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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(A) OF THE SECUR - WILLAMETTE VALLEY VINEYARDS INCexhibit_31-1.htm
EX-32.2 - CERTIFICATION OF RICHARD F. GOWARD JR. PURSUANT TO 18 U.S.C. SECTION 1350 AS ADO - WILLAMETTE VALLEY VINEYARDS INCexhibit_32-2.htm
EX-32.1 - CERTIFICATION OF JAMES W. BERNAU PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED P - WILLAMETTE VALLEY VINEYARDS INCexhibit_32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER REQUIRED BY RULE 13A-14(A) OF THE SECUR - WILLAMETTE VALLEY VINEYARDS INCexhibit_31-2.htm
EX-23.1 - CONSENT OF MOSS ADAMS LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - WILLAMETTE VALLEY VINEYARDS INCexhibit_23-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-K
 
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2017
 
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _________________ to _______________________
 
Commission file number: 000-21522
 
WILLAMETTE VALLEY VINEYARDS, INC.
(Exact name of registrant as specified in its charter)
 
Oregon
93-0981021
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
 
8800 Enchanted Way, S.E.
Turner, OR 97392
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (503) 588-9463
 
Securities registered pursuant to Section 12(b) of the Act:
Series A Redeemable Preferred Stock
(Title of class)
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: ☐ Yes ☒ No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act: ☐ Yes ☒ No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ☒ Yes ☐ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): ☒ Yes ☐ No
 
 
1
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
 
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2017 was approximately $35,501,897.
 
The number of outstanding shares of the registrant’s Common Stock as of March 22, 2018 was 4,964,529.
 
 
 
 
 

 
DOCUMENTS INCORPORATED BY REFERENCE
None
 
 
 
 
 
2
 
 
WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-K
 
 
TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
PART I    
 
 
 
 
 
 
Item 1
Business
4
Item 1A
Risk Factors
14
Item 1B
Unresolved Staff Comments
18
Item 2
Properties
18
Item 3
Legal Proceedings
19
Item 4
Mine Safety Disclosures
19
 
 
 
 
 
 
PART II    
 
 
 
 
 
 
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20
Item 6
Selected Financial Data
21
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 21
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
30
Item 8
Financial Statements and Supplementary Data
30
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 47
Item 9A
Controls and Procedures
47
Item 9B
Other Information
48
 
 
 
 
 
 
PART III    
 
 
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
49
Item 11
Executive Compensation
52
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 53
Item 13
Certain Relationships and Related Transactions, and Director Independence
54
Item 14
Principal Accounting Fees and Services
55
Item 15
Exhibits, Financial Statement Schedules
55
 
 
 
 
3
 
 
WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-K
 
As used in this Annual Report on Form 10-K, “we,” “us,” “our” and “the Company” refer to Willamette Valley Vineyards, Inc.
 
PART I
 
ITEM 1. BUSINESS
 
Forward Looking Statements
 
This Annual Report on Form 10-K, including any information incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, referred to as the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act”. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “seeks,” “estimates” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. However, not all forward-looking statements contain these words. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s actual results, to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those set forth under Item 1A “Risk Factors” in this Annual Report on Form 10-K. We urge you to carefully review the disclosures we make concerning risks and other factors that may affect our business and operations. We caution you not to place undue reliance on forward looking statements, which speak only as of the date of this report. We do not intend, and we undertake no obligation, to update any forward information to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, unless required by law to do so.
 
Business
 
Introduction – Willamette Valley Vineyards, Inc. (“the Company” or “WVV”) was formed in May 1988 to produce and sell premium, super premium and ultra-premium varietals. The Company was originally established as a sole proprietorship by Oregon winegrower Jim Bernau in 1983. The Company is headquartered in Turner, Oregon, which is just south of the state capitol of Salem, Oregon. The Company’s wines are made from grapes grown in vineyards owned, leased or contracted by the Company, and from grapes purchased from other nearby vineyards. The grapes are harvested, fermented and made into wine at the Company’s Turner winery (the “Estate Winery” or “Winery”) and the wines are sold principally under the Company’s Willamette Valley Vineyards label, but also under the Griffin Creek, Tualatin Estate and Elton labels. The Company also owns the Tualatin Estate Vineyards and Winery, located near Forest Grove, Oregon (the “Tualatin Winery”).
 
Segments - The Company has identified two operating segments, direct sales and distributor sales, based upon their different distribution channels, margins and selling strategies. Direct sales includes retail sales in our tasting room and remote sites, wine club sales, on-site events, kitchen and catering sales and other sales made directly to the consumer without the use of an intermediary. Distributor sales include all sales through a third party where prices are given at a wholesale rate.
 
Products – Under its Willamette Valley Vineyards label, the Company produces and sells the following types of wine in 750 ml bottles: Pinot Noir, the brand’s flagship and its largest selling varietal in 2017, $24 to $100 per bottle; Chardonnay, $25 to $45 per bottle; Pinot Gris, $17 per bottle; Pinot Blanc, $24 per bottle; Rose, $18 to $24 per bottle; Methode Champenoise Brut, $55 per bottle; and Riesling, $14 per bottle (all bottle prices included herein are the suggested retail prices). The Company’s mission for this brand is to become the premier producer of Pinot Noir from the Pacific Northwest.
 
