Willamette Valley Vineyards(WVVI) - 2020 Q4 - Annual Report

PART I ITEM 1. BUSINESS Willamette Valley Vineyards produces and sells premium wines through direct and distributor channels, focusing on quality, brand, and direct-to-consumer sales in a growing market - The Company was formed in May 1988, headquartered in Turner, Oregon, producing premium varietals[18] - Operates two operating segments: direct sales (retail, wine club, online, events) and distributor sales (through third parties at wholesale rates)[19] - Produces wines under various labels including Willamette Valley Vineyards, Griffin Creek, Elton, Pambrun, Maison Bleue, and Made in Oregon Cellars[20][21][22][23][24] - The US wine industry saw an increase in wineries from 6,357 in 2009 to 11,053 in 2020, with total US wine sales revenue reaching $72 billion in 2019[26][27] - Oregon's wine industry grew significantly, with the number of wineries increasing from 793 in 2018 to 908 in 2019, and Pinot Noir accounting for 57% of planted acreage and 59% of production[33][39] - The Company's strategy focuses on growing/purchasing high-quality grapes, producing premium wines, achieving brand recognition, effective national distribution, and building direct-to-consumer sales[41] - WVV owns and leases approximately 1,018 acres of land, with 798 acres planted or suitable for future vineyard planting, all certified sustainable by LIVE and Salmon Safe[47] Vineyard Acreage and Harvest Summary (2019-2020) | Category | Total Acres | Producing Acres | Harvest 2020 (Tons) | Harvest 2019 (Tons) | | :------- | :---------- | :-------------- | :------------------ | :------------------ | | Owned Vineyards | 703 | 244 | 515 | 710 | | Leased Vineyards | 315 | 246 | 516 | 862 | | Contracted Vineyards | 368 | 368 | 1,470 | 1,046 | | Total | 1,386 | 858 | 2,501 | 2,618 | - The Estate Winery and production facilities have a capacity of up to 220,000 cases (524,000 gallons) per year; in 2020, the Winery produced approximately 175,357 cases (416,920 gallons)[70] Wine Production Summary (2019-2020) | Harvest Year | Grapes Grown (Tons) | Grapes Purchased (Tons) | Total Grapes Harvested (Tons) | Cases Produced | | :----------- | :------------------ | :---------------------- | :----------------------------- | :------------- | | 2019 | 1,572 | 1,046 | 2,618 | 172,869 | | 2020 | 1,031 | 1,470 | 2,501 | 175,357 | - Direct sales contributed approximately 38.6% of net sales in 2020 (38.2% in 2019) with higher profit margins, while distributor sales contributed 61.4% in 2020 (61.8% in 2019)[86][87] - In 2020, sales to one distributor represented approximately 24.0% of total Company revenue, up from 14.1% in 2019[90] - The Company is subject to extensive governmental regulation and taxation by federal and state agencies, including the TTB and OLCC, which can impact costs and sales[93][94][95][96] - As of December 31, 2020, the Company had 144 full-time and 69 part-time/seasonal employees[98] ITEM 1A. RISK FACTORS The Company faces agricultural, operational, competitive, and financial risks, including climate change impacts, key personnel dependency, intense market competition, and the ongoing effects of the COVID-19 pandemic - Agricultural risks include diseases (phylloxera, Pierce's Disease), pests, fungi, viruses, drought, frost, and adverse weather conditions, which can decrease grape quantity and quality[101] - Changing weather patterns and climatic conditions, including wildfires and unpredictable rainfall, pose risks to grape harvest quality and usability[102][104] - The Company's success depends on key employees (James W. Bernau, John Ferry, Christine Clair), and their loss could harm reputation and profitability[106] - The wine industry is highly competitive and fragmented, with larger California wineries having significantly greater financial, production, distribution, and marketing resources[111] - The COVID-19 pandemic has disrupted business operations, leading to tasting room closures, capacity restrictions, and potential adverse impacts on sales revenue, liquidity, and supply chain[130][131][132][133] - The Company's common stock is thinly traded, making it less liquid than other investments[122] - The Series A Redeemable Preferred Stock has a cumulative 5.3% dividend ($0.22 per share annually), but the Company's ability to pay depends on cash generation and debt obligations[124] ITEM 1B. UNRESOLVED STAFF COMMENTS No unresolved staff comments from the SEC - No unresolved staff comments[135] ITEM 2. PROPERTIES The Company manages 1,018 acres of land, including 490 productive vineyard acres, and operates two wineries with substantial production and hospitality facilities - The Company owns or leases 1,018 acres of land: 703 acres owned and 315 acres leased; of this, 490 acres are productive vineyards, and 308 acres are pre-productive or suitable for future planting[136] - The Estate Winery and production facilities can produce up to 220,000 cases (524,000 gallons) of wine per year; in 2020, it produced approximately 175,357 cases[137] - The Tualatin Winery adds approximately 28,000 cases (66,000 gallons) of wine production