WILLAMETTE VALLEY VINEYARDS INC - Annual Report: 2017 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
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or
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THESECURITIES EXCHANGE ACT OF 1934
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For
the transition period from _________________ to
_______________________
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Commission file number: 000-21522
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WILLAMETTE VALLEY VINEYARDS,
INC.
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(Exact name of registrant as specified in its charter)
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Oregon
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93-0981021
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(State or other jurisdiction ofincorporation or
organization)
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(I.R.S. EmployerIdentification No.)
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8800
Enchanted Way, S.E.
Turner, OR 97392
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(Address of principal executive offices)
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1
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K: ☐
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Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer ☐ Accelerated filer ☐ Non-accelerated
filer ☐ Smaller reporting company ☒
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act): Yes ☐ No
☒
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The
aggregate market value of common stock held by non-affiliates of
the registrant as of June 30, 2017 was approximately
$35,501,897.
The
number of outstanding shares of the registrant’s Common Stock
as of March 22, 2018 was 4,964,529.
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DOCUMENTS INCORPORATED BY REFERENCE
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None
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2
WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1
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Business
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4
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Item 1A
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Risk Factors
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14
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Item 1B
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Unresolved Staff Comments
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18
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Item 2
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Properties
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18
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Item 3
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Legal Proceedings
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19
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Item 4
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Mine Safety Disclosures
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19
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PART II
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Item 5
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Market for Registrant’s Common Equity, Related
Stockholder
Matters and Issuer Purchases of Equity
Securities
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20
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Item 6
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Selected Financial Data
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21
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Item 7
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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21
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Item 7A
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Quantitative and Qualitative Disclosures about Market
Risk
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30
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Item 8
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Financial Statements and Supplementary Data
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30
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Item 9
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Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
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47
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Item 9A
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Controls and Procedures
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47
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Item 9B
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Other Information
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48
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PART III
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Item 10
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Directors, Executive Officers and Corporate Governance
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49
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Item 11
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Executive Compensation
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52
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Item 12
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Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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53
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Item 13
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Certain Relationships and Related Transactions, and Director
Independence
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54
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Item 14
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Principal Accounting Fees and Services
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55
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Item 15
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Exhibits, Financial Statement Schedules
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55
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3
WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-K
As used
in this Annual Report on Form 10-K, “we,”
“us,” “our” and “the Company”
refer to Willamette Valley Vineyards, Inc.
PART I
ITEM 1. BUSINESS
Forward Looking Statements
This
Annual Report on Form 10-K, including any information incorporated
by reference, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
referred to as the “Securities Act”, and Section 21E of
the Securities Exchange Act of 1934, as amended, referred to as the
“Exchange Act”. In some cases, you can identify
forward-looking statements by terms such as “may,”
“will,” “should,” “expect,”
“plan,” “intend,” “forecast,”
“anticipate,” “believe,”
“estimate,” “predict,”
“potential,” “seeks,”
“estimates” or the negative of these terms or other
comparable terminology, which when used are meant to signify the
statement as forward-looking. However, not all forward-looking
statements contain these words. Forward-looking statements include,
but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements that are not
historical facts. These forward-looking statements are not
guarantees of future performance and involve known and unknown
risks, uncertainties and situations that are difficult to predict
and that may cause our own, or our industry’s actual results,
to be materially different from the future results that are
expressed or implied by these statements. Accordingly, actual
results may differ materially from those anticipated or expressed
in such statements as a result of a variety of factors, including
those set forth under 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. We caution you not to place
undue reliance on forward looking statements, which speak only as
of the date of this report. We do not intend, and we undertake no
obligation, to update any forward information to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events, unless required by law to do
so.
Business
Introduction – Willamette Valley Vineyards, Inc.
(“the Company” or “WVV”) 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 nearby vineyards. The
grapes are harvested, fermented and made into wine at the
Company’s Turner winery (the “Estate Winery” or
“Winery”) and the wines are sold principally under the
Company’s Willamette Valley Vineyards label, but also under
the Griffin Creek, Tualatin Estate 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 includes retail sales in our tasting room and remote
sites, wine club 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 2017, $24 to $100 per bottle;
Chardonnay, $25 to $45 per bottle; Pinot Gris, $17 per bottle;
Pinot Blanc, $24 per bottle; Rose, $18 to $24 per bottle; Methode
Champenoise Brut, $55 per bottle; 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 from the Pacific Northwest.
4
Under
its Tualatin Estate Vineyards label, the Company currently produces
and sells the following type of wine in 750 ml bottles:
Semi-Sparkling Muscat, $19 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, $45 per bottle; Merlot, $40 per bottle; Cabernet
Sauvignon, $45 per bottle; Grenache, $45 per bottle; Cabernet
Franc, $45 per bottle; The Griffin (a Bordeaux style blend), $65
per bottle; and Viognier, $30 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 Made in Oregon Cellars label, the Company produces and sells
the following type of wine in 750 ml bottles: Oregon Blossom (blush
blend), $12 per bottle.
The
Company holds U.S. federal and/or Oregon state trademark
registrations for the trademarks material to the business,
including but not limited to, the WILLAMETTE VALLEY VINEYARDS,
BIO-CASK, DAEDALUS CELLARS, OREGON’S LANDMARK WINERY, GRIFFIN
CREEK, GRIFFIN, ELTON, WILLAMETTE, WVV, SIP.SAVE, WHOLE CLUSTER,
MADE IN OREGON CELLARS, OREGON BLOSSOM, INGRAM ESTATE and
IT’S WILLAMETTE, DAMMIT marks. Additionally, the Company has
allowed use on PAMBRUN, PIERRE PAMBRUN and PINOT
BLACK.
Market overview – The United States wine industry has
seen a rapid increase in the number of wineries that are being
established throughout the country. From 1995 to 2017, U.S.
wineries grew in number from 1,817 to 9,654, according to Todorov,
and are one of the fastest growing segments in agriculture with an
annual growth of 9% from 2016 to 2017. U.S. wineries increased
production in 2016, the most recent year such data is available, by
5% and produced approximately 339 million cases according to The
Wine Institute.
The
United States is the largest wine market in the world in terms of
revenues and volume representing 13.4% of world consumption in
2015, the last year in which data is available. In 2017 U.S. wine
sales reached $41.8 billion, according to Wines and Vines, a 2%
increase from 2016. According to Gomberg Fredrickson Associates,
U.S. wine shipments reached 403 million cases in 2017 with total US
wine sales, domestic and import, revenue of $62.7 billion,
according to Wines and Vines. U.S. wine sales have grown for 25
consecutive years and there were 550,000 locations that sell wine
in 2016, the last year in which such data is available, an increase
of 120,000 locations over the past 10 years according to
Nielsen.
According
to the Wine Marketing Council U.S. consumers continue to enjoy wine
with 120 million Americans, approximately 40% of the adult
population, drinking wine in 2017. Of U.S. wine consumers 59% are
female and 41% male with 35% of consumers drinking wine more than
once per week according to the Wine Marketing Council. Domestic
wine accounted for 66.7% of U.S. sales according to Wines and
Vines. The five most popular wines are chardonnay, cabernet
sauvignon, red blends, pinot gris and pinot noir, according to Wine
Business Monthly. Additionally, sparkling wines have seen double
digit growth.
In
2017, off-premise sales accounted for roughly 78% of the U.S.
market with an average bottle price of $10 according to Nielsen.
Although direct to consumer (DTC) sales represented less than 2% of
the U.S. volume in 2017, such sales increased by 15.5% in 2017 from
2016 according to Sovos.
In a
2015 American Wine Consumer Preference Survey, by Sonoma State
University and the Wine Business Institute, American wine consumers
from all 50 states were sampled regarding their wine consumption.
Of those sampled, 56% reported they consume wine daily or several
times per week making them “High Frequency Wine
Drinkers” with the remaining 44% being occasional drinkers.
Respondents demonstrated a preference for red wine, with 74%
listing it as one of their favorites, and 78% considered themselves
to have intermediate or advance knowledge of wine. Price and brand
topped the list of decision making reasons when purchasing wine for
home consumption with 32% listing the most common price being $10
to $15, 19% being $15 to $20 and 14% being more than $20.
Additionally, 89% of respondents thought red wine was most
healthy.
5
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 Southern Oregon University Research Center
(SOURCE) in 2016, the most recent year such data is available,
there were 725 commercial wineries licensed in Oregon, an increase
of 3.3% from 2015, and 30,435 planted acres of wine grape
vineyards, 27,658 acres of which were harvested. Oregon wine grapes
produced a 2016 crop with a total value of $168 million, a decrease
of 4.6% from 2015 according to SOURCE. Pinot Noir leads all
varieties accounting for 64% of planted acreage. According to
SOURCE Oregon case sales in 2016 are estimated at 3.4 million, up
from 3.1 million in 2015, a 10% increase helped by a 14% increase
in national sales. SOURCE estimated case sales in dollars for 2016
to be approximately $529 million, a 12.4% increase from
2015.
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. Though Oregon
contributed only 1% of domestic wine production, it accounted for
21% of domestic wines that garnered a score of 90 points or higher
by Wine Spectator in 2015.
Oregon
does have certain disadvantages as a new wine-producing region.
Oregon’s wines are relatively little 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 its Turner site.
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 and Griffin Creek
brands.
2016 Oregon harvest – The Oregon Vineyard and Winery
Census Report states that 2016 saw increases in domestic sales for
Oregon wine alongside reduced vineyard production. Pinot Noir
continued to lead statewide production representing 64% of planted
acreage and 57% of production. The overall number of wineries
increased from 702 in 2015 to 725 in 2016 with the North Willamette
Valley continuing to lead the state with 73% of total tons
crushed.
2017 Oregon harvest – There is no official data
available on the 2017 Oregon harvest as of the date of this
report.
Company Strategy
The
Company, one of the largest wine producers in Oregon by volume,
believes its success is dependent upon its ability to: (1) grow and
purchase high quality vinifera wine grapes; (2) vinify the grapes
into premium, super premium and ultra-premium wine; (3) achieve
significant brand recognition for its wines, first in Oregon and
then nationally and internationally; (4) effectively distribute and
sell its products nationally; and (5) continue to build on its base
of direct to consumer sales. The Company’s goal is to
continue to build on a reputation for producing some of
Oregon’s finest, most sought-after wines.
6
Based
upon several highly regarded surveys of the U.S. wine industry, the
Company believes that successful wineries exhibit the following
four key attributes: (i) focus on production of high-quality
premium, super premium and ultra-premium varietal wines; (ii)
achieve brand positioning that supports high bottle prices for its
high quality wines; (iii) build brand recognition by emphasizing
restaurant sales; and (iv) develop strong marketing advantages
(such as a highly visible winery location, successful support of
distribution, and life-long customer service
programs).
To
successfully execute this strategy, the Company has assembled a
team of accomplished winemaking professionals and has constructed
and equipped the Estate Winery into a 12,784 square foot
state-of-the-art 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 Estate Winery, the McMinnville
Tasting Room in McMinnville, Oregon and Tualatin Estate Winery and
sales through independent distributors and wine brokers who market
the Company’s wine in specific targeted areas.
The
Company believes the location of the Estate Winery next to
Interstate 5, Oregon’s major north-south freeway,
significantly increases direct sales opportunities to consumers.
The Company believes this location provides high visibility for the
Winery to passing motorists, thus enhancing recognition of the
Company’s products in retail outlets and restaurants. We also
believe the Company’s remodeled Hospitality Center, at the
Estate Winery, has further increased the Company’s direct
sales and enhanced public recognition of its wines.
To
remain competitive in the premium, super premium and ultra-premium
market, the Company has embarked on a brand expansion project and
is in the process of developing a brand and future winery in the
Walla Walla AVA under the name Pambrun. This future winery is
expected to produce small vintages of Cabernet Sauvignon and other
Bordeaux-varietals to compete in the ultra-premium wine market. The
Company intends to release wines under the Pambrun label beginning
with the 2015 vintage year. 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 is expected to produce primarily Pinot Noir and
Chardonnay, also for sale in the ultra-premium space. The Company
has recently released wines under the Elton label beginning with
the 2015 vintage year and plans to complete facility construction
in 2020. In June 2016 the Company purchased 53 acres in the Ribbon
Ridge AVA and is in the process of planning vineyard development
and a small single vineyard brand offering. In December 2016 the
Company purchased approximately 40 acres in the Dundee, Oregon
area, purchased another 17 acres in January 2017 and is in the
process of developing a plan for the use and development of that
property.
Vineyards
The
Company owns and leases approximately 913 acres of land, of which
691 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 63% of the grapes needed to meet the winery’s
current production capacity, of 442,000 gallons (186,000 cases), at
its Estate Winery.
7
The
following table summarizes the Company’s
acreage:
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ACRES
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TONS
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Vineyard
Name
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Total
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Producing
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Pre-Production
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Plantable
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Non-Plantable
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Harvest
2017
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Harvest
2016
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Owned
Vineyards
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WVV
Estate
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107
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60
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5
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-
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42
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321
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197
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Tualatin
Estate Vineyard
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107
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46
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14
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-
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47
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241
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162
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Ingram
Vineyard
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86
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40
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22
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-
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24
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40
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5
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Pambrun
Vineyard
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87
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-
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15
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35
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37
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-
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-
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Loeza
Vineyard
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62
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-
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32
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26
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4
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-
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-
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Louisa
Vineyard
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53
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-
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-
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25
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28
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-
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-
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Rocks
Vineyard
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37
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-
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-
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36
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1
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-
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-
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Bernau
Estate
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17
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15
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-
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-
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2
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69
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-
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Dayton
Vineyard
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40
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-
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-
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38
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2
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-
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-
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Sub-Total
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596
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161
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88
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160
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187
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671
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364
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Leased
Vineyards
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Peter
Michael Vineyard
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79
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66
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3
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-
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10
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448
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231
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Meadowview
Vineyard
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49
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49
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-
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-
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-
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386
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217
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Elton
Vineyard
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59
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54
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-
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2
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3
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205
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109
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Ingram
Vineyard
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110
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-
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87
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6
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17
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-
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-
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Bernau
Estate
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20
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-
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-
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15
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5
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-
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-
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Sub-Total
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317
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169
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90
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23
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35
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1,039
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557
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Contracted
Vineyards*
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Various
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360
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360
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-
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-
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-
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1,712
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1,052
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|
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|
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|
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Total
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1,273
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690
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178
|
183
|
222
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3,422
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1,973
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|
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* Contracted acreage is estimated
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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. The Company planted one and one half acre
in 2017. The Company does not intend to plant at WVV Estate in
2018.
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. The Company does not intend to
plant at Tualatin Estate Vineyard in 2018.
Ingram Estate and Elton Vineyard – 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 and planted 16 acres in
2017. The Ingram site is also adjacent to Elton Vineyards, where
the Company leases 54 acres of established vineyards. The Company
planted 17 acres at leased Ingram in 2017 and intends to plant the
final 6 leased acres in 2018.
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 expected to be sold under the
Pambrun label. The Company planted 4 acres in 2017 and does not
intend to plant in 2018.
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. The site is
close to Tualatin Vineyards which allows the Company to leverage
existing crews for vineyard development and operations. The Company
planted 35 acres in 2017 and intends to plant 20 acres in
2018.
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.
The Company does not intend to plant at Louisa Vineyard in
2018.
Rocks Vineyard – The Company purchased approximately
37 acres in the new Rocks District of Milton-Freewater appellation
near Milton-Freewater, Oregon in 2016. The Company intends to plant
5 acres in 2018.
Bernau Estate – The Company purchased approximately 17
acres in Dundee, Oregon in January 2017 comprised of 15 acres of
producing Pinot Noir. Additionally, the Company leases 20 adjoining
acres. The Company intends to plant 11 acres in 2018
Dayton Vineyard – The Company purchased 40 acres in
Dayton, Oregon in December 2016. The Company has no plans for
planting this site in 2018.
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.
New
clones of Chardonnay preceded Pinot Noir into Oregon and were
planted at the Company’s Estate Vineyard on
phylloxera-resistant rootstock.
Grape supply – In 2017, the Company’s producing
acres in the Estate Vineyard yielded approximately 321 tons of
grapes. Tualatin/Peter Michael/Meadowview Vineyards produced an
aggregate of 1,075 tons of grapes in 2017. Elton and Ingram
Vineyards produced 245 tons of grapes in 2017. Bernau Estate
produced 69 tons of grapes in 2017.
The
Company fulfills its remaining grape needs by purchasing grapes
from other nearby vineyards at competitive prices. In 2017, the
Company purchased an additional 1,712 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 purchase properties for
future vineyards.
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. In addition, 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 (42o–46o North) and
relationship to the eastern edge of a major ocean is very similar
to certain centuries-old wine grape growing regions of
France.
The
Estate Vineyard’s soil type is Jory/Nekia, a dark,
reddish-brown, silky clay loam over basalt bedrock, noted for being
well drained, acidic, of adequate depth, retentive of appropriate
levels of moisture and particularly suited to growing high quality
wine grapes.
The
Estate Vineyard’s elevation ranges from 533 feet to 800 feet
above sea level with slopes from 2% to 30% (predominately 12-20%).
The Estate Vineyard’s slope is oriented to the south,
southwest and west. Average annual precipitation at the Estate
Vineyard is 41.3 inches; average annual air temperature is 52 to 54
degrees Fahrenheit, and the length of each year’s frost-free
season averages from 190 to 210 days. These conditions compare
favorably with conditions found throughout the Willamette Valley
viticultural region and other domestic and foreign viticultural
regions, which produce high quality wine grapes.
In the
Willamette Valley, permanent vineyard irrigation generally is not
required. The average annual rainfall provides sufficient moisture
to avoid the need to irrigate the Estate Vineyard. However, if the
need should arise, the 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 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. Additionally, the Company has water
rights at the Pambrun and Rocks Vineyards.
Susceptibility of vineyards to disease – The Tualatin
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 Winery
and production facilities are capable of efficiently producing up
to 186,000 cases (442,000 gallons) of wine per year, depending on
the type of wine produced. In 2017, the Winery produced
approximately 151,332 cases (359,900 gallons) from its 2015 and
2016 harvest. The Company expects to produce approximately 153,300
cases (364,500 gallons) in 2018 from its 2016 and 2017
harvests.
