WILLAMETTE VALLEY VINEYARDS INC 10-K

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 ) 31 Financial Statements Balance Sheets 32 Statements of Operations 33 Statements of Shareholders’ Equity 34 Statements of Cash Flows 35 Notes to Financial Statements 36-48 30 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, 2022 and 2021, the related statements of operations, 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, 2022 and 2021, 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 Company’s management. Our responsibility is to express an opinion on the Company’s 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 Company’s 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 659 Portland, Oregon March 28, 2023 We have served as the Company’s auditor since 2004. 31 WILLAMETTE VALLEY VINEYARDS, INC. BALANCE SHEETS December 31, December 31, 2022 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 338,676 $ 13,747,285 Accounts receivable, net 4,226,948 3,163,375 Inventories 22,201,499 19,076,750 Prepaid expenses and other current assets 454,085 299,461 Income tax receivable 557,224 138,986 Total current assets 27,778,432 36,425,857 Other assets 13,824 13,824 Vineyard development costs, net 8,448,925 8,088,968 Property and equipment, net 53,547,245 40,596,135 Operating lease right of use assets 8,895,556 6,250,326 TOTAL ASSETS $ 98,683,982 $ 91,375,110 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 3,067,886 $ 2,102,435 Accrued expenses 1,428,380 1,156,823 Investor deposits for preferred stock 147,511 4,134,422 Line of credit 166,617 - Current portion of note payable 1,201,038 1,295,541 Current portion of long-term debt 496,970 472,420 Current portion of lease liabilities 768,818 443,484 Unearned revenue 1,442,401 938,257 Grapes payable 1,208,673 1,388,601 Total current liabilities 9,928,294 11,931,983 Long-term debt, net of current portion and debt issuance costs 6,446,447 4,930,193 Lease liabilities, net of current portion 8,506,830 5,954,433 Deferred income taxes 3,440,477 3,596,507 Total liabilities 28,322,048 26,413,116 COMMITMENTS AND CONTINGENCIES (Note 12) SHAREHOLDERS’ EQUITY Redeemable preferred stock, no par value, 100,000,000 shares authorized, 9,185,666 shares issued and outstanding, liquidation preference $ 38,120,514 at December 31, 2022 and 7,523,539 shares issued and outstanding, liquidation preference $ 31,222,687 , at December 31, 2021. 38,869,075 30,956,192 Common stock, no par value, 10,000,000 shares authorized, 4,964,529 shares issued and outstanding at December 31, 2022 and December 31, 2021. 8,512,489 8,512,489 Retained earnings 22,980,370 25,493,313 Total shareholders’ equity 70,361,934 64,961,994 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 98,683,982 $ 91,375,110 The accompanying notes are an integral part of the financial statements. 32 WILLAMETTE VALLEY VINEYARDS, INC. STATEMENTS OF OPERATIONS Year ended December 31, 2022 2021 SALES, NET $ 33,934,081 $ 31,786,864 COST OF SALES 15,119,985 13,121,191 GROSS PROFIT 18,814,096 18,665,673 OPERATING EXPENSES: Sales and marketing 13,640,290 9,603,723 General and administrative 5,720,224 5,371,931 Total operating expenses 19,360,514 14,975,654 INCOME (LOSS) FROM OPERATIONS ( 546,418 ) 3,690,019 OTHER INCOME (EXPENSE) Interest income 5,496 12,412 Interest expense ( 367,745 ) ( 391,272 ) Other income, net 142,529 155,183 INCOME (LOSS) BEFORE INCOME TAXES ( 766,138 ) 3,466,342 INCOME TAX (EXPENSE) BENEFIT 119,646 ( 1,020,879 ) NET INCOME (LOSS) ( 646,492 ) 2,445,463 Preferred stock dividends ( 1,866,451 ) ( 1,444,283 ) INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ ( 2,512,943 ) $ 1,001,180 Earnings (loss) per common share after preferred dividends, basic and diluted $ ( 0.51 ) $ 0.20 Weighted-average number of common shares outstanding, basic and diluted 4,964,529 4,964,529 The accompanying notes are an integral part of the financial statements. 33 WILLAMETTE VALLEY VINEYARDS, INC. STATEMENTS OF SHAREHOLDERS’ EQUITY Redeemable Preferred Stock Common Stock Retained Shares Dollars Shares Dollars Earnings Total 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 Issuance of preferred stock, net 1,662,127 7,912,883 - - - 7,912,883 Preferred stock dividends declared - - - - ( 1,866,451 ) ( 1,866,451 ) Net loss - - - - ( 646,492 ) ( 646,492 ) Balance at December 31, 2022 9,185,666 $ 38,869,075 4,964,529 $ 8,512,489 $ 22,980,370 $ 70,361,934 The accompanying notes are an integral part of the financial statements. 