capacity, currently used for storage but available for future production needs[138] - The Estate Winery features a 35,642 square foot Hospitality Center with tasting rooms, dining, event spaces, and overnight accommodations, designed to attract visitors and enhance sales[137] ITEM 3. LEGAL PROCEEDINGS The Company is not currently involved in any material legal proceedings - No material legal proceedings pending or contemplated[141] ITEM 4. MINE SAFETY DISCLOSURES Mine Safety Disclosures are not applicable to the Company's operations - Not applicable[142] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common stock trades on NASDAQ (WVVI) with approximately 2,200 shareholders; no common stock dividends are anticipated, with earnings reinvested for expansion - Common stock is traded on the NASDAQ Capital Market under the symbol 'WVVI'[144] - As of December 31, 2020, there were approximately 2,200 common stock shareholders of record[144] - The Company has paid dividends on Preferred Stock but has not paid, and does not anticipate paying, dividends on its Common Stock in the foreseeable future, intending to use earnings for expansion[145] - No equity compensation plan with outstanding options or awards as of December 31, 2020[146] - No recent sales of unregistered securities or issuer purchases of equity securities[147][148] ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data is not required for this report - Selected Financial Data is not required[149] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the Company's financial performance, critical accounting policies, COVID-19 impact, liquidity, and capital resources, highlighting 2020 growth in net income and sales Critical Accounting Policies and Estimates Financial statements adhere to GAAP, relying on management estimates for revenue, inventory, vineyard development, and income tax accounting - Revenue is recognized from direct sales and distributor sales at the time of shipment and passage of title or at the time of sale for retail items[152] - Inventories are valued at the lower of actual cost (FIFO) or net realizable value, with regular reviews for obsolescence[155][254] - Vineyard development costs are capitalized until commercially productive, then amortized straight-line over an estimated 30-year useful life[157][255] - Income taxes are accounted for using the asset and liability approach, recognizing deferred tax assets and liabilities for temporary differences[158] Overview Revenue is generated from wholesale and direct-to-consumer sales, with direct sales offering higher margins, and case sales increasing by 15.3% in 2020 - Direct-to-consumer sales provide a higher gross profit due to closer-to-retail pricing[160] - The Company had 7,873 wine club memberships in 2020, a net increase of 308 from 2019[160] - Preferred stock sales since August 2015 have resulted in approximately 7,750 preferred stockholders, representing an estimated 12,000 potential customers[160] Wine Case Sales (2019-2020) | Year | Cases Sold | | :--- | :--------- | | 2020 | 180,850 | | 2019 | 156,791 | | Change | +24,059 (+15.3%) | - Increase in case sales primarily resulted from increased shipments to distributors and higher direct sales over the internet in 2020[162] - As of December 31, 2020, wine inventory included 157,347 cases of bottled wine and 455,016 gallons of bulk wine[164] Impact of COVID-19 on Operations COVID-19 caused operational disruptions, remote work, and tasting room restrictions, impacting sales to hospitality, with future supply chain and capital expenditure impacts remaining uncertain - COVID-19 pandemic declared a National Public Health Emergency, leading to state of emergency in Oregon and disruptions to business[165] - Office staff shifted to remote workstations, and UV light filtration was installed in HVAC systems at tasting rooms and offices[166] - Curbside pick-ups and complimentary shipping specials mitigated declines in direct-to-consumer sales due to tasting room closures/restrictions[167] - Demand for wine sold to restaurants, bars, and hospitality locations significantly reduced due to restrictions and temporary closures[168] - Future impacts on supply chain, employee availability, and capital expenditures (e.g., Bernau Estate Tasting Room delay) remain uncertain[133][169] Results of Operations The Company achieved substantial financial improvements in 2020, with net income up 35.2% and net sales revenue up 10.4%, driven by strong retail and in-state distributor sales Key Financial Performance (2019-2020) | Metric | 2020 | 2019 | Change (YoY) | | :---------------------------------- | :----------- | :----------- | :------------- | | Net Income | $3,394,996 | $2,510,901 | +35.2% | | Net Income Applicable to Common Shareholders | $2,278,618 | $1,484,838 | +53.5% | | Net Sales Revenues | $27,314,852 | $24,749,263 | +10.4% | | Income from Operations | $5,001,773 | $3,727,524 | +34.2% | | Income per Common Share (basic & diluted) | $0.46 | $0.30 | +53.5% | Revenue by Sales Channel (2019-2020) | Sales Channel | 2020 Revenue | 2019 Revenue | Change (YoY) | | :-------------- | :------------- | :------------- | :------------- | | Retail sales | $10,560,913 | $9,382,155 | +12.6% | | In-state sales | $6,671,743 | $5,215,251 | +27.9% | | Out-of-state sales | $10,350,708 | $10,228,132 | +1.2% | | Bulk wine/misc sales | $103,958 | $156,768 | -33.7% | | Total Revenue (before excise taxes) | $27,687,322 | $24,982,306 | +10.8% | Cost of Sales and Gross Profit (2019-2020) | Metric | 2020 | 2019 | Change (YoY) | | :--------- | :----------- | :----------- | :------------- | | Cost of Sales | $10,585,076 | $9,454,681 | +12.0% | | Gross Profit | $16,729,776 | $15,294,582 | +9.4% | | Gross Margin % | 61.2% | 61.8% | -0.6% | | SG&A Expenses | $11,728,003 | $11,567,058 | +1.4% | Interest and Tax Expenses (2019-2020) | Metric | 2020 | 2019 | Change (YoY) | | :---------------- | :----------- | :----------- | :------------- | | Interest Income | $21,022 | $48,066 | -27,044 | | Interest Expense | $414,061 | $440,999 | -6.1% | | Other Income, net | $165,916 | $128,433 | +29.2% | | Provision for Income Taxes | $1,379,654 | $952,123 | +44.9% | EBITDA EBITDA increased by 22.2% to $6.98 million in 2020, driven by higher net income, serving as a key non-GAAP operating performance benchmark EBITDA Reconciliation (2019-2020) | Metric | 2020 | 2019 | Change (YoY) | | :-------------------------- | :----------- | :----------- | :------------- | | Net Income | $3,394,996 | $2,510,901 | +35.2% | | Depreciation and amortization expense | $1,812,394 | $1,812,463 | -0.0% | | Interest Expense | $414,061 | $440,999 | -6.1% | | Interest Income | ($21,022) | ($48,066) | +56.3% | | Income tax expense | $1,379,654 | $952,123 | +44.9% | | EBITDA | $6,980,083 | $5,668,420 | +23.1% | - EBITDA increased 22.2% to $6,983,662 in 2020 from $5,668,420 in 2019, primarily due to increased net income[190] Sales Total wine case sales increased by 15.3% in 2020 to 180,850 cases, primarily from Pinot Noir, Pinot Gris, and Riesling, with direct sales yielding higher margins Wine Case Sales by Varietal (2019-2020) | Varietal/Product | Cases Sold 2020 | Cases Sold 2019 | Cases On Hand Dec 31, 2020 | | :----------------- | :-------------- | :-------------- | :------------------------- | | Pinot Noir/Estate | 15,801 | 14,696 | 9,739 | | Pinot Noir/Barrel Select | 17,522 | 12,713 | 2,202 | | Pinot Noir/Founders Reserve | 2,613 | 3,934 | 7,324 | | Pinot Noir/Special Designates | 6,603 | 5,217 | 24,470 | | Pinot Noir/Whole Cluster | 51,387 | 43,359 | 14,270 | | Pinot Gris | 33,448 | 28,810 | 9,329 | | Riesling | 22,763 | 19,172 | 18,314 | | Chardonnay | 3,912 | 4,244 | 11,862 | | Table Wine | - | 16,320 | 8,441 | | Other | 26,801 | 8,326 | 51,396 | | Total | 180,850 | 156,791 | 157,347 | - Approximately 52% of 2020 case sales were Pinot Noir, followed by Pinot Gris (19%) and Riesling (13%)[195] Net Sales Channel Contribution (2019-2020) | Sales Channel | 2020 % of Net Sales | 2019 % of Net Sales | | :-------------- | :------------------ | :------------------ | | Direct-to-consumer | 38.6% | 38.2% | | In-state distributors | 24.0% | 20.9% | | Out-of-state distributors | 37.4% | 40.9% | - Direct-to-consumer sales generate a higher gross profit margin than national sales to distributors due to differentiated pricing[197] Wine Inventory At year-end 2020, the Company held 157,347 cases of bottled wine and sufficient bulk wine to bottle 191,350 cases, ensuring demand coverage - Approximately 157,347 cases of bottled wine were on-hand at the end of 2020[198] - Sufficient bulk wine inventory is on-hand to bottle approximately 191,350 cases of wine in 2020, meeting current demand until the 2020 vintage is available[198] Production Capacity The Estate Winery produced 175,357 cases in 2020, operating within its 220,000-case capacity, with an additional 28,000-case capacity at Tualatin Winery for future expansion - Current production volumes are within the Estate Winery's capacity of about 220,000 cases per year[199] - In 2020, approximately 175,357 cases were produced[199] - The Tualatin Winery offers an additional 28,000 cases of wine production capacity, currently used for storage, and will be utilized after the Estate Winery reaches full capacity[199] Grape Supply In 2020, the Company grew 41% of its grapes and purchased 59% via contracts, with plans to develop 56 pre-productive acres and plant 22 additional acres in 2021 to enhance self-sufficiency Grape Supply Sources (2019-2020) | Source | 2020 % of Grapes Harvested | 2019 % of Grapes Harvested | | :---------------- | :------------------------- | :------------------------- | | Grown by Company | 41% | 60% | | Purchased (Short-term) | 50% | 37% | | Purchased (Long-term) | 9% | 3% | Value of Purchased Grapes (2019-2020) | Contract Type | 2020 Value | 2019 Value | | :-------------- | :----------- | :----------- | | Long-term | $220,650 | $222,419 | | Short-term | $3,339,460 | $1,426,867 | | Total Grapes Payable | $1,307,165 | $792,595 | - The Company has 56 acres of vineyards in the pre-productive stage, expected to produce grapes within 1-3 years, and plans to plant approximately 22 additional acres in 2021[203] Wine Quality The Company's wines received numerous