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, and a 4,500 square foot insulated
storage facility with a capacity of approximately 30,000 cases of
wine. 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 25,000 cases (59,000 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. In 2008, the Company replaced the roof and production floor,
insulation and walls, in anticipation of using it for wine storage
and future production.
10
Hospitality facility – The Company has a renovated tasting
and hospitality facility of 35,642 square feet (the
“Hospitality Center”) at the Estate Winery. The main
floor of the Hospitality Center includes retail sales space with
the Estate Tasting Room, Club Room for Wine Club Members, dining
area and mezzanine, which altogether are designed to accommodate
approximately 300 persons for tastings, wine and food pairing
meals, public and private events and meetings. An iconic
observation tower and tiered decks around the Hospitality Center
enable visitors to enjoy the view of the Willamette Valley and the
Company’s Estate Vineyard. The tiered decks funnel into an
outdoor courtyard that hosts many seasonal gatherings. To the south
side of the tiered decks the Company has two hospitality suites for
overnight accommodations. The Hospitality Center sits above the
underground barrel cellar and tunnel that connects with the Winery.
The facility includes a basement cellar, tunnel and barrel room of
11,090 square feet to store up to 1,800 barrels of wine for aging
in the proper environment.
Just outside the Hospitality Center, the Company has a landscaped
park setting consisting of terraced lawns for outdoor events. The
area between the Winery and Hospitality Center form a 20,000 square
foot quadrangle. As designed, a removable fabric top can cover the
quadrangle, making it an all-weather outdoor facility to promote
the sale of the Company’s wines through festivals and social
events. Above the Company’s working Winery houses the Pinot
Room and Founders’ Room, which can accommodate 40 persons and
111 persons for public and private events.
The Company believes the Hospitality Center and surrounding areas
make the Winery an attractive recreational and social destination
for tourists and residents, thereby enhancing the Company’s
ability to sell its wines.
Mortgages on properties – The Company’s winery
facilities at the Estate Winery are subject to two mortgages with
an aggregate principal balance of $7,202,727 at December 31, 2017.
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.
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
|
Cases
produced per ton harvested often vary between years mainly due to
the timing of when the cases are produced.
11
Sales and Distribution
Marketing strategy – The Company markets and sells its
wines through a combination of direct sales at the Winery, directly
through mailing lists, and through distributors and wine brokers.
As the Company has increased production volumes and achieved
greater brand recognition, sales to out of state markets have
increased, both in terms of absolute dollars and as a percentage of
total Company sales.
The Company uses a variety of marketing channels to generate
interest in its wines. The Company has a highly functional website
and maintains social media sites. The Company controls a database
of customers for email and direct promotions. The Company continues
to submit its wines to competitions and state, regional and
national media for editorials and ratings.
Direct sales – The
Company’s 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). The unique location along Interstate 5 has
resulted in generally greater amount of wines sold at the Estate
Winery as compared to the Oregon industry standard. Direct sales
from the Winery are a vital and growing sales channel and an
effective means of product promotion. The Estate Winery Tasting
Room is open daily and offers wine tasting and education by trained
personnel. The Company offers a complimentary daily tour along with
by-appointment private tours offering a behind-the-scenes look at
the production process of the wines. The Company has the largest
wine club membership in Oregon and features a Members-only Club
Room at the Estate Winery.
In 2014, the Company launched “Pairings,” a focused
restaurant offering a wine and food pairing lunch. Led by the
Winery chef, the menu highlights Northwest fresh dishes paired
thoughtfully with the Company’s wines. The culinary offering
has now expanded to include “Pairings Food & Wine
Experiences,” community-style wine dinners hosted on the
weekends.
The Winery has developed a strong 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 also operates two additional tasting rooms; one in
historic downtown McMinnville, in the heart of Oregon Wine Country,
and at its Tualatin Vineyard (located 30 minutes west of
Portland).
The
Company holds four major festivals at the Winery each year. In
addition, open houses are held at the Winery during major holiday
weekends such as Memorial Day and Thanksgiving. Numerous private
events, charitable and political events are also held at the
Winery.
Direct
sales produce a higher profit margin because the Company is able to
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 2017 and 2016, direct sales contributed
approximately 40% and 36% 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 5 non-domestic (export) customers. For 2017 and 2016, sales to
distributors and wine brokers contributed approximately 60% and 64%
of the Company’s revenue from operations,
respectively.
Tourists – Oregon wineries are a popular tourist
destination with many bed & breakfasts, motels and fine
restaurants available. The Willamette Valley, Oregon’s
leading wine region has approximately 76% of the state’s
wineries and vineyards, is home to approximately 554 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 minutes to a two hour
drive.
12
The
Company believes its convenient location, adjacent to Interstate 5,
enables the Winery to attract a significant number of visitors. The
Winery is approximately a 45 minute drive from Portland and less
than one mile from The Enchanted Forest, a popular amusement park
which operates from April through September each year.
Dependence on Major Customers
Historically,
the Company’s revenue has been derived from thousands of
customers annually. In 2017, sales to one distributor represented
approximately 18.2% of total Company revenue. In 2016, sales to one
distributor represented approximately 19.0% of total Company
revenue.
Research and Development
The
nature of the Company’s business does not require the Company
to incur a material amount of research and development
expense.
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 production capacity of 501,000 gallons (211,000
cases) per year at its Estate Vineyards and Tualatin Vineyard
locations give it significant competitive advantages over most
Oregon wineries in areas such as marketing, distribution
arrangements, grape purchasing, and access to financing. The
current production level of most Oregon wineries is generally much
smaller than the estimated production capacity level of the
Company’s Wineries. With respect to label recognition, the
Company believes that its unique structure as a consumer-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 the Winery for shipment to customers or for sale
in its tasting room.
The
2017 federal alcohol tax rate was $1.07 per gallon for wines with
alcohol content at or below 14.0% and $1.57 per gallon for wines
with alcohol content above 14.0%; however, wineries that produce
not more than 250,000 gallons during the calendar year were allowed
a graduated tax credit of up to $0.90 per gallon on the first
100,000 gallons of wine (other than sparkling wines) removed from
the bonded area during that year.
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. 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 are effective January 2018 and are
effective for two years.
13
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.
Employees
As of
December 31, 2017 the Company had approximately 112 full-time
employees and 54 part-time 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
public may read and copy any materials that the Company files with
the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. 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 websites referred to herein are inactive textual references
only, meaning that the information contained in such websites is
not incorporated by reference herein.
ITEM 1A. RISK FACTORS
The
following disclosures should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of this Annual Report on Form 10-K. These
disclosures are intended to discuss certain material risks of the
Company’s business as they appear to Management at this time.
However, this list is not exhaustive. Other risks may, and likely
will, arise from time to time.
Agricultural risks could adversely affect the Company
Winemaking
and grape growing are subject to a variety of agricultural risks.
Various diseases, pests, fungi, viruses, including Grapevine Red
Blotch Disease (GRBV), drought, frost and certain other weather
conditions can affect the quantity of grapes available to the
Company, decreasing the supply of the Company’s products and
negatively impacting profitability. In particular, certain of the
Company’s vines are not resistant to phylloxera; accordingly,
those vines are particularly at risk to the effects from an
infestation of phylloxera. Phylloxera is a pest that attacks the
rootstocks of wine grape plants. Vineyards in the United States,
including some in Oregon and some owned by us, have been infested
in recent years with phylloxera. In particular, Tualatin Vineyards
have phylloxera. There can be no assurance that the Company’s
existing vineyards, or the rootstocks the Company is now using in
its planting programs, will not become susceptible to current or
new strains of phylloxera or that the phylloxera present at the
Tualatin Vineyards will not spread to our other vineyards.
Pierce’s Disease is a vine bacterial disease. It kills
grapevines and there is no known cure. Small insects called
Sharpshooters spread this disease. A new strain of the Sharpshooter
was discovered in Southern California and is believed to be
migrating north. The Company is actively supporting the efforts of
the agricultural industry to control this pest and is making every
reasonable effort to prevent an infestation in its own vineyards.
The Company cannot, however, guarantee that it will succeed in
preventing contamination in its vineyards. Additionally, any future
government restrictions created in connection with government
attempts to combat phyloxera, GRBV or other pests or viruses may
increase vineyard costs and/or reduce production.
14
Our operations are susceptible to changing weather
patterns
Over
the past several years, changing weather patterns and climatic
conditions have added to the unpredictability and frequency of
natural disasters, such as hail storms, wildfires and wind, snow
and ice storms. Any such extreme weather condition could negatively
impact the harvest of grapes at our vineyards and/or the other
vineyards that supply us with grapes for our wine. In particular,
Oregon’s Willamette Valley has an unpredictable rainfall
pattern in particularly in early autumn. If significantly
above-average rains occur just prior to the autumn grape harvest,
the quality of harvested grapes is often materially diminished,
thereby affecting that year’s wine quality.
Additionally,
long-term changes in weather patterns could adversely affect the
Company, especially if such changes impacted the amount or quality
of grapes harvested. We cannot anticipate changes in weather
patterns/conditions and we cannot predict their impact on our
operations if they were to occur.
Loss of key employees could harm the Company’s reputation and
business
The
Company’s success depends to some degree upon the continued
service of a number of key employees. The loss of the services of
one or more of these key employees, including James W. Bernau, our
President and Chief Executive Officer, Richard F. Goward Jr., our
Chief Financial Officer and Christine Clair, our Winery Director
could harm the Company and its reputation and negatively impact its
profitability, particularly if one or more of the Company’s
key employees resigns to join a competitor or to form a competing
company.
The Company’s ability to operate requires utilization of the
line of credit
The
Company’s cash flow from operations historically has not been
sufficient to provide all funds necessary for the Company’s
operations. The Company has entered into a line of credit agreement
to provide such funds and entered into term loan arrangements, the
proceeds of which were used to acquire the Tualatin Winery and the
Tualatin Vineyards, construct and remodel the Hospitality Center
and pay down the Company’s revolving line of credit. There is
no assurance that the Company will be able to comply with all
conditions under its credit facilities in the future or that the
amount available under its line of credit facility will be adequate
for the Company’s future needs. Failure to comply with all
conditions of the credit facilities, or to have sufficient funds
for operations could adversely affect the Company’s results
of operations and shareholder value.
As of
December 31, 2017, the Company’s outstanding indebtedness was
approximately $7.2 million but did not have any outstanding
borrowings under its $2 million line of credit.
Costs of being a publicly-held company may put the Company at a
competitive disadvantage
As a
public company, the Company incurs substantial costs that are not
incurred by its competitors that are privately-held. These
compliance costs may result in the Company’s wines being more
expensive than those produced by its competitors and/or may reduce
profitability compared to such competitors.
The Company faces significant competition which could adversely
affect profitability
The
wine industry is intensely competitive and highly fragmented. The
Company’s wines compete in several premium wine market
segments with many other premium domestic and foreign wines, with
imported wines coming from the Burgundy and Bordeaux regions of
France, as well as Italy, Chile, Argentina, South Africa, New
Zealand and Australia. The Company’s wines also compete with
popular priced generic wines and with other alcoholic and, to a
lesser degree, non-alcoholic beverages, for shelf space in retail
stores and for marketing focus by the Company’s independent
distributors, many of which carry extensive brand portfolios. A
result of this intense competition has been and may continue to be
upward pressure on the Company’s selling and promotional
expenses. In addition, the wine industry has experienced
significant consolidation. Many of the Company’s competitors
have greater financial, technical, marketing and public relations
resources than the Company does. In particular, wine production in
the United States is dominated by large California wineries that
have significantly greater resources than the Company.
Additionally, greater worldwide label recognition and larger
production levels give many of the Company’s competitors
certain unit cost advantages. Company sales may be harmed to the
extent it is not able to compete successfully against such wine or
alternative beverage producers’ costs. There can be no
assurance that in the future the Company will be able to
successfully compete with its current competitors or that it will
not face greater competition from other wineries and beverage
manufacturers.
15
The Company competes for shelf space in retail stores and for
marketing focus by its independent distributors, most of whom carry
extensive product portfolios
Nationwide,
the Company sells its products primarily through independent
distributors and brokers for resale to retail outlets, restaurants,
hotels and private clubs across the United States and in some
overseas markets. Sales to distributors are expected to continue to
represent a substantial portion of the Company’s net revenue
in the future. A change in the relationship with any of the
Company’s significant distributors could harm the
Company’s business and reduce Company sales. The laws and
regulations of several states prohibit changes of distributors,
except under certain limited circumstances, making it difficult to
terminate a distributor for poor performance without reasonable
cause, as defined by applicable statutes. Any difficulty or
inability to replace distributors, poor performance of the
Company’s major distributors or the Company’s inability
to collect accounts receivable from its major distributors could
harm the Company’s business. There can be no assurance that
the distributors and retailers the Company uses will continue to
purchase the Company’s products or provide Company products
with adequate levels of promotional support. Consolidation at the
retail tier, among club and chain grocery stores in particular, can
be expected to heighten competitive pressure to increase marketing
and sales spending or constrain or reduce prices.
Fluctuations in quantity and quality of grape supply could
adversely affect the Company
A
shortage in the supply of quality grapes may result from a variety
of factors that determine the quality and quantity of the
Company’s grape supply, including weather conditions, pruning
methods, diseases and pests, the ability to buy grapes on long and
short term contracts and the number of vines producing grapes. Any
shortage in the Company’s grape production could cause a
reduction in the amount of wine the Company is able to produce,
which could reduce sales and adversely impact the Company’s
results from operations. Factors that reduce the quantity of the
Company’s grapes may also reduce their quality, which in turn
could reduce the quality or amount of wine the Company produces.
Deterioration in the quality of the Company’s wines could
harm its brand name and could reduce sales and adversely impact the
Company’s results of operations.
Contamination of the Company’s wines would harm the
Company’s business
The
Company is subject to certain hazards and product liability risks,
such as potential contamination, through tampering or otherwise, of
ingredients or products. Contamination of any of the
Company’s wines could cause it to destroy its wine held in
inventory and could cause the need for a product recall, which
could significantly damage the Company’s reputation for
product quality. The Company maintains insurance against certain of
these kinds of risks, and others, under various insurance policies.
However, the insurance may not be adequate or may not continue to
be available at a price or on terms that are satisfactory to the
Company and this insurance may not be adequate to cover any
resulting liability.
A reduction in consumer demand for premium wines could harm the
Company’s business
There
have been periods in the past in which there were substantial
declines in the overall per capita consumption of beverage alcohol
products in the United States and other markets in which the
Company participates. A limited or general decline in consumption
in one or more of the Company’s product categories could
occur in the future due to a variety of factors, including: a
general decline in economic conditions; increased concern about the
health consequences of consuming alcoholic beverage products and
about drinking and driving; a trend toward a healthier diet
including lighter, lower calorie beverages such as diet soft
drinks, juices and water products; the increased activity of
anti-alcohol consumer groups; and increased federal, state or
foreign excise and other taxes on beverage alcohol products. The
competitive position of the Company’s products could also be
affected adversely by any failure to achieve consistent, reliable
quality in the product or service levels to customers.
Changes in consumer spending could have a negative impact on the
Company’s financial condition and business
results
Wine
sales depend upon a number of factors related to the level of
consumer spending, including the general state of the economy,
federal and state income tax rates, deductibility of business
entertainment expenses under federal and state tax laws, and
consumer confidence in future economic conditions. Changes in
consumer spending in these and other regions can affect both the
quantity and the price of wines that customers are willing to
purchase at restaurants or through retail outlets. Reduced consumer
confidence and spending may result in reduced demand for the
Company’s products, limitations on the Company’s
ability to increase prices and increased levels of selling and
promotional expenses. This, in turn, may have a considerable
negative impact upon the Company’s sales and profit
margins.
16
Increased regulation and/or taxation could adversely affect the
Company
The
wine industry is subject to extensive regulation by the Federal
Alcohol Tobacco Tax and Trade Bureau (“TTB”) and
various foreign agencies, state liquor authorities, such as the
Oregon Liquor Control Commission (“OLCC”), and local
authorities. These regulations and laws dictate such matters as
licensing requirements, trade and pricing practices, permitted
distribution channels, permitted and required labeling, and
advertising and relations with wholesalers and retailers. Any
expansion of the Company’s existing facilities or development
of new vineyards or wineries may be limited by present and future
zoning ordinances, environmental restrictions and other legal
requirements. In addition, new regulations or requirements or
increases in excise taxes, income taxes, property and sales taxes
or international tariffs, could negatively affect the
Company’s financial condition or results of operations.
Recently, many states have considered proposals to increase, and
some of these states have increased, state alcohol excise taxes.
Additionally, many states have revised, or are revising, statutes
that broaden the definition of nexus to increase tax revenue from
out of state businesses.
On December 22, 2017, the President signed into law the Tax Cuts
and Jobs Act (Public Law 115-97), which makes extensive changes to
the Internal Revenue Code of 1986 (IRC), including income tax rates
and provisions related to alcohol that are administered by TTB.
Those changes are effective January 1, 2018 and are applicable to
any wine removed or imported during calendar years 2018 and 2019.
The impact of the changes on the Company is a reduction in the
Federal excise taxes imposed on wines with an alcohol volume
between 14-16%, which will be taxed at $1.07 per gallon compared to
the prior tax rate in 2017 of $1.57. The new tax law also allows
for certain volume production credits that the Company may be
eligible to take which will further decrease the Company’s
excise tax liability. If the alcohol excise tax provisions
contained in the Tax Cuts and Jobs Act are not extended beyond
December 31, 2019, the tax rates and credits will revert to where
they were before the bill was signed into law.
New or
revised regulations, or increased licensing fees, requirements or
taxes could have a material adverse effect on the Company’s
financial condition or results of operations. There can be no
assurance that new or revised regulations, taxes or increased
licensing fees and requirements will not have a material adverse
effect on the Company’s business and its results of
operations and its cash flows.
The Company’s common stock is thinly traded, and therefore
not as liquid as other investments.
The
trading volume of the Company’s common stock on NASDAQ is
consistently “thin,” in that there is not a great deal
of trading activity on a daily basis. Because the average active
trading volume is thin, there is less opportunity for shareholders
to sell their shares of the Company’s common stock on the
open market, resulting in the common stock being less liquid than
common stock in other publicly traded companies.
The Company may face liabilities associated with the offer and sale
of our preferred stock.