34 WILLAMETTE VALLEY VINEYARDS, INC. STATEMENTS OF CASH FLOWS Year ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ ( 646,492 ) $ 2,445,463 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 2,315,901 1,952,093 Gain on disposition of property & equipment - ( 5,905 ) Preferred stock compensation expense - 39,059 Non-cash lease expense 615,690 423,118 Loan fee amortization 13,246 13,248 Deferred income taxes ( 156,030 ) 345,408 Change in operating assets and liabilities: Accounts receivable ( 1,063,573 ) ( 491,799 ) Inventories ( 3,124,749 ) ( 1,388,777 ) Prepaid expenses and other current assets ( 154,624 ) ( 117,195 ) Income tax receivable ( 418,238 ) 345,574 Unearned revenue ( 573,956 ) ( 419,878 ) Lease liabilities ( 383,189 ) ( 334,094 ) Grapes payable ( 179,928 ) 81,436 Accounts payable 818,157 ( 136,741 ) Accrued expenses 271,557 ( 178,302 ) Net cash from operating activities ( 2,666,228 ) 2,572,708 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposition of property and equipment - 35,510 Additions to vineyard development costs ( 670,257 ) ( 288,973 ) Additions to property and equipment ( 14,809,417 ) ( 10,047,932 ) Net cash from investing activities ( 15,479,674 ) ( 10,301,395 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from investor deposits held as liability 147,511 4,134,422 Payment on installment note for property purchase ( 94,503 ) ( 89,040 ) Proceeds from line of credit 166,617 - Payment on long-term debt ( 472,442 ) ( 450,132 ) Proceeds from long-term debt 2,000,000 - Proceeds from issuance of preferred stock 3,778,461 4,589,192 Payment of preferred stock dividend ( 788,351 ) ( 708,225 ) Net cash from financing activities 4,737,293 7,476,217 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 13,408,609 ) ( 252,470 ) CASH AND CASH EQUIVALENTS, beginning of year 13,747,285 13,999,755 CASH AND CASH EQUIVALENTS, end of year $ 338,676 $ 13,747,285 NON-CASH INVESTING AND FINANCING ACTIVITIES Purchases of property and equipment and vineyard development costs included in accounts payable $ 1,291,029 $ 1,143,735 Reduction in investor deposits for preferred stock $ 4,134,422 $ 510,636 Gift cards given in lieu of cash dividends $ 1,078,100 $ 736,058 Right of use assets obtained in exchange for operating lease liabilities $ 3,369,363 $ 1,729,981 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest paid $ 368,691 $ 389,163 Income tax paid $ 417,686 $ 329,898 The accompanying notes are an integral part of the financial statements. 35 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, wineries and tasting rooms, and produces and distributes premium, super premium, and ultra-premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay, Riesling and Sparkling wine. 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 outbreak in Oregon and other parts of the United States, as well as the response to COVID-19 by federal, state and local governments have had a material adverse impact on economic and market conditions in the United States. Although most restrictive measures have been lifted, 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. 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, short 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 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. At December 31, 2022, two customers accounted for approximately 27% and 14% of accounts receivable. At December 31, 2021, two customers accounted for approximately 11% and 11% of accounts receivable. Other comprehensive income – The nature of the Company’s 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 customer’s ability to pay. The Company has credit risk associated with uncollateralized trade accounts receivable from all operations totaling $ 4,226,948 and $ 3,163,375 as of December 31, 2022 and 2021, 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. 36 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. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. 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 $ 2,354,989 and $ 2,070,009 at December 31, 2022 and 2021, 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, 2022 and 2021, $ 284,980 and $ 245,339 , 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 to 30 years. Winery buildings are depreciated over 30 years. Equipment is depreciated over 3 to 15 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. 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, vineyard development costs, and operating lease right of use assets. 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 Company’s products or significant increase in the costs to manufacture the Company’s 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, 2022 and 2021. 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 Company’s assets and liabilities. The Company had no unrecognized tax benefits as of December 31, 2022 or 2021. 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, 2022 and 2021 were not material. 