 
4
 
 
Under its Tualatin Estate Vineyards label, the Company currently produces and sells the following type of wine in 750 ml bottles: Semi-Sparkling Muscat, $19 per bottle.
 
Under its Griffin Creek label, the Company produces and sells the following types of wine in 750 ml bottles: Syrah, the brand’s flagship, $45 per bottle; Merlot, $40 per bottle; Cabernet Sauvignon, $45 per bottle; Grenache, $45 per bottle; Cabernet Franc, $45 per bottle; The Griffin (a Bordeaux style blend), $65 per bottle; and Viognier, $30 per bottle. This brand’s mission is to be the highest quality producer of Bordeaux and Rhone varietals in Southern Oregon.
 
Under its Elton label, the Company produces and sells the following types of wine in 750 ml bottles: Pinot Noir, $75 per bottle and Chardonnay, $75 per bottle.
 
Under its Made in Oregon Cellars label, the Company produces and sells the following type of wine in 750 ml bottles: Oregon Blossom (blush blend), $12 per bottle.
 
The Company holds U.S. federal and/or Oregon state trademark registrations for the trademarks material to the business, including but not limited to, the WILLAMETTE VALLEY VINEYARDS, BIO-CASK, DAEDALUS CELLARS, OREGON’S LANDMARK WINERY, GRIFFIN CREEK, GRIFFIN, ELTON, WILLAMETTE, WVV, SIP.SAVE, WHOLE CLUSTER, MADE IN OREGON CELLARS, OREGON BLOSSOM, INGRAM ESTATE and IT’S WILLAMETTE, DAMMIT marks. Additionally, the Company has allowed use on PAMBRUN, PIERRE PAMBRUN and PINOT BLACK.
 
Market overview – The United States wine industry has seen a rapid increase in the number of wineries that are being established throughout the country. From 1995 to 2017, U.S. wineries grew in number from 1,817 to 9,654, according to Todorov, and are one of the fastest growing segments in agriculture with an annual growth of 9% from 2016 to 2017. U.S. wineries increased production in 2016, the most recent year such data is available, by 5% and produced approximately 339 million cases according to The Wine Institute.
 
The United States is the largest wine market in the world in terms of revenues and volume representing 13.4% of world consumption in 2015, the last year in which data is available. In 2017 U.S. wine sales reached $41.8 billion, according to Wines and Vines, a 2% increase from 2016. According to Gomberg Fredrickson Associates, U.S. wine shipments reached 403 million cases in 2017 with total US wine sales, domestic and import, revenue of $62.7 billion, according to Wines and Vines. U.S. wine sales have grown for 25 consecutive years and there were 550,000 locations that sell wine in 2016, the last year in which such data is available, an increase of 120,000 locations over the past 10 years according to Nielsen.
 
According to the Wine Marketing Council U.S. consumers continue to enjoy wine with 120 million Americans, approximately 40% of the adult population, drinking wine in 2017. Of U.S. wine consumers 59% are female and 41% male with 35% of consumers drinking wine more than once per week according to the Wine Marketing Council. Domestic wine accounted for 66.7% of U.S. sales according to Wines and Vines. The five most popular wines are chardonnay, cabernet sauvignon, red blends, pinot gris and pinot noir, according to Wine Business Monthly. Additionally, sparkling wines have seen double digit growth.
 
In 2017, off-premise sales accounted for roughly 78% of the U.S. market with an average bottle price of $10 according to Nielsen. Although direct to consumer (DTC) sales represented less than 2% of the U.S. volume in 2017, such sales increased by 15.5% in 2017 from 2016 according to Sovos.
 
In a 2015 American Wine Consumer Preference Survey, by Sonoma State University and the Wine Business Institute, American wine consumers from all 50 states were sampled regarding their wine consumption. Of those sampled, 56% reported they consume wine daily or several times per week making them “High Frequency Wine Drinkers” with the remaining 44% being occasional drinkers. Respondents demonstrated a preference for red wine, with 74% listing it as one of their favorites, and 78% considered themselves to have intermediate or advance knowledge of wine. Price and brand topped the list of decision making reasons when purchasing wine for home consumption with 32% listing the most common price being $10 to $15, 19% being $15 to $20 and 14% being more than $20. Additionally, 89% of respondents thought red wine was most healthy.
 
 
5
 
 
The Oregon wine industry – Oregon is a relatively new wine-producing region in comparison to California and France. In 1966, there were only two commercial wineries licensed in Oregon. According to the Southern Oregon University Research Center (SOURCE) in 2016, the most recent year such data is available, there were 725 commercial wineries licensed in Oregon, an increase of 3.3% from 2015, and 30,435 planted acres of wine grape vineyards, 27,658 acres of which were harvested. Oregon wine grapes produced a 2016 crop with a total value of $168 million, a decrease of 4.6% from 2015 according to SOURCE. Pinot Noir leads all varieties accounting for 64% of planted acreage. According to SOURCE Oregon case sales in 2016 are estimated at 3.4 million, up from 3.1 million in 2015, a 10% increase helped by a 14% increase in national sales. SOURCE estimated case sales in dollars for 2016 to be approximately $529 million, a 12.4% increase from 2015.
 
Because of climate, soil and other growing conditions, we believe the Willamette Valley in western Oregon is ideally suited to growing superior quality Pinot Noir, Chardonnay, Pinot Gris and Riesling wine grapes. Some of Oregon’s Pinot Noir, Pinot Gris and Chardonnay wines have developed outstanding reputations, winning numerous national and international awards. Though Oregon contributed only 1% of domestic wine production, it accounted for 21% of domestic wines that garnered a score of 90 points or higher by Wine Spectator in 2015.
 