In August 2015, the Company commenced a public offering of our
Series A Redeemable Preferred Stock pursuant to a registration
statement filed with the SEC. The Company registered this
transaction with the securities authorities of the States of Oregon
and Washington and, in November 2015, achieved listing status on
NASDAQ under the trading symbol WVVIP. The terms of our Series A
Redeemable Preferred Stock are unusual for a company of our size,
and we believe the structure of these securities and of the
offering are not commonplace among issuers of any type. Federal and
state securities laws impose significant liabilities on issuers of
securities if the related offering documents contain material
misstatements of fact, or if the documents omit to state facts
necessary, in light of the circumstances as a whole, to prevent the
documents from being misleading. These liabilities can include
rescission liability to the purchasers of the securities, as well
as potential enforcement liability that could give rise to civil
money penalties. Securities litigation can be extraordinarily
expensive and protracted, and if we are accused of misstatements or
omissions in our offering documents, we may face economic harms and
management distractions regardless of the ultimate outcome of any
such litigation. Further, if we ultimately are adjudged to have
actually made a material misstatement or omission, the Company may
be liable for the repayment of the purchase price of the related
securities, plus interest from the date of purchase. Any one or
more of these events or circumstances would have a material adverse
impact upon our business, financial condition or results of
operations, and may make it more difficult or more expensive to
undertake capital-raising efforts in the future.
17
The Company may be unable to pay accumulated dividends on its
Series A Redeemable Preferred Stock.
The
Company’s Series A Redeemable Preferred Stock bears a
cumulative 5.3% dividend based upon the original issue price, or
$0.22 per share per annum. However, prior to the declaration and
payment of dividends our board of directors must determine, among
other things, that funds are available out of the surplus of the
Company and that the payment would not render us insolvent or
compromise our ability to pay our obligations as they come due in
the ordinary course of business. Additionally, our existing credit
facility limits, and future debt obligations in the future may
limit, both our legal and our practical ability to declare and pay
dividends. As a result, although the Series A Redeemable Preferred
Stock will continue to earn a right to receive dividends, the
Company’s ability to pay dividends will depend, among other
things, upon our ability to generate excess cash. However, although
shares of our Series A Redeemable Preferred Stock will earn
cumulative dividends, unpaid dividends will not, themselves,
accumulate (as might compounding interest on a debt security, for
example).
The issuance of additional shares of our preferred stock or common
stock in the future could adversely affect holders of common
stock.
The
market price of our common stock may be influenced by any preferred
stock we may issue. Our board of directors is authorized to issue
additional classes or series of preferred stock without any action
on the part of our stockholders. This includes the power to set the
terms of any such classes or series of preferred stock that may be
issued, including voting rights, dividend rights and preferences
over common stock with respect to the liquidation, dissolution or
winding up of the business and other terms. If we issue preferred
stock in the future that has preference over our common stock with
respect to liquidation, dissolution or winding up, or if we issue
preferred stock with voting rights that dilute the voting power of
our common stock, the rights of holders of the common stock or the
market price of the common stock could be adversely
affected.
The provisions in our articles of incorporation, our by-laws and
Oregon law could delay or deter tender offers or takeover attempts
that may offer a premium for our common stock.
Certain
provisions in our articles of incorporation, our by-laws and Oregon
law could make it more difficult for a third party to acquire
control of us, even if that transaction could be beneficial to
stockholders. These impediments include, but are not limited to;
the classification of our Board of Directors (the
“Board”) into three classes serving staggered
three-year terms, which makes it more difficult to quickly replace
Board members; the ability of our Board, subject to certain
limitations under the rules of the NASDAQ Stock Market, to issue
shares of preferred stock with rights as it deems appropriate
without stockholder approval; a provision that special meetings of
our Board may be called only by our chief executive officer or at
the request of holders of not less than half of all outstanding
shares of our common stock; a provision that any member of the
Board, or the entire Board, may be removed from office only for
cause; and a provision that our stockholders comply with
advance-notice provisions to bring director nominations or other
matters before meetings of our stockholders. The Board may
implement other changes that further limit the potential for tender
offers or takeover attempts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Vineyards – The Company owns or leases 913 acres of
land, of which 596 acres is owned and 317 acres leased. Of the 913
acres of land owned or leased, 330 acres are productive vineyards,
361 acres are pre-productive vineyards or are suitable for future
vineyard plantings, and 222 acres are not suitable for vineyard
planting or are used or reserved for winery or hospitality
purposes. See Item 1 Business - Vineyards, of this Annual Report on
Form 10-K for the locations of each of the Company’s
vineyards (both owned and leased) and other information pertaining
to the production capacity, harvest totals and other important
characteristics of each such vineyard.
18
Wine production facility – We believe the
Company’s Estate Winery and production facilities are capable
of efficiently producing up to 186,000 cases (442,000 gallons) of
wine per year, depending on the type of wine produced. In 2017, the
Winery produced approximately 151,332 cases (359,900 gallons) from
its 2015 and 2016 harvest. The Winery is 12,784 square feet in size
and contains areas for processing, fermenting, aging and bottling
wine, as well as an underground wine cellar, meeting rooms, and
administrative offices. There is a 12,500 square foot outside
production area for harvesting, pressing and fermenting wine
grapes, and a 4,500 square foot insulated storage facility with a
capacity of 30,000 cases of wine. The Company also has a 23,000
square foot storage building to store its inventory of bottled
product. The production area is equipped with a settling tank and
sprinkler system for disposing of wastewater from the production
process in compliance with environmental regulations. The
Hospitality Center located as the Company’s Estate Winery is
a large 35,642 square foot tasting and hospitality facility.
The
Hospitality Center sits above the underground barrel cellar and
tunnel that connects with the Winery. The facility includes a basement cellar, tunnel
and barrel room of 11,090 square feet used to store up to 1,800
barrels of wine for aging in the proper
environment.
The Company owned Tualatin Winery has 20,000 square feet of
production capacity. This adds approximately 25,000 cases (59,000
gallons) of wine production capacity to the Company. The production
capacity at the Tualatin Winery is not currently used but is
available to the Company to meet future production needs. The
storage capacity at the Tualatin Winery is periodically used to
store excess bulk wine. Additionally, the Company operates a small
retail store and tasting room at the Tualatin Winery.
The
Company carries Property and Liability insurance coverage in
amounts deemed adequate by Management.
See
additional discussion of vineyard and wine production facility
under Item 1. Business.
ITEM 3. LEGAL PROCEEDINGS
Although
the Company from time to time may be involved with disputes, claims
and litigation related to the conduct of its business, there are no
material legal proceedings pending to which the Company is a party
or to which any of its property is subject, and the Company’s
management does not know of any such action being
contemplated.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
The
Company’s common stock is traded on the NASDAQ Capital Market
under the symbol “WVVI.”
The
following table below sets forth for the quarters indicated the
high and low sales prices for the Company’s common stock as
reported on the NASDAQ Capital Market:
|
Quarters
ended 2017
|
12/31/2017
|
9/30/2017
|
6/30/2017
|
3/31/2017
|
|
|
|
|
|
|
|
High
|
$8.86
|
$8.16
|
$8.16
|
$8.23
|
|
Low
|
$7.86
|
$7.81
|
$7.62
|
$7.35
|
|
Quarters
ended 2016
|
12/31/2016
|
9/30/2016
|
6/30/2016
|
3/31/2016
|
|
|
|
|
|
|
|
High
|
$8.36
|
$8.75
|
$9.00
|
$7.19
|
|
Low
|
$7.80
|
$7.62
|
$6.90
|
$6.55
|
Holders
As of
March 22, 2018, the Company had approximately 2,251 common stock
shareholders of record. As some of our shares of common stock are
held in “street name” by brokers on behalf of
shareholders, we are unable to estimate the total number of
beneficial holders of our common stock represented by these record
holders.
Dividends
The
Company has not paid any dividends on its Common Stock, and the
Company does not anticipate paying any dividends in the foreseeable
future. The Company intends to use its earnings to expand its
vineyards, winemaking and customer service facilities.
The
Company has paid a prorated annual dividend on its Preferred Stock.
On December 30, 2017 the Company paid $.22 per share to Preferred
Stock shareholders of record as of December 8, 2017. Shares issued
by the Company after January 1, 2017 received a prorated dividend
based upon their original issue date. The Company offers a program
that allows Preferred Stock shareholders to use their dividends as
credits for wine purchases at additional discounts. Total dividends
paid, in cash and wine credits, were $704,049 and the payment
satisfied all accrued dividend liabilities through December 31,
2017. The Company anticipates paying Preferred Stock dividends
annually in December of each year.
Equity Compensation Plans
The
Company had no equity compensation plan pursuant to which equity
awards could be granted and no outstanding options or other equity
awards as of December 31, 2017.
Recent Sales of Unregistered Securities
None.
20
Issuer Purchases of Equity Securities
Issuer
purchases of equity securities not disclosed in previous
submissions are as follows:
|
|
|
|
|
Maximum
Number
|
|
|
|
|
Total
Number of
|
(or
Approximate
|
|
|
|
|
Shares
Purchased
|
Dollar
Value) of Shares
|
|
|
Total
Number
|
|
as Part
of Publicly
|
that
May Yet be
|
|
|
of
Shares
|
Average
Price
|
Announced
Plans
|
Purchased
Under the
|
|
Period
|
Purchased
|
Paid
per Share
|
or
Programs
|
Plans
or Programs
|
|
|
|
|
|
|
|
October
2017
|
190
|
8.22
|
190
|
$28,554
|
|
November
2017
|
-
|
-
|
-
|
28,554
|
|
December
2017
|
-
|
-
|
-
|
28,554
|
|
|
|
|
|
|
|
Total
|
190
|
8.22
|
190
|
$28,554
|
In
January 2012 the Company began its first program to repurchase
common stock and has approved two subsequent programs. As of
December 31, 2017, the Company has repurchased 241,648 shares of
common stock since the inception of the original
program.
In
November of 2015 the Company’s Board of Directors (the
“Board”) approved a program to repurchase common stock
of the Company. Under the November 2015 Board action, the Company
funded a plan to repurchase up to $250,000 of our common stock
through the open market. Subsequently, the Board added a total of
$600,000 in funds to this plan in 2016. On February 2, 2017, the
Board approved adding an additional $250,000 to the repurchase
plan. On September 16, 2017, the Board approved adding an
additional $50,000 to the repurchase plan. This plan is intended to
remain in place until all funding for the plan is depleted or the
plan is expanded or terminated by the Board. As of December 31,
2017, $28,554 remained unspent under this plan.
ITEM 6. SELECTED FINANCIAL DATA
Not
required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with the Company’s financial statements and related notes.
Some statements and information contained in this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations are not historical facts but are
forward-looking statements. For a discussion of these
forward-looking statements, and of important factors that could
cause results to differ materially from the forward-looking
statements contained in this report, see Item 1 of Part I,
“Business – Forward-Looking
Statements.”
Critical Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations discusses Willamette Valley Vineyards’ financial
statements, which have been prepared in accordance with generally
accepted accounting principles. As such, management is required to
make certain estimates, judgments and assumptions that are believed
to be reasonable based upon the information available. On an
on-going basis, management evaluates its estimates and judgments,
including those related to product returns, bad debts, inventories,
investments, income taxes, financing operations, and contingencies
and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
21
Revenue - The Company’s principal sources of revenue
are derived from sales and distribution of wine. Distributor sales
are recognized from wine sales at the time of shipment and passage
of title. The Company’s payment arrangements with customers
provide primarily 30-day terms and, to a limited extent, 45-day,
60-day or longer terms for some international customers. Direct
sales from items sold through the Company’s retail locations
are recognized at the time of sale.
Inventory - The Company values inventories at the lower of
actual cost to produce the inventory or net realizable value. The
Company regularly reviews inventory quantities on hand and adjusts
its production requirements for the next twelve months based on
estimated forecasts of product demand. A significant decrease in
demand could result in an increase in the amount of excess
inventory quantities on hand. In the future, if the Company’s
inventory cost is determined to be greater than the net realizable
value of the inventory upon sale, the Company would be required to
recognize such excess costs in its cost of goods sold at the time
of such determination. Therefore, although the Company makes every
effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand could have
a significant impact on the ultimate selling price and cases sold
and, therefore, the carrying value of the Company’s inventory
and its reported operating results.
Additionally,
the Company regularly evaluates inventory for obsolescence and
marketability and if it determines that the inventory is obsolete,
or no longer suitable for use or marketable, the cost of that
inventory is recognized in its cost of sales at the time of such
determination.
Vineyard Development - The Company capitalizes internal
vineyard development costs prior to the vineyard land becoming
fully productive. These costs consist primarily of the costs of the
vines and expenditures related to labor and materials to prepare
the land and construct vine trellises. Amortization of such costs
as annual crop costs is done on a straight-line basis for the
estimated economic useful life of the vineyard, which is estimated
to be 30 years. The Company regularly evaluates the recoverability
of capitalized costs. Amortization of vineyard development costs
are included in capitalized crop costs that in turn are included in
inventory costs and ultimately become a component of cost of goods
sold.
Depletions - The Company pays depletion allowances to the
Company’s distributors based on their sales to their
customers. The Company sets these allowances on a monthly basis and
the Company’s distributors bill them back on a monthly basis.
All depletion expenses associated with a given month are recognized
in that month as a reduction of revenues. The Company also
reimburses for samples used by distributors up to 1.5% of product
sold to the distributors. Sample expenses are recognized at the
time the Company is billed by the distributor as a selling, general
and administrative expense.
Shipping - Amounts paid by customers to the Company for
shipping and handling expenses are included in the net revenue.
Expenses incurred for outbound shipping and handling charges are
included in selling, general and administrative expense. The
Company’s gross margins may not be comparable to other
companies in the same industry as other companies may include
shipping and handling expenses as a cost of goods
sold.
Income Taxes – The
Company accounts for income taxes using the asset and liability
approach. This requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial statement and the tax basis of
assets and liabilities at the applicable tax rates. The Company
evaluates deferred tax assets, and records a valuation allowance
against those assets, if available evidence suggests that some of
those assets will not be realized.
The effect of uncertain tax positions would be recorded in the
financial statements only after determining a more likely than not
probability that the uncertain tax positions would withstand an
examination by tax authorities based on the technical merits of the
position. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than fifty percent likely
of being realized upon ultimate settlement. As facts and
circumstances change, management reassesses these probabilities and
would record any changes in the financial statements as
appropriate.
22
Overview
The
Company generates revenue from the sales of wine to wholesalers and
direct to consumers. The Company is experiencing increased levels
of competition in traditional wholesale to retail grocery
distribution from large California based wineries that are
acquiring, producing and marketing Oregon branded wines. Direct to
consumer sales primarily include sales through the Company’s
tasting rooms and wine club. Direct to consumer sales are more
profitable to the Company due to prices received being closer to
retail than those prices paid by wholesalers. The Company continues
to emphasize growth in direct to consumer sales through use of the
Hospitality Center and growth in wine club membership. The Company
had 7,050 wine club memberships for the year ended December 31,
2017, a net increase of 336 when compared to 2016. Additionally,
the Company has made significant investment in developing
alternative wine brands, products, direct sales methods and
venues.
Periodically,
the Company will sell grapes or bulk wine, which primarily consists
of inventory that does not meet Company standards or is in excess
to production targets. However, this activity is not a significant
part of the Company’s activities.
The
Company sold approximately 134,600 and 134,700 cases of produced
wine during the years ended December 31, 2017 and 2016,
respectively, a decrease of 100 cases, or 0.1% in the current year
over the prior year. The decrease in case sales was primarily
the result of decreased shipments to distributors mostly offset by
increased direct to consumer sales in 2017.
Cost of
Sales includes grape costs, whether purchased or grown at Company
vineyards, crush costs, winemaking and processing costs, bottling,
packaging, warehousing and shipping and handling costs associated
with purchased production materials. For grapes grown at Company
vineyards, costs include farming expenditures and amortization of
vineyard development costs. The Company expects cost of sales to
decrease, as a percentage of net sales, over the next several
years, as higher yield vintages are released.
At
December 31, 2017, wine inventory includes approximately 84,800
cases of bottled wine and 533,200 gallons of bulk wine in various
stages of the aging process. Case wine is expected to be sold over
the next 12 to 24 months and generally before the release date of
the next vintage. The winery bottled approximately 151,332 cases
during the year ended December 31, 2017.
Results of Operations
The
Company had net sales of $20,853,527 and $19,425,412 for the years
December 31, 2017 and 2016, respectively, an increase of $1,428,115
or 7.4%, for the year ended December 31, 2017 over the prior year
period. The reasons for this increase include increased sales in
all categories; retail sales (17.5%), in-state sales (2.7%),
out-of-state sales (0.4%) and sales of bulk products
(43.1%).
Gross
profit was $12,881,851 and $12,220,528 for the years ended December
31, 2017 and 2016, respectively, an increase of $661,323, or 5.4%,
for the year ended December 31, 2017 over the prior year period.
This increase was generally driven by an increase in sales
partially offset by a higher cost of sales percentage.
The
gross margin percentage was 61.8% and 62.9% for the years ended
December 31, 2017 and 2016, respectively, a decrease of 1.8%, for
the year ended December 31, 2017 over the prior year period. This
decrease in the gross profit percentage was primarily the result of
an overall decrease in per case margins due to the release of wines
from vintages produced from lower grape harvest yields as well as
the write down of obsolete inventory. Margins on sales through
distributors were also reduced as a result of large retailers
purchasing and warehousing a higher percentage of wine that is
promotionally discounted.
Selling,
general and administrative expenses were $9,245,807 and $8,053,127
for the years ended December 31, 2017 and 2016, respectively, an
increase of $1,192,680, or 14.8%, for the year ended December 31,
2017 over the prior year period. This increase was mainly the
result of both increased selling expenses and increased general and
administrative costs associated with efforts to increase sales and
accommodate and develop retail growth and new
operations.
23
Income
from operations was $3,636,044 and $4,167,401 for the years ended
December 31, 2017 and 2016, respectively, a decrease of $531,357,
or 12.8%, for the year ended December 31, 3017 over the prior year
period. The primary reason for this decrease was increased selling
expenses and administrative expense including labor and shipping.
Additionally, the Company recognized a $110,000 lawsuit recovery in
2016, as an offset to administrative expenses, that did not recur
in 2017.