37 A valuation allowance is provided when it is more likely than not that some portion or all the deferred tax assets will not be realized. The Company evaluates the potential realization of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization included the Company’s forecast of future taxable income or loss and available tax planning strategies that could be implemented to realize the net deferred tax assets. Certain intangible assets and liabilities will be deductible for tax purposes and may result in deferred tax assets and liabilities as the benefits are recognized in the Company’s tax returns. 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 may be subject to examination by the IRS for tax years 2019 through 2022. Additionally, the Company may be subject to examinations by state taxing jurisdictions for tax years 2018 through 2022. 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 a transaction, are accounted for as an offset to sales in the net sales calculation. The Company’s 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 Company’s 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, 2022, and December 31, 2021, the Company has recorded deferred revenue in the amount of $ 335,431 and $ 255,376 , 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 $ 1,106,970 and $ 682,881 as of December 31, 2022 and 2021, 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 Company’s 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. 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, 2022 and 2021, the Company recorded incentive program expenses of $1,333,396 and $1,437,481, respectively, as a reduction in sales on the Statements of Operations. As of December 31, 2022, and 2021, the Company has recorded an incentive program liability in the amount of $111,398 and $67,326, respectively, which is included in accrued expenses on the balance sheets. 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 sales are recognized as revenue at the point of sale and internet sales are recognized at time of shipment. 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 customer’s 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 Company’s 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. 38 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, 2022 and 2021, advertising costs incurred were $340,427 and $329,152 respectively. The Company provides an allowance to distributors for providing sample of products to potential customers. For the years ended December 31, 2022 and 2021, these costs, which are included in selling, general and administrative expenses, $87,996 and $71,227, respectively. Shipping and handling costs – Amounts paid by customers to the Company for shipping and handling costs are included in net sales. Costs incurred for shipping and handling charges are included in selling, general and administrative expense. For the years ended December 31, 2022 and 2021, shipping and handling costs incurred were $681,975 and $778,598 respectively. 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 Company’s 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, 2022 and 2021, excise taxes incurred were $ 312,103 and $ 384,498 respectively. Income (loss) per common share after preferred dividends – Income (loss) 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 sheets, our operating leases are included in Operating lease right-of-use (“ROU”) 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 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 Company’s financial statements. 39 Reclassifications – Certain immaterial amounts from prior periods have been reclassified to conform to current years’ presentation. NOTE 2 – ACCOUNTS RECEIVABLE, NET The Company’s accounts receivable balance is net of an allowance for doubtful accounts of $ 10,000 and $ 10,000 at December 31, 2022 and 2021, respectively. Changes in the allowance for doubtful accounts are as follows: Year ended December 31, 2022 2021 Beginning of year $ 10,000 $ 10,000 Charged to costs and expenses - - Write-offs, net of recoveries - - End of year $ 10,000 $ 10,000 NOTE 3 – INVENTORIES Inventory consists of the following at December 31, 2022 and 2021: Schedule of Inventory December 31, December 31, 2022 2021 Winemaking and packaging materials $ 1,162,850 $ 742,188 Work-in-process (costs relating to unprocessed and/or unbottled wine products) 12,047,579 9,691,140 Finished goods (bottled wine and related products) 8,991,070 8,643,422 Total inventories $ 22,201,499 $ 19,076,750 NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 2022 and 2021: Schedule of Property and Equipment, Net December 31, December 31, 2022 2021 Construction in progress $ 2,037,128 $ 14,556,807 Land, improvements and other buildings 14,491,827 12,850,316 Winery buildings and tasting rooms 40,806,365 17,791,684 Equipment 18,805,695 15,960,178 Property and equipment, gross 76,141,015 61,158,985 Accumulated depreciation ( 22,593,770 ) ( 20,562,850 ) Property and equipment, net $ 53,547,245 $ 40,596,135 Depreciation expense was $ 2,030,921 and $ 1,645,471 during the years ended December 31, 2022, and 2021, respectively. 