high ratings and awards in 2020 from prominent publications, enhancing brand awareness and quality perception - Wine Enthusiast awarded multiple wines with 90-93 points, including Cellar Selection and Editors' Choice recognitions[205] - Wine Spectator awarded the 2018 Estate Pinot Noir 90 points[206] - James Suckling and Vinous' Josh Raynolds awarded Elton wines with 92-93 points[206][207] - Wine Advocate awarded Maison Bleue Syrahs with 90-95 points[208] - Pambrun wines received 90-93 points from Jeb Dunnuck[209] - The 2019 Whole Cluster Rosé of Pinot Noir received a Double Gold medal and 96 points at The Sunset International Wine Competition[209] Seasonality The Company experiences seasonal revenue and net income fluctuations, with sales typically lowest in Q1 and increasing through Q4 due to consumer buying habits - First quarter sales are typically the lowest, with sales volumes increasing progressively through the fourth quarter due to consumer buying habits[211] Liquidity and Capital Resources As of December 31, 2020, the Company maintained strong liquidity with $27.5 million in working capital and $14.0 million in cash, supported by operating cash flow and preferred stock issuance, while investing in the Bernau Estate Tasting Room Liquidity and Cash Flow Summary (2020) | Metric | Amount (2020) | | :-------------------------------- | :-------------- | | Working Capital | $27.5 million | | Current Ratio | 4.80:1 | | Cash and Cash Equivalents | $13,999,755 | | Net Cash from Operating Activities | $5,420,998 | | Net Cash Used in Investing Activities | $4,771,978 | | Net Cash from Financing Activities | $6,300,559 | - The Company obtained a $5 million commercial loan commitment from Farm Credit Services in July 2020 for additional liquidity, with no funds drawn down as of the filing date[215] - Construction of the Bernau Estate Tasting Room, approved in 2019, is expected to cost $14.4 million, with approximately $5.3 million spent by December 31, 2020[216] - Long-term debt balance was $5,984,272 at December 31, 2020, primarily with NW Farm Credit Services for winery and vineyard capital improvements[218][290] Contractual Obligations as of December 31, 2020 | Obligation Type | Total | Less than 1 Year | 2 – 3 Years | 4 – 5 Years | After 5 Years | | :---------------------- | :------------ | :--------------- | :---------- | :---------- | :------------ | | Long-term debt | $5,985,228 | $450,040 | $969,380 | $1,072,758 | $3,493,050 | | Notes payable | $1,384,581 | $89,040 | $194,806 | $219,447 | $881,288 | | Grape payables | $1,307,165 | $1,307,165 | - | - | - | | Operating leases | $8,169,721 | $578,438 | $1,088,731 | $1,012,737 | $5,489,815 | | Total | $16,846,695 | $2,424,683 | $2,252,917 | $2,304,942 | $9,864,153 | Inflation Inflation did not materially impact the Company's revenues or income in 2020 or 2019 - Inflation did not have a material impact on revenues or income in 2020 or 2019[221] Off Balance Sheet Arrangements The Company had no off-balance sheet arrangements as of December 31, 2020, or 2019 - No off-balance sheet arrangements as of December 31, 2020, and 2019[222] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures about Market Risk are not required - Not required[223] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the audited financial statements for 2020 and 2019, including balance sheets, income statements, equity, and cash flows, with notes and an unqualified auditor's opinion Report of Independent Registered Public Accounting Firm Moss Adams LLP issued an unqualified opinion on the Company's 2020 and 2019 financial statements, confirming fair presentation in conformity with GAAP, with no critical audit matters - Moss Adams LLP issued an unqualified opinion on the financial statements for 2020 and 2019[229] - No critical audit matters were determined[233] Balance Sheets Balance sheets show significant increases in total assets and shareholders' equity from 2019 to 2020, driven by growth in current assets and redeemable preferred stock Balance Sheet Summary (2019-2020) | Asset/Liability/Equity | December 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------------ | :------------------ | | Total Current Assets | $35,026,130 | $26,765,809 | | Cash and cash equivalents | $13,999,755 | $7,050,176 | | Accounts receivable, net | $2,671,576 | $1,814,004 | | Inventories | $17,687,973 | $17,075,080 | | Total Assets | $79,490,347 | $67,915,487 | | Total Current Liabilities | $7,303,520 | $5,371,201 | | Investor deposits for preferred stock | $510,636 | - | | Grapes payable | $1,307,165 | $792,595 | | Long-term debt, net | $5,389,457 | $5,826,161 | | Total Liabilities | $20,668,420 | $18,870,381 | | Redeemable preferred stock | $25,817,305 | $18,319,102 | | Retained earnings | $24,492,133 | $22,213,515 | | Total Shareholders' Equity | $58,821,927 | $49,045,106 | Statements of Income Income statements reflect strong 2020 performance, with net sales up 10.4%, gross profit up 9.4%, operating income up 34.2%, and net income up 35.2% Statements of Income Summary (2019-2020) | Metric | 2020 | 2019 | | :-------------------------------- | :----------- | :----------- | | Sales, net | $27,314,852 | $24,749,263 | | Cost of Sales | $10,585,076 | $9,454,681 | | Gross Profit | $16,729,776 | $15,294,582 | | Total Operating Expenses | $11,728,003 | $11,567,058 | | Income from Operations | $5,001,773 | $3,727,524 | | Income Before Income Taxes | $4,774,650 | $3,463,024 | | Net Income | $3,394,996 | $2,510,901 | | Preferred stock dividends | ($1,116,378) | ($1,026,063) | | Income Applicable to Common Shareholders | $2,278,618 | $1,484,838 | | Earnings per common share (basic & diluted) | $0.46 | $0.30 | Statements of Shareholders' Equity Shareholders' equity significantly increased from $49.0 million in 2019 to $58.8 million in 2020, primarily due to $7.5 million in preferred stock issuance and $3.4 million in net income Statements of Shareholders' Equity Summary (2019-2020) | Metric | December 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------------ | :------------------ | | Redeemable Preferred Stock (Dollars) | $25,817,305 | $18,319,102 | | Common Stock (Dollars) | $8,512,489 | $8,512,489 | | Retained Earnings | $24,492,133 | $22,213,515 | | Common Stock Held in Treasury | ($1,378,303) | ($897,587) | | Total Shareholders' Equity | $58,821,927 | $49,045,106 | | Issuance of preferred stock, net | $7,498,203 | - | | Preferred stock dividends declared | ($1,116,378) | ($1,026,063) | | Net income | $3,394,996 | $2,510,901 | Statements of Cash Flows In 2020, operating activities generated $5.4 million in cash, investing activities used $4.8 million, and financing activities provided $6.3 million, resulting in a year-end cash balance of $14.0 million Statements of Cash Flows Summary (2019-2020) | Cash Flow Activity | 2020 | 2019 | | :-------------------------------- | :----------- | :----------- | | Net cash from operating activities | $5,420,998 | $4,291,446 | | Net cash from investing activities | ($4,771,978) | ($5,318,648) | | Net cash from financing activities | $6,300,559 | ($1,660,089) | | Net change in cash and cash equivalents | $6,949,579 | ($2,687,291) | | Cash and cash equivalents, end of year | $13,999,755 | $7,050,176 | - Proceeds from issuance of preferred stock, net, contributed $7,498,203 to financing activities in 2020[241] - Additions to property and equipment and vineyard development were significant uses of cash in investing activities[241] NOTE 1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note details the Company's operations, GAAP basis of financial statement presentation, COVID-19 impact, and significant accounting policies for various financial elements and recent accounting standards - The Company owns and operates vineyards and a winery in Oregon, producing and distributing premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay, and Riesling[242] - Financial statements are prepared in accordance with GAAP, requiring management estimates and assumptions[244] - The COVID-19 pandemic has disrupted business, leading to remote work, tasting room closures, and potential impacts on sales, liquidity, and supply chain[245][246][247] - Revenue is recognized when performance obligations are completed and control transfers to the customer, net of excise taxes and price promotions[264] - Cost of goods sold includes grape growing, external grape costs, packaging, winemaking, production, and allocated overhead[271] - Selling, general and administrative expenses include non-manufacturing overhead, advertising, and distributor sample allowances[273][274] - The Company accounts for leases by recognizing ROU assets and lease liabilities based on the present value of lease payments[280][281] NOTE 2 – ACCOUNTS RECEIVABLE, NET Accounts receivable are presented net of a $10,000 allowance for doubtful accounts, which remained unchanged in 2020 and 2019 with no write-offs Allowance for Doubtful Accounts (2019-2020) | Metric | 2020 | 2019 | | :------------------------ | :--------- | :--------- | | Balance at Beginning of Period | $10,000 | $10,000 | | Charged to costs and expenses | - | - | | Write-offs, net of recoveries | - | - | | Balance at End of Period | $10,000 | $10,000 | NOTE 3 – INVENTORIES Total inventories increased to $17.7 million in 2020 from $17.1 million in 2019, primarily due to higher work-in-process inventory Inventory Breakdown (2019-2020) | Inventory Category | December 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------------ | :------------------ | | Winemaking and packaging materials | $690,114 | $704,736 | | Work-in-process | $9,066,782 | $8,313,313 | | Finished goods | $7,931,077 | $8,057,031 | | Total Inventories | $17,687,973 | $17,075,080 | NOTE 4 – PROPERTY AND EQUIPMENT Net property and equipment increased to $31.5 million in 2020 from $28.6 million in 2019, driven by increased construction in progress, with consistent depreciation expense Property and Equipment (2019-2020) | Category | December 31, 2020 | December 31, 2019 | | :-------------------------- | :------------------ | :------------------ | | Construction in progress | $6,553,803 | $4,193,467 | | Land, improvements and other buildings | $11,787,334 | $11,764,811 | | Winery buildings