Provision
for income taxes was $452,726 and $1,478,310 for the years ended
December 31, 2017 and 2016, respectively, a decrease of $1,025,584,
or 69.4%, for the year ended December 31, 2017 over the prior year
period. This decrease in income taxes in 2017 compared to 2016 were
primarily the result of lower income from operations and the
cumulative effect of the “Tax Cuts and Jobs Act”
enacted by the U.S. government in December 2017.
Net
income was $2,993,779 and $2,628,975, for the years ended December
31, 2017 and 2016, respectively, an increase of $364,804, or 13.9%,
for the year ended December 31, 2017 over the prior year period.
The primary reason for this increase was a lower income before
taxes being more than offset a reduced income tax
provision.
Net
income applicable to common shareholders was $2,289,730 and
$2,166,446, for the years ended December 31, 2017 and 2016,
respectively, an increase of $123,284, or 5.7%, for the year ended
December 31, 2017 over the prior year period. This increase was
primarily driven by increased net income partially offset by
increased preferred stock dividends in 2017 compared to
2016.
Diluted
income per common share after preferred dividends was $0.46 and
$0.43 for the years ended December 31, 2017 and 2016, respectively,
an increase of $0.03, or 7.0%, for the year ended December 31, 2017
over the prior year period. The primary reason for this increase is
an increase in net income in 2017 compared to 2016.
The
Company has three primary sales channels: direct-to-consumer sales,
in-state sales to distributors, and out-of-state sales to
distributors. These three sales channels represent 39.7%, 18.3% and
42.0%, of net sales for the year ended December 31, 2017,
respectively. This compares to 36.0%, 19.1% and 44.9% of net sales
for the year ended December 31, 2016, respectively. Miscellaneous
and grape sales are included in direct-to-consumer
sales.
The
Company had cash balances of $13,776,257, at December 31, 2017, and
$5,706,351 at December 31, 2016. The Company had no outstanding
line of credit balance at December 31, 2017 or 2016.
EBITDA
In
2017, the Company’s earnings before interest, taxes,
depreciation and amortization (“EBITDA”) decreased 5.0%
to $5,439,591 from $5,724,058 in 2016, primarily as a result of an
increase in net income more than offset by a reduction in income
tax expense.
EBITDA
does not reflect the impact of a number of items that affect our
net income, including financing costs. EBITDA is not a measure of
financial performance under the accounting principles generally
accepted in the United States of America, referred to as
“GAAP”, and should not be considered as an alternative
to net income or income from operations as a measure of
performance, nor as an alternative to net cash from operating
activities as a measure of liquidity. We use EBITDA as a benchmark
measurement of our own operating results and as a benchmark
relative to our competitors. We consider it to be a meaningful
supplement to operating income as a performance measure primarily
because depreciation and amortization expense are not actual cash
costs, and depreciation expense varies widely from company to
company in a manner that we consider largely independent of the
underlying cost efficiency of our operating
facilities.
EBITDA
has significant limitations as an analytical tool, and should not
be considered in isolation, or as a substitute for analysis of our
GAAP results as reported. Because of these limitations, EBITDA
should only be considered as a supplemental performance measure and
should not be considered as a measure of liquidity or cash
available to us to invest in the growth of our business. See the
Statement of Cash Flows set out in our consolidated financial
statements included herein.
24
The
following table provides a reconciliation of net income (the most
comparable GAAP measure) to EBITDA for the periods
indicated:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Net Income
|
$2,993,779
|
$2,628,975
|
|
Depreciation
and amortization expense
|
1,544,735
|
1,335,254
|
|
Interest
Expense
|
473,608
|
291,370
|
|
Interest
Income
|
(25,257)
|
(9,851)
|
|
Income
tax expense
|
452,726
|
1,478,310
|
|
EBITDA
|
$5,439,591
|
$5,724,058
|
Sales
Wine
case sales for the years ended December 31, 2017 and 2016 and
ending inventory amounts for the year ended December 31, 2017, are
shown on the following table, as well as planned production
quantities for the year ending December 31, 2018:
|
|
|
|
|
Planned
Bottling
|
|
|
Cases
Sold
|
Cases
Sold
|
Cases
On-Hand
|
Production
|
|
Varietal/Product
|
2017
|
2016
|
December 31, 2017
|
(Cases) 2018
|
|
|
|
|
|
|
|
Pinot
Noir/Estate
|
13,100
|
13,900
|
18,900
|
2,500
|
|
Pinot
Noir/Barrel Select
|
9,800
|
10,800
|
100
|
15,000
|
|
Pinot
Noir/Founders Reserve
|
5,200
|
3,400
|
4,300
|
5,000
|
|
Pinot
Noir/Special Designates
|
5,300
|
4,100
|
8,800
|
7,900
|
|
Pinot
Noir/Whole Cluster
|
39,300
|
38,000
|
5,500
|
41,500
|
|
Pinot
Gris
|
23,800
|
24,500
|
13,500
|
30,000
|
|
Riesling
|
19,700
|
22,000
|
7,400
|
24,300
|
|
Chardonnay
|
2,300
|
2,600
|
6,300
|
2,500
|
|
Table
Wine
|
11,400
|
10,300
|
8,500
|
21,200
|
|
Other
|
4,700
|
5,100
|
11,500
|
3,400
|
|
|
|
|
|
|
|
Total
|
134,600
|
134,700
|
84,800
|
153,300
|
Approximately
54% of the Company’s case sales during 2017 were of the
Company’s flagship varietal, Pinot Noir. Case sales of Pinot
Gris and Riesling follow with approximately 18% and 15% of case
sales each, respectively. The Company sold approximately 134,600
and 134,700 cases of Company-produced wine during the years ended
December 31, 2017 and 2016, respectively. This represents a
decrease of approximately 100 cases, or 0.1% in 2017 compared to
2016. This decrease in case sales in 2017 compared to 2016 was
primarily the result of a reduction in shipments through
distributors.
Wine Inventory
The
Company had approximately 84,800 cases of bottled wine on-hand at
the end of 2017. Management believes sufficient bulk wine inventory
is on-hand to bottle approximately 153,300 cases of wine in 2018
and that sufficient stock is on hand to meet current demand levels
until the 2018 vintage becomes available.
25
Production Capacity
Current
production volumes are within the current production capacity
constraints of the Winery when including storage capacity at the
Tualatin Winery and utilization of temporary storage when
appropriate. In 2017, approximately 151,332 cases were produced,
and Management anticipates bottling approximately 153,300 cases in
2018. The Winery has capacity to store and process about 186,000
cases of wine per year at the Estate Winery but can expand that
capacity by utilizing storage at the Tualatin Winery as well as
temporary storage. Management continues to invest in new production
technologies to increase the efficiency and quality of wine
production. During 2017, the Company did not choose to utilize the
wine production facilities at the Tualatin Winery but did utilize
it for wine storage. The Tualatin Winery has capacity to produce
approximately 25,000 cases of wine. The facility is maintained in
good condition and is occasionally used by other local wineries.
Management intends to fully utilize the production capacity at the
Estate Winery before expanding into the Tualatin
Winery.
Grape Supply
For the
2017 and 2016 vintages, the Company grew approximately 50% and 47%
of all grapes harvested, respectively. The remaining grapes
harvested were purchased from other growers. In 2017 and 2016, 45%
and 32% of grapes harvested were purchased under short-term
contracts, and 5% and 21% of grapes harvested were purchased under
long-term contracts, respectively. The Company considers short-term
contracts to be for single vintage years and long-term contracts to
cover multiple vintage years.
Grapes
are typically harvested and received in October of the vintage
year. Upon receipt, the grapes are weighed, and a quality analysis
is performed to ensure the grapes meet the standards set forth in
the purchase contract. Based on the quantity of qualifying grapes
received, the full amount payable to the grower is recorded to the
grapes payable liability account. Approximately 50% of the grapes
payable amount is due in November of the vintage year. The
remaining amount is due in March of the following year. The grapes
are processed into wine, which is typically bottled and available
for sale between five months and two years from date of
harvest.
The
Company received $1,126,326 and $525,118 worth of grapes from
long-term contracts during the years ended December 31, 2017 and
2016, respectively. The Company received $2,047,616 and $1,258,642
worth of grapes from short-term contracts during the years ended
December 31, 2017 and 2016, respectively. The increase in grape
purchases contracts was primarily the result of purchases made to
increase the stock of bulk wine available for anticipated bottling
needs. Total grapes payable were $1,455,569 and $693,666 as of
December 31, 2017 and 2016, respectively. Grapes payable includes
$205,475 and $225,118 of grapes payable from long-term contracts as
of December 31, 2017 and 2016, respectively.
The
Company plans to address long-term grape supply needs by developing
new vineyards on properties currently owned or secured by lease.
The Company has approximately 178 acres of vineyards that have been
planted but are in the pre-productive stage. We anticipate that
these vineyards will begin bearing fruit in the next one to three
years. The Company has approximately 168 acres of land that is
suitable for future vineyard development. Management currently has
plans to plant approximately 42 acres and 10 acres in the years
2018 and 2019, which we anticipate will begin bearing fruit in
years 2022 and 2023, respectively. Additionally, the Company
intends to seek out opportunities to acquire land for future grape
plantings in order to continue to increase available quantities,
maintain control over farming practices, more effectively manage
grape costs and mitigate uncertainty associated with long-term
contracts.
Wine Quality
Continued
awareness of the Willamette Valley Vineyards brand and the quality
of its wines, was enhanced by national and regional media coverage
throughout 2017.
Wine
Spectator Magazine rated the Company's 2015 Estate Pinot Noir a 91
point score and included it in an article titled, "12 Polished
Oregon Pinot Noirs." They also rated the Company’s
inaugural 2014 vintage of the Brut Méthode Champenoise
sparkling wine a 92 point score, 2015 Tualatin Estate Pinot Noir a
92 point score, 2015 Bernau Block Pinot Noir a 91 point score, 2015
Ribbon Ridge AVA Series Pinot Noir a 91 point score, and 2015
Chehalem Mountains AVA Series Pinot Noir a 91 point
score.
26
Wine
Enthusiast Magazine rated the Company's 2015 Bernau Block
Chardonnay with a 92 point score, 2015 Estate Chardonnay a 91 point
score, 2014 Hannah Pinot Noir a 91 point score, 2014 Bernau Block
Pinot Noir a 91 point score, and 2014 Tualatin Estate Pinot Noir a
90 point score. They also rated Company's 2015 Vintage 42
Chardonnay a 92 point score and featured it in an article titled,
"The Old Vines of Oregon Wine."
Robert
Parker's Wine Advocate rated the Company's 2015 Vintage 42
Chardonnay with a 92 point score, 2015 Bernau Block Chardonnay
with a 90+ point score, and 2015 Estate Chardonnay with a 90
point score.
Wine
& Spirits Magazine rate the Company's 2014 Brut Methode
Champenoise sparkling wine a 93 point score.
Vinous
rated the Company’s 2015 Hannah Pinot Noir with a 92 point
score, 2015 Bernau Block Pinot Noir with a 92 point score, 2015
Vintage 42 Pinot Noir a 92 point score, and 2015 Tualatin Estate
Pinot Noir with a 91 point score. The inaugural 2015 vintage of the
Elton Pinot Noir received a 94 point score from
Vinous.
The
Company's 2015 Estate Pinot Noir earned a Double Gold Medal and 95
point score and 2016 Whole Cluster Rose of Pinot Noir earned a Gold
Medal and 91 point score at the San Francisco Chronicle Wine
Competition, the largest wine competition in North
America.
The
Company was selected as a 2016 Impact Hot Prospect Brand by M.
Shanken Communications, Inc., the parent company of Wine Spectator
Magazine. The criteria for this prestigious award are
depletions between 50,000 and 200,000 cases in 2016 and at least
15% growth in 2016 and consistent growth in 2015 and 2014. The
Company's award was featured in the September 1st and 15th issues
of Global Impact Newsletter and in the October issue of Market
Watch.
The
Company’s relief efforts offering harvest cellar jobs to
workers displaced by the California wildfires were covered multiple
news outlets including Oregon Public Broadcasting, The Statesman
Journal, Fox News Channel 12, ABC News 10 and Wines &
Vines.
Capital
Press wrote an article, "Queen of the Vine: Betty O'Brien," about
Elton Vineyard owner and member of the Company's Board of
Directors. The article featured her contribution to the Oregon wine
industry and information about the release of the Company's new
Elton wines made from her vineyard.
The
Company's Winery Director Christine Collier was selected by
Portland Business Journal as a Top 40 Under 40 award winner. The
publication featured a profile of her and hosted an awards banquet
in June.
The
Company’s inaugural Méthode Champenoise sparkling wine
was featured in the San Francisco Chronicle in an article titled,
“Suddenly, West Coast is sparkling: Here’s the best of
the new bubbly.”
The
Company was featured in two Wines & Vines articles called,
"Look Up in Walla Walla," and "Willamette Valley Vintners Expands
in Walla Walla," discussing the Company’s expansion into the
Walla Walla Valley for the new Pambrun winery.
The
East Oregonian featured the Company in an article called,
“Oregon’s newest AVA attracting development,”
about the recent purchase of 36 acres in the Rocks District of
Milton-Freewater AVA for a future estate vineyard.
The
Company’s purchase of Maison Bleue Winery in Walla Walla was
covered by Wine Spectator in an online article titled,
“Willamette Valley Vineyards Buys Maison Bleue,” and by
Great Northwest Wine in an article titled, “Willamette Valley
Vineyards Buys Maison Bleue, Plans Vineyard.”
The
Company’s announcement of the expansion into Folsom, CA with
Willamette Wineworks was reported on by the Sacramento Business
Journal in an article called, “New Tenant Announced for
Anticipated Project.” The Sacramento Public Radio station
aired the story.
The
Company participated in the second annual Willamette Pinot Noir
Auction trade auction with two auction lots that helped the event
raise $472,000.
27
The
Company participated in the Seattle Food & Wine Experience,
Pebble Beach Food & Wine Classic, Nashville Wine Auction,
Oregon Chardonnay Symposium, Wine & Dine for the Arts,
Wine & Wishes, Sunset Magazine Celebration Weekend, Five Star
Sensation, and San Diego Wine Classic.
Seasonal and Quarterly Results
The
Company has historically experienced and expects to continue
experiencing seasonal fluctuations in its revenue and net income.
Typically, first quarter sales are the lowest of any given year,
and sales volumes increase progressively through the fourth quarter
mostly because of consumer buying habits.
The
following table sets forth certain information regarding the
Company’s revenue, excluding excise taxes, from the
Winery’s operations for the three and twelve months ended
December 31, 2017 and 2016:
|
|
Three
months ended
|
Twelve
months ended
|
||
|
|
December
31,
|
December
31,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
Retail
sales
|
$2,479,423
|
$1,957,154
|
$8,145,291
|
$6,932,424
|
|
In-state
sales
|
1,142,460
|
1,345,089
|
3,914,662
|
3,810,841
|
|
Out-of-state
sales
|
2,323,058
|
2,616,886
|
8,975,313
|
8,937,097
|
|
Bulk
wine/miscellaneous sales
|
156,228
|
100,565
|
350,640
|
245,097
|
|
|
|
|
|
|
|
Total
revenue
|
6,101,169
|
6,019,694
|
21,385,906
|
19,925,459
|
|
|
|
|
|
|
|
Less
excise taxes
|
(155,559)
|
(158,790)
|
(532,379)
|
(500,047)
|
|
|
|
|
|
|
|
Sales,
net
|
$5,945,610
|
$5,860,904
|
$20,853,527
|
$19,425,412
|
2017 Compared to 2016
Retail
sales for the years ended December 31, 2017 and 2016 were
$8,145,291 and $6,932,424, respectively, an increase of $1,212,867,
or 17.5%, for the year ended December 31, 2017 over the prior year
period. This increase was primarily driven broad based growth in
each major retail category.
Bulk
Wine/miscellaneous sales for the years ended December 31, 2017 and
2016 were $350,640 and $245,097, respectively, an increase of
$105,543 in 2017 compared to 2016. This increase was primarily the
result of normal fluctuations in production needs when compared to
bulk wine supplies.
In-state
sales for the years ended December 31, 2017 and 2016 were
$3,914,662 and $3,810,841, respectively, an increase of $103,821,
or 2.7%, for the year ended December 31, 2017 over the prior year
period. Management believes this increase is primarily due to
increased visibility of our products in the Oregon
market.
Out-of-state
sales for the years ended December 31, 2017 and 2016 were
$8,975,313 and $8,937,097, respectively, an increase of $38,216, or
0.4%. Management believes this increase is not related to a single
factor.
The
Company pays alcohol excise taxes to both the OLCC and to the TTB.
These taxes are based on product sales volumes. The Company is
liable for the taxes upon the removal of product from the
Company’s warehouse on a per gallon basis. The Company also
pays taxes on the grape harvest on a per ton basis to the OLCC for
the Oregon Wine Board. The Company’s excise taxes for the
years ended December 31, 2017 and 2016 were $532,379 and $500,047,
an increase of $32,332, or 6.5%, for the year ended December 31,
2017 over the prior year period. This increase was due primarily to
increased wine sales in 2017.
Cost of
Sales was $7,971,676 and $7,204,884 for the years ended December
31, 2017 and 2016, respectively, an increase of $766,792, or 10.6%,
for the year ended December 31, 2017 over the prior year period.
The increase in cost of sales can be attributed mainly to higher
per case product cost as a result of selling vintages from lower
harvest years.
28
As a
percentage of net sales revenue, gross profit was 61.8% and 62.9%
in the years ended December 31, 2017 and 2016, respectively, a
decrease of 1.8%, for the year ended December 31, 2017 over the
prior year period. This decrease in the gross profit percentage is
primarily a result of the release of lower margin vintages in 2017
and the write-off of obsolete inventory. Margins on sales through
distributors were also reduced as a result of large retailers
purchasing and warehousing a higher percentage of wine that is
promotionally discounted.
Selling,
general and administrative expenses were $9,245,807 and $8,053,127
for the years ended December 31, 2017 and 2016, respectively, an
increase of $1,192,680, or 14.8%, for the year ended December 31,
2017 over the prior year period. This increase was the primarily
the result of increased sales efforts and operating costs
associated with retail and administrative operations in addition to
the receipt of a legal settlement of $110,000 in 2016 that did not
recur in 2017.