40 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. In November 2022, the Company increased the borrowing line up to $5,000,000. The Company had an outstanding line of credit balance of $ 166,617 at December 31, 2022, at an interest rate of 6.5%, and zero outstanding balance at December 31, 2021. 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, 2022, the Company was out of compliance with a debt covenant. The Company has received a waiver from Umqua Bank waiving this violation until the next measurement date of December 31, 2023. 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, 2022 and 2021, the Company had a balance of $ 1,201,038 and $ 1,295,541 , respectively, due on this note. NOTE 7 – LONG-TERM DEBT Long-term debt consists of the following at December 31, 2022 and 2021: Schedule of Long-term Debt December 31, 2022 2021 Northwest Farm Credit Services Loan #4 $ 972,941 $ 1,109,860 Northwest Farm Credit Services Loan #5 4,089,713 4,425,236 Northwest Farm Credit Services Loan 2,000,000 - Long-Term Debt, Gross 7,062,654 5,535,096 Debt issuance costs ( 119,237 ) ( 132,483 ) Current portion of long-term debt ( 496,970 ) ( 472,420 ) Long-Term Debt $ 6,446,447 $ 4,930,193 The Company has three long term debt agreements with Northwest Farm Credit Services (“FCS”) with an aggregate outstanding balance of $ 7,062,654 and $ 5,535,096 as of December 31, 2022 and 2021, respectively. The first 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, respectively. The general purposes of these loans were to make capital improvements to the winery and vineyard facilities. The third loan bears interest at Northwest Variable base which was 6.50% at December 31, 2022, with interest due annually and principal at maturity on November 1, 2025. 41 Future minimum principal payments of long-term debt mature as follows for the years ending December 31: 2023 $ 496,970 2024 522,798 2025 2,549,971 2026 578,559 2027 608,636 Thereafter 2,305,720 Future minimum principal payments of long-term debt total $ 7,062,654 The weighted-average interest rates on the aforementioned borrowings for the years ended December 31, 2022 and 2021 was 5.57% and 5.12% 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 100,000,000 shares of redeemable preferred stock. Each share of the Company’s currently issued preferred stock is non-voting. The Company’s 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 Company’s common stock and is subject to optional redemption after June 1, 2021 at the sole discretion of the Company’s 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 2022 and November 2021, the Company declared a dividend on its Series A Redeemable Preferred stock and paid the dividend on December 31, 2022 and December 31, 2021 respectively. The Company is current on its dividend obligations. 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 Company’s stock on the date the options were granted. There were no stock options outstanding or exercisable at December 31, 2022 and 2021. No stock compensation expense under this plan was recognized for the years ended December 31, 2022 and 2021. As of December 31, 2022, there was no unrecognized compensation expense related to stock options. As part of an incentive program, the Company issued no preferred stock during the year ended December 31, 2022 and minimal shares in 2021, resulting in stock compensation expense of zero and $ 39,059 , respectively. 42 NOTE 10 – INCOME TAXES The provision for income taxes consists of: Schedule of Income Tax Provision Year Ended December 31, 2022 2021 Current tax expense: Federal $ 34,120 $ 459,640 State 2,263 215,831 Current tax expense 36,383 675,471 Deferred tax expense: Federal ( 121,662 ) 263,911 State ( 34,367 ) 81,497 Deferred tax expense (benefit) ( 156,029 ) 345,408 Total $ ( 119,646 ) $ 1,020,879 The effective income tax rate differs from the federal statutory rate as follows: Schedule of Effective Income Tax Rate Year Ended December 31, 2022 2021 Federal statutory rate 21.00 % 21.00 % State taxes, net of federal benefit 3.60 % 6.49 % Permanent differences - 5.63 % 1.26 % Prior year adjustments - 5.34 % - 1.54 % Changes in tax rates and other 1.50 % 2.24 % Total 15.13 % 29.45 % 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. 