NOTE
1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and operations – Willamette Valley Vineyards, Inc. (the “Company”) owns and operates vineyards, wineries and tasting
rooms, and produces and distributes premium, super premium, and ultra-premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay, Riesling
and Sparkling wine.
The
Company has direct-to-consumer sales and national sales to distributors. These sales channels offer comparable products to customers
and utilize similar processes and share resources for production, selling and distribution. Direct-to-consumer sales generate a higher
gross profit margin than national sales to distributors due to differentiated pricing between these segments.
Basis
of presentation – The accompanying financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require management to make certain estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical
experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ
from those estimates under different assumptions or conditions.
The
COVID-19 outbreak in Oregon and other parts of the United States, as well as the response to COVID-19 by federal, state and local governments
have had a material adverse impact on economic and market conditions in the United States. Although most restrictive measures have been
lifted, the COVID-19 pandemic and the government responses to the outbreak presents continued uncertainty and risk with respect to the
Company and its performance and financial results.
Financial
instruments and concentrations of risk – The Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, grapes payable, short and long-term debt.
Cash
and cash equivalents are maintained at five financial institutions. Deposits held with these financial institutions may exceed the amount
of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with a financial institution
of reputable credit and therefore bear minimal credit risk.
In
2022, sales to one distributor represented approximately 17.5% of total Company revenue. In 2021, sales to one distributor represented
approximately 18.1% of total Company revenue.
At
December 31, 2022, two customers accounted for approximately 27% and 14% of accounts receivable. At December 31, 2021, two customers
accounted for approximately 11% and 11% of accounts receivable.
Other
comprehensive income – The nature of the Company’s business and related transactions do not give rise to other comprehensive
income.
Cash
and cash equivalents – Cash and cash equivalents include money market funds.
Accounts
receivable – The Company performs ongoing credit evaluations of its customers and does not require collateral. A reserve
is maintained for potential credit losses. The allowance for doubtful accounts is based on an assessment of the collectability of customer
accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of
the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The Company has credit
risk associated with uncollateralized trade accounts receivable from all operations totaling $4,226,948 and $3,163,375 as of December
31, 2022 and 2021, inclusive of the allowance for doubtful accounts. The allowance for doubtful accounts is further discussed in Note
2.
Inventories
– For Company produced wines, after a portion of the vineyard becomes commercially productive, the annual crop and production
costs relating to such portion are recognized as work-in-process inventories. Such costs are accumulated with related direct and indirect
harvest costs, wine processing and production costs, and are transferred to finished goods inventories when the wine is produced, bottled,
and ready for sale.
The
cost of finished goods is recognized as cost of sales when the wine product is sold. Inventories are stated at the lower of first-in,
first-out (“FIFO”) cost or net realizable value by variety. Net realizable value is the value of an asset that can be
realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal
of the asset in question.
In
accordance with general practices in the wine industry, wine inventories are generally included in current assets in the accompanying
balance sheets, although a portion of such inventories may be aged for more than one year (Note 3).
Vineyard
development costs – Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor
and materials to prepare the land and construct vine trellises. The costs are capitalized until the vineyard becomes commercially productive,
at which time annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard,
which is estimated to be 30 years. Accumulated amortization of vineyard development costs aggregated $2,354,989 and $2,070,009 at December
31, 2022 and 2021, respectively.
Amortization
of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become
a component of cost of goods sold. For the years ending December 31, 2022 and 2021, $284,980 and $245,339, respectively, was amortized
into inventory costs.
Property
and equipment – Property and equipment are stated at cost and are depreciated on the straight-line basis over their estimated
useful lives. Land improvements are depreciated over 15 to 30 years. Winery buildings are depreciated over 30 years. Equipment is depreciated
over 3 to 15 years, depending on the classification of the asset. Depreciation is discussed further in Note 4.
Expenditures
for repairs and maintenance are charged to operating expense as incurred. Expenditures for additions and betterments are capitalized.
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting
gain or loss is included in operations.
Review
of long-lived assets for impairment – The Company evaluates long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset or asset group may not be recoverable. Long-lived assets consist primarily of property
and equipment, vineyard development costs, and operating lease right of use assets. Circumstances that might cause the Company to evaluate
its long-lived assets for impairment could include a significant decline in the prices the Company or the industry can charge for its
products, which could be caused by general economic or other factors, changes in laws or regulations that make it difficult or more costly
for the Company to distribute its products to its markets at prices which generate adequate returns, natural disasters, significant decrease
in demand for the Company’s products or significant increase in the costs to manufacture the Company’s products.