Interest
income was $25,257 and $9,851 for the years ended December 31, 2017
and 2016, respectively, an increase of $15,406 or 156.4%. The
increase in interest income is primarily due to increased balances
of cash on hand in the Company’s accounts as a result of the
proceeds received from sale of Preferred Stock and cash received
from refinancing Company debt in 2017. Interest expense was
$473,608 and $291,370 for the years ended December 31, 2017 and
2016, respectively, an increase of $182,238, or 62.5%, for the year
ended December 31, 2017 over the prior year period. The increase in
interest expense was mainly due to the increased balances on
Company loans including a note payable in 2017 that did not exist
in 2016.
Other
income, net, was $258,812 and $221,403 for the years ended December
31, 2017 and 2016, respectively, an increase of $37,409, or 16.9%,
for the year ended December 31, 2017 over the prior year period.
The increase in other income in 2017 compared to 2016 was primarily
the result of rents received from dwellings located on properties
purchased by the Company in 2017.
The
provision for income taxes and the Company’s effective tax
rate was $452,726 and 13.1%, respectively in the year ended
December 31, 2017. The provision for income taxes and the
Company’s effective tax rate was $1,478,310 and 36.0%,
respectively in the year ended December 31, 2016. This decrease in
tax rate is primarily related to the cumulative effects of the
enactment of the “Tax Cuts and Jobs Act” by the U.S.
government in December 2017.
As a
result of the above factors, net income was $2,993,779 and
$2,628,975 for the years ended December 31, 2017 and 2016,
respectively, an increase of $364,804, or 13.9%, for the year ended
December 31, 2017 over the prior year period. The increase in net
income was primarily the result of deceased income before income
taxes more than offset by a reduced income tax provision as
described above. Diluted income per common share after preferred
dividends was $0.46 and $0.43 for the years ended December 31, 2017
and 2016, respectively, an increase of $0.03 or 7.0% in 2017
compared to 2016. The increase in earnings per share is primarily a
result of increased income applicable to common
shareholders.
Liquidity and Capital Resources
At
December 31, 2017, the Company had a working capital balance of
$24.0 million and a current ratio of 4.73:1. The Company had cash
balances of $13,776,257, at December 31, 2017.
Total
cash provided from operating activities for the years ended
December 31, 2017 was $2,509,899. These results were primarily due
to income from operations, increased by non-cash operating
expenses, such as depreciation, and decreased by an increase in
inventory.
Total
cash used in investing activities for the years ended December 31,
2017 was $3,915,412. These results were primarily due to additions
to property and equipment and general vineyard
development.
Total
cash provided from financing activities for the years ended
December 31, 2017 was $9,475,419. These results were primarily due
to cash received in connection with the issuance of Preferred Stock
and the refinancing of debt, partially offset by the repurchase of
common stock and payment of a preferred stock
dividend.
At
December 31, 2017, the Company had no outstanding borrowings under
its $2,000,000 line of credit. The current line of credit loan
agreement with Umpqua Bank is due to expire in
July 2018.
29
As of
December 31, 2017, the Company had a long-term debt balance of
$7,202,727 owed to NW Farm Credit Services. The debt with NW Farm
Credit Services was used to finance the Hospitality Center and
subsequent remodels, invest in winery equipment to increase the
Company’s winemaking capacity, complete the storage facility,
and acquire new vineyard land for future development. Additionally,
the Company had a long-term debt balance of $35,381 owed to Toyota
Credit Corporation for the purchase of a vehicle.
As of
December 31, 2017, the Company had an installment note payable of
$275,333, due in payments of $137,667 on March 15, 2018 and 2019,
associated with the purchase of 45 acres of farmland in the Walla
Walla AVA.
As of
December 31, 2017, the Company had a 15 year installment note
payable of $1,621,986, due in quarterly payments of $42,534,
associated with the purchase of property in the Dundee Hills
AVA.
The
Company believes that cash flow from operations and funds available
under its existing credit facilities will be sufficient to meet the
Company’s foreseeable short and long-term operating
needs.
The
Company’s contractual obligations as of December 31, 2017
including long-term debt, note payable, grape payables and
commitments for future payments under non-cancelable lease
arrangements are summarized below:
|
|
Payments
Due by Period
|
||||
|
|
Total
|
Less than
1
Year
|
1 -
3
Years
|
3 -
5
Years
|
After
5
Years
|
|
Long-term
debt
|
$7,238,108
|
$397,251
|
$855,668
|
$922,454
|
$5,062,735
|
|
Notes
payable
|
1,897,319
|
212,138
|
300,600
|
183,543
|
1,201,038
|
|
Grape
payables
|
1,455,569
|
1,455,569
|
-
|
-
|
-
|
|
Operating
leases
|
3,203,752
|
425,348
|
672,866
|
509,794
|
1,595,744
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
$13,794,748
|
$2,490,306
|
$1,829,134
|
$1,615,791
|
$7,859,517
|
Inflation
The
Company’s management does not believe inflation has had a
material impact on the Company’s revenues or income during
2017 or 2016.
Off Balance Sheet Arrangements
At
December 31, 2017 and 2016, the Company had no off-balance sheet
arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
|
|
PAGE
|
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
31
|
|
|
Financial Statements
|
|
|
|
|
Balance Sheets
|
32
|
|
|
Statements of Income
|
33
|
|
|
Statements of Shareholders’ Equity
|
34
|
|
|
Statements of Cash Flows
|
35
|
|
|
Notes to Financial Statements
|
36-47
|
30
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
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, 2017 and 2016,
the related statements of income, shareholders’ equity, and
cash flows for the years then ended. In our opinion, the
financial statements present fairly,
in all material respects, the financial position of the Company as
of December 31, 2017 and 2016, 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 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.
/s/
Moss Adams LLP
Portland,
Oregon
March
22, 2018
We have
served as the Company’s auditor since 2004.
31
WILLAMETTE VALLEY VINEYARDS, INC.
BALANCE SHEETS
|
ASSETS
|
||
|
|
|
|
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash
and cash equivalents
|
$13,776,257
|
$5,706,351
|
|
Accounts
receivable, net
|
1,760,039
|
1,871,450
|
|
Inventories
(Note 3)
|
14,793,594
|
11,970,656
|
|
Prepaid
expenses and other current assets
|
108,102
|
399,740
|
|
Total
current assets
|
30,437,992
|
19,948,197
|
|
|
|
|
|
Other
assets
|
49,153
|
59,186
|
|
Vineyard
development costs, net
|
6,006,250
|
4,666,794
|
|
Property
and equipment, net (Note 4)
|
23,201,876
|
20,196,945
|
|
|
|
|
|
TOTAL ASSETS
|
$59,695,271
|
$44,871,122
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
Accounts
payable
|
$993,598
|
$505,085
|
|
Accrued
expenses
|
871,427
|
995,405
|
|
Investor
deposits for preferred stock
|
430,305
|
-
|
|
Current
portion of note payable
|
1,759,652
|
245,417
|
|
Current
portion of long-term debt
|
397,251
|
380,471
|
|
Income
taxes payable
|
125,297
|
389,798
|
|
Current
portion of deferred revenue-distribution agreement
|
95,220
|
142,857
|
|
Unearned
revenue
|
306,564
|
213,612
|
|
Grapes
payable
|
1,455,569
|
693,666
|
|
Total
current liabilities
|
6,434,883
|
3,566,311
|
|
|
|
|
|
Note
payable, net of current portion
|
137,667
|
-
|
|
Long-term
debt, net of current portion and debt issuance costs
|
6,655,384
|
4,443,685
|
|
Deferred
rent liability
|
82,024
|
113,567
|
|
Deferred
revenue-distribution agreement, net of current portion
|
-
|
95,223
|
|
Deferred
gain
|
57,077
|
89,172
|
|
Deferred
income taxes
|
1,587,227
|
1,931,000
|
|
Total
liabilities
|
14,954,262
|
10,238,958
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note
12)
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
Redeemable preferred stock, no par value, 10,000,000 shares
authorized,
|
|
|
|
4,427,991 shares, liquidation preference $18,375,831, issued
and
|
|
|
|
outstanding at December 31, 2017 and 2,396,954 shares,
liquidation
|
|
|
|
preference $9,947,359, issued and outstanding at December 31,
2016,
|
|
|
|
respectively.
|
17,339,508
|
9,061,307
|
|
Common stock, no par value, 10,000,000 shares authorized, 4,964,529
and
|
|
|
|
5,016,685 shares issued and outstanding at December 31, 2017
and
|
|
|
|
December
31, 2016, respectively.
|
8,512,489
|
8,971,575
|
|
Retained
earnings
|
18,889,012
|
16,599,282
|
|
Total
shareholders' equity
|
44,741,009
|
34,632,164
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$59,695,271
|
$44,871,122
|
The
accompanying notes are an integral part of the financial
statements.
32
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS OF INCOME
|
|
Twelve months ended
|
|
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
SALES, NET
|
$20,853,527
|
$19,425,412
|
|
COST OF SALES
|
7,971,676
|
7,204,884
|
|
|
|
|
|
GROSS PROFIT
|
12,881,851
|
12,220,528
|
|
|
|
|
|
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
|
9,245,807
|
8,053,127
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
3,636,044
|
4,167,401
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
Interest
income
|
25,257
|
9,851
|
|
Interest
expense
|
(473,608)
|
(291,370)
|
|
Other
income, net
|
258,812
|
221,403
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
3,446,505
|
4,107,285
|
|
|
|
|
|
INCOME TAX PROVISION
|
(452,726)
|
(1,478,310)
|
|
|
|
|
|
NET INCOME
|
2,993,779
|
2,628,975
|
|
|
|
|
|
Preferred stock dividends
|
(704,049)
|
(462,529)
|
|
|
|
|
|
INCOME APPLICABLE TO COMMON SHAREHOLDERS
|
$2,289,730
|
$2,166,446
|
|
|
|
|
|
Basic income per common share after preferred
dividends
|
$0.46
|
$0.43
|
|
|
|
|
|
Diluted income per common share after preferred
dividends
|
$0.46
|
$0.43
|
|
|
|
|
|
Weighted average number of basic common shares
outstanding
|
4,985,219
|
4,991,065
|
|
|
|
|
|
Weighted average number of diluted common shares
outstanding
|
4,985,219
|
4,995,343
|
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, 2015
|
1,074,338
|
$3,735,437
|
4,989,216
|
$8,998,760
|
$14,432,836
|
$27,167,033
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock, net
|
1,322,616
|
5,325,870
|
-
|
-
|
-
|
5,325,870
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends declared
|
-
|
-
|
-
|
-
|
(462,529)
|
(462,529)
|
|
|
|
|
|
|
|
|
|
Stock
based compensation expense
|
-
|
-
|
-
|
748
|
-
|
748
|
|
|
|
|
|
|
|
|
|
Stock
issued and options exercised
|
-
|
-
|
97,500
|
498,927
|
-
|
498,927
|
|
|
|
|
|
|
|
|
|
Stock
repurchased
|
-
|
-
|
(70,031)
|
(526,860)
|
-
|
(526,860)
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
2,628,975
|
2,628,975
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
2,396,954
|
9,061,307
|
5,016,685
|
8,971,575
|
16,599,282
|
34,632,164
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock, net
|
2,030,957
|
8,278,201
|
-
|
-
|
-
|
8,278,201
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends declared
|
-
|
-
|
-
|
-
|
(704,049)
|
(704,049)
|
|
|
|
|
|
|
|
|
|
Stock
issued and options exercised
|
-
|
-
|
7,000
|
21,630
|
-
|
21,630
|
|
|
|
|
|
|
|
|
|
Stock
repurchased
|
-
|
-
|
(59,156)
|
(480,716)
|
-
|
(480,716)
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
2,993,779
|
2,993,779
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
4,427,911
|
$17,339,508
|
4,964,529
|
$8,512,489
|
$18,889,012
|
$44,741,009
|
The
accompanying notes are an integral part of the financial
statements.
34
WILLAMETTE
VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
income
|
$2,993,779
|
$2,628,975
|
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
Depreciation
and amortization
|
1,544,735
|
1,335,254
|
|
Gain
on disposition of property & equipment
|
(3,269)
|
(2,500)
|
|
Stock
based compensation expense
|
-
|
748
|
|
Non-cash
loss from other assets
|
10,033
|
814
|
|
Deferred
rent liability
|
(31,543)
|
(27,189)
|
|
Deferred
income taxes
|
(343,773)
|
83,000
|
|
Deferred
gain
|
(32,095)
|
(32,095)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
111,411
|
(186,948)
|
|
Inventories
|
(2,822,938)
|
(1,338,194)
|
|
Prepaid
expenses and other current assets
|
291,638
|
(268,567)
|
|
Income
taxes receivable
|
-
|
204,513
|
|
Income
taxes payable
|
(264,501)
|
389,798
|
|
Unearned
revenue
|
92,952
|
140,412
|
|
Deferred
revenue-distribution agreement
|
(142,860)
|
(142,860)
|
|
Grapes
payable
|
761,903
|
(123,213)
|
|
Accounts
payable
|
468,405
|
35,140
|
|
Accrued
expenses
|
(123,978)
|
390,825
|
|
Net
cash from operating activities
|
2,509,899
|
3,087,913
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Additions
to vineyard development
|
(1,186,046)
|
(1,003,115)
|
|
Additions
to property and equipment
|
(2,782,366)
|
(4,327,804)
|
|
Proceeds
from sale of property and equipment
|
53,000
|
2,500
|
|
Net
cash from investing activities
|
(3,915,412)
|
(5,328,419)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from long-term debt
|
2,672,659
|
-
|
|
Proceeds
from investor deposits held as restricted cash
|
-
|
1,476,232
|
|
Proceeds
from investor deposits held as liability
|
430,305
|
(1,476,232)
|
|
Payment
on installment note for property purchase
|
(298,431)
|
(245,417)
|
|
Payments
on long-term debt
|
(444,180)
|
(348,923)
|
|
Issuance
of preferred stock, net
|
8,278,201
|
5,325,870
|
|
Payment
of preferred stock dividend
|
(704,049)
|
(462,529)
|
|
Proceeds
from stock options exercised
|
21,630
|
194,052
|
|
Repurchase
of common stock
|
(480,716)
|
(526,860)
|
|
Net
cash from financing activities
|
9,475,419
|
3,936,193
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
8,069,906
|
1,695,687
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
5,706,351
|
4,010,664
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
$13,776,257
|
$5,706,351
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Purchase
of property with common stock
|
-
|
304,875
|
|
Purchase
of property with notes payable
|
1,950,333
|
-
|
|
Purchase
of equipment with long-term debt
|
-
|
45,899
|
|
Purchases
of property and equipment included in
|
|
|
|
accounts
payable
|
120,004
|
99,896
|
|
|
$2,070,337
|
$450,670
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash
paid during the year for:
|
|
|
|
Interest
paid (net of capitalized interest)
|
$428,194
|
$292,870
|
|
Income
tax paid
|
$1,061,000
|
$801,250
|
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 and a winery located in the state of Oregon, and
produces and distributes premium, super premium, and ultra-premium
wines, primarily Pinot Noir, Pinot Gris, Chardonnay, and
Riesling.
The
Company has direct-to-consumer sales and national sales to
distributors. These sales channels offer comparable products to
customers and utilize similar processes and share resources for
production, selling and distribution. Direct-to-consumer sales
generate a higher gross profit margin than national sales to
distributors due to differentiated pricing between these
segments.
Direct-to-consumer
sales, including bulk wine, miscellaneous sales, and grape sales,
represented approximately 39.7% and 36.0% of total revenue for 2017
and 2016, respectively.
In
state sales through distributors represented approximately 18.3%
and 19.1% of total revenue for 2017 and 2016,
respectively.
Out-of-state
sales, including foreign sales, represented approximately 42.0% and
44.9% of total revenue for 2017 and 2016, respectively. Foreign
sales represent approximately 0.01% of total revenue for
2017.
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.
Financial instruments and concentrations of risk – The Company has the
following financial instruments: cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, grapes
payable and long-term debt.
Cash
and cash equivalents are maintained at four 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
2017, sales to one distributor represented approximately 18.2% of
total Company revenue. In 2016, sales to one distributor
represented approximately 19.0% of total Company
revenue.
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 $1,760,039 and $1,871,450 as of
December 31, 2017 and 2016 exclusive 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.
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 $1,287,682 and $1,185,823 at December 31, 2017 and
2016, 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, 2017 and 2016, approximately $101,860 and $76,417,
respectively, was amortized into inventory costs.
Property and equipment – Property
and equipment are stated at cost and are depreciated on the
straight-line basis over their estimated useful lives. Land
improvements are depreciated over 15 years. Winery buildings are
depreciated over 30 years. Equipment is depreciated over 3 to 10
years, depending on the classification of the asset. Depreciation
is discussed further in Note 4.
Expenditures
for repairs and maintenance are charged to operating expense as
incurred. Expenditures for additions and betterments are
capitalized. When assets are sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in
operations.
Review of long-lived assets for impairment
- The Company evaluates
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable. Long-lived assets
consist primarily of property and
equipment. Circumstances that might cause the Company to
evaluate its long-lived assets for impairment could include a
significant decline in the prices the Company or the industry can
charge for its products, which could be caused by general economic
or other factors, changes in laws or regulations that make it
difficult or more costly for the Company to distribute its products
to its markets at prices which generate adequate returns, natural
disasters, significant decrease in demand for the 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, 2017 and 2016.
Debt issuance costs – Debt
issuance costs are amortized on the straight-line basis, which
approximates the effective interest method, over the life of the
debt. For the years ended December 31, 2017 and 2016, amortization
of debt issuance costs included in interest expense was
approximately $11,028 and $4,383 respectively. Debt issuance
amortization costs are scheduled at $13,243 for each of the next
four years, and $132,500 thereafter. Unamortized debt
issuance costs are recorded as a reduction from the carrying amount
of the related debt liability in the Company’s Balance
Sheets.
