payable to private parties of approximately $1.3 million as
of December 31, 2021.
Costs
of being a publicly-held company may put the Company at a competitive disadvantage
As
a public company, the Company incurs substantial costs that are not incurred by its competitors that are privately-held. These compliance
costs may result in the Companys wines being more expensive than those produced by its competitors and/or may reduce profitability
compared to such competitors.
The
Company faces significant competition which could adversely affect profitability
The
wine industry is intensely competitive and highly fragmented. The Companys wines compete in several premium wine market segments
with many other premium domestic and foreign wines, with imported wines coming from the Burgundy and Bordeaux regions of France, as well
as Italy, Chile, Argentina, South Africa, New Zealand and Australia. The Companys wines also compete with popular priced generic
wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus
by the Companys independent distributors, many of which carry extensive brand portfolios. A result of this intense competition
has been and may continue to be upward pressure on the Companys selling and promotional expenses. In addition, the wine industry
has experienced significant consolidation. Many of the Companys competitors have greater financial, technical, marketing and public
relations resources than the Company does. In particular, wine production in the United States is dominated by large California wineries
that have significantly greater resources than the Company. Additionally, greater worldwide label recognition and larger production levels
give many of the Companys competitors certain unit cost advantages. Company sales may be harmed to the extent it is not able to
compete successfully against such wine or alternative beverage producers costs. There can be no assurance that in the future the
Company will be able to successfully compete with its current competitors or that it will not face greater competition from other wineries
and beverage manufacturers.
16
The
Willamette Valley American Viticultural Area (AVA) value may be eroded by out of state competition who use it inappropriately
or as fanciful marketing
Wine
grape growing regions in the United States are divided into American Viticultural Areas (AVAs) by the Alcohol and Tobacco Tax and Trade
Bureau (TTB), of the United States Department of the Treasury, based on distinguishable geographic features. The Oregon
wine industry has historically embraced higher standards for wine production than those established by the federal government and other
states. As a result, wines from Oregon AVAs, and specifically the Willamette Valley AVA, have achieved recognition for their quality
against other wines in their class. As a result, these wines are often sold at a higher price point than wines not produced in Oregon.
Because of this recognition, out of state competitors have used Oregon AVAs on bottles and packaging claiming its use as fanciful marketing.
Such use, inappropriate or otherwise, could have a dilutive effect on the prestige of Oregon AVAs and ultimately the prices that can
be charged for wines from Oregon AVAs as a result of reduced competitor quality and/or pricing.
The
Company competes for shelf space in retail stores and for marketing focus by its independent distributors, most of whom carry extensive
product portfolios
Nationwide,
the Company sells its products primarily through independent distributors and brokers for resale to retail outlets, restaurants, hotels
and private clubs across the United States and in some overseas markets. Sales to distributors are expected to continue to represent
a substantial portion of the Companys net revenue in the future. A change in the relationship with any of the Companys
significant distributors could harm the Companys business and reduce Company sales. The laws and regulations of several states
prohibit changes of distributors, except under certain limited circumstances, making it difficult to terminate a distributor for poor
performance without reasonable cause, as defined by applicable statutes. Any difficulty or inability to replace distributors, poor performance
of the Companys major distributors or the Companys inability to collect accounts receivable from its major distributors
could harm the Companys business. There can be no assurance that the distributors and retailers the Company uses will continue
to purchase the Companys products or provide Company products with adequate levels of promotional support. Consolidation at the
retail tier, among club and chain grocery stores in particular, can be expected to heighten competitive pressure to increase marketing
and sales spending or constrain or reduce prices.
Loss
of the Willamette Valley Vineyards and Willamette trademarks could adversely affect the Companys distinction
within the AVA
The
Company has long held the federal trademarks Willamette Valley Vineyards and Willamette as used in its wine
brands. While it is lawful for wine producers meeting the federal and state requirements to list the American Viticultural Area Willamette
Valley source of their wine grapes and wine on their labels, packaging and advertising materials, the Company has enforced its
trademarks on any unauthorized use as a wine brand. These trademarks have been challenged and, should the Company lose this challenge
or future challenges, the Company could lose a competitive advantage.
Fluctuations
in quantity and quality of grape supply could adversely affect the Company
A
shortage in the supply of quality grapes may result from a variety of factors that determine the quality and quantity of the Companys
grape supply, including weather conditions, pruning methods, diseases and pests, the ability to buy grapes on long and short term contracts
and the number of vines producing grapes. Any shortage in the Companys grape production could cause a reduction in the amount
of wine the Company is able to produce, which could reduce sales and adversely impact the Companys results from operations. Factors
that reduce the quantity of the Companys grapes may also reduce their quality, which in turn could reduce the quality or amount
of wine the Company produces. Deterioration in the quality of the Companys wines could harm its brand name and could reduce sales
and adversely impact the Companys results of operations.
Contamination
of the Companys wines would harm the Companys business
The
Company is subject to certain hazards and product liability risks, such as potential contamination, through tampering or otherwise, of
ingredients or products. Contamination of any of the Companys wines could cause it to destroy its wine held in inventory and could
cause the need for a product recall, which could significantly damage the Companys reputation for product quality. The Company
maintains insurance against certain of these kinds of risks, and others, under various insurance policies. However, the insurance may
not be adequate or may not continue to be available at a price or on terms that are satisfactory to the Company and this insurance may
not be adequate to cover any resulting liability.
17
A
reduction in consumer demand for premium wines could harm the Companys business
There
have been periods in the past in which there were substantial declines in the overall per capita consumption of beverage alcohol products
in the United States and other markets in which the Company participates. A limited or general decline in consumption in one or more
of the Companys product categories could occur in the future due to a variety of factors, including: a general decline in economic
conditions; increased concern about the health consequences of consuming alcoholic beverage products and about drinking and driving;
a trend toward a healthier diet including lighter, lower calorie beverages such as diet soft drinks, juices and water products; the increased
activity of anti-alcohol consumer groups; and increased federal, state or foreign excise and other taxes on beverage alcohol products.
The competitive position of the Companys products could also be affected adversely by any failure to achieve consistent, reliable
quality in the product or service levels to customers.
Changes
in consumer spending could have a negative impact on the Companys financial condition and business results
Wine
sales depend upon a number of factors related to the level of consumer spending, including the general state of the economy, federal
and state income tax rates, deductibility of business entertainment expenses under federal and state tax laws, and consumer confidence
in future economic conditions. Changes in consumer spending in these and other regions can affect both the quantity and the price of
wines that customers are willing to purchase at restaurants or through retail outlets. Reduced consumer confidence and spending may result
in reduced demand for the Companys products, limitations on the Companys ability to increase prices and increased levels
of selling and promotional expenses. This, in turn, may have a considerable negative impact upon the Companys sales and profit
margins.
Increased
regulation and/or taxation could adversely affect the Company
The
wine industry is subject to extensive regulation by the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) and various
foreign agencies, state liquor authorities, such as the Oregon Liquor Control Commission (OLCC), and local authorities.
These regulations and laws dictate such matters as licensing requirements, trade and pricing practices, permitted distribution channels,
permitted and required labeling, and advertising and relations with wholesalers and retailers. Any expansion of the Companys existing
facilities or development of new vineyards or wineries may be limited by present and future zoning ordinances, environmental restrictions
and other legal requirements. In addition, new regulations or requirements or increases in excise taxes, income taxes, property and sales
taxes or international tariffs, could negatively affect the Companys financial condition or results of operations. Recently, many
states have considered proposals to increase, and some of these states have increased, state alcohol excise taxes. Additionally, many
states have revised, or are revising, statutes that broaden the definition of nexus to increase tax revenue from out of state businesses.
New
or revised regulations, or increased licensing fees, requirements or taxes could have a material adverse effect on the Companys
financial condition or results of operations. There can be no assurance that new or revised regulations, taxes or increased licensing
fees and requirements will not have a material adverse effect on the Companys business and its results of operations and its cash
flows.
The
Companys common stock is thinly traded, and therefore not as liquid as other investments.
The
trading volume of the Companys common stock on NASDAQ is consistently thin, in that there is not a great deal of
trading activity on a daily basis. Because the average active trading volume is thin, there is less opportunity for shareholders to sell
their shares of the Companys common stock on the open market, resulting in the common stock being less liquid than common stock
in other publicly traded companies.
18
The
Company may face liabilities associated with the offer and sale of our preferred stock.
In
August 2015, the Company commenced a public offering of our Series A Redeemable Preferred Stock pursuant to a registration statement
filed with the SEC. The Company registered this transaction with the securities authorities of the States of Oregon and Washington and,
in November 2015, achieved listing status on NASDAQ under the trading symbol WVVIP. The terms of our Series A Redeemable Preferred Stock
are unusual for a company of our size, and we believe the structure of these securities and of the offering are not commonplace among
issuers of any type. Federal and state securities laws impose significant liabilities on issuers of securities if the related offering
documents contain material misstatements of fact, or if the documents omit to state facts necessary, in light of the circumstances as
a whole, to prevent the documents from being misleading. These liabilities can include rescission liability to the purchasers of the
securities, as well as potential enforcement liability that could give rise to civil money penalties. Securities litigation can be extraordinarily
expensive and protracted, and if we are accused of misstatements or omissions in our offering documents, we may face economic harms and
management distractions regardless of the ultimate outcome of any such litigation. Further, if we ultimately are adjudged to have actually
made a material misstatement or omission, the Company may be liable for the repayment of the purchase price of the related securities,
plus interest from the date of purchase. Any one or more of these events or circumstances would have a material adverse impact upon our
business, financial condition or results of operations, and may make it more difficult or more expensive to undertake capital-raising
efforts in the future.
The
Company may be unable to pay accumulated dividends on its Series A Redeemable Preferred Stock.
The
Companys Series A Redeemable Preferred Stock bears a cumulative 5.3% dividend based upon the original issue price, or $0.22 per
share per annum. However, prior to the declaration and payment of dividends our board of directors must determine, among other things,
that funds are available out of the surplus of the Company and that the payment would not render us insolvent or compromise our ability
to pay our obligations as they come due in the ordinary course of business. Additionally, our existing credit facility limits, and future
debt obligations in the future may limit, both our legal and our practical ability to declare and pay dividends. As a result, although
the Series A Redeemable Preferred Stock will continue to earn a right to receive dividends, the Companys ability to pay dividends
will depend, among other things, upon our ability to generate excess cash. However, although shares of our Series A Redeemable Preferred
Stock will earn cumulative dividends, unpaid dividends will not, themselves, accumulate (as might compounding interest on a debt security,
for example).
As
the Companys sales revenues are dependent in part upon the purchases made by and continued goodwill with its holders of Preferred
Stock, any failure to pay dividends timely could adversely effect the Companys sales. Additionally, as the Company focuses its
issuance of Preferred Stock to wine enthusiasts likely to purchase the Companys wines, any failure by the Management to successfully
target its stock sales could diminish the opportunity to maximize earnings and offset the administrative, regulatory and legal costs
of this form of capital formation through Preferred Stockholder wine purchases.
The
issuance of additional shares of our preferred stock or common stock in the future could adversely affect holders of common stock.
The
market price of our common stock may be influenced by any preferred stock we may issue. Our board of directors is authorized to issue
additional classes or series of preferred stock without any action on the part of our stockholders. This includes the power to set the
terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over
common stock with respect to the liquidation, dissolution or winding up of the business and other terms. If we issue preferred stock
in the future that has preference over our common stock with respect to liquidation, dissolution or winding up, or if we issue preferred
stock with voting rights that dilute the voting power of our common stock, the rights of holders of the common stock or the market price
of the common stock could be adversely affected.
Failures
or security breaches of our information technology systems could disrupt our operations and negatively impact our business.
We
use information technologies to manage our operations and various business functions. We rely on various technologies to process, store
and report on our business and to communicate electronically between our facilities, personnel, customers and suppliers as well as for
administrative functions and many of such technology systems are independent on one another for their functionality. We also use information
technologies to process financial information and results of operations for internal reporting purposes and to comply with regulatory,
legal and tax requirements. We rely on third party providers for some of these information technologies and support. Our ability to effectively
manage our business and coordinate the production, distribution and sale of our products is highly dependent on our technology systems.