Recoverability
of assets is measured by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated
by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The Company groups its long-lived assets with other assets and
liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities
(or asset group). This would typically be at the winery level. The Company did not recognize any impairment charges associated with long-lived
assets during the years ended December 31, 2022 and 2021.
Income
taxes – Income taxes are recognized using enacted tax rates and are composed of taxes on financial accounting income
that is adjusted for requirements of current tax law, and deferred taxes. Deferred taxes are estimated using the asset and liability
approach whereby, deferred income taxes are calculated for the expected future tax consequences of temporary differences between the
book basis and tax basis of the Company’s assets and liabilities.
The
Company had no unrecognized tax benefits as of December 31, 2022 or 2021. The Company recognizes interest assessed by taxing authorities
as a component of tax expense. The Company recognizes any penalties assessed by taxing authorities as a component of tax expense. Interest
and penalties for the years ended December 31, 2022 and 2021 were not material.
A
valuation allowance is provided when it is more likely than not that some portion or all the deferred tax assets will not be realized.
The Company evaluates the potential realization of its deferred tax assets by assessing its valuation allowance and by adjusting the
amount of such allowance, if necessary. The factors used to assess the likelihood of realization included the Company’s forecast
of future taxable income or loss and available tax planning strategies that could be implemented to realize the net deferred tax assets.
Certain intangible assets and liabilities will be deductible for tax purposes and may result in deferred tax assets and liabilities as
the benefits are recognized in the Company’s tax returns.
The
Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in Oregon
and California. The Company may be subject to examination by the IRS for tax years 2019 through 2022. Additionally, the Company may be
subject to examinations by state taxing jurisdictions for tax years 2018 through 2022. The Company is not aware of any current examinations
by the IRS or the state taxing authorities.
Revenue
recognition – The Company recognizes revenue once its performance obligation to the customer is completed, and control
of the product or service is transferred to the customer. Revenue reflects the total amount the Company receives, or expects to receive,
from the customer and includes shipping costs that are billed and included in the consideration. Excise taxes that are accrued and paid,
as a result of a transaction, are accounted for as an offset to sales in the net sales calculation. The Company’s contractual obligations
to customers generally have a single point of obligation and are short term in nature.
The
cost of price promotions and rebates are treated as reductions of revenue. Credit sales are recorded as trade accounts receivable, and
no collateral is required. Revenue from items sold through the Company’s retail locations is recognized at the time of sale. Net
revenue reported herein is shown net of sales allowances and excise taxes. If the conditions for revenue recognition are not met, the
Company defers the revenue until all conditions are met. As of December 31, 2022, and December 31, 2021, the Company has recorded deferred
revenue in the amount of $335,431 and $255,376, respectively, which is included in unearned revenue on the balance sheet. Gift cards
that have been issued but not used are also treated as unearned revenue and were $1,106,970 and $682,881 as of December 31, 2022 and
2021, respectively.
Distributor
Sales Segment – Wholesale wine sales are through distributors and the Company recognizes revenue when the product is shipped,
and title passes to the distributor. The Company’s standard terms are ‘FOB’ shipping point, with no customer acceptance
provisions. The cost of price promotions and rebates are treated as reductions of revenue. Credit sales are recorded as trade accounts
receivable, and no collateral is required.
The
Company has price incentive programs with its distributors to encourage product placement and depletions. Sales are reported net of incentive
program expenses. Incentive program payments are made when completed incentive program payment requests are received from the customers.
For the year ended December 31, 2022 and 2021, the Company recorded incentive program expenses of $1,333,396 and $1,437,481, respectively,
as a reduction in sales on the Statements of Operations. As of December 31, 2022, and 2021, the Company has recorded an incentive program
liability in the amount of $111,398 and $67,326, respectively, which is included in accrued expenses on the balance sheets. Estimates
are based on historical and projected experience for each type of program or customer and have historically been in line with actual
costs incurred.
Direct
Sales Segment – The Company sells wine directly to customers through its tasting rooms, web site and wine club. Additionally,
the Company sells merchandise, food, and hospitality related services through its tasting rooms.
Tasting
room sales are recognized as revenue at the point of sale and internet sales are recognized at time of shipment. Hospitality sales, that
are paid in advance of the event, are accrued as unearned revenue, and are subsequently recognized as revenue in the period of the event.