Oregon does have certain disadvantages as a new wine-producing region. Oregon’s wines are relatively little known to consumers worldwide and the total wine production of Oregon wineries is small relative to California and French competitors. Greater worldwide label recognition and larger production levels give Oregon’s competitors certain financial, marketing, distribution and unit cost advantages.
 
Furthermore, Oregon’s Willamette Valley has an unpredictable rainfall pattern in early autumn. If significantly above-average rains occur just prior to the autumn grape harvest, the quality of harvested grapes is often materially diminished, thereby affecting that year’s wine quality.
 
Finally, phylloxera, an aphid-like insect that feeds on the roots of grapevines, has been found in several commercial vineyards in Oregon. Contrary to the California experience, most Oregon phylloxera infestations have expanded very slowly and done only minimal damage. Nevertheless, phylloxera does constitute a significant risk to Oregon vineyards. Prior to the discovery of phylloxera in Oregon, all vine plantings in the Company’s Estate Vineyard, in Turner, Oregon, were with non-resistant rootstock. In 1997, the Company purchased Tualatin Vineyards at the Tualatin Winery, which has phylloxera at its site. All current plantings are with, and all future planting will be with phylloxera-resistant rootstock at that location. The Company takes commercially reasonable precautions in an effort to prevent the spread of phylloxera to its Turner site.
 
As a result of these factors, subject to the risks and uncertainties identified in this Annual Report, the Company believes that long-term prospects for growth in the Oregon wine industry are excellent. The Company believes that over the next several years the Oregon wine industry will grow at a faster rate than the overall domestic wine industry, and that much of this growth will favor producers of premium, super premium and ultra-premium wines such as the Company’s Estate, Elton and Griffin Creek brands.
 
2016 Oregon harvest – The Oregon Vineyard and Winery Census Report states that 2016 saw increases in domestic sales for Oregon wine alongside reduced vineyard production. Pinot Noir continued to lead statewide production representing 64% of planted acreage and 57% of production. The overall number of wineries increased from 702 in 2015 to 725 in 2016 with the North Willamette Valley continuing to lead the state with 73% of total tons crushed.
 
2017 Oregon harvest – There is no official data available on the 2017 Oregon harvest as of the date of this report.
 
Company Strategy
 
The Company, one of the largest wine producers in Oregon by volume, believes its success is dependent upon its ability to: (1) grow and purchase high quality vinifera wine grapes; (2) vinify the grapes into premium, super premium and ultra-premium wine; (3) achieve significant brand recognition for its wines, first in Oregon and then nationally and internationally; (4) effectively distribute and sell its products nationally; and (5) continue to build on its base of direct to consumer sales. The Company’s goal is to continue to build on a reputation for producing some of Oregon’s finest, most sought-after wines.
 
 
6
 
 
Based upon several highly regarded surveys of the U.S. wine industry, the Company believes that successful wineries exhibit the following four key attributes: (i) focus on production of high-quality premium, super premium and ultra-premium varietal wines; (ii) achieve brand positioning that supports high bottle prices for its high quality wines; (iii) build brand recognition by emphasizing restaurant sales; and (iv) develop strong marketing advantages (such as a highly visible winery location, successful support of distribution, and life-long customer service programs).
 
To successfully execute this strategy, the Company has assembled a team of accomplished winemaking professionals and has constructed and equipped the Estate Winery into a 12,784 square foot state-of-the-art winery that includes a 12,500 square foot outdoor production area for the harvesting, pressing and fermentation of wine grapes.
 
The Company’s marketing and selling strategy is to sell its premium, super premium and ultra-premium cork-finished-wine through a combination of direct sales at the Estate Winery, the McMinnville Tasting Room in McMinnville, Oregon and Tualatin Estate Winery and sales through independent distributors and wine brokers who market the Company’s wine in specific targeted areas.
 
The Company believes the location of the Estate Winery next to Interstate 5, Oregon’s major north-south freeway, significantly increases direct sales opportunities to consumers. The Company believes this location provides high visibility for the Winery to passing motorists, thus enhancing recognition of the Company’s products in retail outlets and restaurants. We also believe the Company’s remodeled Hospitality Center, at the Estate Winery, has further increased the Company’s direct sales and enhanced public recognition of its wines.
 
To remain competitive in the premium, super premium and ultra-premium market, the Company has embarked on a brand expansion project and is in the process of developing a brand and future winery in the Walla Walla AVA under the name Pambrun. This future winery is expected to produce small vintages of Cabernet Sauvignon and other Bordeaux-varietals to compete in the ultra-premium wine market. The Company intends to release wines under the Pambrun label beginning with the 2015 vintage year. Additionally, the Company has developed a single vineyard brand near Hopewell, Oregon adjacent to the current site of Elton Vineyards to produce wine under the Elton label. This brand is expected to produce primarily Pinot Noir and Chardonnay, also for sale in the ultra-premium space. The Company has recently released wines under the Elton label beginning with the 2015 vintage year and plans to complete facility construction in 2020. In June 2016 the Company purchased 53 acres in the Ribbon Ridge AVA and is in the process of planning vineyard development and a small single vineyard brand offering. In December 2016 the Company purchased approximately 40 acres in the Dundee, Oregon area, purchased another 17 acres in January 2017 and is in the process of developing a plan for the use and development of that property.
 