Despite our security design and controls and other operational safeguards, and those of our third party providers, our information technology
systems may be vulnerable to a variety of interruptions, including during the process of upgrading or replacing hardware, software, databases
or components thereof, natural disasters, terrorist attacks, telecommunications failures, computer viruses, cyber-attacks, hackers, unauthorized
access attempts and other security issues or may be breached due to employee error, malfeasance or other disruptions. Any such interruption
or breach could result in operational disruptions or the misappropriation of sensitive data that could subject us to civil and criminal
penalties, litigation or have a negative impact on our reputation. There can be no assurance that such disruptions or misappropriations
and the resulting repercussions will not negatively impact our cash flows and materially affect our results of operations or financial
condition.
19
In
addition, many of our information technology systems, such as those we use for administrative functions, including human resources, payroll,
accounting and internal and external communications, as well as the information technology systems of our third-party business partners
and service providers, whether cloud-based or hosted in proprietary servers, contain personal, financial or other information that is
entrusted to us by our customers and personnel. Many of our information technology systems also contain proprietary and other confidential
information related to our business, such as business plans and research and development initiatives. To the extent we or a third party
were to experience a material breach of our or such third partys information technology systems that result in the unauthorized
access, theft, use, destruction or other compromises of our customers or personnels data or confidential information stored
in such systems, including through cyber-attacks or other external or internal methods could result in a violation of applicable privacy
and other laws, and subject us to litigation and governmental investigations and proceedings, any of which could result in our exposure
to material liability.
The
provisions in our articles of incorporation, our by-laws and Oregon law could delay or deter tender offers or takeover attempts that
may offer a premium for our common stock.
Certain
provisions in our articles of incorporation, our by-laws and Oregon law could make it more difficult for a third party to acquire control
of us, even if that transaction could be beneficial to stockholders. These impediments include, but are not limited to; the classification
of our Board of Directors (the Board) into three classes serving staggered three-year terms, which makes it more difficult
to quickly replace Board members; the ability of our Board, subject to certain limitations under the rules of the NASDAQ Stock Market,
to issue shares of preferred stock with rights as it deems appropriate without stockholder approval; a provision that special meetings
of our Board may be called only by our chief executive officer or at the request of holders of not less than half of all outstanding
shares of our common stock; a provision that any member of the Board, or the entire Board, may be removed from office only for cause;
and a provision that our stockholders comply with advance-notice provisions to bring director nominations or other matters before meetings
of our stockholders. The Board may implement other changes that further limit the potential for tender offers or takeover attempts.
The
COVID-19 pandemic could adversely affect our financial results, operations and outlook for an extended period of time.
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 most 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.
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 Companys 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.
20
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Vineyards
– The Company owns or leases 1,018 acres of land, of which 704 acres is owned and 314 acres leased. Of the 1,018 acres of land
owned or leased, 504 acres are productive vineyards, 297 acres are pre-productive vineyards or are suitable for future vineyard plantings,
and 217 acres are not suitable for vineyard planting or are used or reserved for winery or hospitality purposes. See Item 1 Business
- Vineyards, of this Annual Report on Form 10-K for the locations of each of the Companys vineyards (both owned and leased) and
other information pertaining to the production capacity, harvest totals and other important characteristics of each such vineyard.
Wine
production facility – We believe the Companys Estate Winery and production facilities are capable of efficiently producing
up to 258,620 cases (615,000 gallons) of wine per year, depending on the type of wine produced. In 2021, the Winery produced approximately
206,954 cases (492,043 gallons) from its 2019 and 2020 harvest. The Winery is 12,784 square feet in size and contains areas for processing,
fermenting, aging and bottling wine, as well as an underground wine cellar, meeting rooms, and administrative offices. There is a 12,500
square foot outside production area for harvesting, pressing and fermenting wine grapes. The Company also has a 23,000 square foot storage
building to store its inventory of bottled product. The production area is equipped with a settling tank and sprinkler system for disposing
of wastewater from the production process in compliance with environmental regulations. The Hospitality Center located as the Companys
Estate Winery is a large 35,642 square foot tasting and hospitality facility. The
Hospitality Center sits above the underground barrel cellar and tunnel that connects with the Winery. The
facility includes a basement cellar, tunnel and barrel room of 11,090 square feet used to store up to 1,800 barrels of wine for aging
in the proper environment.
The
Company owned Tualatin Estate Winery has 20,000 square
feet of production capacity. This adds approximately 28,000 cases (66,000 gallons) of wine production capacity to the Company. The production
capacity at the Tualatin Estate Winery is not currently used but is available to the Company to meet future production needs. The storage
capacity at the Tualatin Estate Winery is periodically used to store excess bulk wine. Additionally, the Company operates a small retail
store and tasting room at the Tualatin Estate Winery.
The
Company carries Property and Liability insurance coverage in amounts deemed adequate by Management.
See
additional discussion of vineyard and wine production facility under Item 1. Business.
ITEM
3. LEGAL PROCEEDINGS
Although
the Company from time to time may be involved with disputes, claims and litigation related to the conduct of its business, there are
no material legal proceedings pending to which the Company is a party or to which any of its property is subject, and the Companys
management does not know of any such action being contemplated.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
21
PART
II
ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
The
Companys common stock is traded on the NASDAQ Capital Market under the symbol WVVI.
Holders
As
of December 31, 2021, the Company had approximately 2,146 common stock shareholders of record. As some of our shares of common stock
are held in street name by brokers on behalf of shareholders, we are unable to estimate the total number of beneficial
holders of our common stock represented by these record holders.
Dividends
The
Company has paid dividends on the Preferred Stock. The Company has not paid any dividends on its Common Stock, and the Company does not
anticipate paying any dividends in the foreseeable future. The Company intends to use its earnings to expand its vineyards, winemaking
and customer service facilities.
Equity
Compensation Plans
The
Company had no equity compensation plan pursuant to which equity awards could be granted and no outstanding options or other equity awards
as of December 31, 2021.
Recent
Sales of Unregistered Securities
None.
Issuer
Purchases of Equity Securities
None.
ITEM
6. SELECTED FINANCIAL DATA
Not
required.
ITEM
7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with
the Companys financial statements and related notes. Some statements and information contained in this Managements Discussion
and Analysis of Financial Condition and Results of Operations are not historical facts but are forward-looking statements. For a discussion
of these forward-looking statements, and of important factors that could cause results to differ materially from the forward-looking
statements contained in this report, see Item 1 of Part I, Business – Forward-Looking Statements.
While
our significant accounting policies are described in more detail in Note 1 to our audited financial statements, we believe the following
accounting policies are those most critical to the judgements and estimates used in the preparation of our financial statements.
Critical
Accounting Policies and Estimates
Managements
Discussion and Analysis of Financial Condition and Results of Operations discusses Willamette Valley Vineyards financial statements,
which have been prepared in accordance with generally accepted accounting principles. As such, management is required to make certain
estimates, judgments and assumptions that are believed to be reasonable based upon the information available. On an on-going basis, management
evaluates its estimates and judgments, including those related to product returns, bad debts, inventories, leases, investments, income
taxes, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Revenue
- The Companys principal sources of revenue are derived from direct sales and sales through distributors of wine. Distributor
sales are recognized from wine sales at the time of shipment and passage of title. The Companys payment arrangements with wholesalers
provide primarily 30-day terms and, to a limited extent, 45-day, 60-day or longer terms for some international wholesalers. Direct sales
from items sold through the Companys retail locations are recognized at the time of sale.
22
The
Company pays depletion allowances to the Companys distributors based on their sales to their customers. The Company sets these
allowances on a monthly basis and the Companys distributors bill them back on a monthly basis. All depletion expenses associated
with a given month are recognized in that month as a reduction of revenues. The Company also reimburses for samples used by distributors
up to 1.5% of product sold to the distributors. Sample expenses are recognized at the time the Company is billed by the distributor as
a selling, general and administrative expense.
Amounts
paid by customers to the Company for shipping and handling expenses are included in the net revenue. Expenses incurred for outbound shipping
and handling charges are included in selling, general and administrative expense.
Inventory
- The Company values inventories at the lower of actual cost to produce the inventory or net realizable value. The Company regularly
reviews inventory quantities on hand and adjusts its production requirements for the next twelve months based on estimated forecasts
of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand.
In the future, if the Companys inventory cost is determined to be greater than the net realizable value of the inventory upon
sale, the Company would be required to recognize such excess costs in its cost of goods sold at the time of such determination. Therefore,
although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated
changes in demand could have a significant impact on the ultimate selling price and cases sold and, therefore, the carrying value of
the Companys inventory and its reported operating results.
Additionally,
the Company regularly evaluates inventory for obsolescence and marketability and if it determines that the inventory is obsolete, or
no longer suitable for use or marketable, the cost of that inventory is recognized in cost of sales at the time of such determination.
Vineyard
Development - The Company capitalizes internal vineyard development costs prior to the vineyard land becoming fully productive. These
costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine
trellises. Amortization of such costs as annual crop costs is done on a straight-line basis for the estimated economic useful life of
the vineyard, which is estimated to be 30 years. The Company regularly evaluates the recoverability of capitalized costs. Amortization
of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become
a component of cost of goods sold.
Income
Taxes – The Company accounts for income taxes using the asset and liability approach. This requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the
financial statement and the tax basis of assets and liabilities at the applicable tax rates. The Company evaluates deferred tax assets,
and records a valuation allowance against those assets, if available evidence suggests that some of those assets will not be realized.
The
effect of uncertain tax positions would be recorded in the financial statements only after determining a more likely than not probability
that the uncertain tax positions would withstand an examination by tax authorities based on the technical merits of the position. The
tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. As facts and circumstances change, management reassesses these probabilities and would record any changes in
the financial statements as appropriate.
Overview
The
Company generates revenue from the sales of wine to wholesalers and direct to consumers. The Company is experiencing increased levels
of competition in traditional wholesale to retail grocery distribution from large California based wineries that are acquiring, producing
and marketing Oregon branded wines. Direct to consumer sales primarily include sales through the Companys tasting rooms and wine
club. Direct to consumer sales provide a higher gross profit to the Company 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 use of the Hospitality Center,
opening new tasting rooms and growth in wine club membership. The Company had 8,625 wine club memberships for the year ended December
31, 2021, a net increase of 752 when compared to 2020. Additionally, the Companys preferred stock sales since August 2015 have
resulted in approximately 9,400 preferred stockholders many of which the Company believes are wine enthusiasts. When considering joint
ownership, we believe these new shareholders represent approximately 14,000 potential customers of the Company. The Company also has
approximately 2,200 common shareholders which we believe represent an estimated 3,300 potential customers when considering joint ownership.
Additionally, the Company has made a significant investment in developing alternative wine brands, products, direct sales methods and
venues.
23
Periodically,
the Company will sell grapes or bulk wine, which primarily consists of inventory that does not meet Company standards or is in excess
to production targets. However, this activity is not a significant part of the Companys activities.
The
Company sold approximately 203,817 and 180,850 cases of produced wine during the years ended December 31, 2021 and 2020, respectively,
an increase of 22,967 cases, or 12.7% in the current year over the prior year. The increase in case sales was primarily the result
of increased shipments to distributors and higher direct sales in 2021 when compared to 2020.
Cost
of Sales includes grape costs, whether purchased or grown at Company vineyards, crush costs, winemaking and processing costs, bottling,
packaging, warehousing and shipping and handling costs associated with purchased production materials. For grapes grown at Company vineyards,
costs include farming expenditures and amortization of vineyard development costs.
At
December 31, 2021, wine inventory included approximately 101,627 cases of bottled wine and 502,755 gallons of bulk wine in various stages
of the aging process. Case wine is expected to be sold over the next 12 to 24 months and generally before the release date of the next
vintage. The Winery bottled approximately 206,954 cases during the year ended December 31, 2021.
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 most 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.
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 Companys 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 Companys 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 Companys 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 Companys customers, all of which are
uncertain and cannot be predicted.
24
Results
of Operations
2021
compared to 2020
Net
income was $2,445,463 and $3,394,996, for the years ended December 31, 2021 and 2020, respectively, a decrease of $949,533, or 28.0%,
for the year ended December 31, 2021 over the prior year period. The primary reason for this decrease was higher operating expenses for
the year ended December 31, 2021, compared to the previous year.
Net
income applicable to common shareholders was $1,001,180 and $2,278,618, for the years ended December 31, 2021 and 2020, respectively,
a decrease of $1,277,438, or 56.1%, for the year ended December 31, 2021 over the prior year period. This decrease was primarily driven
by lower net income and higher preferred stock dividends.