and hospitality center | $17,694,466 | $16,319,704 | | Equipment | $14,392,923 | $13,751,324 | | Less accumulated depreciation | ($18,941,670) | ($17,381,005) | | Total Property and Equipment, net | $31,486,856 | $28,648,301 | | Depreciation expense | $1,614,665 | $1,597,076 | NOTE 5 – LINE OF CREDIT FACILITY The Company maintains a $2.0 million revolving line of credit with Umpqua Bank, with no outstanding balance and full compliance with covenants as of December 31, 2020 - Revolving line of credit with Umpqua Bank allows borrowings up to $2,000,000[287] - No outstanding balance on the line of credit at December 31, 2020, or 2019[287] - The Company was in compliance with all financial covenants as of December 31, 2020[288] NOTE 6 – NOTES PAYABLE As of December 31, 2020, an outstanding note payable of $1,384,581 for a property purchase in Dundee Hills AVA has quarterly payments at 6% interest through February 2032 - Outstanding note payable of $1,384,581 as of December 31, 2020, for a property purchase in the Dundee Hills AVA[289] - The note has quarterly payments of $42,534 at 6% interest and matures in February 2032[289] NOTE 7 – LONG-TERM DEBT Long-term debt, primarily with Northwest Farm Credit Services, totaled $5.98 million in 2020, down from $6.42 million in 2019, with fixed interest rates and compliance with all debt covenants Long-Term Debt Breakdown (2019-2020) | Lender | December 31, 2020 | December 31, 2019 | | :-------------------------- | :------------------ | :------------------ | | Northwest Farm Credit Services Loan 4 | $1,240,453 | $1,364,964 | | Northwest Farm Credit Services Loan 5 | $4,743,819 | $5,046,122 | | Toyota Credit Corporation | $956 | $12,431 | | Total Long-Term Debt | $5,985,228 | $6,423,517 | | Debt issuance costs | ($145,731) | ($158,978) | | Current portion of long-term debt | ($450,040) | ($438,378) | | Long-Term Debt, net | $5,389,457 | $5,826,161 | - Loans with Farm Credit Services have fixed interest rates of 4.75% and 5.21%, with maturity dates of 2028 and 2032[290] - The Company was in compliance with all debt covenants as of December 31, 2020[291] Future Minimum Principal Payments of Long-Term Debt | Year | Amount | | :--- | :--------- | | 2021 | $450,040 | | 2022 | $472,415 | | 2023 | $496,965 | | 2024 | $522,793 | | 2025 | $549,965 | | Thereafter | $3,493,050 | | Total | $5,985,228 | NOTE 8 – SHAREHOLDERS' EQUITY The Company is authorized to issue 10 million common and 10 million preferred shares; common stock has voting rights but no dividends, while preferred stock is non-voting with a $0.22 annual dividend and optional redemption after June 1, 2021 - Authorized to issue 10,000,000 shares of common stock (one vote per share) and 10,000,000 shares of redeemable preferred stock (non-voting)[294][295] - Series A Redeemable Preferred Stock has an annual dividend of $0.22 per share, a liquidation preference, and is optionally redeemable after June 1, 2021[295] - The Company does not anticipate paying dividends on common stock in the foreseeable future, intending to use earnings for expansion[294] - The Company is current on its preferred stock dividend obligations[295] NOTE 9 – STOCK INCENTIVE PLAN The Company's stock incentive plan has no additional grants or outstanding options, resulting in no stock compensation expense recognized in 2020 or 2019 - No additional grants can be made under the stock incentive plan[296] - No stock options were outstanding or exercisable at December 31, 2020, and 2019[296] - No stock compensation expense was recognized for the years ended December 31, 2020, and 2019[297] NOTE 10 – INCOME TAXES Income tax provision increased to $1.38 million in 2020 from $0.95 million in 2019, with an effective tax rate of 28.90%, reflecting higher income and a $3.25 million net noncurrent deferred tax liability Provision for Income Taxes (2019-2020) | Tax Component | 2020 | 2019 | | :-------------------- | :----------- | :----------- | | Current tax expense: | | | | Federal | $719,341 | $130,248 | | State | $367,819 | $63,496 | | Deferred tax expense (benefit): | | | | Federal | $227,248 | $591,493 | | State | $65,247 | $166,886 | | Total | $1,379,655 | $952,123 | Effective Income Tax Rate Reconciliation (2019-2020) | Factor | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Federal statutory rate | 21.00% | 21.00% | | State taxes, net of federal benefit | 6.79% | 5.93% | | Permanent differences | 0.26% | 0.47% | | Prior year adjustments | 0.76% | -0.01% | | Changes in tax rates and other | 0.09% | 0.11% | | Effective Tax Rate | 28.90% | 27.50% | Net Deferred Tax Assets and (Liabilities) (2019-2020) | Item | 2020 | 2019 | | :-------------------------------- | :------------- | :------------- | | Various Accruals and Deferred Timing Differences | $145,195 | $61,319 | | Prepaids | ($29,404) | ($52,309) | | Depreciation | ($2,744,921) | ($2,493,973) | | Inventory | ($621,969) | ($473,643) | | Net noncurrent deferred tax liability | ($3,251,099) | ($2,958,606) | NOTE 11 – RELATED PARTY TRANSACTIONS The Company provides living accommodations for its CEO as an employment condition, with annual housing