Vineyards
 
The Company owns and leases approximately 913 acres of land, of which 691 acres are currently planted as vineyards or is suitable for future vineyard planting. The vineyards the Company owns and leases are all certified sustainable by LIVE (Low Input Viticulture and Enology) and Salmon Safe. At full production, the Company anticipates these vineyards would enable the Company to grow approximately 63% of the grapes needed to meet the winery’s current production capacity, of 442,000 gallons (186,000 cases), at its Estate Winery.
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 
 
The following table summarizes the Company’s acreage:
 
 
 
ACRES        
 
 
TONS    
 
Vineyard Name
 
Total
 
 
Producing
 
 
Pre-Production
 
 
Plantable
 
 
Non-Plantable
 
 
Harvest 2017
 
 
Harvest 2016
 
Owned Vineyards
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WVV Estate
  107 
  60 
  5 
  - 
  42 
  321 
  197 
Tualatin Estate Vineyard
  107 
  46 
  14 
  - 
  47 
  241 
  162 
Ingram Vineyard
  86 
  40 
  22 
  - 
  24 
  40 
  5 
Pambrun Vineyard
  87 
  - 
  15 
  35 
  37 
  - 
  - 
Loeza Vineyard
  62 
  - 
  32 
  26 
  4 
  - 
  - 
Louisa Vineyard
  53 
  - 
  - 
  25 
  28 
  - 
  - 
Rocks Vineyard
  37 
  - 
  - 
  36 
  1 
  - 
  - 
Bernau Estate
  17 
  15 
  - 
  - 
  2 
  69 
  - 
Dayton Vineyard
  40 
  - 
  - 
  38 
  2 
  - 
  - 
Sub-Total
  596 
  161 
  88 
  160 
  187 
  671 
  364 
 
    
    
    
    
    
    
    
Leased Vineyards
    
    
    
    
    
    
    
Peter Michael Vineyard
  79 
  66 
  3 
  - 
  10 
  448 
  231 
Meadowview Vineyard
  49 
  49 
  - 
  - 
  - 
  386 
  217 
Elton Vineyard
  59 
  54 
  - 
  2 
  3 
  205 
  109 
Ingram Vineyard
  110 
  - 
  87 
  6 
  17 
  - 
  - 
Bernau Estate
  20 
  - 
  - 
  15 
  5 
  - 
  - 
Sub-Total
  317 
  169 
  90 
  23 
  35 
  1,039 
  557 
 
    
    
    
    
    
    
    
Contracted Vineyards*
    
    
    
    
    
    
    
Various
  360 
  360 
  - 
  - 
  - 
  1,712 
  1,052 
 
    
    
    
    
    
    
    
Total
  1,273 
  690 
  178 
  183 
  222 
  3,422 
  1,973 
 
    
    
    
    
    
    
    
 
* Contracted acreage is estimated
 
    
    
    
    
    
    
 
WVV Estate –Established in 1983, the Company’s Estate Vineyard (the “Estate Vineyard”) is located at the Winery location south of Salem, near Turner, Oregon. The Estate Vineyard uses an elaborate trellis design known as the Geneva Double Curtain. The Company has incurred the additional expense of constructing this trellis because it doubles the number of canes upon which grape clusters grow and spreads these canes for additional solar exposure and air circulation. Research and practical applications of this trellis design indicate that it should improve grape quality through smaller clusters and berries over traditional designs. The Company planted one and one half acre in 2017. The Company does not intend to plant at WVV Estate in 2018.
 
Tualatin Estate Vineyard – Established in 1973 at the Tualatin Winery location near Forest Grove, Oregon, the Company’s Tualatin Estate Vineyards is one of the oldest vineyards in Oregon. It was purchased by the Company in 1997. A series of sale-leaseback transactions split the property into two additional vineyards, and the Company continues to lease and manage the Peter Michael Vineyard and Meadowview Vineyard, located adjacent to the Tualatin Vineyard. The Company does not intend to plant at Tualatin Estate Vineyard in 2018.
 
Ingram Estate and Elton Vineyard – The Company purchased 86 acres near Hopewell, Oregon, for vineyard plantings. Adjacent to the purchased land is an additional 110 leased acres, also for vineyard development. The Company believes the site is ideally situated to grow premium Pinot Noir and planted 16 acres in 2017. The Ingram site is also adjacent to Elton Vineyards, where the Company leases 54 acres of established vineyards. The Company planted 17 acres at leased Ingram in 2017 and intends to plant the final 6 leased acres in 2018.
 
Pambrun Vineyards – In 2015, the Company purchased 42 acres in the Walla Walla AVA near the town of Milton-Freewater, Oregon. Additionally, the Company purchased an additional 45 adjoining acres in 2017. The Company believes this site is ideal to grow Cabernet Sauvignon and other Bordeaux-varietals. Wines produced from this vineyard are expected to be sold under the Pambrun label. The Company planted 4 acres in 2017 and does not intend to plant in 2018.
 
 
8
 
 
Loeza Vineyard – The Company purchased 62 acres near Gaston, Oregon in 2014, for vineyard plantings, and believes the site is ideally situated to grow premium Pinot Gris. The site is close to Tualatin Vineyards which allows the Company to leverage existing crews for vineyard development and operations. The Company planted 35 acres in 2017 and intends to plant 20 acres in 2018.
 