The
Company had net sales revenues of $31,786,864 and $27,314,852 for the years December 31, 2021 and 2020, respectively, an increase of
$4,472,012 or 16.4%, for the year ended December 31, 2021 over the prior year period primarily as a result of an increase in revenue
from direct sales of $2,739,589 or 26.0% in 2021 compared to 2020, combined with an increase in revenue from sales to distributors of
$1,732,423 or 10.3% in 2021 compared to 2020.
The
Company has three primary sales channels: direct-to-consumer retail sales, in-state sales to distributors, and out-of-state sales to
distributors. During 2021, revenues from retail sales increased 26.0%, revenues from in-state sales decreased 12.7%, and revenues from
out-of-state sales increased 25.0%, compared to 2020.
Direct
sales included $103,471 and $103,958 of bulk wine and grape sales in the years ended December 31, 2021 and 2020, respectively, and represented
approximately 41.7% and 38.6% of the Companys total net revenue for 2021 and 2020, respectively, while the Companys remaining
revenues came from sales through distributors.
The
following table sets forth certain information regarding the Companys revenue, excluding excise taxes, from the Winerys operations
for the twelve months ended December 31, 2021 and 2020:
Twelve months ended
December 31,
2021
2020
Retail
sales
$ 13,306,156
$ 10,560,913
In-state sales
5,824,130
6,671,743
Out-of-state sales
12,937,605
10,350,708
Bulk wine/miscellaneous sales
103,471
103,958
Total revenue
32,171,362
27,687,322
Less excise taxes
(384,498 )
(372,470 )
Sales, net
$ 31,786,864
$ 27,314,852
Retail
sales revenues for the years ended December 31, 2021 and 2020 were $13,306,156 and $10,560,913, respectively, an increase of $2,745,243,
or 26.0%, for the year ended December 31, 2021 over the prior year period. The increase in retail sales revenues in 2021 compared to
2020 was mostly a result of increased revenues from our brand ambassador program and increased wine club sales and sales made over the
internet as well as higher tasting room sales.
Bulk
Wine/miscellaneous sales revenues for the years ended December 31, 2021 and 2020 were $103,471 and $103,958, respectively, a decrease
of $487 or, 0.5%, for the year ended December 31, 2021, over the prior year period.
In-state
sales revenues for the years ended December 31, 2021 and 2020 were $5,824,130 and $6,671,743, respectively, a decrease of $847,163, or
12.7%, for the year ended December 31, 2021 over the prior year period. Management believes this decrease is primarily due to less product
being available to sell at the end of 2021.
25
Out-of-state
sales revenues for the years ended December 31, 2021 and 2020 were $12,937,605 and $10,350,708, respectively, an increase of $2,586,897,
or 25.0%. Management believes this increase is related to increased sales and promotion efforts in 2021.
The
Company pays alcohol excise taxes to both the OLCC and to the TTB. These taxes are based on product sales volumes. The Company is liable
for the taxes upon the removal of product from the Companys warehouse on a per gallon basis. The Company also pays taxes on the
grape harvest on a per ton basis to the OLCC for the Oregon Wine Board. The Companys excise related taxes for the years ended
December 31, 2021 and 2020 were $384,498 and $372,470, an increase of $12,028, for the year ended December 31, 2021 over the prior year
period. This increase was due primarily to increased wine sales revenues in 2021 and the timing of removals.
Cost
of Sales was $13,121,191 and $10,585,076 for the years ended December 31, 2021 and 2020, respectively, an increase of $2,536,115, or
24.0%, for the year ended December 31, 2021, over the prior year period. This change was primarily the result of an increase in sales
in 2021.
Gross
profit was $18,665,673 and $16,729,776 for the years ended December 31, 2021 and 2020, respectively, an increase of $1,935,897, or 11.6%,
for the year ended December 31, 2021 over the prior year period. This increase was generally driven by an increase in sales revenues
partially offset by a higher cost of sales.
The
gross margin percentage was 58.7% and 61.2% for the years ended December 31, 2021 and 2020, respectively, a decrease of 2.5 percentage
points, for the year ended December 31, 2021 over the prior year period. This decrease in the gross profit percentage was primarily the
result of an overall decrease in per case margins mostly due to the release of wines in 2021 from vintages produced from higher product
costs such as the 2020 vintage.
Selling,
general and administrative expenses were $14,975,654 and $11,728,003 for the years ended December 31, 2021 and 2020, respectively, an
increase of $3,247,651, or 27.7%, for the year ended December 31, 2021 over the prior year period. This increase was mainly the result
of increased selling expenses with tasting rooms being open for more days in 2021 and shipping, packaging and administrative cost increases
associated with efforts to increase sales and accommodate and develop retail growth and new operations.
Income
from operations was $3,690,019 and $5,001,773 for the years ended December 31, 2021 and 2020, respectively, a decrease of $1,311,754,
or 26.2%, for the year ended December 31, 2021 compared to the prior year period. The primary reason for this increase was higher cost
of sales and higher selling and administrative expenses as a percentage of sales.
Interest
income was $12,412 and $21,022 for the years ended December 31, 2021 and 2020, respectively, a decrease of $8,610. Interest expense was
$391,272 and $414,061 for the years ended December 31, 2021 and 2020, respectively, a decrease of $22,789, or 5.5%, for the year ended
December 31, 2021 over the prior year period. The decrease in interest expense was mainly due to the decrease in loan balances in 2021
compared to the previous year.
Other
income, net, was $155,183 and $165,916 for the years ended December 31, 2021 and 2020, respectively, a decrease of $10,733, or 6.5%,
for the year ended December 31, 2021 over the prior year period.
Provision
for income taxes was $1,020,879 and $1,379,654 for the years ended December 31, 2021 and 2020, respectively, a decrease of $358,775,
or 26.0%, for the year ended December 31, 2021 over the prior year period. This decrease in income taxes in 2021 compared to 2020 was
primarily the result of lower income from operations in 2021.
Income
per common share after preferred dividends was $0.20 and $0.46 for the years ended December 31, 2021 and 2020, respectively, a decrease
of $0.26, or 56.6%, for the year ended December 31, 2021 over the prior year period. The primary reason for this decrease is a decrease
in net income in 2021 compared to 2020.
26
The
Company had cash balances of $13,747,285 at December 31, 2021, and $13,999,755 at December 31, 2020. The Company had no outstanding line
of credit balances at December 31, 2021 or 2020.
EBITDA
In
2021, the Companys earnings before interest, taxes, depreciation and amortization (EBITDA) decreased 16.9% to $5,797,295
from $6,980,083 in 2020, primarily as a result of a decrease in net income.
EBITDA
does not reflect the impact of a number of items that affect our net income, including financing costs. EBITDA is not a measure of financial
performance under the accounting principles generally accepted in the United States of America, referred to as GAAP, and
should not be considered as an alternative to net income or income from operations as a measure of performance, nor as an alternative
to net cash from operating activities as a measure of liquidity. We use EBITDA as a benchmark measurement of our own operating results
and as a benchmark relative to our competitors. We consider it to be a meaningful supplement to operating income as a performance measure
primarily because depreciation and amortization expense are not actual cash costs, and depreciation expense varies widely from company
to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities.
EBITDA
has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our
GAAP results as reported. Because of these limitations, EBITDA should only be considered as a supplemental performance measure and should
not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash
Flows set out in our consolidated financial statements included herein.
The
following table provides a reconciliation of net income (the most comparable GAAP measure) to EBITDA for the periods indicated:
Year Ended December 31,
2021
2020
Net Income
$ 2,445,463
$ 3,394,996
Depreciation and amortization expense
1,952,093
1,812,394
Interest Expense
391,272
414,061
Interest Income
(12,412 )
(21,022 )
Income tax expense
1,020,879
1,379,654
EBITDA
$ 5,797,295
$ 6,980,083
27
Sales
Wine
case sales for the years ended December 31, 2021 and 2020 and ending inventory amounts for the year ended December 31, 2021, are shown
on the following table:
Cases Sold
Cases Sold
Cases On-Hand
Varietal/Product
2021
2020
December 31, 2021
Pinot Noir/Estate
17,414
15,801
13,048
Pinot Noir/Barrel Select
13,928
17,522
2,645
Pinot Noir/Founders Reserve
3,895
2,613
2,661
Pinot Noir/Special Designates
10,384
6,603
14,854
Pinot Noir/Whole Cluster
59,683
51,387
7,375
Pinot Gris
32,991
33,448
5,746
Riesling
22,843
22,763
11,561
Chardonnay
5,831
3,912
5,549
Other
36,848
26,801
38,187
Total
203,817
180,850
101,627
Approximately
52% of the Companys case sales during 2021 were of the Companys flagship varietal, Pinot Noir. Case sales of Pinot Gris
and Riesling follow with approximately 16% and 11% of case sales each, respectively. The Company sold approximately 203,817 and 180,850
cases of Company-produced wine during the years ended December 31, 2021 and 2020, respectively. This represents an increase of approximately
22,967 cases, or 12.7% in 2021 compared to 2020. This increase in case sales in 2021 compared to 2020 was primarily the result of increased
shipments through the wine club, internet and telephone sales as well as distributors.
The
Company has three primary sales channels: direct-to-consumer sales, in-state sales to distributors, and out-of-state sales to distributors.
These three sales channels represent 41.7%, 18.1% and 40.2%, of net sales for the year ended December 31, 2021, respectively. This compares
to 38.6%, 24.0% and 37.4% of net sales for the year ended December 31, 2020, respectively. Miscellaneous and grape sales are included
in direct-to-consumer sales.
The
Companys direct-to-consumer sales and national sales to distributors offer comparable products to customers and utilize similar
processes and share resources for production, selling and distribution. Direct-to-consumer sales generate a higher gross profit margin
than national sales to distributors due to differentiated pricing between these segments.
Wine
Inventory
The
Company had approximately 101,627 cases of bottled wine on-hand at the end of 2021. Management believes sufficient bulk wine inventory
is on-hand to bottle approximately 211,419 cases of wine in 2022 and that sufficient stock is on hand to meet current demand levels until
the 2021 vintage becomes available.
Production
Capacity
Current
production volumes are within the current production capacity constraints of the Winery when including storage capacity at the Tualatin
Winery and utilization of temporary storage when appropriate. In 2021, approximately 206,954 cases were produced. The Winery has capacity
to store and process about 258,620 cases of wine per year at the Estate Winery but can expand that capacity by utilizing storage at the
Tualatin Winery as well as temporary storage. Management continues to invest in new production technologies intended to increase the
efficiency and quality of wine production. During 2021, the Company did not choose to utilize the wine production facilities at the Tualatin
Winery but did utilize it for wine storage. The Tualatin Winery has capacity to produce approximately 28,000 cases of wine. The facility
is maintained in good condition. Management intends to fully utilize the production capacity at the Estate Winery before expanding into
the Tualatin Winery.
28
Grape
Supply
For
the 2021 and 2020 vintages, the Company grew approximately 50% and 41% of all grapes harvested, respectively. The remaining grapes harvested
were purchased from other growers. In 2021 and 2020, 30% and 50% of grapes harvested were purchased under short-term contracts, and 19%
and 9% of grapes harvested were purchased under long-term contracts, respectively. The Company considers short-term contracts to be for
single vintage years and long-term contracts to cover multiple vintage years.
Grapes
are typically harvested and received in September and October of the vintage year. Upon receipt, the grapes are weighed, and a quality
analysis is performed to ensure the grapes meet the standards set forth in the purchase contract. Based on the quantity of qualifying
grapes received, the full amount payable to the grower is recorded to the grapes payable liability account. Approximately 50% of the
grapes payable amount is due in November of the vintage year. The remaining amount is due in March of the following year. The grapes
are processed into wine, which is typically bottled and available for sale between five months and two years from date of harvest.
The
Company received $1,166,116 and $220,650 worth of grapes from long-term contracts during the years ended December 31, 2021 and 2020,
respectively. The Company received $1,762,283 and $3,339,460 worth of grapes from short-term contracts during the years ended December
31, 2021 and 2020, respectively. Total grapes payable was $1,388,601 and $1,307,165 as of December 31, 2021 and 2020, respectively. Grapes
payable includes $538,677 and $126,024 of grapes payable from long-term contracts as of December 31, 2021 and 2020, respectively.