Wine club sales are made under an agreement with the customer, which specifies the quantity and timing of the wine club shipment. Wine
club charges are billed to the customer’s credit card, at the time of shipment, and revenue is then recognized.
The
Company periodically sells bulk wine or grapes that either do not meet the Company’s quality standards or are in excess of production
requirements. These sales are recognized when ownership transfers to the buyer which occurs at the point of shipment.
Cost
of goods sold – Costs of goods sold include costs associated with grape growing, external grape costs, packaging materials,
winemaking and production costs, vineyard and production administrative support and overhead costs, purchasing and receiving costs and
warehousing costs.
Administrative
support, purchasing, receiving and most other fixed overhead costs are expensed as selling, general and administrative expenses without
regard to inventory units. Warehouse and winery production and facilities costs are allocated to inventory units on a per gallon basis
during the production of wine, prior to bottling the final product. No further costs are allocated to inventory units after bottling.
Selling,
general and administrative expenses – Selling, general and administrative expenses consist primarily of non-manufacturing administrative
and overhead costs, advertising, and other marketing promotions. Advertising costs are expensed as incurred or the first time the advertising
takes place. For the years ended December 31, 2022 and 2021, advertising costs incurred were $340,427 and $329,152 respectively.
The
Company provides an allowance to distributors for providing sample of products to potential customers. For the years ended December 31,
2022 and 2021, these costs, which are included in selling, general and administrative expenses, $87,996 and $71,227, respectively.
Shipping
and handling costs – Amounts paid by customers to the Company for shipping and handling costs are included in net sales. Costs
incurred for shipping and handling charges are included in selling, general and administrative expense. For the years ended December
31, 2022 and 2021, shipping and handling costs incurred were $681,975 and $778,598 respectively.
Excise
taxes – The Company pays alcohol excise taxes based on product sales to both the Oregon Liquor Control Commission and
to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau. The Company is liable for the taxes upon the removal
of product from the Company’s warehouse on a per gallon basis. The federal tax rate is affected by a small winery tax credit provision,
which declines based upon the number of gallons of wine production in a year rather than the quantity sold. The Company also pays taxes
on the grape harvest on a per ton basis to the Oregon Liquor Control Commission for the Oregon Wine Advisory. For the years ended December
31, 2022 and 2021, excise taxes incurred were $312,103 and $384,498 respectively.
Income
(loss) per common share after preferred dividends – Income (loss) per share is computed based on the weighted-average
number of common shares outstanding each year.
Leases
– We determine if an arrangement is a lease at inception. On our balance sheets, our operating leases are included in Operating lease
right-of-use (“ROU”) assets, Current portion of lease liabilities and Lease liabilities, net of current portion. The Company
does not currently have any finance leases.
ROU
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present
value of lease payments over the lease term. For leases that do not provide an implicit rate, we use our incremental borrowing rate based
on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily
determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Significant
judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration
in a contract between lease and non-lease components, and the determination of the discount rate included in our leases. We review the
underlying objective of each contract, the terms of the contract, and consider our current and future business conditions when making
these judgments.
Recently
issued accounting pronouncements not yet adopted
There
are no recently issued accounting pronouncements that the Company has yet to adopt that management believes will have a significant impact
on the Company’s financial statements.
Reclassifications
– Certain immaterial amounts from prior periods have been reclassified to conform to current years’ presentation.
NOTE
2 – ACCOUNTS RECEIVABLE, NET
The
Company’s accounts receivable balance is net of an allowance for doubtful accounts of $10,000 and $10,000 at December 31, 2022 and
2021, respectively.