Distribution agreement receivable –
Effective September 1, 2011, the Company entered into an agreement
with Young’s Market Company for distribution of
Company-produced wines in Oregon and Washington. The terms of this
contract include exclusive rights to distribute Willamette Valley
Vineyard’s wines in Oregon and Washington for seven years. In
an effort to facilitate the transition, with as little disruption
as possible, Young’s Market Company agreed to compensate
Willamette Valley Vineyards for ongoing Oregon sales and branding
efforts. As a result, the Company was due to receive $250,000 per
year starting on September 2011 for each of the next four years for
a total of $1,000,000. As of December 31, 2017 and 2016, the
Company has no distribution agreement receivable with the final
payment having been made in 2014. The total amount of $1,000,000
received by the Company related to this agreement is being
recognized as revenue on a straight-line basis over the seven year
life of the agreement. For the years ended December 31, 2017 and
2016, the Company has recognized revenue related to this agreement
in the amount of $142,860 and $142,860, respectively, recorded to
other income.
37
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,
2017 or 2016. 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,
2017 and 2016 were not material.
The Company files U.S. federal income tax returns with the Internal
Revenue Service (“IRS”) as well as income tax returns
in Oregon, California and Connecticut. The Company may be subject
to examination by the IRS for tax years 2014 through 2017.
Additionally, the Company may be subject to examinations by state
taxing jurisdictions for tax years 2013 through 2017. The Company
is not aware of any current examinations by the IRS or the state
taxing authorities.
Deferred rent liability – The
Company leases land under a sale-leaseback agreement. The long-term
operating lease has minimum lease payments that escalate every
year. For accounting purposes, rent expense is recognized on the
straight-line basis by dividing the total minimum rents due during
the lease by the number of months in the lease. In the early years
of a lease with escalation clauses, this treatment results in
rental expense recognition in excess of rents paid, and the
creation of a long-term deferred rent liability. As the lease
matures, the deferred rent liability will decrease, and the rental
expense recognized will be less than the rents actually paid. For
the years ended December 31, 2017 and 2016, rent costs paid in
excess of amounts recognized totaled $31,543 and $27,189,
respectively.
Revenue recognition – The Company
recognizes revenue when the product is shipped and title passes to
the customer. 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. No products are sold on consignment. 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.
The
Company has price incentive programs with its distributors to
encourage product placement and depletions. When recording a sale
to the customer, an incentive program liability is recorded to
accrued liabilities and sales are reported net of incentive program
expenses. Incentive program payments are made when completed
incentive program payment requests are received from the customers.
Incentive payments to a customer reduce the incentive program
accrued liability. For the years ended December 31, 2017 and 2016,
the Company recorded incentive program expenses of $799,942 and
$503,334, respectively, as a reduction in sales on the income
statement. As of December 31, 2017 and 2016, the Company has
recorded an incentive program liability in the amount of $49,075
and $46,888, respectively, which is included in accrued expenses on
the balance sheet.
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, which make up approximately 11% of total
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, 2017 and 2016, advertising costs incurred
were approximately $136,935 and $182,08 respectively.
38
The
Company provides an allowance to distributors for providing sample
of products to potential customers. For the years ended December
31, 2017 and 2016, these costs, which are included in selling,
general and administrative expenses, totaled approximately $116,816
and $106,432, respectively.
Shipping and handling costs – Amounts
paid by customers to the Company for shipping and handling costs
are included in the net revenue. Costs incurred for shipping and
handling charges are included in selling, general and
administrative expense. For the years ended December 31, 2017 and
2016, such costs totaled approximately $502,018 and $412,331,
respectively. The Company’s gross margins may not be
comparable to other companies in the same industry as other
companies may include shipping and handling costs as a cost of
goods sold.
Excise taxes – The Company
pays alcohol excise taxes based on product sales to both the Oregon
Liquor Control Commission and to the U.S. Department of the
Treasury, Alcohol and Tobacco Tax and Trade Bureau. The Company is
liable for the taxes upon the removal of product from the
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, 2017 and 2016, excise taxes incurred were
approximately $532,379 and $500,048 respectively.
Stock based compensation – The Company
expenses stock options on a straight-line basis over the
options’ related vesting term. For the years ended December
31, 2017 and 2016, the Company recognized pretax compensation
expense related to stock options of $0 and $748,
respectively.
Basic and diluted income per common share after preferred
dividends – Basic income
per share is computed based on the weighted-average number of
common shares outstanding each year. Diluted income per share is
computed using the weighted average number of shares of common
stock and potentially dilutive securities assumed to be outstanding
during the year. Potentially dilutive shares from stock options and
other common stock equivalents are excluded from the computation
when their effect is anti-dilutive.
There
were no outstanding options to purchase shares of common stock at
December 31, 2017. Options to purchase 7,000 shares of common stock
were outstanding at December 31, 2016 and diluted weighted-average
shares outstanding at December 31, 2016 include the effect of 4,278
stock options.
There
were no potentially dilutive shares from stock options included in
the computation of dilutive income per share for 2016 as their
impact would have been anti-dilutive.
Recently issued accounting standards – In May 2014, the FASB
issued ASU No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (“ASU
2014-09”), a new standard to achieve a consistent application
of revenue recognition within the U.S., resulting in a single
revenue model to be applied by reporting companies under GAAP. The
original effective date for ASU 2014-09 would have required
adoption by the Company in the first quarter of fiscal 2017 with
early adoption prohibited. In August 2015, the FASB issued ASU No.
2015-14, Revenue
from Contracts with Customers (Topic 606) - Deferral of the
Effective Date (“ASU
2015-14”), which defers the effective date of ASU 2014-09 for
one year and permits early adoption in accordance with the original
effective date of ASU 2014-09.
The new revenue standard is required to be applied retrospectively
to each prior reporting period presented or prospectively with the
cumulative effect of initially applying the standard recognized at
the date of initial application. The Company will adopt the
standard in the first quarter of 2018 using the modified
prospective method. The Company has evaluated the effect of the
standard and concluded it will not be material to the
Company’s financial reporting. Additionally, the Company has
concluded that the application of the standard does not have a
material effect that would require a retrospective
adjustment.
In February 2016, the FASB issued ASU
2016-02, Leases (“ASU 2016-02”). This update
requires that lessees recognize assets and liabilities on the
balance sheet for the rights and obligations created by all leases
with terms of more than 12 months. ASU 2016-02 also will require
disclosures designed to give financial statement users information
on the amount, timing, and uncertainty of cash flows arising from
leases. These disclosures include both qualitative and quantitative
information. The effective date for ASU 2016-02 is for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2018 with earlier adoption permitted.
The Company is still evaluating the impact of ASU 2016-02 on its
financial position and results of operations.
39
The accounting standards that have been issued by the FASB or other
standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on our
financial statements upon adoption.
NOTE 2 – ACCOUNTS RECEIVABLE
The
Company’s accounts receivable balance is net of an allowance
for doubtful accounts of $3,977 and $15,921 at December 31, 2017
and 2016, respectively. Changes in the allowance for doubtful
accounts are as follows:
|
|
Year
ended December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Balance
at Beginning of Period
|
$15,921
|
$11,944
|
|
Charged
to costs and expenses
|
-
|
3,977
|
|
Charged
to other accounts
|
-
|
-
|
|
Write-offs,
net of recoveries
|
(11,944)
|
-
|
|
|
|
|
|
Balance
at End of Period
|
$3,977
|
$15,921
|
NOTE 3 – INVENTORIES
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Winemaking
and packaging materials
|
$849,825
|
$817,836
|
|
Work-in-process
(costs relating to
|
|
|
|
unprocessed
and/or unbottled wine products)
|
8,126,838
|
6,634,014
|
|
Finished
goods (bottled wine and related products)
|
5,816,931
|
4,518,806
|
|
|
|
|
|
Current
inventories
|
$14,793,594
|
$11,970,656
|
NOTE 4 – PROPERTY AND EQUIPMENT
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Construction
in progress
|
$1,036,615
|
$449,409
|
|
Land,
improvements and other buildings
|
10,197,388
|
8,063,716
|
|
Winery
buildings and hospitality center
|
15,055,935
|
14,458,309
|
|
Equipment
|
11,221,964
|
10,122,593
|
|
|
|
|
|
|
37,511,902
|
33,094,027
|
|
|
|
|
|
Less
accumulated depreciation
|
(14,310,026)
|
(12,897,082)
|
|
|
|
|
|
|
$23,201,876
|
$20,196,945
|
Depreciation
expense was $1,442,875 and $1,254,455 during the years ended
December 31, 2017 and 2016, respectively.
NOTE 5 – LINE OF CREDIT FACILITY
In
December of 2005 the Company entered into a revolving line of
credit agreement with Umpqua Bank that allows borrowings of up to
$2,000,000 against eligible accounts receivable and inventories as
defined in the agreement. The revolving line bears interest at
prime, is payable monthly, and is subject to annual renewal. In
April of 2017, the Company renewed the credit agreement until July
31, 2018. The interest rate was 4.00% at December 31, 2017 and
3.75% at December 31, 2016. At December 31, 2017 and 2016 there was
no outstanding balance on this revolving line of
credit.
40
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, 2017, the Company was in compliance
with these financial covenants.
NOTE 6 – NOTES PAYABLE
In
April of 2015 the Company purchased approximately 42 acres of
farmland in the Walla Walla AVA under terms that included paying
one third of the price upon closing and one third in each of the
two subsequent years. As of December 31, 2017 the Company had no
balance due on this note. As of December 31, 2016 the Company had a
balance due of $245,417.
In
March of 2017 the Company purchased approximately 45 acres of
farmland in the Walla Walla AVA under terms that included paying
one third of the price upon closing, one third on March 15, 2018
and one third on March 15, 2019. As of December 31, 2017 the
Company had a balance of $275,333 due on this note. No interest
accrues under the terms of this note.
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, 2017 the Company had a balance of $1,621,986 due on this
note.
NOTE 7 – LONG-TERM DEBT
Long-term
debt consists of:
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Northwest
Farm Credit Services Loan #1
|
$-
|
$1,081,296
|
|
Northwest
Farm Credit Services Loan #2
|
-
|
981,263
|
|
Northwest
Farm Credit Services Loan #3
|
-
|
1,056,491
|
|
Northwest
Farm Credit Services Loan #4
|
1,597,002
|
1,705,046
|
|
Northwest
Farm Credit Services Loan #5
|
5,605,725
|
-
|
|
Toyota
Credit Corporation
|
35,381
|
45,899
|
|
|
7,238,108
|
4,869,995
|
|
Debt
issuance costs
|
(185,473)
|
(45,839)
|
|
Current
portion of long-term debt
|
(397,251)
|
(380,471)
|
|
|
|
|
|
|
$6,655,384
|
$4,443,685
|
In
March 2017 the Company secured a loan with Farm Credit Services
that involved the refinancing of three of its four outstanding
loans. The Company subsequently has two long term debt agreements
with Farm Credit Services with an aggregate outstanding balance of
$7,202,727, as of December 31, 2017. At December 31, 2016, the
Company had four long term debt arrangements with Farm Credit
Services with an aggregate outstanding balance of $4,824,096. 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. The general purposes of these loans were to make capital
improvements to the winery and vineyard facilities.
The
loan agreements contain covenants, which require the Company to
maintain certain financial ratios and balances. At December 31,
2017, the Company was in compliance with these covenants. In the
event of future noncompliance with the Company’s debt
covenants, FCS would have the right to declare the Company in
default, and at FCS’ option without notice or demand, the
unpaid principal balance of the loan, plus all accrued unpaid
interest thereon and all other amounts due shall immediately become
due and payable.
The
Company has an outstanding loan with Toyota Credit Corporation
maturing in February 2021, at zero interest, with an outstanding
balance of $35,381 and $45,899 as of December 31, 2017 and 2016,
respectively. The purpose of this loan was to purchase a
vehicle.
41
Future
minimum principal payments of long-term debt mature as follows for
the years ending December 31:
|
2018
|
397,251
|
|
2019
|
417,292
|
|
2020
|
438,376
|
|
2021
|
450,037
|
|
2022
|
472,417
|
|
Thereafter
|
5,062,735
|
|
|
|
|
|
$7,238,108
|
The
weighted-average interest rates on the aforementioned borrowings
for the fiscal years ended December 31, 2017 and 2016 was 5.09% and
5.68% respectively.
NOTE 8 – SHAREHOLDERS’ EQUITY
The
Company is authorized to issue 10,000,000 shares of its common
stock. Each share of common stock is entitled to one vote. At its
discretion, the Board of Directors may declare dividends on shares
of common stock so long as the Company has paid or set aside funds
for all cumulative dividends on its preferred stock. The Board does
not anticipate paying dividends on its common stock in the
foreseeable future.
The
Company is authorized to issue 10,000,000 shares of 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 2017, the Company declared a dividend on its
Series A Redeemable Preferred stock payable to shareholders of
record at the close of business on December 8, 2017 and paid the
dividend on December 30, 2017. 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.
The
following table presents information on stock options outstanding
for the periods shown:
|
|
2017
|
2016
|
||
|
|
Weighted
Average Exercise
|
Weighted
Average Exercise
|
||
|
|
Shares
|
Price
|
Shares
|
Price
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
7,000
|
$3.09
|
67,000
|
$3.22
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
(7,000)
|
3.09
|
(60,000)
|
3.23
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
-
|
$-
|
7,000
|
$3.09
|
42
The
following table presents information on stock options outstanding
for the periods shown:
|
|
2017
|
2016
|
|
|
|
|
|
Intrinsic
value of options exercised in the period
|
$33,440
|
$260,685
|
|
Stock
options fully vested and expected to vest
|
-
|
7,000
|
|
Weighted
average exercise price
|
$-
|
$3.09
|
|
Aggregate
intrinsic value
|
$-
|
$34,440
|
|
Weighted
average contractual term of options
|
-
|
4.55
|
|
Stock
options vested and currently exercisable
|
-
|
7,000
|
|
Weighted
average exercise price
|
$-
|
$3.09
|
|
Aggregate
intrinsic value
|
$-
|
$34,440
|
|
Weighted
average contractual term of options
|
-
|
4.55
|
There
were no options outstanding and exercisable at December 31,
2017.
Stock
compensation expense was $0 and $748 for the years ended December
31, 2017 and 2016, respectively. As of December 31, 2017, there was
no unrecognized compensation expense related to stock
options.
NOTE 10 – INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act makes broad and complex changes
to the U.S. tax code, which included reducing the U.S. federal
corporate tax rate from 34 percent to 21 percent in tax years
beginning after December 31, 2017. Due to the reduction of
the corporate tax rate as part of the Tax Act, deferred tax assets
and liabilities have been revalued to reflect the updated corporate
tax rate. The Company has recorded a decrease to deferred tax
liabilities of $757,562 with a corresponding benefit recorded to
deferred income tax expense of $757,562 for the year ended December
31, 2017.
The
provision (benefit) for income taxes consists of:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Current
tax expense:
|
|
|
|
Federal
|
$520,984
|
$1,094,647
|
|
State
|
192,515
|
300,663
|
|
|
|
|
|
|
713,499
|
1,395,310
|
|
|
|
|
|
Deferred
tax expense (benefit):
|
|
|
|
Federal
|
(227,632)
|
72,452
|
|
State
|
(33,141)
|
10,548
|
|
|
|
|
|
|
(260,773)
|
83,000
|
|
|
|
|
|
Total
|
$452,726
|
$1,478,310
|
The
effective income tax rate differs from the federal statutory rate
as follows:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Federal
statutory rate
|
34.00%
|
34.00%
|
|
State
taxes, net of federal benefit
|
4.95%
|
4.95%
|
|
Permanent
differences
|
-1.69%
|
-2.27%
|
|
Tax
credits
|
0.00%
|
0.00%
|
|
Prior
year adjustments
|
-2.16%
|
-0.71%
|
|
Changes
in tax rates and other
|
-21.97%
|
0.02%
|
|
|
|
|
|
|
13.13%
|
35.99%
|
43
Permanent differences for the periods consist primarily of tax
deductions for domestic production activities. Changes in tax rate
are described above.
Net
deferred tax assets and (liabilities) at December 31 consist
of:
|
|
2017
|
2016
|
|
|
|
|
|
Deferred
gain on sale-leaseback
|
15,368
|
35,000
|
|
Other
|
35,469
|
110,000
|
|
Prepaids
|
(27,909)
|
(48,000)
|
|
Depreciation
|
(1,487,036)
|
(1,784,000)
|
|
Inventory
|
(123,119)
|
(244,000)
|
|
Net
noncurrent deferred tax liability
|
(1,587,227)
|
(1,931,000)
|
|
|
|
|
|
Valuation
allowance
|
-
|
-
|
|
Net
deferred tax liability
|
$(1,587,227)
|
$(1,931,000)
|
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 President. The President 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 president.
In
February 2007, the Company entered into a lease agreement for 59
acres of vineyard land at Elton Vineyards. This lease is for a
10-year term with four five-year renewals at the Company’s
option and a first right of refusal in the event of the
vineyard’s sale. For 2017, the annual costs of this lease,
including utility reimbursements, were $124,976. For subsequent
years there is an escalation provision tied to the CPI not to
exceed 2% per annum. Betty M. O’Brien, a Director of the
Company, is a principal owner of Elton Vineyards.
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.
Operating leases – 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. The gain of approximately $500,000 is being amortized
over the life of the lease. 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 14-year operating lease agreement for the
vineyard portion of the property. Approximately $99,000 of the
total gain of $176,000 has been deferred and is being amortized
over the life of the lease. This property is referred to as the
Meadowview Vineyard, and includes approximately 45 acres of
producing vineyards.
The
amortization of the deferred gain totals approximately $25,000 per
year for the 1999 sale-leaseback agreement and $7,000 for the 2004
sale-leaseback agreement and is recorded as an offset to the
related lease expense in selling, general and administrative
expenses.
In
February 2007, the Company entered into a lease agreement for 59
acres of vineyard land at Elton Vineyards. This lease is for a
10-year term with four five-year renewals at the Company’s
option and a first right of refusal in the event of the
vineyard’s sale. For 2017, the annual costs of this lease
were $124,976. For subsequent years there is an escalation
provision tied to the CPI not to exceed 2% per annum. Betty M.
O’Brien, a Director of the Company, is principal owner of
Elton Vineyards. The terms of the lease currently call for a
monthly payment of $10,244, plus utility costs not to exceed $1,500
per year. In 2017 the Company exercised its option to renew the
lease until December 31, 2022.
44
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 is
being developed into vineyards. Terms of this agreement contain
rent escalation that rises as the vineyard is developed. The
current terms call for monthly payments of $1,726.