The
Company plans to address long-term grape supply needs by developing new vineyards on properties currently owned or secured by lease.
The Company has approximately 46 acres of vineyards that have been planted but are in the pre-productive stage. We anticipate that these
vineyards will begin producing grapes within the next one to three years. The Company has approximately 251 acres of land that is suitable
for future vineyard development. Management currently has plans to plant approximately 42 acres in 2022, which we anticipate will begin
producing grapes in 2026. Additionally, the Company intends to seek out opportunities to acquire land for future grape plantings in order
to continue to increase available quantities, maintain control over farming practices, more effectively manage grape costs and mitigate
uncertainty associated with long-term contracts.
Wine
Quality
Continued
awareness of the Willamette Valley Vineyards brand and the quality of its wines was enhanced by national and regional media coverage
throughout 2021 including the accolades below.
Wine Enthusiast awarded the Companys 2020 Whole Cluster Pinot Noir with 91 points and Editors Choice, 2020
Whole Cluster Rosé of Pinot Noir with 90 points, 2019 Founders Reserve Pinot Noir with 90 points, 2020 Riesling with 90
points and Best Buy, 2018 Pambrun Merlot with 91 points and Cellar Selection, 2018 Pambrun Cabernet Sauvignon with 90 points,
2018 Pambrun Chrysologue with 90 points, 2018 Metis with 91 points and Editors Choice, 2019 Maison Bleue Voyageur Syrah with 91
points, 2018 Maison Bleue Frontiere Syrah with 91 points and 2018 Maison Bleue Graviere Syrah with 90 points.
Wine
& Spirits awarded the Companys 2019 Estate Chardonnay with 90 points, 2018 Dijon Clone Chardonnay with 90 points
and 2017 Bernau Estate Brut with 92 points and Years Best for the United States Sparkling category.
James
Suckling awarded the Companys 2018 Elton Pinot Noir with 93 points, 2018 Fuller Pinot Noir with 93 points, 2018 Estate
Pinot Noir with 91 points, 2018 Tualatin Estate Pinot Noir with 91 points, 2018 OBrien Pinot Noir with 91 points and 2018 Bernau
Block Pinot Noir with 90 points.
The
International Wine Report awarded the Companys 2018 Bernau Block Pinot Noir with 90 points, 2019 Estate Pinot Noir with 90
points, 2019 Estate Chardonnay with 91 points and Estate Rose of Pinot Noir with 91 points.
29
The
Wine Panel awarded the Companys 2019 Estate Pinot Noir with 91 points, 2020 Pinot Gris with 93 points, 2019 White Pinot Noir
with 90 points and 2019 Dijon Clone Pinot Noir with 90 points.
The Companys 2018 Estate Pinot Noir and 2020 Pinot Gris were both awarded gold medals and 91 points from the 2021 Sunset International
Wine Competition.
The
Companys 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 Bravos Top Chef , and the season finale was hosted at the Companys
Estate in the Salem Hills.
Seasonality
The
Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenue and net income. Typically,
first quarter sales are the lowest of any given year, and sales volumes increase progressively through the fourth quarter mostly because
of consumer buying habits.
Liquidity
and Capital Resources
At
December 31, 2021, the Company had a working capital balance of $24.5 million and a current ratio of 3.05:1. The Company had cash balances
of $13,747,285, at December 31, 2021.
Total
cash provided from operating activities for the year ended December 31, 2021 was $2,572,708, which resulted primarily from cash provided
by net income combined with increased non-cash operating expenses, such as depreciation and unearned revenue, being partially offset
by cash used in connection with increased inventory and accounts receivable.
Total
cash used in investing activities for the year ended December 31, 2021 was $10,301,395, which primarily consisted of cash used on construction
activity and vineyard development costs.
Total
cash provided from financing activities for the year ended December 31, 2021 was $7,476,217, which 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 and payment of a preferred stock dividend.
In
2019, the Companys Board of Directors approved the construction of a new tasting room at the Bernau Estate Vineyard, expected
to be completed during the 2022 fiscal year. The total construction costs for the Bernau Estate Tasting Room is expected to be 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 December 31, 2021, we had incurred approximately $9.5 million in costs related to the project.
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. 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 December 31, 2021 and December 31, 2020, there was no outstanding balance on this revolving line of credit and the Company
was in compliance with the line of credits financial covenants.
As
of December 31, 2021, the Company had a total long-term debt balance of $5,535,096, including the portion due in the next year, owed
to Farm Credit Services, exclusive of debt issuance costs of $132,483. As of December 31, 2020, the Company had a total long-term debt
balance of $5,985,228, exclusive of debt issuance costs of $145,731. The debt with NW Farm Credit Services was used to finance the Hospitality
Center and subsequent remodels, invest in winery equipment to increase the Companys winemaking capacity, complete the storage
facility, and acquire new vineyard land for future development.
As
of December 31, 2021, the Company had an installment note payable of $1,295,541, due in quarterly payments of $42,534 through February
2032, associated with the purchase of property in the Dundee Hills AVA.
30
The
Company believes that cash flow from operations and funds available under its existing credit facilities and preferred stock program
will be sufficient to meet the Companys foreseeable short and long-term operating needs.
The
Companys contractual obligations as of December 31, 2021 including long-term debt, note payable, grape payables and commitments
for future payments under non-cancelable lease arrangements are summarized below:
Payments Due by Period
Less than 1
2 – 3
4 – 5
After 5
Total
Year
Years
Years
Years
Long-term debt
$ 5,535,096
$ 472,420
$ 1,019,768
$ 1,128,530
$ 2,914,378
Notes payable
1,295,541
94,503
206,760
232,914
761,364
Grape payables
1,388,601
1,388,601
-
-
-
Operating leases
9,163,990
769,014
1,538,605
1,402,305
5,454,066
Total contractual obligations
$ 17,383,228
$ 2,724,538
$ 2,765,133
$ 2,763,749
$ 9,129,808
Inflation
The
Companys management does not believe inflation has had a material impact on the Companys revenues or income during 2021
or 2020.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required.
31
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO FINANCIAL STATEMENTS
PAGE
Report
of Independent Registered Public Accounting Firm ( Moss Adams LLP , Portland,
Oregon , PCAOB ID No. 659 )
33
Financial
Statements
Balance Sheets
34
Statements of Income
35
Statements of Shareholders Equity
36
Statements of Cash Flows
37
Notes to Financial Statements
38-50
32
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and the Board of Directors of
Willamette Valley Vineyards, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Willamette Valley Vineyards, Inc. (the Company) as of December 31, 2021
and 2020, the related statements of income, shareholders equity, and cash flows for the years then ended and the related notes
(collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of
America.
Basis
for Opinion
These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
Critical
audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/
Moss Adams LLP
Portland,
Oregon
March 29, 2022
We
have served as the Companys auditor since 2004.
33
WILLAMETTE
VALLEY VINEYARDS, INC.
BALANCE
SHEETS
December 31,
December 31,
2021
2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$ 13,747,285
$ 13,999,755
Accounts receivable, net
3,163,375
2,671,576
Inventories
19,076,750
17,687,973
Prepaid expenses and other current assets
299,461
182,266
Income tax receivable
138,986
484,560
Total current assets
36,425,857
35,026,130
Other assets
13,824
13,824
Vineyard development costs, net
8,088,968
8,020,074
Property and equipment, net
40,596,135
31,486,856
Operating lease right of use assets
6,250,326
4,943,463
TOTAL ASSETS
$ 91,375,110
$ 79,490,347
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable
$ 2,102,435
$ 1,416,210
Accrued expenses
1,156,823
1,335,125
Investor deposits for preferred stock
4,134,422
510,636
Current portion of note payable
1,295,541
1,384,581
Current portion of long-term debt
472,420
450,040
Current portion of lease liabilities
443,484
277,686
Unearned revenue
938,257
622,077
Grapes payable
1,388,601
1,307,165
Total current liabilities
11,931,983
7,303,520
Long-term debt, net of current portion and debt issuance costs
4,930,193
5,389,457
Lease liabilities, net of current portion
5,954,433
4,724,344
Deferred income taxes
3,596,507
3,251,099
Total liabilities
26,413,116
20,668,420
COMMITMENTS AND CONTINGENCIES (Note
12)
SHAREHOLDERS EQUITY
Redeemable preferred stock, no par value, 10,000,000 shares authorized, 7,523,539 shares issued and outstanding, liquidation preference $ 31,222,687 , at December 31, 2021 and 6,309,508 shares issued and outstanding, liquidation preference $ 26,184,458 , at December 31, 2020.
30,956,192
25,817,305
Common stock, no par value, 10,000,000 shares authorized,
4,964,529 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively.
8,512,489
8,512,489
Retained earnings
25,493,313
24,492,133
Total shareholders equity
64,961,994
58,821,927
LIABILITIES AND SHAREHOLDERS EQUITY
$ 91,375,110
$ 79,490,347
The
accompanying notes are an integral part of the financial statements.
34
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS
OF INCOME
Twelve months ended
December 31,
2021
2020
SALES, NET
$ 31,786,864
$ 27,314,852
COST OF SALES
13,121,191
10,585,076
GROSS PROFIT
18,665,673
16,729,776
OPERATING EXPENSES:
Sales and marketing
9,603,723
7,458,139
General and administrative
5,371,931
4,269,864
Total operating expenses
14,975,654
11,728,003
INCOME FROM OPERATIONS
3,690,019
5,001,773
OTHER INCOME (EXPENSE)
Interest income
12,412
21,022
Interest expense
( 391,272 )
( 414,061 )
Other income, net
155,183
165,916
INCOME BEFORE INCOME TAXES
3,466,342
4,774,650
INCOME TAX PROVISION
( 1,020,879 )
( 1,379,654 )
NET INCOME
2,445,463
3,394,996
Preferred stock dividends
( 1,444,283 )
( 1,116,378 )
INCOME APPLICABLE TO COMMON SHAREHOLDERS
$ 1,001,180
$ 2,278,618
Earnings per common share after preferred dividends, basic and diluted
$ 0.20
$ 0.46
Weighted-average number of common shares outstanding
4,964,529
4,964,529
The
accompanying notes are an integral part of the financial statements.
35
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS
OF SHAREHOLDERS EQUITY
Redeemable
Preferred Stock
Common Stock
Retained
Shares
Dollars
Shares
Dollars
Earnings
Total
Balance at December 31, 2019
4,662,768
$ 18,319,102
4,964,529
$ 8,512,489
$ 22,213,515
$ 49,045,106
Issuance of preferred stock, net
1,646,740
7,428,482
-
-
-
7,428,482
Stock based compensation
69,721
-
-
-
69,721
Preferred stock dividends declared
-
-
-
-
( 1,116,378 )
( 1,116,378 )
Net income
-
-
-
-
3,394,996
3,394,996
Balance at December 31, 2020
6,309,508
25,817,305
4,964,529
8,512,489
24,492,133
58,821,927
Issuance of preferred stock, net
1,214,031
5,099,828
-
-
-
5,099,828
Stock based compensation
39,059
-
-
-
39,059
Preferred stock dividends declared
-
-
-
-
( 1,444,283 )
( 1,444,283 )
Net income
-
-
-
-
2,445,463
2,445,463
Balance at December 31, 2021
7,523,539
$ 30,956,192
4,964,529
$ 8,512,489
$ 25,493,313
$ 64,961,994
The
accompanying notes are an integral part of the financial statements.