Changes in the allowance for doubtful accounts are as follows:
| |
|
|
|
|
|
| |
| | |
Year ended December 31, | |
| | |
2022 | | |
2021 | |
| Beginning of year | |
$ | 10,000 | | |
$ | 10,000 | |
| Charged to costs and expenses | |
| - | | |
| - | |
| Write-offs, net of recoveries | |
| - | | |
| - | |
| | |
| | | |
| | |
| End of year | |
$ | 10,000 | | |
$ | 10,000 | |
NOTE
3 – INVENTORIES
Inventory
consists of the following at December 31, 2022 and 2021:
Schedule
of Inventory
| | |
December 31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Winemaking and packaging materials | |
$ | 1,162,850 | | |
$ | 742,188 | |
| Work-in-process (costs relating to unprocessed and/or unbottled wine products) | |
| 12,047,579 | | |
| 9,691,140 | |
| Finished goods (bottled wine and related products) | |
| 8,991,070 | | |
| 8,643,422 | |
| | |
| | | |
| | |
| Total inventories | |
$ | 22,201,499 | | |
$ | 19,076,750 | |
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at December 31, 2022 and 2021:
Schedule of Property and Equipment, Net
| | |
December 31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Construction in progress | |
$ | 2,037,128 | | |
$ | 14,556,807 | |
| Land, improvements and other buildings | |
| 14,491,827 | | |
| 12,850,316 | |
| Winery buildings and tasting rooms | |
| 40,806,365 | | |
| 17,791,684 | |
| Equipment | |
| 18,805,695 | | |
| 15,960,178 | |
| | |
| | | |
| | |
| Property and equipment, gross | |
| 76,141,015 | | |
| 61,158,985 | |
| | |
| | | |
| | |
| Accumulated depreciation | |
| (22,593,770 | ) | |
| (20,562,850 | ) |
| | |
| | | |
| | |
| Property and equipment, net | |
$ | 53,547,245 | | |
$ | 40,596,135 | |
Depreciation
expense was $2,030,921 and $1,645,471 during the years ended December 31, 2022, and 2021, respectively.
NOTE
5 – LINE OF CREDIT FACILITY
In
December of 2005, the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowing up to $2,000,000
against eligible accounts receivable and inventories, as defined in the agreement. The revolving line bears interest at prime less 0.5%,
with a floor of 3.25%, is payable monthly, and is subject to renewal. In July 2021, the Company renewed the credit agreement until July
31, 2023. In November 2022, the Company increased the borrowing line up to $5,000,000. The Company had an outstanding line of credit
balance of $166,617 at December 31, 2022, at an interest rate of 6.5%, and zero outstanding balance at December 31, 2021.
The
line of credit agreement includes various covenants, which among other things, requires the Company to maintain minimum amounts of tangible
net worth, debt-to-equity, and debt service coverage, as defined, and limits the level of acquisitions of property and equipment. As
of December 31, 2022, the Company was out of compliance with a debt covenant. The Company has received a waiver from Umqua Bank waiving
this violation until the next measurement date of December 31, 2023.
NOTE
6 – NOTES PAYABLE
In
February of 2017 the Company purchased property, including vineyard land, bare land and structures in the Dundee Hills AVA under terms
that included a 15 year note payable with quarterly payments of $42,534 at 6%. The note may be called by the owner, up to the outstanding
balance, with 180 days written notice. As of December 31, 2022 and 2021, the Company had a balance of $1,201,038 and $1,295,541, respectively,
due on this note.
NOTE
7 – LONG-TERM DEBT
Long-term
debt consists of the following at December 31, 2022 and 2021:
Schedule
of Long-term Debt
| |
|
|
|
|
|
| |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Northwest Farm Credit Services Loan #4 | |
$ | 972,941 | | |
$ | 1,109,860 | |
| Northwest Farm Credit Services Loan #5 | |
| 4,089,713 | | |
| 4,425,236 | |
| Northwest Farm Credit Services Loan | |
| 2,000,000 | | |
| - | |
| Long-Term Debt, Gross | |
| 7,062,654 | | |
| 5,535,096 | |
| Debt issuance costs | |
| (119,237 | ) | |
| (132,483 | ) |
| Current portion of long-term debt | |
| (496,970 | ) | |
| (472,420 | ) |
| | |
| | | |
| | |
| Long-Term Debt | |
$ | 6,446,447 | | |
$ | 4,930,193 | |
The
Company has three long term debt agreements with Northwest Farm Credit Services (“FCS”) with an aggregate outstanding
balance of $7,062,654 and $5,535,096
as of December 31, 2022 and 2021, respectively. The first two outstanding loans require monthly principal and interest payments of
$62,067 for the life of the loans, at annual fixed interest rates of 4.75% and 5.21%, and with maturity dates of 2028 and 2032,
respectively. The general purposes of these loans were to make capital improvements to the winery and vineyard facilities. The third
loan bears interest at Northwest Variable base which was 6.50% at December 31, 2022, with interest due annually and principal at maturity on
November 1, 2025.
Future
minimum principal payments of long-term debt mature as follows for the years ending December 31:
| |
| | |
| 2023 | |
$ | 496,970 | |
| 2024 | |
| 522,798 | |
| 2025 | |
| 2,549,971 | |
| 2026 | |
| 578,559 | |
| 2027 | |
| 608,636 | |
| Thereafter | |
| 2,305,720 | |
| | |
| | |
| Future minimum principal payments of long-term debt total | |
$ | 7,062,654 | |
The
weighted-average interest rates on the aforementioned borrowings for the years ended December 31, 2022 and 2021 was 5.57% and 5.12% respectively.
