Willamette Valley Vineyards(WVVI) - 2018 Q4 - Annual Report

PART I Business Willamette Valley Vineyards (WVV) produces premium wines, primarily Pinot Noir, through direct and distributor sales, focusing on brand recognition and direct-to-consumer growth - The company operates through two primary segments: direct sales, which includes retail and wine club sales, and distributor sales, which involve selling at wholesale rates to third parties[17] - WVV's brand portfolio includes Willamette Valley Vineyards, Griffin Creek, Tualatin Estate, Pambrun, Maison Bleue, and Elton, with Pinot Noir being the flagship varietal[16][18] - The company's strategy focuses on producing high-quality wines, achieving brand recognition, effective national distribution, and growing its direct-to-consumer sales base[39] Vineyard Acreage Summary | Vineyard Type | Total Acres | Producing Acres | Pre-Production Acres | Plantable Acres | | :--- | :--- | :--- | :--- | :--- | | Owned | 599 | 201 | 59 | 149 | | Leased | 315 | 169 | 99 | 32 | | Contracted | 225 | 225 | - | - | | Total | 1,139 | 595 | 158 | 181 | Annual Grape Harvest and Wine Production | Harvest Year | Total Tons Harvested | Cases Produced | | :--- | :--- | :--- | | 2017 | 3,253 | 151,332 | | 2018 | 1,986 | 164,590 | - In 2018, sales to a single distributor accounted for approximately 21.0% of the company's total revenue, up from 18.2% in 2017, indicating a significant customer concentration[88] Risk Factors The company faces agricultural, financial, market, and regulatory risks, including intense competition and dependence on distributors - Agricultural risks include diseases, pests like phylloxera (present at Tualatin Estate Vineyards), and adverse weather conditions like unpredictable rainfall and wildfire smoke, which can impact grape quantity and quality[101][102][104] - The company faces intense competition from large domestic and foreign wineries that have greater financial, marketing, and distribution resources[110] - Dependence on independent distributors for a substantial portion of revenue presents a risk, as changes in these relationships or distributor consolidation could harm business[112] - Changes in consumer spending, potential declines in demand for premium wines, and increased regulation or excise taxes on alcoholic beverages could adversely affect financial results[116][117][118] - The company's common stock is thinly traded, which results in lower liquidity for shareholders[122] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[131] Properties The company owns or leases 914 acres, with primary production facilities having a combined capacity of 248,000 cases annually - The company owns or leases 914 acres, of which 370 are productive vineyards and 339 are pre-productive or suitable for future planting[132] - The Estate Winery has a production capacity of up to 220,000 cases annually, while the Tualatin Estate Winery provides an additional 28,000 cases of capacity[133][134] Legal Proceedings The company is not a party to any material legal proceedings - There are no material legal proceedings pending against the Company[137] Mine Safety Disclosures This section is not applicable to the company - Not applicable[138] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'WVVI', with no common stock dividends paid, but preferred stock dividends were issued - The Company's common stock is traded on the NASDAQ Capital Market under the symbol "WVVI"[140] - No dividends have been paid on common stock, and none are anticipated in the foreseeable future. A dividend of $0.22 per share was paid on Preferred Stock on December 30, 2018[143][144] 2018 Common Stock Price Range | Quarter Ended | High ($) | Low ($) | | :--- | :--- | :--- | | 12/31/2018 | 7.97 | 6.66 | | 9/30/2018 | 8.55 | 7.88 | | 6/30/2018 | 8.55 | 7.85 | | 3/31/2018 | 8.37 | 7.82 | Selected Financial Data This section is not required for smaller reporting companies - Not required[148] Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales increased 10.7% to $23.1 million in 2018, while net income decreased 4.5% to $2.9 million due to higher tax provisions, despite improved gross margin and strong liquidity Key Financial Results (2018 vs. 2017) | Metric | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Sales, Net | $23,079,739 | $20,853,527 | 10.7% | | Gross Profit | $14,781,499 | $12,881,851 | 14.7% | | Income from Operations | $4,182,715 | $3,636,044 | 15.0% | | Net Income | $2,858,580 | $2,993,779 | -4.5% | | Income per Common Share | $0.37 | $0.46 | -19.6% | - The decrease in net income was primarily caused by a 138.8% increase in the provision for income taxes, as the 2017 provision was unusually low due to the one-time effects of the Tax Cuts and Jobs Act[181] - Total wine case sales increased by 8.7% to 146,300 cases in 2018 from 134,600 in 2017, mainly due to increased shipments to distributors[162][188] EBITDA Reconciliation (2018 vs. 2017) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income | $2,858,580 | $2,993,779 | | Depreciation and amortization | $1,692,463 | $1,544,735 | | Interest Expense | $457,689 | $473,608 | | Interest Income | ($26,591) | ($25,257) | | Income tax expense | $1,081,006 | $452,726 | | EBITDA | $6,063,147 | $5,439,591 | - The company ended 2018 with a working capital balance of $23.2 million and cash of $9.7 million, with no outstanding borrowings on its $2.0 million line of credit[212][215] Quantitative and Qualitative Disclosures about Market Risk This section is not required for smaller reporting