36
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS
OF CASH FLOWS
Year ended December 31,
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$ 2,445,463
$ 3,394,996
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
1,952,093
1,812,394
Gain on disposition of property & equipment
( 5,905 )
( 8,000 )
Preferred stock compensation expense
39,059
69,721
Non-cash lease expense
423,118
280,331
Loan fee amortization
13,248
13,247
Deferred income taxes
345,408
292,493
Change in operating assets and liabilities:
Accounts receivable, net
( 491,799 )
( 857,572 )
Inventories
( 1,388,777 )
( 612,893 )
Prepaid expenses and other current assets
( 117,195 )
20,715
Income tax receivable
345,574
139,008
Unearned revenue
( 419,878 )
( 530,387 )
Lease liabilities
( 334,094 )
( 276,752 )
Grapes payable
81,436
514,570
Accounts payable
( 136,741 )
290,596
Accrued expenses
( 178,302 )
330,844
Net cash from operating activities
2,572,708
4,873,311
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposition of property and equipment
35,510
-
Additions to vineyard development
( 288,973 )
( 593,157 )
Additions to property and equipment
( 10,083,442 )
( 4,178,821 )
Net cash from investing activities
( 10,301,395 )
( 4,771,978 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Paycheck Protection Program
-
1,655,200
Payments on Paycheck Protection Program
-
( 1,655,200 )
Proceeds from investor deposits held as liability
4,134,422
510,636
Payment on installment note for property purchase
( 89,040 )
( 83,892 )
Payments on long-term debt
( 450,132 )
( 438,289 )
Proceeds from issuance of preferred stock
4,589,192
7,428,482
Payment of preferred stock dividend
( 708,225 )
( 568,691 )
Net cash from financing activities
7,476,217
6,848,246
NET CHANGE IN CASH AND CASH EQUIVALENTS
( 252,470 )
6,949,579
CASH AND CASH EQUIVALENTS, beginning of year
13,999,755
7,050,176
CASH AND CASH EQUIVALENTS, end of year
$ 13,747,285
$ 13,999,755
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchases of property and equipment and vineyard development costs included in accounts payable
$ 1,143,735
$ 320,769
Reduction in investor deposits for preferred stock
$ 510,636
$ -
Gift cards given in lieu of cash dividends
$ 736,058
$ 547,687
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid (net of capitalized interest)
$ 389,163
$ 413,319
Income tax paid
$ 329,898
$ 956,672
The
accompanying notes are an integral part of the financial statements.
37
NOTE
1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and operations – Willamette Valley Vineyards, Inc. (the Company) owns and operates vineyards and a winery located
in the state of Oregon, and produces and distributes premium, super premium, and ultra-premium wines, primarily Pinot Noir, Pinot Gris,
Chardonnay, and Riesling.
The
Company has direct-to-consumer sales and national sales to distributors. These sales channels offer comparable products to customers
and utilize similar processes and share resources for production, selling and distribution. Direct-to-consumer sales generate a higher
gross profit margin than national sales to distributors due to differentiated pricing between these segments.
Basis of presentation – The accompanying financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require management to make certain estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical
experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ
from those estimates under different assumptions or conditions.
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 primarily remote workstations, and we expect we will continue
to operate primarily 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys customers, all of which are
uncertain and cannot be predicted.
38
Financial instruments and concentrations of risk – The Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, grapes payable and long-term debt.
Cash
and cash equivalents are maintained at five financial institutions. Deposits held with these financial institutions may exceed the amount
of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with a financial institution
of reputable credit and therefore bear minimal credit risk.
In
2021, sales to one distributor represented approximately 18.1 % of total Company revenue. In 2020, sales to one distributor represented
approximately 24.0 % of total Company revenue.
Other comprehensive income – The nature of the Companys business and related transactions do not give rise to other comprehensive
income.
Cash and cash equivalents – Cash and cash equivalents include money market funds.
Accounts receivable – The Company performs ongoing credit evaluations of its customers and does not require collateral. A reserve
is maintained for potential credit losses. The allowance for doubtful accounts is based on an assessment of the collectability of customer
accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of
the accounts receivable balances, and current economic conditions that may affect a customers ability to pay. The Company has
credit risk associated with uncollateralized trade accounts receivable from all operations totaling $ 3,163,375 and $ 2,671,576 as of December
31, 2021 and 2020 inclusive of the allowance for doubtful accounts. The allowance for doubtful accounts is further discussed in Note
2.
Inventories
– For Company produced wines, after a portion of the vineyard becomes commercially productive, the annual crop and production
costs relating to such portion are recognized as work-in-process inventories. Such costs are accumulated with related direct and indirect
harvest costs, wine processing and production costs, and are transferred to finished goods inventories when the wine is produced, bottled,
and ready for sale.
The
cost of finished goods is recognized as cost of sales when the wine product is sold. Inventories are stated at the lower of first-in,
first-out (FIFO) cost or net realizable value by variety.
In
accordance with general practices in the wine industry, wine inventories are generally included in current assets in the accompanying
balance sheets, although a portion of such inventories may be aged for more than one year (Note 3).
Vineyard development costs – Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor
and materials to prepare the land and construct vine trellises. The costs are capitalized until the vineyard becomes commercially productive,
at which time annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard,
which is estimated to be 30 years. Accumulated amortization of vineyard development costs aggregated $ 2,070,009 and $ 1,824,610 at December
31, 2021 and 2020, respectively.
Amortization
of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become
a component of cost of goods sold. For the years ending December 31, 2021 and 2020, $ 245,399 and $ 243,760 , respectively,
was amortized into inventory costs.
Property and equipment – Property and equipment are stated at cost and are depreciated on the straight-line basis over their estimated
useful lives. Land improvements are depreciated over 15 years. Winery buildings are depreciated over 30 years. Equipment is depreciated
over 3 to 10 years, depending on the classification of the asset. Depreciation is discussed further in Note 4.
Expenditures
for repairs and maintenance are charged to operating expense as incurred. Expenditures for additions and betterments are capitalized.
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting
gain or loss is included in operations.
39
Review of long-lived assets for impairment – The Company evaluates long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset or asset group may not be recoverable. Long-lived assets consist primarily of property
and equipment. Circumstances that might cause the Company to evaluate its long-lived assets for impairment could include a significant
decline in the prices the Company or the industry can charge for its products, which could be caused by general economic or other factors,
changes in laws or regulations that make it difficult or more costly for the Company to distribute its products to its markets at prices
which generate adequate returns, natural disasters, significant decrease in demand for the Companys products or significant increase
in the costs to manufacture the Companys products.
Recoverability
of assets is measured by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated
by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The Company groups its long-lived assets with other assets
and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities
(or asset group). This would typically be at the winery level. The Company did not recognize any impairment charges associated with
long-lived assets during the years ended December 31, 2021 and 2020.
Income taxes – Income taxes are recognized using enacted tax rates and are composed of taxes on financial accounting income
that is adjusted for requirements of current tax law, and deferred taxes. Deferred taxes are estimated using the asset and liability
approach whereby deferred income taxes are calculated for the expected future tax consequences of temporary differences between the book
basis and tax basis of the Companys assets and liabilities.
The
Company had no unrecognized tax benefits as of December 31, 2021 or 2020. The Company recognizes interest assessed by taxing authorities
as a component of tax expense. The Company recognizes any penalties assessed by taxing authorities as a component of tax expense. Interest
and penalties for the years ended December 31, 2021 and 2020 were not material.
The
Company files U.S. federal income tax returns with the Internal Revenue Service (IRS) as well as income tax returns in Oregon
and California. The Company is subject to the Oregon Corporate Activity Tax (OR CAT) beginning in 2020. The Company may be subject to
examination by the IRS for tax years 2018 through 2021. Additionally, the Company may be subject to examinations by state taxing jurisdictions
for tax years 2017 through 2021. The Company is not aware of any current examinations by the IRS or the state taxing authorities.
Revenue recognition – The Company recognizes revenue once its performance obligation to the customer is completed and control
of the product or service is transferred to the customer. Revenue reflects the total amount the Company receives, or expects to receive,
from the customer and includes shipping costs that are billed and included in the consideration. Excise taxes that are accrued and paid,
as a result of transaction, are accounted for as an offset to sales in the net sales calculation. The Companys contractual obligations
to customers generally have a single point of obligation and are short term in nature.
The
cost of price promotions and rebates are treated as reductions of revenue. Credit sales are recorded as trade accounts receivable and
no collateral is required. Revenue from items sold through the Companys retail locations is recognized at the time of sale. Net
revenue reported herein is shown net of sales allowances and excise taxes. If the conditions for revenue recognition are not met, the
Company defers the revenue until all conditions are met. As of December 31, 2021, and December 31, 2020, the Company has recorded deferred
revenue in the amount of $ 229,106 and $ 131,782 , respectively, which is included in unearned revenue on the balance sheet. Gift cards
that have been issued but not used are also treated as unearned revenue and were $682,881 and $487,633 as of December 31, 2021 and 2020,
respectively.
Distributor
Sales Segment – Wholesale wine sales are through distributors and the Company recognizes revenue when the product is shipped,
and title passes to the distributor. The Companys standard terms are FOB shipping point, with no customer acceptance
provisions. The cost of price promotions and rebates are treated as reductions of revenue. Credit sales are recorded as trade accounts
receivable and no collateral is required.
40
The
Company has price incentive programs with its distributors to encourage product placement and depletions. Sales are reported net of incentive
program expenses. Incentive program payments are made when completed incentive program payment requests are received from the customers.
For the year ended December 31, 2021 and 2020, the Company recorded incentive program expenses of $ 1,437,481 and $ 1,757,631 , respectively,
as a reduction in sales on the Statements of Income. As of December 31, 2021, and 2020, the Company has recorded an incentive program
liability in the amount of $ 67,326 and $ 157,044 , respectively, which is included in accrued expenses on the balance sheet. Estimates
are based on historical and projected experience for each type of program or customer and have historically been in line with actual
costs incurred.
Direct
Sales Segment – The Company sells wine directly to customers through its tasting rooms, web site and wine club. Additionally,
the Company sells merchandise, food and hospitality related services through its tasting rooms.
Tasting
room and web site sales are paid for and recognized as revenue at the point of sale. Hospitality sales, that are paid in advance of the
event, are accrued as unearned revenue and are subsequently recognized as revenue in the period of the event. Wine club sales are made
under an agreement with the customer which specifies the quantity and timing of the wine club shipment. Wine club charges are billed
to the customers credit card, at the time of shipment, and revenue is then recognized.
The
Company periodically sells bulk wine or grapes that either do not meet the Companys quality standards or are in excess of production
requirements. These sales are recognized when ownership transfers to the buyer which occurs at the point of shipment.
Cost of goods sold – Costs of goods sold include costs associated with grape growing, external grape costs, packaging materials,
winemaking and production costs, vineyard and production administrative support and overhead costs, purchasing and receiving costs and
warehousing costs.
Administrative
support, purchasing, receiving and most other fixed overhead costs are expensed as selling, general and administrative expenses without
regard to inventory units. Warehouse and winery production and facilities costs, are allocated to inventory units on a per gallon basis
during the production of wine, prior to bottling the final product. No further costs are allocated to inventory units after bottling.
Selling, general and administrative expenses – Selling, general and administrative expenses consist primarily of non-manufacturing administrative
and overhead costs, advertising and other marketing promotions. Advertising costs are expensed as incurred or the first time the advertising
takes place. For the years ended December 31, 2021 and 2020, advertising costs incurred were $ 329,152 and $ 247,049 respectively.
The
Company provides an allowance to distributors for providing sample of products to potential customers. For the years ended December 31,
2021 and 2020, these costs, which are included in selling, general and administrative expenses, totaled approximately $ 89,000 and $ 87,000 ,
respectively.
Shipping
and handling costs – Amounts paid by customers to the Company for shipping and handling costs are included in the net revenue.
Costs incurred for shipping and handling charges are included in selling, general and administrative expense. For the years ended December
31, 2021 and 2020, shipping and handling costs included in selling, general and administration costs were $773,164 and $555,409 respectively.
The Companys gross margins may not be comparable to other companies in the same industry as other companies may include shipping
and handling costs as a cost of goods sold.
Excise taxes – The Company pays alcohol excise taxes based on product sales to both the Oregon Liquor Control Commission and
to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau. The Company is liable for the taxes upon the removal
of product from the Companys warehouse on a per gallon basis. The federal tax rate is affected by a small winery tax credit provision
which declines based upon the number of gallons of wine production in a year rather than the quantity sold. The Company also pays taxes
on the grape harvest on a per ton basis to the Oregon Liquor Control Commission for the Oregon Wine Advisory. For the years ended December
31, 2021 and 2020, excise taxes incurred were approximately $ 384,000 and $ 372,000 respectively.
41
Income per common share after preferred dividends – Income per share is computed based on the weighted-average number of common
shares outstanding each year.
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, 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 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.
Recently
adopted accounting pronouncements
Accounting
Standard 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 did not have a significant impact.
Recently
issued accounting pronouncements not yet adopted
There
are no recently issued accounting pronouncements that the Company has yet to adopt that management believes will have a significant impact
on the Companys financial statements.
Reclassifications
– Certain immaterial amounts from prior periods have been reclassified to conform to current years presentation.