43 Net deferred tax assets and (liabilities) at December 31 consist of: Schedule of Net Deferred Tax Assets and Liabilities December 31, 2022 2021 Net Operating Losses $ 1,518,394 $ - Various Accruals and Deferred Timing Differences 230,574 36,037 Prepaid expenses ( 50,227 ) ( 31,706 ) Depreciation ( 4,418,327 ) ( 3,289,735 ) Inventory ( 720,891 ) ( 311,103 ) Net deferred tax liability $ ( 3,440,477 ) $ ( 3,596,507 ) The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties related to income tax matters are recognized in income tax expense. The Company recognized no uncertain tax positions, or any accrued interest and penalties associated with uncertain tax positions as of December 31, 2022 and 2021. FASB ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management believes that the Company will generate sufficient taxable income in the timeframe required to utilize existing net operating losses and therefore no valuation allowance has been recognized. As of December 31, 2022, the Company has federal net operating loss carryforward of approximately $5,828,673 that do not expire, state net operating loss carryforwards of approximately $5,118,609 which will start expiring in 2033. NOTE 11 – RELATED PARTY TRANSACTIONS The Company provides living accommodations in a residence on the Company’s premises, at its convenience, for the Company’s 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 Company’s financial position, results of operations or cash flows, but, due to the nature of litigation, the ultimate outcome of any potential actions cannot presently be determined. 44 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. 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. In May 2022 the Company amended the lease to extend the lease to August 2025 with one three year renewal option and defined payments over the term of the lease. In January 2018 , the Company assumed a lease, through December 2022, for its Maison Bleue tasting room in Walla Walla, Washington. In December 2022, the Company entered into a new lease to December 2027 with one five year renewal option, and defined payments over the term of the lease. 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. In February 2022 , the Company entered into a lease for 10 years , with three five-year renewal options for a retail wine facility in Lake Oswego, Oregon. The lease defines the payments over the term of the lease and option periods. In May 2022 , the Company entered into a lease for 10 years , with two five-year renewal options for a retail wine facility in Happy Valley, Oregon. The lease defines the payments over the term of the lease and option periods. 45 The following tables provide lease cost and other lease information for the year ended December 31, 2022: Year Ended December 31, 2022 Lease Cost Operating Lease cost - Vineyards $ 459,128 Operating Lease cost - Other 690,924 Short-term lease cost 37,746 Total Lease Cost $ 1,187,798 Other information Cash paid for amounts included in the measurement of lease liabilities, Operating cash flows from operating leases - Vineyard 450,026 Operating cash flows from operating leases - Other 437,091 Weighted-average remaining lease term - Operating leases in years 11.15 Weighted-average discount rate - Operating leases 5.15 % Right-of-use assets obtained in exchange for new operating lease obligations were $3,369,363 and $1,729,981 for the years ended December 31 2022 and 2021, respectively. The Company has two additional operating leases that has not yet commenced as of December 31, 2022, and as such, has not been recognized in the Company’s balance sheet. These operating leases are expected to commence in 2023 with lease terms of 5 and 10 years. As of December 31, 2022, maturities of lease liabilities were as follows: Schedule of Maturities of Lease Liabilities Operating Years Ended December 31, Leases 2023 $ 1,215,935 2024 1,224,702 2025 1,139,179 2026 1,095,471 2027 1,146,487 Thereafter 6,621,417 Total minimal lease payments 12,443,191 Less present value adjustment ( 3,167,543 ) Operating lease liabilities 9,275,648 Less current lease liabilities ( 768,818 ) Lease liabilities, net of current portion $ 8,506,830 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 $2,508,419 and $2,928,398 during the years ended December 31, 2022 and 2021, respectively. The Company had an outstanding balance due on grape purchase agreements of $ 1,208,673 and $ 1,388,601 as of December 31, 2022 and 2021, respectively. 