Louisa Vineyard – The Company purchased 53 acres in the Ribbon Ridge sub-AVA in 2016 for vineyard plantings and believes the site is suitable for growing ultra-premium Pinot Noir. The Company does not intend to plant at Louisa Vineyard in 2018.
 
Rocks Vineyard – The Company purchased approximately 37 acres in the new Rocks District of Milton-Freewater appellation near Milton-Freewater, Oregon in 2016. The Company intends to plant 5 acres in 2018.
 
Bernau Estate – The Company purchased approximately 17 acres in Dundee, Oregon in January 2017 comprised of 15 acres of producing Pinot Noir. Additionally, the Company leases 20 adjoining acres. The Company intends to plant 11 acres in 2018
 
Dayton Vineyard – The Company purchased 40 acres in Dayton, Oregon in December 2016. The Company has no plans for planting this site in 2018.
 
Grape Vines - Beginning in 1997, the Company embarked on a major effort to improve the quality of its flagship varietal by planting new Pinot Noir clones that originated directly from the cool climate growing region of Burgundy rather than the previous source, Napa, California, where winemakers believe the variety adapted to the warmer climate over the many years it was grown there.
 
These new French clones are called “Dijon clones” after the University of Dijon in Burgundy, which assisted in their selection and shipment to a U.S. government authorized quarantine site, and then two years later to Oregon winegrowers. The most desirable of these new Pinot Noir clones are numbered 113, 114, 115, 667, 777 and 943. In addition to certain flavor advantages, these clones ripen up to two weeks earlier, allowing growers to pick before heavy autumn rains. Heavy rains can dilute concentrated fruit flavors and promote bunch rot and spoilage. These Pinot Noir clones were planted at the Tualatin Vineyards with phylloxera-resistant rootstock and the 667 and 777 clones have been grafted onto seven acres of self-rooted, non-phylloxera-resistant vines at the Company’s Estate Vineyard.
 
New clones of Chardonnay preceded Pinot Noir into Oregon and were planted at the Company’s Estate Vineyard on phylloxera-resistant rootstock.
 
Grape supply – In 2017, the Company’s producing acres in the Estate Vineyard yielded approximately 321 tons of grapes. Tualatin/Peter Michael/Meadowview Vineyards produced an aggregate of 1,075 tons of grapes in 2017. Elton and Ingram Vineyards produced 245 tons of grapes in 2017. Bernau Estate produced 69 tons of grapes in 2017.
 
The Company fulfills its remaining grape needs by purchasing grapes from other nearby vineyards at competitive prices. In 2017, the Company purchased an additional 1,712 tons of grapes from other growers. The Company cannot grow enough grapes to meet anticipated production needs, and therefore contracts grape purchases to make up the difference. Contracted grape purchases are considered an important component of the Company’s long-term growth and risk-management plan. The Company believes high quality grapes will be available for purchase in sufficient quantity to meet the Company’s requirements. Additionally, the Company will continue to evaluate opportunities to purchase properties for future vineyards.
 
The grapes grown on the Company’s vineyards establish a foundation of quality, through the Company’s farming practices, upon which the quality of the Company’s wines is built. In addition, wine produced from grapes grown in the Company’s own vineyards may be labeled as “Estate Bottled” wines. These wines traditionally sell at a premium over non-estate bottled wines.
 
 
9
 
 
Viticultural conditions – Oregon’s Willamette Valley is recognized as a premier location for growing certain varieties of high quality wine grapes, particularly Pinot Noir, Pinot Gris, Chardonnay and Riesling. The Company believes that the Estate Vineyard’s growing conditions, including its soil, elevation, slope, rainfall, evening marine breezes and solar orientation are among the most ideal conditions in the United States for growing certain varieties of high-quality wine grapes. The Estate Vineyard’s grape growing conditions compare favorably to those found in some of the famous Viticultural regions of France. Western Oregon’s latitude (42o–46o North) and relationship to the eastern edge of a major ocean is very similar to certain centuries-old wine grape growing regions of France.
 
The Estate Vineyard’s soil type is Jory/Nekia, a dark, reddish-brown, silky clay loam over basalt bedrock, noted for being well drained, acidic, of adequate depth, retentive of appropriate levels of moisture and particularly suited to growing high quality wine grapes.
 
The Estate Vineyard’s elevation ranges from 533 feet to 800 feet above sea level with slopes from 2% to 30% (predominately 12-20%). The Estate Vineyard’s slope is oriented to the south, southwest and west. Average annual precipitation at the Estate Vineyard is 41.3 inches; average annual air temperature is 52 to 54 degrees Fahrenheit, and the length of each year’s frost-free season averages from 190 to 210 days. These conditions compare favorably with conditions found throughout the Willamette Valley viticultural region and other domestic and foreign viticultural regions, which produce high quality wine grapes.
 
In the Willamette Valley, permanent vineyard irrigation generally is not required. The average annual rainfall provides sufficient moisture to avoid the need to irrigate the Estate Vineyard. However, if the need should arise, the Company’s Estate property contains one water well which can sustain sufficient volume to meet the needs of the Winery and to provide auxiliary water to the Estate Vineyard for new plantings and unusual drought conditions. At the Tualatin Vineyard, the Company has water rights to a year round spring that feeds an irrigation pond. Additionally, the Company has water rights at the Pambrun and Rocks Vineyards.
 