expenses, excluding depreciation, less than $12,000 - The Company provides living accommodations for its CEO, James W. Bernau, on its premises as a condition of employment for security and lock-up services[301] - Annual expenses related to the CEO's housing are less than $12,000, exclusive of depreciation[301] NOTE 12 – COMMITMENTS AND CONTINGENCIES The Company has no material litigation, holds various operating leases, and has significant commitments including a long-term grape purchase agreement and the $14.4 million Bernau Estate Tasting Room construction - No material legal proceedings are pending[302] - Operating leases include vineyard properties (Peter Michael, Meadowview, Elton, Ingram, Bernau Estate) and non-vineyard properties (McMinnville, Maison Bleue, Willamette Wineworks)[303][304][305][306][307][308][309] Lease Cost and Information (2020) | Metric | 2020 | | :-------------------------------- | :--------- | | Operating Lease cost - Vineyards | $454,740 | | Operating Lease cost - Other | $139,133 | | Short-term lease cost | $33,492 | | Total Lease Cost | $627,365 | | Weighted-average remaining lease term | 16.55 years | | Weighted-average discount rate | 6.22% | - The Company has a long-term grape purchase agreement through the 2023 harvest year, with an outstanding balance of $1,307,165 as of December 31, 2020[310][311] - Construction of the Bernau Estate Tasting Room is expected to cost approximately $14.4 million, with $5.3 million spent by December 31, 2020[312] NOTE 13 – EMPLOYEE BENEFIT PLAN The Company operates a 401(k) profit sharing plan, making discretionary contributions of $138,588 in 2020 and $129,017 in 2019 - The Company has a 401(k) profit sharing plan for eligible employees[313] Company 401(k) Contributions (2019-2020) | Year | Contribution Amount | | :--- | :------------------ | | 2020 | $138,588 | | 2019 | $129,017 | NOTE 14 - SALE OF PREFERRED STOCK Since 2015, the Company has offered Series A Redeemable Preferred Stock, which is non-voting, senior to common stock, pays a $0.22 annual dividend, and is optionally redeemable after June 1, 2021 - Public offering of Series A Redeemable Preferred Stock commenced in August 2015, listed on NASDAQ (WVVIP)[314] - Series A Preferred Stock is non-voting, ranks senior to common stock, and pays an annual dividend of $0.22 per share[314][295] - In 2020, the Company concluded $8,008,839 in stock sales (net of acquisition costs) under a new Form S-3 registration statement[318] - Proceeds from 2020 sales recorded as $7,498,203 for Preferred Stock Issued and $510,636 as 'Investor deposits for preferred stock'[318] - The Company has the option to redeem outstanding preferred stock after June 1, 2021[319] NOTE 15 – SEGMENT REPORTING The Company operates two segments, Direct Sales and Distributor Sales, with performance evaluated by gross profit; in 2020, Direct Sales contributed 38.6% of net sales and Distributor Sales 61.4% - Two operating segments: Direct Sales (retail, wine club, internet, events, bulk wine/grapes) and Distributor Sales (through third parties at wholesale rates)[320] - Performance is evaluated based on gross profit, with segment-specific selling expenses included[321] Segment Performance (2019-2020) | Metric | Direct Sales 2020 | Direct Sales 2019 | Distributor Sales 2020 | Distributor Sales 2019 | Total 2020 | Total 2019 | | :------------------ | :---------------- | :---------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Sales, net | $10,533,070 | $9,463,481 | $16,781,782 | $15,285,782 | $27,314,852 | $24,749,263 | | Cost of Sales | $2,646,706 | $2,521,094 | $7,938,370 | $6,933,587 | $10,585,076 | $9,454,681 | | Gross Margin | $7,886,364 | $6,942,387 | $8,843,412 | $8,352,195 | $16,729,776 | $15,294,582 | | Selling Expenses | $5,180,431 | $4,659,543 | $1,713,370 | $2,201,091 | $6,893,801 | $6,860,634 | | Contribution Margin | $2,705,933 | $2,282,844 | $7,130,042 | $6,151,104 | $9,835,975 | $8,433,948 | | Percent of Sales, net | 38.6% | 38.2% | 61.4% | 61.8% | 100.0% | 100.0% | NOTE 16 – SUBSEQUENT EVENTS No material subsequent events were identified after the balance sheet date but before financial statement issuance - No material subsequent events identified[326] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[327] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes in the fourth fiscal quarter - Disclosure controls and procedures were effective as of December 31, 2020[327] - Internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[330] - No material changes in internal control over financial reporting during the fourth fiscal quarter[331] ITEM 9B. OTHER INFORMATION No other information is required to be disclosed in this item - No other information to report[332] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE This section details the Company's Board of Directors and executive officers, their terms, the staggered board structure, adopted Code of Ethics, and the independent Audit Committee Directors and Executive Officers | Name | Position(s) | Age | Term Ends | | :---------------- | :------------------------------------ | :-- | :-------- | | James