In
September 2014, the Company entered into a two-year lease, with an
option to renew for an additional two years, for its McMinnville
tasting room. In September 2016 the Company exercised its option to
renew the lease until August 31, 2018. The monthly payment for this
lease is $3,000 with potential negotiated escalations not to exceed
5%.
As of
December 31, 2017, future minimum lease payments are as follows for
the years ending December 31:
|
2018
|
425,348
|
|
2019
|
422,090
|
|
2020
|
250,776
|
|
2021
|
253,223
|
|
2022
|
256,571
|
|
Thereafter
|
1,595,744
|
|
|
|
|
Total
|
$3,203,752
|
The
Company is also committed to lease payments for various pieces of
office equipment. Total rental expense for these operating leases
amounted to $12,866 and $9,770 in 2017 and 2016, respectively. In
addition, payments for the leased vineyards have been included in
inventory or vineyard developments costs and aggregate
approximately $379,230 and $380,096 for the years ended December
31, 2017 and 2016, respectively.
Grape Purchases - The Company has entered into a long-term
grape purchase agreement with one of its Willamette Valley wine
grape growers. This contract amended and extended three separate
contracts and purchases fruit through the 2023 harvest year. With
this agreement 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.
Asset Purchase Agreement – In May 2017 the Company
agreed to buy the assets of an existing Company for approximately
$142,000. The purchase is scheduled to close in January 2018 and
the Company will also assume two contracts comprised of a tasting
room lease and a wine processing agreement.
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, 2017 and 2016 there were $74,651 and $67,090
contributions made by the Company to the 401(k) plan,
respectively.
NOTE 14 - SALE OF PREFERRED STOCK
In August 2015, the Company commenced a public offering of our
Series A Redeemable Preferred Stock pursuant to a registration
statement filed with the Securities and Exchange Commission. The
preferred stock under this issue is non-voting and ranks senior in
rights and preferences to the Company’s common stock.
Shareholders of this issue are entitled to receive dividends, when
and as declared by the Company’s Board of Directors, at a
rate of $0.22 per share. 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 of $4.15 per share plus accrued but unpaid dividends
and a redemption premium equal to 3% of the original issue price of
$4.15 per share. The Company registered this transaction with the
securities authorities of the States of Oregon and Washington and
subsequently obtained a listing on the NASDAQ under the trading
symbol WVVIP. This issue had an aggregate initial offering price
not to exceed $6,000,000 and was fully subscribed as of December
31, 2015.
45
On December 23, 2015 the Company filed a Registration Statement on
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. On February 28, 2016 shareholders of the Series A
Redeemable Preferred Stock approved an increase in shares
designated as Series A Redeemable Preferred Stock, from 1,445,783
to 2,857,548 shares, and amended the certificate of designation for
those shares to allow the Company’s Board of Directors to
make future increases.
On March 10, 2016 the Company filed with the SEC a Prospectus
Supplement to the December 2015 Form S-3, pursuant to which the
Company proposed to offer and sell, on a delayed or continuous
basis, up to 970,588 additional shares of Series A Redeemable
Preferred stock having proceeds not to exceed $4,125,000. This
stock was established to be sold in four offering periods beginning
with an offering price of $4.25 per share and concluding at $4.55
per share. The Company sold all preferred stock available under
this offering.
On May
3, 2017, the Company filed with the SEC a Prospectus Supplement to
the December 2015 Form S-3,
pursuant to which the Company proposed to offer and sell, on a
delayed or continuous basis, up to 2,298,851 additional shares of
Series A Redeemable Preferred stock having proceeds not to exceed
$10,000,000. This stock was established to be sold in four offering
periods beginning with an offering price of $4.35 per share and
concluding at $4.65 per share.
Proceeds from the sale of preferred stock for the three months
ended December 31, 2017 were received by the Company and included
as unrestricted cash. As of December 31, 2017 the Company concluded
$430,305 in stock sales, net of acquisition costs, under this
agreement and recorded it as a current liability, “Investor
deposits for preferred stock”, until the stock was issued
effective January 1, 2018.
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 includes
retail sales in the tasting room and remote sites, Wine Club 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.
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 twelve-month periods ending December 31, 2017
and 2016. Sales figures are net of related excise
taxes.
|
|
Twelve
Months Ended December 31,
|
|||||
|
|
Direct
Sales
|
Distributor
Sales
|
Total
|
|||
|
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$8,340,366
|
$7,032,287
|
$12,513,161
|
$12,393,125
|
$20,853,527
|
$19,425,412
|
|
Cost
of Sales
|
2,237,599
|
1,876,751
|
5,734,077
|
5,328,133
|
7,971,676
|
7,204,884
|
|
Gross
Margin
|
6,102,767
|
5,155,536
|
6,779,084
|
7,064,992
|
12,881,851
|
12,220,528
|
|
Selling
Expenses
|
3,854,772
|
3,226,831
|
1,805,840
|
1,568,433
|
5,660,612
|
4,795,264
|
|
Contribution
Margin
|
$2,247,995
|
$1,928,705
|
$4,973,244
|
$5,496,559
|
$7,221,239
|
$7,425,264
|
|
Percent
of Sales
|
40.0%
|
36.2%
|
60.0%
|
63.8%
|
100.0%
|
100.0%
|
Direct
sales include $350,640 and $245,097 of bulk wine and grape sales in
the years ended December 31, 2017 and 2016,
respectively.
46
Net
direct-to-consumer sales, including bulk wine, miscellaneous sales,
and grape sales, represented approximately 40.0% and 36.2% of total
net revenue for 2017 and 2016, respectively.
Net
sales through distributors represented approximately 60.0% and
63.8% of total net revenue for 2017 and 2016,
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.
In
January 2018 the Company purchase approximately 38 acres of
vineyard land near Carlton, Oregon in a cash
transaction.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We
carried out an evaluation as of the end of the period covered by
this Annual Report on Form 10-K, under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-5(e) under the Exchange Act) pursuant to
paragraph (b) of Rules 13a-15 and 15d-5 under the Exchange Act.
Based on that review, the Chief Executive Officer and the Chief
Financial Officer have concluded that, as of the end of the period
covered by this Annual Report on Form 10-K, our disclosure controls
and procedures are effective to ensure that information required to
be disclosed by us in the reports we file or submit under the
Exchange Act (1) is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and
forms, and (2) is accumulated and communicated to our management,
including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
It
should be noted that any system of controls is based in part upon
certain assumptions designed to obtain reasonable (and not
absolute) assurance as to its effectiveness, and there can be no
assurance that any design will succeed in achieving its stated
goals.
Internal Control over Financial Reporting
Management’s report on internal control over financial
reporting
The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of the Company’s financial reporting and the
preparation of the Company’s financial statements for
external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting is defined in
Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange
Act and includes those policies and procedures that:
(a) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets; (b) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that the
Company’s receipts and expenditures are being made only in
accordance with authorizations of the Company’s management
and directors; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a
material effect on the Company’s financial statements. All
internal controls, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
47
The
Company’s management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2017. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in Internal Control – Integrated Framework
(2013). Based on this assessment, management has concluded
that, as of December 31, 2017, our internal control over financial
reporting was effective.
Changes in Internal Control over Financial Reporting
There
have not been any other changes in the Company’s internal
control over financial reporting (as such term is defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act) during the
Company’s fourth fiscal quarter that our certifying officers
concluded materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
following table sets forth certain information regarding the
Company’s directors and executive officers:
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
Term
|
|
Name
|
|
|
|
|
Position(s) with the Company
|
|
Age
|
|
Number
|
|
Ends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James W. Bernau (3)
|
|
Chairperson of the Board, CEO
|
|
64
|
|
I
|
|
2020
|
||||
|
|
|
|
|
|
|
President and Director
|
|
|
|
|
|
|
|
Craig Smith (2)(3)(4)
|
|
Secretary and Director
|
|
71
|
|
II
|
|
2018
|
||||
|
Richard F. Goward Jr.
|
|
Chief Financial Officer
|
|
62
|
|
NA
|
|
NA
|
||||
|
James L. Ellis (3)
|
|
Director
|
|
73
|
|
III
|
|
2019
|
||||
|
Sean M. Cary (2)
|
|
Director
|
|
44
|
|
I
|
|
2020
|
||||
|
Christopher Sarles (1)(4)
|
|
Director
|
|
53
|
|
I
|
|
2020
|
||||
|
Betty M. O’Brien (1)
|
|
Director
|
|
74
|
|
II
|
|
2018
|
||||
|
Stan G. Turel (1)(2)(3)(4)
|
|
Director
|
|
69
|
|
II
|
|
2018
|
||||
|
Heather Westing (4)
|
|
Director
|
|
59
|
|
III
|
|
2019
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Member of the Compensation Committee
|
|
|
|
|
|
|
||||||
|
(2) Member of the Audit Committee
|
|
|
|
|
|
|
||||||
|
(3) Member of the Executive Committee
|
|
|
|
|
|
|
||||||
|
(4) Member of the Capital Development Committee
|
|
|
|
|
|
|
||||||
All
directors hold office until the end of their term’s
respective annual meeting of shareholders or until their successors
have been elected and qualified. Executive officers are appointed
by the Board of Directors and serve at the pleasure of the Board.
The Board is divided into three groups (I, II, and III). Each
director shall serve for a term ending on the date of the third
annual meeting following the annual meeting at which such director
was elected; provided, that each director initially appointed to
Group II shall serve for an initial term expiring at our second
annual meeting of stockholders following the 2016 annual meeting of
stockholders; and each director initially appointed to Group III
shall serve for an initial term expiring at our third annual
meeting of stockholders following the 2016 annual meeting of
stockholders.
Except
for Mr. Goward’s stepdaughter who is married to Mr.
Smith’s son, there are no family relationships among any of
our current directors or executive officers. Set forth below is
additional information as to each director and executive officer of
the Company.
James W. Bernau – Mr. Bernau has been President and
Chief Executive Officer of the Company and Chairperson of the Board
of Directors of the Company since its inception in May 1988. Mr.
Bernau, an Oregon winegrower, originally established Willamette
Valley Vineyards as a sole proprietorship in 1983, and he
co-founded the Company in 1988 with Salem grape grower, Donald
Voorhies. From 1981 to September 1989, Mr. Bernau was Director of
the Oregon Chapter of the National Federation of Independent
Businesses (“NFIB”), an association of 15,000
independent businesses in Oregon. Mr. Bernau has served as the
President of the Oregon Winegrowers Association and the Treasurer
of the association’s Political Action Committee (PAC) and
Chair of the Promotions Committee of the Oregon Wine Advisory
Board, the State of Oregon’s agency dedicated to the
development of the industry. In March 2005, Mr. Bernau received the
industry’s Founder’s Award for his service. Mr.
Bernau’s qualifications to serve on the Company’s Board
of Directors include his more than 30 years of leadership of the
Company and his industry experience and contacts.
Craig Smith, MBA, JD – Mr. Smith has served as a
director since October 2007 and as Secretary since 2009. For over
20 years Mr. Smith served as the Vice President/Chief Financial
Officer of Chemeketa Community College in Salem, Oregon. He was an
Adjunct Professor at the Atkinson Graduate School of Management at
Willamette University, as well as Managing Partner of Faler, Grove,
Mueller & Smith, a large local CPA firm. He has served on many
State of Oregon commissions and as the Board Chairperson for many
of the local non-profit and educational institutions including the
Salem Keizer School Board, Chemeketa Community College Board of
Education, Oregon State Fair Council, State Fair Dismissal Appeals
Board, Mid-Willamette Valley Council of Governments, Oregon School
Boards Association and the United Way. Mr. Smith is a member of the
Oregon State Bar and a retired Certified Public Accountant. Mr.
Smith’s qualifications to serve on the Company’s Board
of Directors include his financial and accounting
experience.
49
Richard F. Goward Jr., CPA, CMA, MBA – Mr. Goward has
been the Company’s Chief Financial Officer since May of 2013.
Prior to being appointed, Mr. Goward served as Chief Financial
Officer for Oregon’s largest city, the City of Portland, a
position he retired from after serving from April 2010 to May 2013.
From June 1997 to April 2010, Mr. Goward served as Chief Financial
Officer at Salem-Keizer Public Schools, the second largest school
district in the State of Oregon. From November 1986 to June 1997,
Mr. Goward worked at Chemeketa Community College as manager of the
Business Office and Director of Auxiliary Services. Mr. Goward has
also worked as a partner in Faler, Grove, Mueller & Smith CPAs,
has 26 years of experience as an officer in the United States Navy
and Navy Reserve; retiring at the rank of Captain, for 20 years was
an Adjunct Professor in Accounting at Willamette University’s
Atkinson Graduate School of Management and has served on many
community boards and committees. Mr. Goward is licensed as a CPA in
the State of Oregon and is a Certified Management Accountant. He
holds a Bachelor of Science Degree in Business from Oregon State
University and a Masters in Business Administration from Willamette
University.
James L. Ellis – Mr. Ellis has served as a director
since July 1991. Mr. Ellis retired from full time duties with the
Company in July of 2009. He currently serves as the Company’s
ombudsman and works part-time on selected projects. Mr. Ellis
previously served as the Company’s Director of Human
Resources from 1993 to 2009. He was the Company’s Secretary
from 1997 to 2009, and Vice President /Corporate from 1998 to 2009.
From 1990 to 1992, Mr. Ellis was a partner in Kenneth L. Fisher,
Ph.D. & Associates, a management-consulting firm. From 1980 to
1990, Mr. Ellis was Vice President and General Manager of R.A.
Kevane & Associates, a Pacific Northwest personnel-consulting
firm. From 1962 to 1979, Mr. Ellis was a member of and
administrator for the Christian Brothers of California, owner of
Mont La Salle Vineyards and producer of Christian Brothers wines
and brandy. Mr. Ellis’ qualifications to serve on the
Company’s Board of Directors include his prior experience as
a member of the Company’s senior management, as well as more
than 40 years of business experience.
Sean M. Cary –
Mr. Cary has served as a director since July 2007. Mr. Cary is the
Chief Financial Officer of Pacific Excavation, Inc., a Eugene,
Oregon based heavy and civil engineering contractor. Previously,
Mr. Cary served as the CFO of CBT Nuggets, LLC, the Corporate
Controller of National Warranty Corporation, the CFO of Cascade
Structural Laminators and prior to that as Controller of Willamette
Valley Vineyards. Mr. Cary served in the U.S. Air Force as a
Financial Officer. Mr. Cary holds a Master of Business
Administration degree from the University of Oregon and a Bachelor
of Science Degree in Management from the U.S. Air Force Academy.
Mr. Cary’s qualifications to serve on the Company’s
Board of Directors include his financial and accounting
expertise.
Christopher L. Sarles – Mr. Sarles has served as a
director since January of 2015. Mr. Sarles is the President/CEO of
Oregon Fruit Products, a position he has held since July of 2014.
From May of 1998 until June of 2014 Mr. Sarles worked in various
executive capacities in Columbia Distributing/Young’s Market,
most recently as Executive Vice President of Sales from 2011 to
2014. From 1987 to 1995 he was President/Chief Operating Officer of
Alehouse Distributing Company in Seattle Washington. Mr. Sarles has
been actively involved in the wine industry, been a speaker on Wine
Industry issues, and served as President of the Oregon Beer and
Wine Wholesalers Association. He holds a Bachelor of Science degree
in Business Marketing from Oregon State University. Mr. Sarles is
qualified to serve on the Company’s Board of Directors as a
result of his many years of executive experience in the alcohol
distribution industry.
Betty M. O’Brien – Ms. O’Brien has served
as a director on the Board since July 1991. Ms. O’Brien is
owner of Elton Vineyards L.L.C., a commercial vineyard located in
Eola Hills in Yamhill County, Oregon and established in 1983. Ms.
O’Brien was the Executive Director of the Oregon Wine Board
from 2001 to 2004. Ms. O’Brien was employed by Willamette
University as its Director of News and Publications from 1988 to
2000. She has served as a director, President and Treasurer of the
Oregon Winegrowers Association. Ms. O’Brien is chairman of
the Wine Studies Program Advisory Committee at Chemeketa Community
College (CCC). She headed a wine industry task force developing a
new wine marketing program and curriculum. She taught Wine
Marketing classes there for seven years and was recognized by the
college with the Legacy Builders Award in 2016. Ms. O’Brien
served as Chair of the Board of Directors of LIVE (Low Input
Viticulture and Enology). She was president of the Eola-Amity Hills
Winegrowers Association in 2014-15. Ms. O’Brien received a
2010 Oregon Wine Industry Outstanding Service Award. Ms.
O’Brien’s qualifications to serve on the
Company’s Board of Directors include her industry experience
and contacts.
50
Stan G. Turel – Mr. Turel has served as a director
since November 1994. Mr. Turel is President of Turel Enterprises, a
real estate management company managing his own properties in
Oregon, Washington and Idaho and is president of Columbia Pacific
Tax in Bend, Oregon. Prior to his current activities, Mr. Turel was
the Principal and CEO of Columbia Turel, (formerly Columbia
Bookkeeping, Inc.) a position which he held from 1974 to 2001.
Prior to the sale of the company to Fiducial, one of Europe’s
largest accounting firms, Columbia had approximately 26,000 annual
tax clients including approximately 4,000 small business clients.
Additionally, Mr. Turel successfully operated as majority owner of
two cable TV companies during the 80’s and 90’s which
were eventually sold to several public corporations. Mr. Turel is a
pilot, author, was a former delegate to the White House Conference
on Small Business and held positions on several state and local
Government committees. Mr. Turel’s qualifications to serve on
the Company’s Board of Directors include his more than 20
years of accounting and business management
experience.
Heather Westing – Ms. Westing has served as a director
since March 2016. Ms. Westing owns several real estate
developments, restaurant and financial companies in Oregon. She is
the former owner of The Subway Group – franchisor agency for
over 350 Subway Restaurants and served on Subway’s Worldwide
Advisory Board. Ms. Westing is an active member in the Oregon Angel
Fund, and oversees the Westing Family Foundation. Previously, Ms.