NOTE
8 – SHAREHOLDERS’ EQUITY
The
Company is authorized to issue 10,000,000 shares of its common stock. Each share of common stock is entitled to one vote. At its discretion,
the Board of Directors may declare dividends on shares of common stock so long as the Company has paid or set aside funds for all cumulative
dividends on its preferred stock. The Board does not anticipate paying dividends on its common stock in the foreseeable future.
The
Company is authorized to issue 100,000,000 shares of redeemable preferred stock. Each share of the Company’s currently issued preferred
stock is non-voting. The Company’s Series A Redeemable Preferred Stock includes an annual dividend of $0.22 per share and is payable
annually. Additionally, the Series A Redeemable Preferred Stock contains a liquidation preference over the Company’s common stock
and is subject to optional redemption after June 1, 2021 at the sole discretion of the Company’s Board of Directors. The liquidation
preference is calculated at the original issue price of $4.15 per share plus all accrued but unpaid dividends. The optional redemption,
if implemented, would be at the original issue price of $4.15 per share plus all accrued but unpaid dividends plus a redemption premium
of 3% of the original issue price. In November 2022 and November 2021, the Company declared a dividend on its Series A Redeemable Preferred
stock and paid the dividend on December 31, 2022 and December 31, 2021 respectively. The Company is current on its dividend obligations.
NOTE
9 – STOCK INCENTIVE PLAN
The
Company had a stock incentive plan, originally created in 1992, most recently amended in 2001. No additional grants may be made under
the plan. All stock options contained an exercise price that was equal to the fair market value of the Company’s stock on the date
the options were granted. There were no stock options outstanding or exercisable at December 31, 2022 and 2021.
No
stock compensation expense under this plan was recognized for the years ended December 31, 2022 and 2021. As of December 31, 2022, there
was no unrecognized compensation expense related to stock options.
As
part of an incentive program, the Company issued no preferred stock during the year ended December 31, 2022 and minimal shares in 2021,
resulting in stock compensation expense of zero and $39,059, respectively.
NOTE
10 – INCOME TAXES
The
provision for income taxes consists of:
Schedule
of Income Tax Provision
The
effective income tax rate differs from the federal statutory rate as follows:
Schedule
of Effective Income Tax Rate
Permanent
differences for the periods consist primarily of changes in non-deductible gifts, meals and entertainment as well as political contributions.
Changes in tax rate are described above.
Net
deferred tax assets and (liabilities) at December 31 consist of:
Schedule
of Net Deferred Tax Assets and Liabilities
The
Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained
on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties related to income tax
matters are recognized in income tax expense. The Company recognized no uncertain tax positions, or any accrued interest and penalties
associated with uncertain tax positions as of December 31, 2022 and 2021.
FASB
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset
to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is
dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management believes that
the Company will generate sufficient taxable income in the timeframe required to utilize existing net operating losses and therefore
no valuation allowance has been recognized.
As
of December 31, 2022, the Company has federal net operating loss carryforward of approximately $5,828,673 that do not expire, state net
operating loss carryforwards of approximately $5,118,609 which will start expiring in 2033.
NOTE
11 – RELATED PARTY TRANSACTIONS
The
Company provides living accommodations in a residence on the Company’s premises, at its convenience, for the Company’s chief
executive officer (“CEO”). The CEO provides security and lock-up services and is required to live on premises as a condition
of his employment. Over the years the Company has recorded annual expenses less than $12,000, exclusive of depreciation, related to the
housing provided for its CEO.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Litigation
– From time to time, in the normal course of business, the Company is a party to legal proceedings. Management believes that
these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows,
but, due to the nature of litigation, the ultimate outcome of any potential actions cannot presently be determined.
Operating
leases – Vineyard - In December
1999, under a sale-leaseback agreement, the Company sold approximately 79 acres of the Tualatin Vineyards property with a net book value of approximately $1,000,000 for approximately $1,500,000
cash and entered into a 20-year
operating lease agreement, with three five-year extension options, and contains an escalation provision of 2.5% per year. The
Company extended the lease in January 2019 until January 2025. This property is referred to as the Peter Michael
Vineyard and includes approximately 69 acres of producing vineyards.
