WILLAMETTE VALLEY VINEYARDS INC 10-K

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 Company’s business, and beliefs and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”, “predicts,” “potential,” “should,” or “will” or the negative thereof and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease or smoke from forest fires, changes in consumer spending. 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 Company’s wines are made from grapes grown in vineyards owned, leased or contracted by the Company, and from grapes purchased from other vineyards. The grapes are harvested, fermented and made into wine primarily at the Company’s winery in Turner, Oregon (the “Estate Winery” or “Winery”) and the wines are sold principally under the Company’s Willamette Valley Vineyards label, but also under the Domaine Willamette, 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 brand’s flagship and its largest selling varietal in 2022, $24 to $100 per bottle; Chardonnay, $25 to $50 per bottle; Pinot Gris, $18 per bottle; Pinot Blanc, $25 per bottle; Sauvignon Blanc, $28 per bottle; Gruner Veltliner, $28 per bottle; Rose, $18 to $25 per bottle; Brut, $50 to $65 per bottle; Brut Rose, $65, and Riesling, $14 per bottle (all bottle prices included herein are the suggested retail prices). The Company’s mission for this brand is to become the premier producer of Pinot Noir in the Pacific Northwest. 4 Under its Domaine Willamette label, the Company produces and sells the following types of wine in 750 ml bottles: Brut, $75 per bottle; Brut Rose, $75; Blanc de Blancs, $85. This brand’s mission is to be the highest quality producer of Sparkling Wines in Oregon. Under its Tualatin Estate Vineyards label, the Company currently produces and sells the following type of wine in 750 ml bottles: Semi-Sparkling Muscat, $22 per bottle. Under its Griffin Creek label, the Company produces and sells the following types of wine in 750 ml bottles: Syrah, the brand’s flagship, $55 per bottle; Merlot, $48 per bottle; Cabernet Sauvignon, $55 per bottle; Grenache, $55 per bottle; Cabernet Franc, $55 per bottle; Tempranillo, $55 per bottle; Malbec, $55 per bottle; The Griffin (a Bordeaux style blend), $65 per bottle; and Viognier, $35 per bottle. This brand’s 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, $65 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, $30 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, WILLAMETTE VALLEY VINEYARDS, DOMAINE WILLAMETTE, OREGON’S LANDMARK WINERY, GRIFFIN CREEK, GRIFFIN, ELTON, WILLAMETTE, WVV, SIP. SAVE, WHOLE CLUSTER, GIVE YOUR WHOLE HEART WITH WILLAMETTE WHOLE CLUSTER, OREGON BLOSSOM, NOG, OREGON NOG, INGRAM ESTATE, IT’S WILLAMETTE, DAMMIT, FULLER, TUALATIN, TUALATIN ESTATE, MAISON BLEUE WINERY, MÉTIS, O’BRIEN, EAGLE’S CLUTCH, WILLAMETTE WINEWORKS, JORY CLAIM, COTE DU BLEUE, PÈRE AMI, KAYAK, DAEDALUS 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 wineries established nationwide. The United States wine industry added 400 new wineries in 2022, a 3% increase from 2021, according to Wine Analytics Report . From 2009 to 2021, U.S. wineries grew from 6,357 to 11,053, according to Statista, and consequently can be considered one of the fastest-growing segments in agriculture. The total retail value of wine sales has increased from $26.3 billion in 2000 to $78.4 billion in 2021, according to Statista. According to the report, the U.S. value of direct-to-consumer wine shipments grew by 13.4 percent during 2021. Total wine consumption in the United States has also grown 46 percent since 2005. Additionally, 1.1 Billion gallons of wine were consumed in 2021, an increase of 413 million from 2005 (Statista). Wine consumption has been increasing in the United States, as since 2005, the average annual consumption per U.S. resident has increased by 33 percent to a high of 3.18 gallons in 2021. According to Statista revenue in the U.S. wine market is worth $56.65 billion as of 2023, up 7.5% from the prior year, and is expected to grow annually by 5.85% through 2027. Wine Grand View Research in their report believes millennials and younger generations drive this increase as wine consumption has become a sign of social status. In addition, Wine Grand View Research believe innovations in flavors, color, and packaging have also contributed to the growth. 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, according to this same report the number of consumers drinking wine at least once a month declined by 11 million over that same time. Wine Intelligence reports in that this trend is driven by 21-34 year old’s who are moderating consumption and switching to other beverages. Yet, Wine Intelligence found that Millennials who remain 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 2022, 54% were female and 42% male, with 34% drinking wine more than once a week. Further, domestic wine accounted for 66.9% of U.S. sales in 2019, according to a Wines & Vines Analytics. Within the total wine market, the five most popular wines in 2022 were cabernet sauvignon, chardonnay, red blends, pinot gris, and pinot noir, according to Nielsen. 5 In 2021, off-premise sales accounted for roughly 80% of the U.S. market, with an average bottle price of $12.05, according to Grand View Research and Statista. In addition, a Sovos ShipCompliant and Wines Vines Analytics report from 2022 shows direct-to-consumer wine shipments remained consistent with 2021 at 12% of the total off-premise wine market in the U.S. However, according to this report the average price per bottle within these shipments increased by 9.7% in 2022 versus the prior year, up to $45.16. Pinot Noir was the second most-shipped varietal during the year. In summary, we believe the wine industry is on a solid trajectory and continues to grow. Overall, we believe the industry is expected to stabilize in 2023 at the current levels. However, of concern, consumption growth is mainly amongst those over 60 years old, with the most significant growth area among 70-80-year-olds. Consequently, we believe future positive sales and growth will depend on the industry targeting younger consumers. According to the