Susceptibility of vineyards to disease – The Tualatin Vineyard and the adjacent leased vineyards are known to be infested with phylloxera, an aphid-like insect, which can destroy vines.
 
It is not possible to estimate any range of loss that may be incurred due to the phylloxera infestation of the Company’s vineyards. The phylloxera at Tualatin Vineyard is believed to have been introduced on the roots of the vines first planted on the property in the southern most section Gewurztraminer in 1971 that the Company partially removed in 2004. The remaining vines, and all others infested, remain productive at low crop levels. The Company is in the process of gradually replacing infested areas with new, phylloxera-resistant vines.
 
Winery
 
Wine production facility – The Company’s Winery and production facilities are capable of efficiently producing up to 186,000 cases (442,000 gallons) of wine per year, depending on the type of wine produced. In 2017, the Winery produced approximately 151,332 cases (359,900 gallons) from its 2015 and 2016 harvest. The Company expects to produce approximately 153,300 cases (364,500 gallons) in 2018 from its 2016 and 2017 harvests.
 
The Winery is 12,784 square feet in size and contains areas for processing, fermenting, aging and bottling wine, as well as an underground wine cellar, and administrative offices. There is a 12,500 square foot outside production area for harvesting, pressing and fermenting wine grapes, and a 4,500 square foot insulated storage facility with a capacity of approximately 30,000 cases of wine. The Company also has a 23,000 square foot storage building to store its inventory of bottled product with a capacity of approximately 135,000 cases of wine. The production area is equipped with a settling tank and sprinkler system for disposing of wastewater from the production process in compliance with environmental regulations.
 
In addition to the production capacity discussed above, the Tualatin Winery has 20,000 square feet of production capacity. This adds approximately 25,000 cases (59,000 gallons) of wine production capacity to the Company. The capacity at the Tualatin Winery is available to the Company to meet any anticipated future production needs. In 2008, the Company replaced the roof and production floor, insulation and walls, in anticipation of using it for wine storage and future production.
 
 
10
 
 
Hospitality facility – The Company has a renovated tasting and hospitality facility of 35,642 square feet (the “Hospitality Center”) at the Estate Winery. The main floor of the Hospitality Center includes retail sales space with the Estate Tasting Room, Club Room for Wine Club Members, dining area and mezzanine, which altogether are designed to accommodate approximately 300 persons for tastings, wine and food pairing meals, public and private events and meetings. An iconic observation tower and tiered decks around the Hospitality Center enable visitors to enjoy the view of the Willamette Valley and the Company’s Estate Vineyard. The tiered decks funnel into an outdoor courtyard that hosts many seasonal gatherings. To the south side of the tiered decks the Company has two hospitality suites for overnight accommodations. The Hospitality Center sits above the underground barrel cellar and tunnel that connects with the Winery. The facility includes a basement cellar, tunnel and barrel room of 11,090 square feet to store up to 1,800 barrels of wine for aging in the proper environment.
 
Just outside the Hospitality Center, the Company has a landscaped park setting consisting of terraced lawns for outdoor events. The area between the Winery and Hospitality Center form a 20,000 square foot quadrangle. As designed, a removable fabric top can cover the quadrangle, making it an all-weather outdoor facility to promote the sale of the Company’s wines through festivals and social events. Above the Company’s working Winery houses the Pinot Room and Founders’ Room, which can accommodate 40 persons and 111 persons for public and private events.
 
The Company believes the Hospitality Center and surrounding areas make the Winery an attractive recreational and social destination for tourists and residents, thereby enhancing the Company’s ability to sell its wines.
 
Mortgages on properties – The Company’s winery facilities at the Estate Winery are subject to two mortgages with an aggregate principal balance of $7,202,727 at December 31, 2017. The two outstanding loans require monthly principal and interest payments of $62,067 for the life of the loans, at annual fixed interest rates of 4.75% and 5.21%, and with maturity dates of 2028 and 2032.
 
Wine production – The Company operates on the principle that winemaking is a natural but highly technical process requiring the attention and dedication of the winemaking staff. The Company’s Winery is equipped with current technical innovations and uses modern laboratory equipment and computers to monitor the progress of each wine through all stages of the winemaking process.
 
The Company’s recent annual grape harvest and wine production is as follows:
 
 
 
Tons of
 
 
Tons of
 
 
Total Tons
 
 
Gallons of
 
 
 
 
 
 
 
Harvest
 
Grapes
 
 
Grapes
 
 
of Grapes
 
 
Bulk
 
 
Production
 
 
Cases
 
Year
 
Grown
 
 
Purchased
 
 
Harvested
 
 
Purchases
 
 
Year
 
 
Produced
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2005
  1,107 
  25 
  1,132 
  - 
  2005 
  72,297 
2006
  1,454 
  34 
  1,488 
  - 
  2006 
  81,081 
2007
  850 
  896 
  1,746 
  - 
  2007 
  115,466 
2008
  551 
  874 
  1,425 
  57,736 
  2008 
  121,027 
2009
  1,033 
  1,100 
  2,133 
  74,954 
  2009 
  132,072 
2010
  674 
  371 
  1,045 
  4,276 
  2010 
  110,224 
2011
  718 
  609 
  1,327 
  9,620 
  2011 
  81,357 
2012
  658 
  670 
  1,328 
  7,910 
  2012 
  91,181 
2013
  755 
  1,020 
  1,775 
  6,257 
  2013 
  95,638 
2014
  1,211 
  970 
  2,181 
  520 
  2014 
  108,958 
2015
  1,266 
  1,012 
  2,278 
  - 
  2015 
  120,794 
2016
  921 
  1,052 
  1,973 
  47,780 
  2016 
  141,416 
2017
  1,631 
  1,622 
  3,253 
  15,900 
  2017 
  151,332 
 
Cases produced per ton harvested often vary between years mainly due to the timing of when the cases are produced.
 