In
December 2004, under a sale-leaseback agreement, the Company sold approximately 75 acres of the Tualatin Vineyards property with a net
book value of approximately $551,000 for approximately $727,000 cash and entered into a 15-year operating lease agreement, with three
five-year extension options, for the vineyard portion of the property. The first five year extension has been exercised. The lease contains
a formula-based escalation provision with a maximum increase of 4% every three years. This property is referred to as the Meadowview
Vineyard and includes approximately 49 acres of producing vineyards.
In
February 2007, the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyard. In June 2021, the company
entered into a new 11 year lease for this property. The lease contains an escalation provision tied to the CPI not to exceed 2% per annum.
This property includes 54 acres of producing vineyards and 2 additional plantable acres.
In
July 2008, the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 110 acres adjacent
to the existing Elton Vineyards site. These 110 acres are being developed into vineyards. Terms of this agreement contain rent increases,
that rises as the vineyard is developed, and contains an escalation provision of CPI plus 0.5% per year capped at 4%. This property is
referred to as part of Ingram Vineyard and includes 93 acres of producing vineyards and 17 additional plantable acres.
In
March 2017, the Company entered into a 25-year lease for approximately 17 acres of agricultural land in Dundee, Oregon. These acres are
being developed into vineyards. This lease contains an annual payment that remains constant throughout the term of the lease. This property
is referred to as part of Bernau Estate Vineyard and includes 9 acres of pre-production vineyards.
Operating
Leases – Non-Vineyard – In September 2018, the Company renewed an existing lease for three years, with two one-year renewal
options, for its McMinnville tasting room. In May 2022 the Company amended the lease to extend the lease to August 2025 with one three
year renewal option and defined payments over the term of the lease.
In
January 2018, the Company assumed a lease, through December 2022, for its Maison Bleue tasting room in Walla Walla, Washington. In December
2022, the Company entered into a new lease to December 2027 with one five year renewal option, and defined payments over the term of
the lease.
In
February 2020, the Company entered into a lease for 5 years, with three five-year renewal options for a retail wine facility in Folsom,
California, referred to as Willamette Wineworks. The lease contains an escalation provision tied to the CPI not to exceed 3% per annum
with increases not allowed in any year being carried forward to following years.
In
March 2021, the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Vancouver,
Washington. The lease defines the payments over the term of the lease and option periods.
In
February 2022, the Company entered into a lease for 10 years, with three five-year renewal options for a retail wine facility in Lake
Oswego, Oregon. The lease defines the payments over the term of the lease and option periods.
In
May 2022, the Company entered into a lease for 10 years, with two five-year renewal options for a retail wine facility in Happy Valley,
Oregon. The lease defines the payments over the term of the lease and option periods.
The
following tables provide lease cost and other lease information for the year ended December 31, 2022:
| | |
Year Ended | |
| | |
December 31, 2022 | |
| Lease Cost | |
| | |
| Operating Lease cost - Vineyards | |
$ | 459,128 | |
| Operating Lease cost - Other | |
| 690,924 | |
| Short-term lease cost | |
| 37,746 | |
| | |
| | |
| Total Lease Cost | |
$ | 1,187,798 | |
| | |
| | |
| Other information | |
| | |
| Cash paid for amounts included in the measurement of lease liabilities, | |
| | |
| Operating cash flows from operating leases - Vineyard | |
| 450,026 | |
| Operating cash flows from operating leases - Other | |
| 437,091 | |
| Weighted-average remaining lease term - Operating leases in years | |
| 11.15 | |
| Weighted-average discount rate - Operating leases | |
| 5.15 | % |
Right-of-use
assets obtained in exchange for new operating lease obligations were $3,369,363 and $1,729,981 for the years ended December 31 2022 and
2021, respectively.
The
Company has two additional operating leases that has not yet commenced as of December 31, 2022, and as such, has not been recognized
in the Company’s balance sheet. These operating leases are expected to commence in 2023 with lease terms of 5 and 10 years.
As
of December 31, 2022, maturities of lease liabilities were as follows:
Schedule
of Maturities of Lease Liabilities
| | |
Operating | |
| Years Ended December 31, | |
Leases | |
| 2023 | |
$ | 1,215,935 | |
| 2024 | |
| 1,224,702 | |
| 2025 | |
| 1,139,179 | |
| 2026 | |
| 1,095,471 | |
| 2027 | |
| 1,146,487 | |
| Thereafter | |
| 6,621,417 | |
| Total minimal lease payments | |
| 12,443,191 | |
| Less present value adjustment | |
| (3,167,543 | ) |
| Operating lease liabilities | |
| 9,275,648 | |
| Less current lease liabilities | |
| (768,818 | ) |
| Lease liabilities, net of current portion | |
$ | 8,506,830 | |
Grape
Purchases – The Company has entered into long-term grape purchase agreements with a number of Willamette Valley wine grape growers.