companies - Not required[221] Financial Statements and Supplementary Data This section presents the company's audited financial statements for 2018 and 2017, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and segment performance Financial Statements Financial statements show asset growth to $61.5 million, liability decrease to $13.9 million, and net income of $2.9 million in 2018 Balance Sheet Summary (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Total Current Assets | $28,634,329 | $30,437,992 | | Total Assets | $61,482,536 | $59,695,271 | | Total Current Liabilities | $5,395,262 | $6,434,883 | | Total Liabilities | $13,922,268 | $14,954,262 | | Total Shareholders' Equity | $47,560,268 | $44,741,009 | Statement of Income Summary (Year Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Sales, Net | $23,079,739 | $20,853,527 | | Gross Profit | $14,781,499 | $12,881,851 | | Income from Operations | $4,182,715 | $3,636,044 | | Net Income | $2,858,580 | $2,993,779 | Statement of Cash Flows Summary (Year Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net cash from operating activities | $2,302,113 | $2,520,927 | | Net cash from investing activities | ($5,261,865) | ($3,915,412) | | Net cash from financing activities | ($1,079,038) | $9,464,391 | | Net change in cash | ($4,038,790) | $8,069,906 | Notes to Financial Statements Notes detail accounting policies, financial components like inventories ($16.2 million) and debt ($6.8 million), and segment performance for direct and distributor sales - Inventories totaled $16.2 million at year-end 2018, with work-in-process (unbottled wine) at $8.5 million and finished goods at $7.0 million[289] - Long-term debt as of December 31, 2018, was $6.8 million, primarily with Northwest Farm Credit Services, with maturity dates extending to 2032[295] - The company has a stock incentive plan, but no options were outstanding at the end of 2018[301][302] Segment Performance (Year Ended Dec 31, 2018) | Segment | Sales, net | Gross Margin | Contribution Margin | | :--- | :--- | :--- | :--- | | Direct Sales | $9,115,074 | $6,684,926 | $2,429,602 | | Distributor Sales | $13,964,665 | $8,096,573 | $5,961,908 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on financial disclosure - None reported[332] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures are effective[332] - Management assessed internal control over financial reporting based on the COSO framework and concluded that it was effective as of December 31, 2018[335] Other Information The company reports no other information - None[338] PART III Directors, Executive Officers and Corporate Governance This section outlines the company's executive leadership, board structure, code of ethics, and independent audit committee composition - Key executive officers are James W. Bernau (CEO & President) and Richard F. Goward Jr. (CFO)[340] - The company has a Code of Ethics applicable to its principal officers, available on its website[352] - The Audit Committee consists of three independent directors: Craig Smith, Sean Cary, and Stan G. Turel. Craig Smith is designated as the 'audit committee financial expert'[353][354] Executive Compensation This section details 2018 executive compensation, including CEO James Bernau's $579,557 total and CFO Richard Goward Jr.'s $150,579 2018 Executive Compensation Summary | Name, Principal Position | Year | Salary | Bonus | Total Compensation | | :--- | :--- | :--- | :--- | :--- | | James W. Bernau, President, CEO | 2018 | $265,441 | $265,441 | $579,557 | | Richard F. Goward Jr., CFO | 2018 | $128,944 | $15,315 | $150,579 | - CEO James Bernau's bonus is calculated as a percentage of pre-tax income, not to exceed his base salary[357] - Director compensation includes a $1,000 yearly stipend, fees for attending board and committee meetings ($500 per in-person board meeting), and a yearly wine allowance[362] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership, with CEO James Bernau holding 8.7% and all directors/officers holding 9.6% of common stock Security Ownership of Major Holders (as of March 21, 2019) | Name / Group | Number of Shares | Percent of Shares | | :--- | :--- | :--- | | James W. Bernau | 432,926 | 8.7% | | Christopher Riccardi | 385,485 | 7.8% | | Carl D. Thoma | 336,189 | 6.8% | | All Directors and Executive Officers as a group | 479,003 | 9.6% | Certain Relationships and Related Transactions, and Director Independence This section details a related party lease transaction with Elton Vineyards, LLC, and identifies independent directors - The company leases Elton Vineyards from Elton Vineyards, LLC, which is owned by former director Betty O'Brien. In 2018, payments under this lease totaled $135,749[368] - The Board of Directors has determined that all directors are independent, with the exception of CEO James W. Bernau and former employee James L. Ellis[371] Principal Accounting Fees and Services This section details fees paid to Moss Adams LLP for audit and tax services, totaling $238,500 in 2018 Accountant Fees (Moss Adams LLP) | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit fees | $167,000 | $141,000 | | Tax fees | $71,500 | $38,940 | | All other fees | - | - | | Total | $238,500 | $179,940 | Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed with the Form 10-K report - Lists all financial statements, schedules, and exhibits filed with the report[376] - Key exhibits include corporate governance documents, employment agreements for key executives, and required CEO/CFO certifications[379]