 
11
 
 
Sales and Distribution
 
Marketing strategy – The Company markets and sells its wines through a combination of direct sales at the Winery, directly through mailing lists, and through distributors and wine brokers. As the Company has increased production volumes and achieved greater brand recognition, sales to out of state markets have increased, both in terms of absolute dollars and as a percentage of total Company sales.
 
The Company uses a variety of marketing channels to generate interest in its wines. The Company has a highly functional website and maintains social media sites. The Company controls a database of customers for email and direct promotions. The Company continues to submit its wines to competitions and state, regional and national media for editorials and ratings.
 
Direct sales – The Company’s Estate Winery is located on a visible hill adjacent to Oregon’s major north-south freeway (Interstate 5), approximately 2 miles south of the state’s second-largest metropolitan area (Salem), and 50 miles in either direction from the state’s first and third-largest metropolitan areas (Portland and Eugene). The unique location along Interstate 5 has resulted in generally greater amount of wines sold at the Estate Winery as compared to the Oregon industry standard. Direct sales from the Winery are a vital and growing sales channel and an effective means of product promotion. The Estate Winery Tasting Room is open daily and offers wine tasting and education by trained personnel. The Company offers a complimentary daily tour along with by-appointment private tours offering a behind-the-scenes look at the production process of the wines. The Company has the largest wine club membership in Oregon and features a Members-only Club Room at the Estate Winery.
 
In 2014, the Company launched “Pairings,” a focused restaurant offering a wine and food pairing lunch. Led by the Winery chef, the menu highlights Northwest fresh dishes paired thoughtfully with the Company’s wines. The culinary offering has now expanded to include “Pairings Food & Wine Experiences,” community-style wine dinners hosted on the weekends.  
 
The Winery has developed a strong Winery Ambassador program, which connects its “Ambassadors” with customers throughout the United States and offers personalized wine recommendations and easy ordering by phone or email.
 
The Company also operates two additional tasting rooms; one in historic downtown McMinnville, in the heart of Oregon Wine Country, and at its Tualatin Vineyard (located 30 minutes west of Portland).
 
The Company holds four major festivals at the Winery each year. In addition, open houses are held at the Winery during major holiday weekends such as Memorial Day and Thanksgiving. Numerous private events, charitable and political events are also held at the Winery.
 
Direct sales produce a higher profit margin because the Company is able to sell its wine directly to consumers at retail prices rather than to distributors at free-on-board or “FOB” prices. Sales made directly to consumers at retail prices result in an increased profit margin equal to the difference between retail prices and distributor prices. For 2017 and 2016, direct sales contributed approximately 40% and 36% of the Company’s net sales, respectively.
 
Distributors and wine brokers – The Company uses both independent distributors and wine brokers primarily to market the Company’s wines in specific targeted areas. Only those distributors and wine brokers who have demonstrated knowledge of and a proven ability to market premium, super premium, and ultra-premium wines are utilized. The Company’s products are distributed in 49 states and the District of Columbia, and there are 5 non-domestic (export) customers. For 2017 and 2016, sales to distributors and wine brokers contributed approximately 60% and 64% of the Company’s revenue from operations, respectively.
 
Tourists – Oregon wineries are a popular tourist destination with many bed & breakfasts, motels and fine restaurants available. The Willamette Valley, Oregon’s leading wine region has approximately 76% of the state’s wineries and vineyards, is home to approximately 554 wineries and was selected by Wine Enthusiast Magazine as its 2016 Wine Region of the Year. An additional advantage for Willamette Valley wine tourism is the proximity of the wineries to Portland (Oregon’s largest city and most popular destination). From Portland, tourists can visit the Willamette Valley winery of their choice in anywhere from a 45 minutes to a two hour drive.
 
 
12
 
 
The Company believes its convenient location, adjacent to Interstate 5, enables the Winery to attract a significant number of visitors. The Winery is approximately a 45 minute drive from Portland and less than one mile from The Enchanted Forest, a popular amusement park which operates from April through September each year.
 
Dependence on Major Customers
 
Historically, the Company’s revenue has been derived from thousands of customers annually. In 2017, sales to one distributor represented approximately 18.2% of total Company revenue. In 2016, sales to one distributor represented approximately 19.0% of total Company revenue.
 
Research and Development
 
The nature of the Company’s business does not require the Company to incur a material amount of research and development expense.
 
Competition
 
The wine industry is highly competitive. In a broad sense, wines may be considered to compete with all alcoholic and nonalcoholic beverages. Within the wine industry, the Company believes that its principal competitors include wineries in Oregon, California and Washington, which, like the Company, produce premium, super premium, and ultra-premium wines. Wine production in the United States is dominated by large California wineries that have significantly greater financial, production, distribution and marketing resources than the Company. Currently, no Oregon winery dominates the Oregon wine market. Several Oregon wineries, however, are older and better established and have greater label recognition than that of the Company.
 