46 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, 2022, and 2021 there were $ 196,198 and $ 164,188 of 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 (the “2020 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. The Company subsequently filed with the SEC prospectus supplement on June 10, 2020, pursuant to which the Company sold an aggregate of 1,902,155 shares of its Series A Redeemable Preferred Stock for aggregate proceeds of $8,533,086, net of acquisition costs. On June 11, 2021, the Company filed with the SEC an additional Prospectus Supplement to the 2020 Form S-3, pursuant to which the Company sold an aggregate of 1,918,939 shares of its Series A Redeemable Preferred Stock for aggregate proceeds of $9,008,334 net of acquisition costs. On July 1, 2022, the Company filed a new shelf Registration Statement on Form S-3 (the “July 2022 Form S-3”) with 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 June 2022 Form S-3 is not to exceed $20,000,000. On August 1, 2022 and September 1 2022, the Company filed with the SEC Prospectus Supplements to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 213,158 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,097,765 and up to 284,995 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,467,729, respectively. Each of these Prospectus Supplements established that our shares of preferred stock were to be sold in three offering periods with three separate offering prices beginning with an offering price of $5.15 per share and concluding with an offering of $5.35 per share. On October 3, 2022, the Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 233,564 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,226,211. This Prospectus Supplement established that our shares of preferred stock were to be sold in two offering periods with two separate offering prices beginning with an offering price of $5.25 per share and concluding with an offering of $5.35 per share. On November 1, 2022, the Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell, on a delayed or continuous basis, up to 344,861 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,845,009. This Prospectus Supplement established that our shares of preferred stock were to be sold in one offering period with an offering price of $5.35 per share. Net proceeds of $3,156,064 have been received under these offerings as of December, 31 2022 for the issuance of Preferred Stock. 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, 2022 and 2021 was $ 1,106,970 and $ 682,881 , respectively and is recorded as unearned revenue on the balance sheets. Revenue from gift cards is recognized when the gift card is redeemed by a customer. When the likelihood of a gift card being redeemed by a customer is determined to be remote and the Company expects to be entitled to the breakage, then the value of the unredeemed gift card is recognized as revenue. We determine the gift card breakage rate based upon Company-specific historical redemption patterns. To date we have determined that no breakage should be recognized related to our gift cards. 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. 47 The two segments reflect how the Company’s operations are evaluated by senior management and the structure of its internal financial reporting. The Company evaluates performance based on the gross profit of the respective business segments. Selling expenses that can be directly attributable to the segment, including depreciation of segment specific assets, are included, however, centralized selling expenses and general and administrative expenses are not allocated between operating segments. Therefore, net income information for the respective segments is not available. Discrete financial information related to segment assets, other than segment specific depreciation associated with selling, is not available and that information continues to be aggregated. The following table outlines the sales, cost of sales, gross margin, directly attributable selling expenses, and contribution margin of the segments for the years ended December 31, 2022 and 2021. Sales figures are net of related excise taxes. Schedule of Segment reporting Twelve Months Ended December 31, Direct Sales Distributor Sales Unallocated Total 2022 2021 2022 2021 2022 2021 2022 2021 Sales, net $ 15,732,142 $ 13,272,659 $ 18,201,939 $ 18,514,205 $ - $ - $ 33,934,081 $ 31,786,864 Cost of sales 4,710,457 3,470,963 10,409,528 9,650,228 - - 15,119,985 13,121,191 Gross margin 11,021,685 9,801,696 7,792,411 8,863,977 - - 18,814,096 18,665,673 Selling expenses 10,690,806 6,929,882 2,020,713 1,914,207 928,771 759,634 13,640,290 9,603,723 Contribution margin $ 330,879 $ 2,871,814 $ 5,771,698 $ 6,949,770 Percent of sales 46.4 % 41.8 % 53.6 % 58.2 % General and administrative expenses 5,720,224 5,371,931 5,720,224 5,371,931 Income (loss) from operations $ ( 546,418 ) $ 3,690,019 Direct sales include $ 97,652 and $ 103,471 of bulk wine and grape sales in the years ended December 31, 2022 and 2021, respectively. Net direct-to-consumer sales, including bulk wine, miscellaneous sales, and grape sales, represented approximately 46.4 % and 41.8 % of total net revenue for 2022 and 2021, respectively. Net sales through distributors represented approximately 53.6 % and 58.2 % of total net revenue for 2022 and 2021, 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 Company’s 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. 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None