State of the Wine Industry 2023 by Rob McMillan, younger wine consumers are not limited by cost; instead, they seek something enticing to draw them in to learn more about wine, including but not limited to health, sustainability, social values, and transparent labeling, The Company’s Board of Directors and Management believe the winery’s 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 Oregon’s Institute for Policy Research and Engagement (UOIPRE) in 2021, the most recent year such data is available, the overall number of wineries increased from 995 to 1,058 with the biggest increases coming from the Willamette Valley, which added 45. Planted acres of wine grape vineyards increased by 2,368 acres from 39,531 to 41,899, an increase of 6%, 39,083 acres of which were harvested. Oregon wine grapes produced a 2021 crop with a total value of $271 million, an increase of 72% from 2020 primarily due to a more normal fruit set compared to the preceding 2020 harvest according to UOIPRE. Pinot Noir leads all varieties accounting for 60% of planted acreage and 61% of production. According to UOIPRE, Oregon case sales in 2021 were 5.3 million, which was a 13% increase from 2020. UOIPRE reported case sales in dollars for 2021 were approximately $844 million, a 21% increase from 2020. 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 Oregon’s 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. Oregon’s 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 Oregon’s competitors certain financial, marketing, distribution, and unit cost advantages. Furthermore, Oregon’s 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 year’s wine quality. 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 Company’s 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. 6 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 Company’s Estate, Elton, Domaine Willamette, Pambrun, Maison Bleue and Griffin Creek brands. 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 Company’s goal is to continue to build on a reputation for producing some of Oregon’s 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; and (iv) develop strong marketing advantages (such as a highly visible winery locations, 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 Company’s 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 Company’s wineries, tasting room and restaurant locations in Oregon, Washington and California and sales through independent distributors and wine brokers who market the Company’s wine in specific targeted areas. To remain competitive in the premium, super premium and ultra-premium market, the Company has embarked on a brand expansion project including developing a brand and 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 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. In 2022, the Company has opened a sparkling wine facility and tasting room called Domaine Willamette, at Bernau Estate that features the Company’s sparkling wines, as well as its other reserve wines, and its biodynamic farming practices. 7 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 winery’s current production capacity, of 654,000 gallons (275,000 cases), at its Estate Winery. The following table summarizes the Company’s acreage: ACRES TONS Vineyard Name Total Producing Pre-Production Plantable Non-Plantable Harvest 2022 Harvest 2021 Owned Vineyards WVV Estate 107 69 - - 38 206 242 Tualatin Estate Vineyard 107 61 - - 46 279 184 Ingram Vineyard 86 63 - - 23 364 172 Pambrun Vineyard 87 20 - 30 37 49 28 Loeza Vineyard 62 20 15 23 4 104 43 Louisa Vineyard 53 - - 25 28 - - Maison Bleue Vineyard 37 15 - 19 3 45 30 Bernau Estate 20 13 - - 7 33 35 Dayton Vineyard 40 - - 34 6 - - Lafayette Vineyard 36 - - 36 - - - Jory Claim Vineyard 69 - 20 45 4 - - Sub-Total 704 261 35 212 196 1,080 734 Leased Vineyards Peter Michael Vineyard 79 69 - - 10 461 270 Meadowview Vineyard 49 49 - - - 307 189 Elton Vineyard 59 54 - 2 3 198 163 Ingram Vineyard 110 93 - 17 - 463 194 Bernau Estate 17 7 2 - 8 - - Sub-Total 314 272 2 19 21 1,429 816 Contracted Vineyards* Various 327 327 - - - 1,307 1,522 Total 1,345 860 37 231 217 3,816 3,072 * Contracted acreage is estimated WVV Estate – Established in 1983, the Company’s 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 Company’s 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. 8 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 13 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 Company’s Estate Vineyard. In 2022, crop yields were above the 7-year average and the Company’s producing acres in the Estate Vineyard and Tualatin Estate yielded approximately 206 tons and 279 tons of grapes, respectively. The Company fulfills its remaining grape needs by purchasing grapes from other nearby vineyards at competitive prices. In 2022, the Company purchased an additional 1,307 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 Company’s long-term growth and risk-management plan. The Company believes high quality grapes will be available for purchase in sufficient quantity to meet the Company’s 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 Company’s vineyards establish a foundation of quality through the Company’s farming practices, upon which the quality of the Company’s wines is built. Wine produced from grapes grown in the Company’s own vineyards may be labeled as “Estate Bottled” wines. These wines traditionally sell at a premium over non-estate bottled wines. 9 Viticultural conditions – Oregon’s 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 Vineyard’s 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 Vineyard’s grape growing conditions compare favorably to those found in some of the famous Viticultural regions of France. Western Oregon’s 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. In the Willamette Valley, permanent vineyard irrigation generally is not required. The average annual rainfall provides sufficient moisture to avoid the need to irrigate. However, if the need should arise, the Company’s 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 WVV 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 also has water rights at the Pambrun Vineyard and Maison Bleue Vineyards. 