NOTE
2 – ACCOUNTS RECEIVABLE, NET
The
Companys accounts receivable balance is net of an allowance for doubtful accounts of $ 10,000 and $ 10,000 at December 31, 2021
and 2020, respectively.
Changes in the allowance for doubtful accounts are as follows:
Year ended December 31,
2021
2020
Beginning of year
$ 10,000
$ 10,000
Charged to costs and expenses
-
-
Write-offs, net of recoveries
-
-
End of year
$ 10,000
$ 10,000
42
NOTE
3 – INVENTORIES
Inventory
consists of the following at December 31, 2021 and 2020:
December 31,
December 31,
2021
2020
Winemaking and packaging materials
$ 742,188
$ 690,114
Work-in-process (costs relating to unprocessed and/or unbottled wine products)
9,691,140
9,066,782
Finished goods (bottled wine and related products)
8,643,422
7,931,077
Total inventories
$ 19,076,750
$ 17,687,973
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at December 31, 2021 and 2020:
Schedule of Property and Equipment, Net
December 31,
December 31,
2021
2020
Construction in progress
$ 14,556,807
$ 6,553,803
Land, improvements and other buildings
12,850,316
11,787,334
Winery buildings and hospitality center
17,791,684
17,694,466
Equipment
15,960,178
14,392,923
Property and equipment, gross
61,158,985
50,428,526
Less accumulated depreciation
( 20,562,850 )
( 18,941,670 )
Property and equipment, net
$ 40,596,135
$ 31,486,856
Depreciation
expense was $ 1,645,471 and $ 1,614,665 during the years ended December 31, 2021 and 2020, respectively.
NOTE
5 – 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. 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 December 31, 2021 and 2020, there was no outstanding balance on this revolving line of credit.
The
line of credit agreement includes various covenants, which among other things, requires the Company to maintain minimum amounts of tangible
net worth, debt-to-equity, and debt service coverage as defined, and limits the level of acquisitions of property and equipment. As of
December 31, 2021, the Company was in compliance with these financial covenants.
NOTE
6 – NOTES PAYABLE
In
February of 2017 the Company purchased property, including vineyard land, bare land and structures in the Dundee Hills AVA under terms
that included a 15 year note payable with quarterly payments of $42,534 at 6%. The note may be called by the owner, up to the outstanding
balance, with 180 days written notice. As of December 31, 2021 and 2020, the Company had a balance of $ 1,295,541 and $ 1,384,581 , respectively,
due on this note.
43
NOTE
7 – LONG-TERM DEBT
Long-term
debt consists of the following at December 31, 2021 and 2020:
Schedule
of Long-term Debt
December 31,
2021
2020
Northwest Farm Credit Services Loan #4
$ 1,109,860
$ 1,240,453
Northwest Farm Credit Services Loan #5
4,425,236
4,743,819
Toyota Credit Corporation
-
956
Long-Term Debt, Gross
5,535,096
5,985,228
Debt issuance costs
( 132,483 )
( 145,731 )
Current portion of long-term debt
( 472,420 )
( 450,040 )
Long-Term Debt
$ 4,930,193
$ 5,389,457
The
Company has two long term debt agreements with Farm Credit Services (FCS) with an aggregate outstanding balance of $5,535,096
and $5,984,272 as of December 31, 2021 and 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 December 31, 2021,
the Company was in compliance with these covenants. In the event of future noncompliance with the Companys 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 shall immediately become due and payable.
The
Company had an outstanding loan with Toyota Credit Corporation which matured and was paid in full in February 2021, at zero interest,
with an outstanding balance of $0 and $956 as of December 31, 2021 and 2020, respectively.
Future
minimum principal payments of long-term debt mature as follows for the years ending December 31:
Schedule
of Future Minimum Long-term Debt Payment
2022
$ 472,420
2023
496,970
2024
522,798
2025
549,971
2026
578,559
Thereafter
2,914,378
Future minimum principal payments of long-term debt total
$ 5,535,096
The
weighted-average interest rates on the aforementioned borrowings for the fiscal years ended December 31, 2021 and 2020 was 5.12% and
5.11% respectively.
NOTE
8 – SHAREHOLDERS EQUITY
The
Company is authorized to issue 10,000,000 shares of its common stock. Each share of common stock is entitled to one vote. At its discretion,
the Board of Directors may declare dividends on shares of common stock so long as the Company has paid or set aside funds for all cumulative
dividends on its preferred stock. The Board does not anticipate paying dividends on its common stock in the foreseeable future.
The
Company is authorized to issue 10,000,000
shares of redeemable preferred stock. Each share of the Companys currently issued preferred stock is non-voting. The
Companys Series A Redeemable Preferred Stock includes an annual dividend of $ 0.22
per share and is payable annually. Additionally, the Series A Redeemable Preferred Stock contains a liquidation preference over the
Companys common stock and is subject to optional redemption after June 1, 2021 at the sole discretion of the Companys
Board of Directors. The liquidation preference is calculated at the original issue price of $ 4.15
per share plus all accrued but unpaid dividends. The optional redemption, if implemented, would be at the original issue price of
$4.15 per share plus all accrued but unpaid dividends plus a redemption premium of 3% of the original issue price. In November 2021
and November 2020, the Company declared a dividend on its Series A Redeemable Preferred stock and paid the dividend on December 31,
2021 and December 31, 2020 respectively. The Company is current on its dividend obligations.
44
NOTE
9 – STOCK INCENTIVE PLAN
The
Company had a stock incentive plan, originally created in 1992, most recently amended in 2001. No additional grants may be made under
the plan. All stock options contained an exercise price that was equal to the fair market value of the Companys stock on the date
the options were granted. There were no stock options outstanding or exercisable at December 31, 2021 and 2020.
No
stock compensation expense under this plan was recognized for the years ended December 31, 2021 and 2020. As of December 31, 2021, there
was no unrecognized compensation expense related to stock options.
As
part of an incentive, the Company issued preferred stock during the years ended December 31, 2021 and 2020, resulting in stock compensation
expense of $39,059 and $69,721, respectively.
NOTE
10 – INCOME TAXES
The
provision for income taxes consists of:
Schedule
of Income Tax Provision
Year Ended December 31,
2021
2020
Current tax expense:
Federal
$ 459,640
$ 719,342
State
215,831
367,819
Current tax expense
675,471
1,087,161
Deferred tax expense:
Federal
263,911
227,246
State
81,497
65,247
Deferred tax expense (benefit)
345,408
292,493
Total
$ 1,020,879
$ 1,379,654
The
effective income tax rate differs from the federal statutory rate as follows:
Schedule
of Effective Income Tax Rate
Year Ended December 31,
2021
2020
Federal statutory rate
21.00 %
21.00 %
State taxes, net of federal benefit
6.49 %
6.79 %
Permanent differences
1.26 %
0.26 %
Prior year adjustments
- 1.54 %
0.76 %
Changes in tax rates and other
2.24 %
0.09 %
Total
29.45 %
28.90 %
Permanent
differences for the periods consist primarily of changes in non-deductible gifts, meals and entertainment as well as political contributions.
Changes in tax rate are described above.
45
Net
deferred tax assets and (liabilities) at December 31 consist of:
Schedule
of Net Deferred Tax Assets and Liabilities
Year Ended December 31,
2021
2020
Various Accruals and Deferred Timing Differences
$ 36,037
$ 145,195
Prepaid
( 31,706 )
( 29,404 )
Depreciation
( 3,289,735 )
( 2,744,921 )
Inventory
( 311,103 )
( 621,969 )
Net noncurrent deferred tax liability
( 3,596,507 )
( 3,251,099 )
Valuation allowance
-
-
Net deferred tax liability
$ ( 3,596,507 )
$ ( 3,251,099 )
NOTE
11 – RELATED PARTY TRANSACTIONS
The
Company provides living accommodations in a residence on the Companys premises, at its convenience, for the Companys chief
executive officer (CEO). The CEO provides security and lock-up services and is required to live on premises as a condition
of his employment. Over the years the Company has recorded annual expenses less than $12,000, exclusive of depreciation, related to the
housing provided for its CEO.
NOTE
12 – 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 Companys 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.
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. This property is referred to as the Peter Michael
Vineyard and includes approximately 69 acres of producing vineyards.
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. This property is referred to as the Meadowview
Vineyard and includes approximately 49 acres of producing vineyards.
In
February 2007 , the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyard . 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.
This property includes 54 acres of producing vineyards and 2 additional plantable acres.
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%. This property is
referred to as part of Ingram Vineyard and includes 93 acres of producing vineyards and 17 additional plantable acres.
In
March 2017 , the Company entered into a 25 -year lease for approximately 17 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. This property
is referred to as part of Bernau Estate Vineyard and includes 9 acres of pre-production vineyards.
46
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 2018 , the Company assumed a lease, through December 2022, 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.
In
March 2021 , the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Vancouver,
Washington. The lease defines the payments over the term of the lease and option periods.
The
following tables provide lease cost and other lease information for the year ended December 31, 2021:
Schedule
of Lease Cost and Other Lease Information
Year Ended
December 31, 2021
Lease Cost
Operating Lease cost - Vineyards
$ 459,128
Operating Lease cost - Other
229,769
Short-term lease cost
31,656
Total Lease Cost
$ 720,553
Other information
Cash paid for amounts included in the measurement of lease liabilities,
Operating cash flows from operating leases - Vineyard
445,473
Operating cash flows from operating leases - Other
154,399
Weighted-average remaining lease term - operating leases
13.03
Weighted-average discount rate - operating leases
5.41 %
Right-of-use
assets obtained in exchange for new operating lease obligations were $1,729,981 and $360,887 for the years ended December 31 2021 and
2020, respectively.
The
Company has two additional operating leases that have not yet commenced as of December 31, 2021, and as such, have not been recognized
in the Companys balance sheet. These operating leases are expected to commence in 2022 with lease terms of 10 years.
47
As
of December 31, 2021, maturities of lease liabilities were as follows:
Schedule
of Maturities of Lease Liabilities
Operating
Years Ended December 31,
Leases
2022
$ 769,014
2023
766,597
2024
772,008
2025
704,016
2026
698,289
Thereafter
5,454,066
Total minimal lease payments
9,163,990
Less present value adjustment
( 2,766,073 )
Operating lease liabilities
6,397,917
Less current lease liabilities
( 443,484 )
Lease liabilities, net of current portion
$ 5,954,433
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. The Company purchased grapes amounting to $2,956,291 and $2,652,864 during the years
ended December 31, 2021 and 2020, respectively. The Company had an outstanding balance due on grape purchase agreements of $ 1,388,601
and $ 1,307,165 as of December 31, 2021 and 2020,
respectively
Domaine
Willamette – In 2019, the Board of Directors approved the construction of a new tasting room at the Bernau Estate Vineyard, expected
to be completed during the 2022 fiscal year. The total construction costs for the Domaine Willamette Tasting Room is expected to be approximately
$15.6 million, of which we expect will be funded through cash on hand. Construction on the Tasting Room began in July, 2019 and as of
December 31, 2021, we had spent approximately $9.5 million on the project from our cash reserves.
NOTE
13 – EMPLOYEE BENEFIT PLAN
In
February 2006, the Company instituted a 401(k) profit sharing plan (the Plan) covering all eligible employees. Employees
who participate may elect to make salary deferral contributions to the Plan up to 100% of the employees eligible payroll subject
to annual Internal Revenue Code maximum limitations. The Company may make a discretionary contribution to the entire qualified employee
pool, in accordance with the Plan. For the years ended December 31, 2021 and 2020 there were $ 164,188 and $ 138,588 contributions made
by the Company to the Plan, respectively.
NOTE
14 - 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 December 31, 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. This Prospectus Supplement
has been closed and all related shares issued as of December 31, 2021.
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 $9,234,250 have been received under this offering as of December, 30
2021 for the issuance of Preferred Stock and $ 4,134,422 is shown as an investor liability for shares to be issued in 2022.
48
Shareholders
have the option to receive dividends as cash or as a gift card for purchasing Company products. The amount of unused dividend gift cards
at December 31, 2021 and 2020 was $682,881 and $487,633, respectively and is recorded as unearned revenue on the balance sheet.
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.
NOTE
15 – 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 rooms, 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 Companys 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 years ended December 31, 2021 and 2020. Sales figures are net of related excise taxes.