With these agreements the Company purchases an annually agreed upon quantity of fruit, at pre-determined prices, within strict quality
standards and crop loads. The Company cannot calculate the minimum or maximum payment as such a calculation is dependent in large part
on unknowns such as the quantity of fruit needed by the Company and the availability of grapes produced that meet the strict quality
standards in any given year. If no grapes are produced that meet the contractual quality levels, the grapes may be refused, and no payment
would be due. The Company purchased grapes amounting to $2,508,419 and $2,928,398 during the years ended December 31, 2022 and 2021,
respectively. The Company had an outstanding balance due on grape purchase agreements of $1,208,673 and $1,388,601 as of December 31,
2022 and 2021, respectively.
NOTE
13 – EMPLOYEE BENEFIT PLAN
In
February 2006, the Company instituted a 401(k) profit sharing plan (the “Plan”) covering all eligible employees. Employees
who participate may elect to make salary deferral contributions to the Plan up to 100% of the employees’ eligible payroll
subject to annual Internal Revenue Code maximum limitations. The Company may make a discretionary contribution to the entire
qualified employee pool, in accordance with the Plan. For the years ended December 31, 2022, and 2021 there were $196,198
and $164,188
of contributions made by the Company to the Plan, respectively.
NOTE
14 – SALE OF PREFERRED STOCK
On
January 24, 2020, the Company filed a shelf Registration Statement on Form S-3 (the “2020 Form S-3”) with the United States
Securities and Exchange Commission (the “SEC”) pertaining to the potential future issuance of one or more classes or series
of debt, equity, or derivative securities. The maximum aggregate offering amount of securities sold pursuant to the January 2020 Form
S-3 is not to exceed $20,000,000. The Company subsequently filed with the SEC prospectus supplement on June 10, 2020, pursuant to which
the Company sold an aggregate of 1,902,155 shares of its Series A Redeemable Preferred Stock for aggregate proceeds of $8,533,086, net
of acquisition costs.
On
June 11, 2021, the Company filed with the SEC an additional Prospectus Supplement to the 2020 Form S-3, pursuant to which the Company
sold an aggregate of 1,918,939 shares of its Series A Redeemable Preferred Stock for aggregate proceeds of $9,008,334 net of acquisition
costs.
On
July 1, 2022, the Company filed a new shelf Registration Statement on Form S-3 (the “July 2022 Form S-3”) with the SEC pertaining
to the potential future issuance of one or more classes or series of debt, equity, or derivative securities. The maximum aggregate offering
amount of securities sold pursuant to the June 2022 Form S-3 is not to exceed $20,000,000. On August 1, 2022 and September 1 2022, the
Company filed with the SEC Prospectus Supplements to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell,
on a delayed or continuous basis, up to 213,158 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,097,765
and up to 284,995 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,467,729, respectively. Each of these
Prospectus Supplements established that our shares of preferred stock were to be sold in three offering periods with three separate offering
prices beginning with an offering price of $5.15 per share and concluding with an offering of $5.35 per share. On October 3, 2022, the
Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell,
on a delayed or continuous basis, up to 233,564 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,226,211.
This Prospectus Supplement established that our shares of preferred stock were to be sold in two offering periods with two separate offering
prices beginning with an offering price of $5.25 per share and concluding with an offering of $5.35 per share. On November 1, 2022, the
Company filed with the SEC a Prospectus Supplement to the July 2022 Form S-3, pursuant to which the Company proposed to offer and sell,
on a delayed or continuous basis, up to 344,861 shares of Series A Redeemable Preferred Stock having proceeds not to exceed $1,845,009.
This Prospectus Supplement established that our shares of preferred stock were to be sold in one offering period with an offering price
of $5.35 per share. Net proceeds of $3,156,064 have been received under these offerings as of December, 31 2022 for the issuance of Preferred
Stock.