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 Company’s 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. Winery Wine production facility – The Company’s Estate Winery and production facilities are capable of efficiently producing up to 275,000 cases (654,000 gallons) of wine per year, depending on the type of wine produced. In 2022, the Winery produced approximately 186,792 cases (444,107 gallons) primarily from its 2020 and 2021 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. The Company also stores and ages product at the Domaine Willamette Winery location in Dundee, Oregon. Mortgages on properties – The Company’s winery facilities at the Estate Winery are subject to two mortgages with an aggregate principal balance of $5,062,654 at December 31, 2022. 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 Company’s 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. 10 The Company’s 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 2022 2,509 1,307 3,816 22,000 2022 186,792 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 retail locations, 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 Estate Winery is located on a visible hill adjacent to Oregon’s major north-south freeway (Interstate 5), approximately 2 miles south of the state’s second-largest metropolitan area (Salem), and 50 miles in either direction from the state’s first and third-largest metropolitan areas (Portland and Eugene). We believe the unique location along Interstate 5 has resulted in a 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’s 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 September 2022, the Company opened a new sparkling winery, Domaine Willamette, located adjacent to Highway 99 in Dundee, Oregon (the “Domaine Willamette Winery, approximately 30 miles southwest of the state’s largest metropolitan area (Portland) and 25 miles northwest of the state’s second-largest metropolitan area (Salem). We believe the location of the Domaine Willamette Winery along Highway 99 in Dundee provides an ideal location for direct wine sales and wine tourism. Domaine Willamette Winery’s Tasting Room is open daily for wine tasting, restaurant service and education by trained personnel. It features méthode traditionelle sparkling wines and a wine club. The Company offers by-appointment private tours giving a behind-the-scenes look at sparkling wine production. Domaine Willamette Winery’s biodynamic garden is another attraction for visitors. 11 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 Company’s 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 Pinot Noir Clonal Blending experience giving guests the ability to be a winemaker for a day by crafting their own custom blends from barrel. 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 where permissible. The Company also operates seven additional tasting rooms at the following locations: (i) historic downtown McMinnville, Oregon; (ii) at its Tualatin Vineyard, Oregon; (iii) Lake Oswego, Oregon; (iv) Happy Valley, Oregon; (v) downtown Walla Walla, Washington; (vi) Vancouver, Washington and (vii) Folsom, California. The Company holds various festivals and events at its locations throughout the year. Numerous private events, charitable and political events are also held at Company locations. 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 2022 and 2021, direct sales contributed approximately 46.4% and 41.8% of the Company’s net sales, respectively. Distributors and wine brokers – The Company uses both independent distributors and wine brokers primarily to market the Company’s 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 Company’s products are distributed in 49 states and the District of Columbia, and there are 3 non-domestic (export) customers. For 2022 and 2021, sales to distributors and wine brokers contributed approximately 53.6% and 58.2% of the Company’s 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, Oregon’s leading wine region has approximately 74% of the state’s wineries and vineyards, is home to approximately 781 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 (Oregon’s 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 the location of the Estate Winery next to Interstate 5, and Domaine Willamette Winery next to Highway 99W, significantly increases direct sales opportunities to consumers. The Company believes these locations provide high visibility for the Company to passing motorists, thus enhancing recognition of the Company’s products in retail outlets and restaurants. These wineries are also each approximately a 45-minute drive from Portland. Dependence on Major Customers Historically, the Company’s revenue has been derived from thousands of customers annually. In 2022, sales to one distributor represented approximately 17.5% of total Company revenue. In 2021, sales to one distributor represented approximately 18.1% of total Company revenue. 12 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. 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 720,000 gallons (303,000 cases) per year at its Estate and Tualatin 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 Company’s 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 Company’s wine is subject to federal alcohol tax, payable at the time wine is removed from the bonded area of a 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 Company’s 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 Company’s 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 Company’s regular operations and consequently do not generally cause significant alternative processes or costs. 13 Employees As of December 31, 2022, the Company had approximately 169 full-time employees and 193 part-time, or on call employees. In addition, the Company hires additional employees for seasonal work as required. The Company’s employees are not represented by any collective bargaining unit. The Company believes it maintains positive relations with its employees. 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 Company’s 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.