Schedule of Segment reporting
Twelve Months Ended December 31,
Direct Sales
Distributor Sales
Unallocated
Total
2021
2020
2021
2020
2021
2020
2021
2020
Sales, net
$ 13,272,659
$ 10,533,070
$ 18,514,205
$ 16,781,782
$ -
$ -
$ 31,786,864
$ 27,314,852
Cost of sales
3,470,963
2,646,706
9,650,228
7,938,370
-
-
13,121,191
10,585,076
Gross margin
9,801,696
7,886,364
8,863,977
8,843,412
-
-
18,665,673
16,729,776
Selling expenses
6,929,882
5,170,804
1,914,207
1,677,797
759,634
609,538
9,603,723
7,458,139
Contribution margin
$ 2,871,814
$ 2,715,560
$ 6,949,770
$ 7,165,615
Percent of sales
41.8 %
38.6 %
58.2 %
61.4 %
General and administration
5,371,931
4,269,864
5,371,931
4,269,864
Income from operations
$ 3,690,019
$ 5,001,773
Direct
sales include $ 103,471 and $ 103,958 of bulk wine and grape sales in the years ended December 31, 2021 and 2020, respectively.
Net
direct-to-consumer sales, including bulk wine, miscellaneous sales, and grape sales, represented approximately 41.8 % and 38.6 % of total
net revenue for 2021 and 2020, respectively.
Net
sales through distributors represented approximately 58.2 % and 61.4 % of total net revenue for 2021 and 2020, respectively.
NOTE
16 – SUBSEQUENT EVENTS
Subsequent
events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes
in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the
date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Companys
financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the
balance sheet but arose after the balance sheet date and before financial statements are issued. The Company has not identified any material
subsequent events.
49
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
carried out an evaluation as of the end of the period covered by this Annual Report on Form 10-K, under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-5(e) under the Exchange Act) pursuant to paragraph (b) of
Rules 13a-15 and 15d-5 under the Exchange Act. Based on that review, our Chief Executive Officer and our Chief Financial Officer have
concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated
to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
It
should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute)
assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals.
Internal
Control over Financial Reporting
Managements
Report on Internal Control over Financial Reporting
The
Companys management is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Companys
financial reporting and the preparation of the Companys financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act and includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the Companys assets; (b) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that the Companys receipts and expenditures are being made only in accordance with authorizations of the Companys
management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Companys assets that could have a material effect on the Companys financial statements. All internal
controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation.
The
Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December
31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework (2013) . Based on this assessment, management
has concluded that, as of December 31, 2021, our internal control over financial reporting was effective.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act) during the Companys fourth fiscal quarter that our certifying officers concluded materially
affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
50
ITEM
9B. OTHER INFORMATION
None.
ITEM
9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth certain information regarding the Companys directors and executive officers:
Group
Term
Name
Position(s) with the Company
Age
Number
Ends
James W. Bernau (3)
Chairperson of the Board, CEO
68
I
2023
President and Director
Craig Smith (2)(3)(4)
Secretary and Director
75
II
2024
John Ferry
Chief Financial Officer
56
NA
NA
James L. Ellis (3)
Director
77
III
2022
Sean M. Cary (2)
Director
48
I
2023
Stan G. Turel (1)(2)(3)(4)
Director
73
II
2024
Leslie Copland (1)
Director
68
III
2022
(1) Member
of the Compensation Committee
(2) Member
of the Audit Committee
(3) Member
of the Executive Committee
(4) Member
of the Capital Development Committee
All
directors hold office until the end of their terms respective annual meeting of shareholders or until their successors have
been elected and qualified. Executive officers are appointed by the Board of Directors and serve at the pleasure of the Board. The Board
is divided into three groups (I, II, and III). Each director shall serve for a term ending on the date of the third annual meeting
following the annual meeting at which such director was elected.
There
are no family relationships among any of our current directors or executive officers. Set forth below is additional information as to
each director and executive officer of the Company.
James
W. Bernau – Mr. Bernau has been President and Chief Executive Officer of the Company and Chairperson of the Board of Directors
of the Company since its inception in May 1988. Mr. Bernau, an Oregon winegrower, originally established Willamette Valley Vineyards
as a sole proprietorship in 1983, and he co-founded the Company in 1988 with Salem grape grower, Donald Voorhies. From 1981 to September
1989, Mr. Bernau was Director of the Oregon Chapter of the National Federation of Independent Businesses (NFIB), an association
of 15,000 independent businesses in Oregon. Mr. Bernau has served as the President of the Oregon Winegrowers Association and the Treasurer
of the associations Political Action Committee (PAC) and Chair of the Promotions Committee of the Oregon Wine Advisory Board,
the State of Oregons agency dedicated to the development of the industry. In March 2005, Mr. Bernau received the industrys
Founders Award for his service. Mr. Bernaus qualifications to serve on the Companys Board of Directors include his
more than 30 years of leadership of the Company and his industry experience and contacts.
51
Craig
Smith , MBA, JD – Mr. Smith has served as a director since October 2007 and as Secretary since 2009. For over 20 years Mr. Smith
served as the Vice President/Chief Financial Officer of Chemeketa Community College in Salem, Oregon. He was an Adjunct Professor at
the Atkinson Graduate School of Management at Willamette University, as well as Managing Partner of Faler, Grove, Mueller & Smith,
a large local CPA firm. He has served on many State of Oregon commissions and as the Board Chairperson for many of the local non-profit
and educational institutions including the Salem Keizer School Board, Chemeketa Community College Board of Education, Oregon State Fair
Council, State Fair Dismissal Appeals Board, Mid-Willamette Valley Council of Governments, Oregon School Boards Association and the United
Way. Now retired Mr. Smith was a member of the Oregon State Bar as well as a Certified public accountant. Mr. Smiths qualifications
to serve on the Companys Board of Directors include his financial and accounting experience.
John
Ferry – Mr. Ferry has served as Chief Financial Officer since September 2019, has previously served as President of Contact Industries,
a wood products based OEM supplier from November 2014 until July 2019. He has also served as CFO of Lifeport Inc. a division of Sikorsky
Aircraft from April 2012 to November 2014. Further, he has served in senior financial leadership positions in various Aerospace
related industries dating back to 1996. Mr. Ferry has earned an Executive MBA from Bath University, in England, and a MA Hons
degree in Accounts/Economics from Dundee University
in Scotland.
James
L. Ellis – Mr. Ellis has served as a director since July 1991. Mr. Ellis retired from full time duties with the Company in
July of 2009. He currently serves as the Companys ombudsman and works part-time on selected projects. Mr. Ellis previously served
as the Companys Director of Human Resources from 1993 to 2009. He was the Companys Secretary from 1997 to 2009, and Vice
President /Corporate from 1998 to 2009. From 1990 to 1992, Mr. Ellis was a partner in Kenneth L. Fisher, Ph.D. & Associates, a management-consulting
firm. From 1980 to 1990, Mr. Ellis was Vice President and General Manager of R.A. Kevane & Associates, a Pacific Northwest personnel-consulting
firm. From 1962 to 1979, Mr. Ellis was a member of and administrator for the Christian Brothers of California, owner of Mont La Salle
Vineyards and producer of Christian Brothers wines and brandy. Mr. Ellis qualifications to serve on the Companys Board
of Directors include his prior experience as a member of the Companys senior management, as well as more than 40 years of business
experience.
Sean
M. Cary – Mr. Cary has served as a director since July 2007. Mr. Cary is the Chief Financial Officer of Pacific Excavation,
Inc., a Eugene, Oregon based heavy and civil engineering contractor. Previously, Mr. Cary served as the CFO of CBT Nuggets, LLC, the
Corporate Controller of National Warranty Corporation, the CFO of Cascade Structural Laminators and prior to that as Controller of Willamette
Valley Vineyards. Mr. Cary served in the U.S. Air Force as a Financial Officer. Mr. Cary holds a Master of Business Administration degree
from the University of Oregon and a Bachelor of Science Degree in Management from the U.S. Air Force Academy. Mr. Carys qualifications
to serve on the Companys Board of Directors include his financial and accounting expertise.
Stan
G. Turel – Mr. Turel has served as a director since November 1994. Mr. Turel is President of Turel Enterprises, a real estate
management company managing his own properties in Oregon, Washington and Idaho and is president of Columbia Pacific Tax in Bend, Oregon.
Prior to his current activities, Mr. Turel was the Principal and CEO of Columbia Turel, (formerly Columbia Bookkeeping, Inc.) a position
which he held from 1974 to 2001. Prior to the sale of the company to Fiducial, one of Europes largest accounting firms, Columbia
had approximately 26,000 annual tax clients including approximately 4,000 small business clients. Additionally, Mr. Turel successfully
operated as majority owner of two cable TV companies during the 80s and 90s which were eventually sold to several public
corporations. Mr. Turel is a pilot, author, was a former delegate to the White House Conference on Small Business and held positions
on several state and local Government committees. Mr. Turels qualifications to serve on the Companys Board of Directors
include his more than 20 years of accounting and business management experience.
Leslie
Copland – Ms. Copland has served as a director since September 2019. Ms. Copland owns Leslie Copland Leadership and previously worked
as Vice President Learning and Development for WE Communications. She holds a Masters degree in Applied Behavioral Science from
the Leadership Institute of Seattle and a B.A, in Art History with minor in Psychology from George Washington University. Ms. Coplands
qualifications to serve on the Companys Board of Directors include her extensive business experience and expertise in organizational
development and executive coaching.
52
Delinquent
Section 16(a) Reports
Section
16(a) of the Exchange Act requires the Companys officers, directors and persons who own more than 10% of a registered class
of the Companys equity securities to file certain reports with the SEC regarding ownership of, and transactions in, the Companys
securities. These officers, directors and stockholders are also required by SEC rules to furnish the Company with copies of all Section
16(a) reports that are filed with the SEC. Based solely on a review of copies of such forms received by the Company and written
representations received by the Company from certain reporting persons, the Company believes that for the year ended December 31, 2021,
except for one Form 4 that was filed late by Stan Turel and one Form 4 that was filed late by James Bernau, all Section 16(a) reports
required to be filed by the Companys executive officers, directors and 10% stockholders were filed on a timely basis.
Code
of Ethics
The
Company has adopted a code of ethics applicable to its principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, which is a code of ethics as defined by applicable rules
of the SEC. A copy of the Companys Code of Business Conduct and Ethics is posted on the Companys web site, www.wvv.com .
Amendments to the Companys Code of Business Conduct and Ethics or any grant of a waiver from a provision of the Companys
Code of Business Conduct and Ethics requiring disclosure under applicable SEC rules, if any, will be disclosed on the Company website
at www.wvv.com. Any person may request a copy of the Companys Code of Business Conduct and Ethics, at no cost, by writing to the
Company at the following address:
Willamette
Valley Vineyards, Inc.
Attention:
Corporate Secretary
8800
Enchanted Way SE
Turner,
OR 97392
Audit
Committee
The
Company has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The members of the Audit Committee are Craig Smith, Sean Cary and Stan G. Turel. All members of the Audit Committee are independent
as defined under the applicable rules and regulations of the SEC and the director independence standards of the NASDAQ Stock Market,
as currently in effect. Sean Cary serves as chair of the committee.
Audit
Committee Financial Expert
Craig
Smith serves as the Audit Committees financial expert as defined in applicable SEC rules and NASDAQ listing standards.
Mr. Smith is independent as defined under the applicable rules and regulations of the SEC and the director independence standards of
the NASDAQ Stock Market, as currently in effect.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth certain information concerning compensation paid or accrued by the Company, to or on behalf of the Companys
principal executive officer, James W. Bernau and Chief Financial Officer, John Ferry for the fiscal years ended December 31, 2021 and
December 31, 2020. No other executive officer of the Company received total compensation in 2021 in excess of $100,000, and thus disclosure
is not required for any other person.
53
Summary
compensation information is as follows:
Summary
Compensation Table
Nonqualified
Non-equity
Deferred
All
Name,
Stock
Option
Incentive Plan
Comp.