Shareholders
have the option to receive dividends as cash or as a gift card for purchasing Company products. The amount of unused dividend gift
cards at December 31, 2022 and 2021 was $1,106,970
and $682,881, respectively
and is recorded as unearned revenue on the balance sheets. Revenue from gift cards is recognized when the gift card
is redeemed by a customer. When the likelihood of a gift card being redeemed by a customer is determined to be remote and the Company
expects to be entitled to the breakage, then the value of the unredeemed gift card is recognized as revenue. We determine the gift card
breakage rate based upon Company-specific historical redemption patterns. To date we have determined that no breakage should be recognized
related to our gift cards.
Dividends
accrued but not paid will be added to the liquidation preference of the stock until the dividend is declared and paid. At any time after
June 1, 2021, the Company has the option, but not the obligation, to redeem all of the outstanding preferred stock in an amount equal
to the original issue price plus accrued but unpaid dividends and a redemption premium equal to 3% of the original issue price.
NOTE
15 – SEGMENT REPORTING
The
Company has identified two operating segments, Direct Sales and Distributor Sales, based upon their different distribution channels,
margins and selling strategies. Direct Sales include retail sales in the tasting rooms, wine club sales, internet sales, on-site events,
kitchen and catering sales and other sales made directly to the consumer without the use of an intermediary, including sales of bulk
wine or grapes. Distributor Sales include all sales through a third party where prices are given at a wholesale rate.
The
two segments reflect how the Company’s operations are evaluated by senior management and the structure of its internal financial
reporting. The Company evaluates performance based on the gross profit of the respective business segments. Selling expenses that can
be directly attributable to the segment, including depreciation of segment specific assets, are included, however, centralized selling
expenses and general and administrative expenses are not allocated between operating segments. Therefore, net income information for
the respective segments is not available. Discrete financial information related to segment assets, other than segment specific depreciation
associated with selling, is not available and that information continues to be aggregated.
The
following table outlines the sales, cost of sales, gross margin, directly attributable selling expenses, and contribution margin of the
segments for the years ended December 31, 2022 and 2021. Sales figures are net of related excise taxes.
Schedule of Segment reporting
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Twelve
Months Ended December 31, | |
| | |
Direct
Sales | | |
Distributor
Sales | | |
Unallocated | | |
Total | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Sales, net | |
$ | 15,732,142 | | |
$ | 13,272,659 | | |
$ | 18,201,939 | | |
$ | 18,514,205 | | |
$ | - | | |
$ | - | | |
$ | 33,934,081 | | |
$ | 31,786,864 | |
| Cost of sales | |
| 4,710,457 | | |
| 3,470,963 | | |
| 10,409,528 | | |
| 9,650,228 | | |
| - | | |
| - | | |
| 15,119,985 | | |
| 13,121,191 | |
| Gross margin | |
| 11,021,685 | | |
| 9,801,696 | | |
| 7,792,411 | | |
| 8,863,977 | | |
| - | | |
| - | | |
| 18,814,096 | | |
| 18,665,673 | |
| Selling
expenses | |
| 10,690,806 | | |
| 6,929,882 | | |
| 2,020,713 | | |
| 1,914,207 | | |
| 928,771 | | |
| 759,634 | | |
| 13,640,290 | | |
| 9,603,723 | |
| Contribution
margin | |
$ | 330,879 | | |
$ | 2,871,814 | | |
$ | 5,771,698 | | |
$ | 6,949,770 | | |
| | | |
| | | |
| | | |
| | |
| Percent of sales | |
| 46.4 | % | |
| 41.8 | % | |
| 53.6 | % | |
| 58.2 | % | |
| | | |
| | | |
| | | |
| | |
| General
and administrative expenses | |
| | | |
| | | |
| | | |
| | | |
| 5,720,224 | | |
| 5,371,931 | | |
| 5,720,224 | | |
| 5,371,931 | |
| Income
(loss) from operations | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | (546,418 | ) | |
$ | 3,690,019 | |
Direct
sales include $97,652 and $103,471 of bulk wine and grape sales in the years ended December 31, 2022 and 2021, respectively.
Net
direct-to-consumer sales, including bulk wine, miscellaneous sales, and grape sales, represented approximately 46.4% and 41.8% of total
net revenue for 2022 and 2021, respectively.
Net
sales through distributors represented approximately 53.6% and 58.2% of total net revenue for 2022 and 2021, respectively.
NOTE
16 – SUBSEQUENT EVENTS
Subsequent
events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes
in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the
date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s
financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the
balance sheet but arose after the balance sheet date and before financial statements are issued. The Company has not identified any material
subsequent events.