W. Bernau | Chairperson of the Board, CEO, President and Director | 67 | 2023 | | Craig Smith | Secretary and Director | 74 | 2021 | | John Ferry | Chief Financial Officer | 55 | NA | | James L. Ellis | Director | 76 | 2022 | | Sean M. Cary | Director | 47 | 2023 | | Stan G. Turel | Director | 72 | 2021 | | Leslie Copland | Director | 65 | 2022 | - The Board of Directors is divided into three classes serving staggered three-year terms[334] - The Company has adopted a Code of Ethics, available on its website[344] - The Audit Committee members are Craig Smith, Sean Cary, and Stan G. Turel, all independent, with Craig Smith serving as the Audit Committee's financial expert[345][346] ITEM 11. EXECUTIVE COMPENSATION This section details the 2019-2020 compensation for the CEO and CFO, including salaries, bonuses, and other benefits, alongside director compensation Summary Compensation Table (2019-2020) | Name, Principal Position | Year | Salary | Bonus | Non-equity Incentive Plan Compensation | Other Comp. | Total | | :----------------------- | :--- | :------- | :------ | :------------------------------------- | :---------- | :------ | | Bernau, James W., President, CEO | 2020 | $276,704 | $276,704 | - | $52,908 | $606,316 | | Bernau, James W., President, CEO | 2019 | $271,812 | $233,488 | - | $108,906 | $614,206 | | John Ferry, Chief Financial Officer | 2020 | $145,000 | - | $15,000 | $1,750 | $161,750 | | John Ferry, Chief Financial Officer | 2019 | $35,000 | - | - | $495 | $35,495 | - Mr. Bernau's annual salary is $235,000 with CPI increases; his bonus is calculated as a percentage of pre-tax income (5% on first $1.75 million, 7.5% over $1.75 million, capped at base salary)[349][350] - Mr. Ferry's annual salary is $140,000 and he is eligible for an annual performance-based incentive up to $15,000[351] Director Compensation (2020) | Name | Fees Earned in Cash | All Other Compensation | Total | | :------------- | :------------------ | :--------------------- | :------ | | James L. Ellis | $9,177 | $2,354 | $11,531 | | Sean M. Cary | $3,150 | - | $3,150 | | Craig Smith | $3,050 | - | $3,050 | | Stan G. Turel | $3,250 | - | $3,250 | | Leslie Copland | $5,828 | - | $5,828 | - Board members receive a $1,000 yearly stipend, $500 per in-person meeting, $250 per teleconference meeting, and additional fees for committee meetings[353] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This section details beneficial ownership of Common Stock as of March 15, 2021, listing major shareholders and management, noting the absence of active equity compensation plans - The Company does not have active equity compensation plans or outstanding options/equity awards[354] Beneficial Ownership of Common Stock (March 15, 2021) | Name | Number of Shares Beneficially Owned | Percent of Shares Outstanding | | :------------------------------------ | :-------------------------------- | :---------------------------- | | James W. Bernau, President/CEO, Chair of the Board | 422,743 | 8.5% | | Christopher Riccardi | 385,485 | 7.8% | | Carl D. Thoma | 336,189 | 6.8% | | All Directors and Executive Officers as a group (7 persons) | 464,500 | 9.4% | - The percentage of outstanding shares is calculated based on 4,964,529 shares of common stock outstanding as of March 15, 2021[358] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE No material related party transactions exceeding $120,000 occurred in 2020; all proposed transactions require Board approval, and most directors are deemed independent - No material related party transactions exceeding $120,000 occurred in 2020 or are currently proposed[360] - All proposed related party transactions require approval by a disinterested majority of the Board[361] - All directors, except James W. Bernau and James L. Ellis, are considered 'independent' under SEC and NASDAQ standards[362] ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Moss Adams LLP served as the independent auditor, with total fees of $250,510 in 2020 and $249,051 in 2019 for audit and tax services, requiring Audit Committee pre-approval for non-audit services - Moss Adams LLP served as the independent registered public accounting firm for 2020 and 2019[363] Principal Accounting Fees and Services (2019-2020) | Fee Category | 2020 | 2019 | | :------------- | :--------- | :--------- | | Audit fees | $198,200 | $183,282 | | Tax fees | $52,310 | $65,769 | | Total | $250,510 | $249,051 | | 401k financial statement audit | $15,500 | - | - The Company's policy requires pre-approval by the Audit Committee for all non-audit services[364] ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists all 10-K report documents, including financial statements and exhibits, with financial statement schedules omitted as not required or redundant - Financial statements are filed as part of this report[366] - All financial statement schedules are omitted because they are not required, not applicable, or the information is included in the financial statements or notes[367] - A comprehensive list of exhibits is provided, including corporate governance documents, employment agreements, and certifications[368]