Other
Principal
Position
Year
Salary
Bonus
Awards
Awards
Compensation
Earnings
Comp.*
Total
Bernau, James W.,
President, Chief
Executive
2021
$ 285,474
$ 233,757
$ -
$ -
$ -
$ -
$ 54,389
$ 573,620
President, Chief Executive
2020
$ 276,704
$ 276,704
$ -
$ -
$ -
$ -
$ 52,908
$ 606,316
John Ferry
Chief Financial Officer
2021
$ 170,677
$ -
$ -
$ -
$ 21,000
$ -
$ 7,667
$ 199,344
Chief Financial Officer
2020
$ 145,000
$ -
$ -
$ -
$ 15,000
$ -
$ 1,750
$ 161,750
* All
other compensation includes Company payments for medical insurance, value of lodging, Board of Director stipends, life insurance payments
and Company 401(k) matching contributions.
Bernau
Employment Agreement – The Company and Mr. Bernau are parties to an employment agreement dated August 3, 1988 as amended on
February 20, 1997, in January of 1998, in November 2010, and again on November 8, 2012. Under the amended agreement, Mr. Bernau is paid
an annual salary with annual increases tied to increases in the consumer price index. Mr. Bernaus 2021 bonus is calculated as
a percentage of Company net income before taxes; 5% on the first $1.75 million of pre-tax income, and 7.5% on the pre-tax net income
over $1.75 million, not to exceed his current year base salary. Additionally, Mr. Bernau participates in the employer sponsored 401(k)
plan. Pursuant to the terms of the employment agreement, the Company is to provide Mr. Bernau with housing on the Companys property.
Mr. Bernau resides in the estate house, free of rent, which is also used to accommodate overnight stays for Company guests. Mr. Bernau
resides in the residence for the convenience of the Company and must continue to reside there for the duration of his employment in order
to provide additional security and lock-up services for late evening events at the Winery and Vineyard. The employment agreement provides
that Mr. Bernaus employment may be terminated only for cause, which is defined as non-performance of his duties or conviction
of a crime.
Ferry
Employment Agreement – The Company and Mr. Ferry are parties to an employment agreement dated September 11, 2019. Under the
agreement Mr. Ferry is paid an annual salary that is reviewed and subject to adjustment by the Board annually. Mr. Ferry is also eligible
to receive an annual performance based incentive payment that is reviewed and subject to adjustment.
Director
compensation
The
following table sets forth information concerning compensation of the Companys directors other than Mr. Bernau for the fiscal
year ended December 31, 2021:
Change
in Pension
Value and
Nonqualified
Fees Earned
Non-equity
Deferred
or
Stock
Option
Incentive Plan
Compensation
All Other
Name
Paid in Cash
Awards
Awards
Compensation
Earnings
Compensation
Total
James L. Ellis
$ 11,250
-
-
-
-
$ 450
$ 11,700
Sean M. Cary
2,400
-
-
-
-
-
2,400
Craig Smith
2,400
-
-
-
-
-
2,400
Stan G. Turel
2,400
-
-
-
-
-
2,400
Leslie Copland
2,000
-
-
-
-
-
2,000
Other
compensation for James L. Ellis includes a monthly stipend for ongoing consultation services as well as serving as administrator of any
potential employee complaint that might rise to the board of directors level. The members of the Board received cash compensation
for their service on the Board in 2021 and are reimbursed for out-of-pocket and travel expenses incurred in attending Board meetings.
54
In
January 2009, the Board, upon recommendation of the Boards Compensation Committee (the Compensation Committee),
who had sought outside counsel regarding revision of the Companys Board Compensation Plan, adopted the final version of the revised
WVV Board Member Compensation Plan. Under the terms of the revised plan, any Board member may elect not to receive any or all of the
compensation components. The Board also reserved the right to suspend this plan at any time on the basis of prevailing economic conditions
and their impact on the company. The basic elements of the revised plan are: $1,000 yearly stipend for service on the Board, $500 per
Board meeting attended in person, $250 per Board meeting via teleconference, $200 per committee meeting in person and $100 per committee
meeting via teleconference. A set per diem for expenses associated with meeting attendance, as well as a yearly wine allowance were also
approved.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity
compensation plan information
The
Company does not have active equity compensation plans and no options or other equity awards outstanding.
Security
ownership of certain beneficial owners and management
The
following table sets forth certain information with respect to beneficial ownership of the Companys Common Stock as of March 29,
2022, by (i) each person who beneficially owns more than 5% of the Companys Common Stock, (ii) each Director of the Company, (iii)
each of the Companys named executive officers, and (iv) all directors and executive officers as a group. Except as indicated in
the footnotes to this table, each person has sole voting and investment power with respect to all shares attributable to such person.
Information
concerning persons who beneficially own more than 5% of the Companys common stock who are not otherwise affiliated with the Company
is based solely upon statements made in filings with the SEC or other information we believe to be reliable.
Unless
otherwise noted, the address of each beneficial owner listed in the table is 8800 Enchanted Way SE
Turner,
OR 97392.
Percent of
Beneficial
Number of
Shares
Ownership
Beneficial
Shares Outstanding
Beneficially
Denominator
Ownership
Stock
Owned (1)
4,964,529
Percent
James W. Bernau, President/CEO, Chair of the Board
355,502
7.2%
4,964,529
7.2%
John Ferry, CFO
-
**
4,964,529
0.0%
James L. Ellis, Director
19,865
**
4,964,529
0.4%
Sean M. Cary, Director
5,200
**
4,964,529
0.1%
Stan G. Turel, Director
12,192
**
4,964,529
0.2%
Craig Smith, Director
1,500
**
4,964,529
0.0%
Leslie Copland, Director
-
**
4,964,529
0.0%
Christopher Riccardi
385,485 (2)
7.8%
4,964,529
7.8%
100 Tall Pine Ln., Apt 2102, Naples, FL 34105
Carl D. Thoma
336,189 (3)
6.8%
4,964,529
6.8%
300 N. LaSalle St, Suite 4350. Chicago, IL 60654
All Directors and Executive Officers as a group (7 persons)
394,259
7.9%
4,964,529
7.9%
** Less
than one percent
(1) The
percentage of outstanding shares of common stock is calculated out of a total of 4,964,529 shares of common stock outstanding as of March
29, 2022. Shares owned do not include ownership of preferred stock shares.
(2) Based
on a Form 4 filed by Mr. Riccardi with the SEC on December 29, 2015.
(3) Based
on a Schedule 13G/A filed by Mr. Thoma with the SEC on February 8, 2017. Beneficial ownership includes 139,429 shares held by the Carl
D. Thoma Roth IRA, TD Ameritrade Clearing Custodian for the benefit of Mr. Thoma.
55
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
Company did not participate in any transactions with related persons for the year ended December 31, 2021 that had a direct or indirect
material interest in an amount exceeding $120,000 and there are no currently proposed transactions with related persons that exceed $120,000.
All
proposed transactions between the Company and its officers, directors, and principal shareholders are required be approved by a disinterested
majority of the members of the Board and will be on terms no less favorable to the Company than could be obtained from unaffiliated third
parties.
The
Board has determined that each of our directors, except Mr. Bernau and Mr. Ellis is independent within the meaning
of the applicable rules and regulations of the SEC and the director independence standards of NASDAQ, as currently in effect. Furthermore,
the Board has determined that, with the exception of the Executive Committee, each of the members of each of the committees of the Board
is independent under the applicable rules and regulations of the SEC and the director independence standards of NASDAQ,
as currently in effect.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Moss
Adams LLP served as the Companys independent registered public accounting firm for the years ended December 31, 2021 and 2020.
Fees for professional services provided by our independent registered public accounting firm in each of the last two fiscal years, in
each of the following categories are:
Years Ended December 31,
2021
2020
Audit fees (1)
$ 241,038
$ 198,200
Tax fees (2)
54,880
52,310
$ 295,918
$ 250,510
(1) Audit
fees represent fees for services rendered for the audit of the Companys annual financial statements and other audit related, 401k
plan audit and review of the Companys quarterly financial statements.
(2) Tax
fees represent fees for services rendered for tax compliance, tax advice and tax planning
Pre-approval
policies and procedures
It
is the policy of the Company not to enter into any agreement for Moss Adams LLP to provide any non-audit services to the Company unless
(a) the agreement is approved in advance by the Audit Committee or (b) (i) the aggregate amount of all such non-audit
services constitutes no more than 5% of the total amount the Company pays to Moss Adams LLP during the fiscal year in which such services
are rendered, (ii) such services were not recognized by the Company as constituting non-audit services at the time of the engagement
of the non-audit services and (iii) such services are promptly brought to the attention of the Audit Committee and prior to the
completion of the audit were approved by the Audit Committee or by one or more members of the Audit Committee who are members of the
Board to whom authority to grant such approvals has been delegated by the Audit Committee. The Audit Committee will not approve any agreement
in advance for non-audit services unless (1) the procedures and policies are detailed in advance as to such services, (2) the
Audit Committee is informed of such services prior to commencement and (3) such policies and procedures do not constitute delegation
of the Audit Committees responsibilities to management under the Exchange Act.
56
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The
following documents are filed as part of this report:
(1) Financial
Statements
See
Index to Financial Statements in Item 8 of this Annual Report on Form 10-K.
(2) Financial
Statement Schedules
All
financial statement schedules are omitted either because they are not required, not applicable or the required information is included
in the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number
Description
3.1
Articles
of Incorporation of Willamette Valley Vineyards, Inc. (incorporated by reference from the Companys Regulation A Offering
Statement on Form 1-A [File No. 24S-2996])
3.2
Amended and Restated Bylaws of Willamette Valley Vineyards, Inc. (incorporated by reference from the Companys Current Report
on Form 8-K filed with the SEC on November 20, 2015 [File No. 001-37610])
4.1
Amended and Restated Certificate of Designation regarding the Series A Redeemable Preferred Stock (incorporated by reference from the
Companys Current Report on Form 8-K filed with the SEC on March 16, 2016 [File No. 001-37610])
4.2
Description of Common Stock (incorporated by reference from the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2019 filed with the SEC on March 11, 2020 [File No. 001-37610])
10.1
Employment
Agreement between Willamette Valley Vineyards, Inc. and James W. Bernau dated August 3, 1988 (incorporated by reference from the
Companys Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
10.2
Employment Agreement between Willamette Valley Vineyards, Inc. and John Ferry dated September 11, 2019 (incorporated by reference from the
Companys Current Report on Form 8-K filed with the SEC on September 16, 2019 [File No. 001-37610])
10.3
Revolving
Note and Loan Agreement dated May 28, 1992 by and between Northwest Farm Credit Services, Willamette Valley Vineyards, Inc. and James
W. and Cathy Bernau (incorporated by reference from the Companys Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
14.1
Code of Ethics (incorporated by reference from the Companys Proxy Statement on Schedule
14A, filed on June 30, 2004)
23.1
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm (Filed herewith)
31.1
Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed herewith)
31.2
Certification of Chief Financial Officer required by Rule 13a-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 (Furnished, not filed, herewith)
32.2
Certification of John Ferry pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Furnished, not filed, herewith)
101
The
following financial information from the Corporations Annual Report on Form 10-K for the year ended December 31, 2021,
furnished electronically herewith, and formatted in iXBRL (Inline Extensible Business Reporting Language); (i) Consolidated Balance
Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Shareholders Equity; (iv) Consolidated
Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. (Filed herewith)
104
The cover page from the Companys Annual Report on Form 10-K
for the year ended December 31, 2021 has been formatted in Inline XBRL
(1) The
exhibits listed under Item 15(a)(3) hereof are filed as part of this Form 10-K, other than Exhibits 32.1 and 32.2, which shall be
deemed furnished.
(2) All
financial statement schedules are omitted either because they are not required, not applicable or the required information is included
in the financial statements or notes thereto.
57
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities 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.
(Registrant)
By:
/s/
James W. Bernau
James
W. Bernau,
Chairperson
of the Board, President
Date:
March 29, 2022
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/
James W. Bernau
Chairperson
of the Board,
March
29, 2022
James
W. Bernau
President
(Principal
Executive Officer)
/s/
John Ferry
Chief
Financial Officer
March
29, 2022
John
Ferry
(Principal
Financial
and
Accounting Officer)
/s/
James L. Ellis
Director
March
29, 2022
James
L. Ellis
/s/
Craig Smith
Director
March
29, 2022
Craig
Smith
/s/
Stan G. Turel
Director
March
29, 2022
Stan
G. Turel
/s/
Sean M. Cary
Director
March
29, 2022
Sean
M. Cary
/s/
Leslie Copland
Director
March
29, 2022
Leslie
Copland
58
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.