Westing owned an advertising and marketing agency, with offices in
Eugene, Portland and Bend. She has also owned and operated a
50-acre farm of filberts, grass seed and Christmas trees. She
served on Umpqua Bank’s Regional Board of Advisory and The
Oregon Bach Festival’s Board of Directors. She is a Lifetime
Alumni of University of Oregon, where she studied finance and real
estate. Ms. Westing’s qualifications to serve on the
Company’s Board of Directors include her extensive business
experience and expertise in marketing.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires the Company’s
officers, directors and persons who own more than 10% of a
registered class of the Company’s equity securities to file
certain reports with the SEC regarding ownership of, and
transactions in, the Company’s securities. These officers,
directors and stockholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) reports
that are filed with the SEC. Based solely on a review of copies of
such forms received by the Company and written representations
received by the Company from certain reporting persons, the Company
believes that for the year ended December 31, 2017 all Section
16(a) reports required to be filed by the Company’s executive
officers, directors and 10% stockholders were filed on a timely
basis with the exception of one Form 4 filing for James Bernau that
was filed late.
Code of Ethics
The
Company has adopted a code of ethics applicable to its principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, which is a “code of ethics” as defined by
applicable rules of the SEC. A copy of the Company’s Code of
Business Conduct and Ethics is posted on the Company’s web
site, www.wvv.com.
Amendments to the Company’s Code of Business Conduct and
Ethics or any grant of a waiver from a provision of the
Company’s Code of Business Conduct and Ethics requiring
disclosure under applicable SEC rules, if any, will be disclosed on
the Company website at www.wvv.com.
Any person may request a copy of the Company’s Code of
Business Conduct and Ethics, at no cost, by writing to the Company
at the following address:
Willamette
Valley Vineyards, Inc.
Attention:
Corporate Secretary
8800
Enchanted Way SE
Turner,
OR 97392
Audit Committee
The
Company has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The members of the Audit Committee are Craig Smith,
Sean Cary and Stan G. Turel. All members of the Audit Committee are
independent as defined under the applicable rules and regulations
of the SEC and the director independence standards of the NASDAQ
Stock Market, as currently in effect.
51
Audit Committee Financial Expert
Craig
Smith serves as the Audit Committee’s “financial
expert” as defined in applicable SEC rules and NASDAQ listing
standards. Mr. Smith is independent as defined under the applicable
rules and regulations of the SEC and the director independence
standards of the NASDAQ Stock Market, as currently in
effect.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The
following table sets forth certain information concerning
compensation paid or accrued by the Company, to or on behalf of the
Company’s principal executive officer, James W. Bernau and
Chief Financial Officer, Richard F. Goward Jr. for the fiscal years
ended December 31, 2017 and December 31, 2016. No other executive
officer of the Company other than Mr. Bernau and Mr. Goward
received total compensation in 2017 in excess of $100,000, and thus
disclosure is not required for any other person. Summary
compensation information is as follows:
|
Summary
Compensation Table
|
|||||||||
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
Non-equity
|
Deferred
|
All
|
|
|
Name,
|
|
|
|
Stock
|
Option
|
Incentive
Plan
|
Comp.
|
Other
|
|
|
Principal
Position
|
Year
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Comp.*
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernau,
James W.,
|
|
|
|
|
|
|
|
|
|
|
President,
Chief Executive
|
2017
|
$259,564
|
$214,738
|
$-
|
$-
|
$-
|
$-
|
$46,833
|
$521,135
|
|
President,
Chief Executive
|
2016
|
$256,645
|
$356,000
|
$-
|
$-
|
$-
|
$-
|
$50,806
|
$663,451
|
|
Goward,
Richard F. Jr
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
2017
|
$126,090
|
$15,000
|
$-
|
$-
|
$-
|
$-
|
$6,183
|
$147,273
|
|
Chief
Financial Officer
|
2016
|
$122,269
|
$12,000
|
$-
|
$-
|
$-
|
$-
|
$5,921
|
$140,190
|
|
* All
other compensation includes Company payments for medical insurance,
value of lodging, Board of Director stipends, life insurance
payments
and
Company 401(k) matching contributions.
|
Bernau Employment Agreement – The Company and Mr.
Bernau are parties to an employment agreement dated August 3, 1988
as amended on February 20, 1997, in January of 1998, in November
2010, and again on November 8, 2012. Under the amended agreement,
Mr. Bernau is paid an annual salary of $235,000 with annual
increases tied to increases in the consumer price index. Mr.
Bernau’s 2017 bonus is calculated as a percentage of Company
net income before taxes; 5% on the first $1.75 million of pre-tax
income, and 7.5% on the pre-tax net income over $1.75 million, not
to exceed his current year base salary. Additionally, Mr. Bernau
participates in the employer sponsored 401(k) plan. Pursuant to the
terms of the employment agreement, the Company is to provide Mr.
Bernau with housing on the Company’s property. Mr. Bernau
resides in the estate house, free of rent, which is also used to
accommodate overnight stays for Company guests. Mr. Bernau resides
in the residence for the convenience of the Company and must
continue to reside there for the duration of his employment in
order to provide additional security and lock-up services for late
evening events at the Winery and Vineyard. The employment agreement
provides that Mr. Bernau’s employment may be terminated only
for cause, which is defined as non-performance of his duties or
conviction of a crime.
Goward Employment Agreement – The Company and Mr.
Goward are parties to an employment agreement dated April 16, 2013
as amended on July 15, 2015. Under the agreement Mr. Goward is paid
an annual salary of $128,382 and is reviewed annually for potential
meritorious awards. Additionally, Mr. Goward receives the
equivalent of a board stipend for board meetings outside of the
normal working schedule. Mr. Goward also participates in the
employer sponsored 401(k) plan.
Director compensation
The
following table sets forth information concerning compensation of
the Company’s directors other than Mr. Bernau for the fiscal
year ended December 31, 2017:
52
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
in
Pension
|
|
|
|
|
|
|
|
|
Value
and
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
Fees
Earned
|
|
|
Non-equity
|
Deferred
|
|
|
|
|
or
|
Stock
|
Option
|
Incentive
Plan
|
Compensation
|
All
Other
|
|
|
Name
|
Paid in
Cash
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
|
|
|
|
|
|
|
|
|
|
James
L. Ellis
|
$12,400
|
-
|
-
|
-
|
-
|
$364
|
$12,764
|
|
Sean
M. Cary
|
4,400
|
-
|
-
|
-
|
-
|
-
|
4,400
|
|
Christopher
L. Sarles
|
5,500
|
-
|
-
|
-
|
-
|
-
|
5,500
|
|
Craig
Smith
|
4,700
|
-
|
-
|
-
|
-
|
-
|
4,700
|
|
Betty
M. O'Brien
|
6,250
|
-
|
-
|
-
|
-
|
-
|
6,250
|
|
Stan
G. Turel
|
4,850
|
-
|
-
|
-
|
-
|
-
|
4,850
|
|
Heather
Westing
|
3,850
|
-
|
-
|
-
|
-
|
-
|
3,850
|
|
Jonathan
Ricci
|
3,850
|
-
|
-
|
-
|
-
|
-
|
3,850
|
Other
compensation for James L. Ellis includes a monthly stipend for
ongoing consultation services as well as serving as administrator
of any potential employee complaint that might rise to the board of
directors’ level.
The
members of the Board received cash compensation for their service
on the Board in 2017, and were reimbursed for out-of-pocket and
travel expenses incurred in attending Board meetings. The Company
adopted a Stock Incentive Plan that was approved by the
shareholders in 1992 and further amended by the shareholders in
1996. There are no remaining stock options, owned by Directors,
under this plan. In the foreseeable future, as a result of FASB ASC
Topic 718, Stock Compensation, requiring all share-based payments
to be recognized as expenses in the statement of operations based
on their fair values and vesting periods, the Company does not
intend to issue stock options to the directors for their
service.
In
January 2009, the Board, upon recommendation of the Board’s
Compensation Committee (the “Compensation Committee”),
who had sought outside counsel regarding revision of the
Company’s Board Compensation Plan, adopted the final version
of the revised WVV Board Member Compensation Plan. Under the terms
of the revised plan, any Board member may elect not to receive any
or all of the compensation components. The Board also reserved the
right to suspend this plan at any time on the basis of prevailing
economic conditions and their impact on the company. The basic
elements of the revised plan are: $1,000 yearly stipend for service
on the Board, $500 per Board meeting attended in person, $250 per
Board meeting via teleconference, $200 per committee meeting in
person and $100 per committee meeting via teleconference. A set per
diem for expenses associated with meeting attendance, as well as a
yearly wine allowance were also approved.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Equity compensation plan information
The
Company does not have active equity compensation plans and no
options or other equity awards outstanding.
Security ownership of certain beneficial owners and
management
The
following table sets forth certain information with respect to
beneficial ownership of the Company’s Common Stock as of
March 22, 2018, by (i) each person who beneficially owns more than
5% of the Company’s Common Stock, (ii) each Director of the
Company, (iii) each of the Company’s named executive
officers, and (iv) all directors and executive officers as a group.
Except as indicated in the footnotes to this table, each person has
sole voting and investment power with respect to all shares
attributable to such person.
Information
concerning persons who beneficially own more than 5% of the
Company’s common stock who are not otherwise affiliated with
the Company is based solely upon statements made in filings with
the SEC or other information we believe to be
reliable.
Unless
otherwise noted, the address of each beneficial owner listed in the
table is 8800 Enchanted Way SE Turner, OR
97392.
53
|
|
|
|
Percent
of
|
|
|
Number
of
|
|
Shares
|
|
|
Shares
Outstanding
|
|
Beneficially
|
|
|
Stock
|
|
Owned
(1)
|
|
|
|
|
|
|
James
W. Bernau, President/CEO, Chair of the Board
|
465,705
|
|
9.4%
|
|
|
|
|
|
|
Richard
F. Goward Jr., CFO
|
500
|
|
**
|
|
|
|
|
|
|
James
L. Ellis, Director
|
19,865
|
|
**
|
|
|
|
|
|
|
Christopher
L. Sarles, Director
|
-
|
|
**
|
|
|
|
|
|
|
Sean
M. Cary, Director
|
5,200
|
|
**
|
|
|
|
|
|
|
Betty
M. O'Brien, Director
|
40,624
|
|
**
|
|
|
|
|
|
|
Stan
G. Turel, Director
|
14,192
|
|
**
|
|
|
|
|
|
|
Craig
Smith, Director
|
1,500
|
|
**
|
|
|
|
|
|
|
Heather
Westing, Director
|
1,700
|
|
**
|
|
|
|
|
|
|
Christopher
Riccardi
|
385,485
|
(2)
|
7.8%
|
|
100
Tall Pine Ln., Apt 2102, Naples, FL 34105
|
|
|
|
|
|
|
|
|
|
Carl
D. Thoma
|
336,189
|
(3)
|
6.8%
|
|
300
N. LaSalle St, Suite 4350. Chicago, IL 60654
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a group (9
persons)
|
549,286
|
|
11.1%
|
|
|
|
|
|
|
**
Less than one percent
|
|
|
|
(1) The
percentage of outstanding shares of common stock is calculated out
of a total of 4,964,529 shares of common stock outstanding as of
March 22, 2018. Shares owned do not include ownership of preferred
stock shares.
(2)
Based on a Form 4 filed by Mr. Riccardi with the SEC on December
29, 2015
(3)
Based on a Schedule 13G/A filed by Mr. Thoma with the SEC on
February 8, 2017. Beneficial ownership includes 139,429 shares held
by the Carl D. Thoma Roth IRA, TD Ameritrade Clearing Custodian for
the benefit of Mr. Thoma.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
In
2007, the Company entered into a long-term lease for Elton
vineyards which consists of 54 acres of mature grapevines, of which
approximately 42 acres are Pinot Noir. The agreement was for an
initial 10-year lease with the option to renew for four successive
terms of five years each, plus a first right of refusal on the
property’s sale. Betty O’ Brien, a member of the Board,
is the owner of the lessor, Elton Vineyards, LLC. As such, she is
therefore entitled to the net income of Elton Vineyards, LLC. In
2017, the Company paid Elton Vineyards, LLC $124,976 in lease
payments and utility reimbursements.
The
Company believes that the transactions set forth above were made on
terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. All future transactions
between the Company and its officers, directors, and principal
shareholders will be approved by a disinterested majority of the
members of the Board, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
After reviewing the relationship between the Company and Elton
Vineyards, LLC, in each of the last three years, the Board has
determined that Ms. O’Brien is “independent”
within the meaning of the applicable rules and regulations of the
SEC and the director independence standards of the NASDAQ Stock
Market (“NASDAQ”).
54
Except
for payments to Elton Vineyards, LLC described above, during 2017
the Company did not participate in any transactions with related
persons that had a direct or indirect material interest in an
amount exceeding $120,000 and there are no currently proposed
transactions with related persons that exceed
$120,000.
The
Board has determined that each of our directors, except
Mr. Bernau and Mr. Ellis is “independent” within
the meaning of the applicable rules and regulations of the SEC and
the director independence standards of NASDAQ, as currently in
effect. Furthermore, the Board has determined that, with the
exception of the Executive Committee, each of the members of each
of the committees of the Board is “independent” under
the applicable rules and regulations of the SEC and the director
independence standards of NASDAQ, as currently in
effect.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Moss
Adams LLP served as the Company’s independent registered
public accounting firm for the years ended December 31, 2017 and
2016. Fees for
professional services provided by our independent registered public
accounting firm in each of the last two fiscal years, in each of
the following categories are:
|
|
Years
Ended December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Audit
fees (1)
|
$141,000
|
$141,000
|
|
Tax
fees (2)
|
38,940
|
46,469
|
|
All
other fees (3)
|
-
|
3,471
|
|
|
|
|
|
|
$179,940
|
$190,940
|
(1)
Audit fees
represent fees for services rendered for the audit of the
Company’s annual financial statements and review of the
Company’s quarterly financial statements.
(2)
Tax fees represent
fees for services rendered for tax compliance, tax advice and tax
planning
(3)
All other fees
represent limited engagement activity.
The
Company did not incur any audit related fees in either 2017 or
2016.
Pre-approval policies and procedures
It is
the policy of the Company not to enter into any agreement for Moss
Adams LLP to provide any non-audit services to the Company unless
(a) the agreement is approved in advance by the Audit
Committee or (b) (i) the aggregate amount of all such
non-audit services constitutes no more than 5% of the total amount
the Company pays to Moss Adams LLP during the fiscal year in which
such services are rendered, (ii) such services were not
recognized by the Company as constituting non-audit services at the
time of the engagement of the non-audit services and
(iii) such services are promptly brought to the attention of
the Audit Committee and prior to the completion of the audit were
approved by the Audit Committee or by one or more members of the
Audit Committee who are members of the Board to whom authority to
grant such approvals has been delegated by the Audit Committee. The
Audit Committee will not approve any agreement in advance for
non-audit services unless (1) the procedures and policies are
detailed in advance as to such services, (2) the Audit
Committee is informed of such services prior to commencement and
(3) such policies and procedures do not constitute delegation
of the Audit Committee’s responsibilities to management under
the Exchange Act.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The
following documents are filed as part of this report:
(1)
Financial
Statements
See
“Index to Financial Statements” in Item 8 of this
Annual Report on Form 10-K.
55
(2)
Financial
Statement Schedules
All
financial statement schedules are omitted either because they are
not required, not applicable or the required information is
included in the financial statements or notes thereto.
(3)
Exhibits
|
Exhibit
Number
|
Description
|
|
3.1
|
Articles of
Incorporation of Willamette Valley Vineyards, Inc. (incorporated by reference from the
Company’s Regulation A Offering Statement on Form 1-A [File
No. 24S-2996])
|
|
|
|
|
|
|
|
|
|
|
10.1
|
Employment
Agreement between Willamette Valley Vineyards, Inc. and James W.
Bernau dated August 3, 1988 as amended on February 20, 1997, in
January of 1998, in November 2010, and on November 8, 2012
(incorporated by reference from
the Company’s Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
|
|
|
|
|
10.2
|
Indemnity
Agreement between Willamette Valley Vineyards, Inc. and James W.
Bernau dated May 2, 1988 (incorporated by reference from the
Company’s Regulation A Offering Statement on Form 1-A [File
No. 24S-2996])
|
|
|
|
|
10.3
|
Revolving Note
and Loan Agreement dated May 28, 1992 by and between Northwest Farm
Credit Services, Willamette Valley Vineyards, Inc. and James W. and
Cathy Bernau (incorporated by
reference from the Company’s Regulation A Offering Statement
on Form 1-A [File No. 24S-2996])
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
The
following financial information from the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2017, furnished
electronically herewith, and formatted in XBRL (Extensible Business
Reporting Language); (i) Consolidated Balance Sheets; (ii)
Consolidated Statements of Income; (iii) Consolidated Statements of
Shareholders’ Equity; (iv) Consolidated Statements of Cash
Flows; and (v) Notes to Consolidated Financial Statements, tagged
as blocks of text. (Filed herewith)
|
*Confidential
treatment of certain portions of this exhibit has been granted by
the SEC pursuant to a request for confidential treatment dated
November 10, 2011.
(1)
The exhibits listed
under Item 15(a)(3) hereof are filed as part of this Form
10-K, other than Exhibits 32.1 and 32.2, which shall be deemed
furnished.
(2)
All financial
statement schedules are omitted either because they are not
required, not applicable or the required information is included in
the financial statements or notes thereto.
56
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
(Registrant)
By:_/s/
James W. Bernau____________
James
W. Bernau,
Chairperson
of the Board, President
Date:
March 22, 2018
57
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James W. Bernau
|
|
Chairperson of the Board,
|
|
March 22, 2018
|
|
James W. Bernau
|
|
President
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Richard F. Goward Jr.
|
|
Chief Financial Officer
|
|
March 22, 2018
|
|
Richard F. Goward Jr.
|
|
(Principal Financial
|
|
|
|
|
|
and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ James L. Ellis
|
|
Director
|
|
March 22, 2018
|
|
James L. Ellis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Christopher L. Sarles
|
|
Director
|
|
March 22, 2018
|
|
Christopher L. Sarles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Craig Smith
|
|
Director
|
|
March 22, 2018
|
|
Craig Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Betty M. O'Brien
|
|
Director
|
|
March 22, 2018
|
|
Betty M. O'Brien
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Stan G. Turel
|
|
Director
|
|
March 22, 2018
|
|
Stan G. Turel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Sean M. Cary
|
|
Director
|
|
March 22, 2018
|
|
Sean M. Cary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Heather Westing
|
|
Director
|
|
March 22, 2018
|
|
Heather Westing
|
|
|
|
|
58