The Company believes that the principal competitive factors in the premium, super premium, and ultra-premium segment of the wine industry are product quality, price, label recognition, and product supply. The Company believes it competes favorably with respect to each of these factors. The Company has primarily received “Excellent” to “Recommended” reviews in tastings of its wines and believes its prices are competitive with other Oregon wineries. Larger scale production is necessary to satisfy retailers’ and restaurants’ demand and the Company believes that additional production capacity will be needed to meet estimated future demand. Furthermore, the Company believes that its estimated production capacity of 501,000 gallons (211,000 cases) per year at its Estate Vineyards and Tualatin Vineyard locations give it significant competitive advantages over most Oregon wineries in areas such as marketing, distribution arrangements, grape purchasing, and access to financing. The current production level of most Oregon wineries is generally much smaller than the estimated production capacity level of the Company’s Wineries. With respect to label recognition, the Company believes that its unique structure as a consumer-owned company will give it a significant advantage in gaining market share in Oregon, as well as penetrating other wine markets.
 
Governmental Regulation of the Wine Industry
 
The production and sale of wine is subject to extensive regulation by the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau and the Oregon Liquor Control Commission. The Company is licensed by and meets the bonding requirements of each of these governmental agencies. Sale of the Company’s wine is subject to federal alcohol tax, payable at the time wine is removed from the bonded area of the Winery for shipment to customers or for sale in its tasting room.
 
The 2017 federal alcohol tax rate was $1.07 per gallon for wines with alcohol content at or below 14.0% and $1.57 per gallon for wines with alcohol content above 14.0%; however, wineries that produce not more than 250,000 gallons during the calendar year were allowed a graduated tax credit of up to $0.90 per gallon on the first 100,000 gallons of wine (other than sparkling wines) removed from the bonded area during that year.
 
In December 2017, the federal government passed comprehensive tax legislation which included the Craft Beverage Modernization and Tax Reform Act. This legislation modified federal alcohol tax rates by expanding the lower $1.07 per gallon tax rate to wines up to 16.0% alcohol content. Additionally, the legislation provides for a $1 credit per gallon for the first 30,000 gallons produced; $0.90 for the next 100,000 gallons; and then $0.535 for up to 750,000 gallons. These modifications are effective January 2018 and are effective for two years.
 
 
13
 
 
The Company also pays the state of Oregon an excise tax of $0.67 per gallon for wines with alcohol content at or below 14.0% and $0.77 per gallon for wines with alcohol content above 14.0% on all wine sold in Oregon. In addition, most states in which the Company’s wines are sold impose varying excise taxes on the sale of alcoholic beverages. As an agricultural processor, the Company is also regulated by the Oregon Department of Agriculture and, as a producer of wastewater, by the Oregon Department of Environmental Quality. The Company has secured all necessary permits to operate its business.
 
Prompted by growing government budget shortfalls and public reaction against alcohol abuse, government entities often consider legislation that could potentially affect the taxation of alcoholic beverages. Excise tax rates being considered are often substantial. The ultimate effects of such legislation, if passed, cannot be assessed accurately. Any increase in the taxes imposed on table wines can be expected to have a potentially adverse impact on overall sales of such products. However, the impact may not be proportionate to that experienced by producers of other alcoholic beverages and may not be the same in every state.
 
Costs and Effects of Compliance with Local, State and Federal Environmental Laws
 
The Company management is strongly focused on environmental stewardship and maintains a variety of policies and processes designed to protect the environment, the public and consumers of its wine. Although much of the Company’s expenses for protecting the environment are voluntary, the Company is regulated by various local, state and federal agencies regarding environmental laws. However, these regulatory costs and processes are effectively integrated into the Company’s regular operations and consequently do not generally cause significant alternative processes or costs.
 
Employees
 
As of December 31, 2017 the Company had approximately 112 full-time employees and 54 part-time employees. In addition, the Company hires additional employees for seasonal work as required. The Company’s employees are not represented by any collective bargaining unit. The Company believes it maintains positive relations with its employees.
 
Additional Information
 
The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and proxy statements with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov. You may learn more about the Company by visiting the Company’s website at www.wvv.com. All websites referred to herein are inactive textual references only, meaning that the information contained in such websites is not incorporated by reference herein.
 
ITEM 1A. RISK FACTORS
 
The following disclosures should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K. These disclosures are intended to discuss certain material risks of the Company’s business as they appear to Management at this time. However, this list is not exhaustive. Other risks may, and likely will, arise from time to time.
 
Agricultural risks could adversely affect the Company
 
Winemaking and grape growing are subject to a variety of agricultural risks. Various diseases, pests, fungi, viruses, including Grapevine Red Blotch Disease (GRBV), drought, frost and certain other weather conditions can affect the quantity of grapes available to the Company, decreasing the supply of the Company’s products and negatively impacting profitability. In particular, certain of the Company’s vines are not resistant to phylloxera; accordingly, those vines are particularly at risk to the effects from an infestation of phylloxera. Phylloxera is a pest that attacks the rootstocks of wine grape plants. Vineyards in the United States, including some in Oregon and some owned by us, have been infested in recent years with phylloxera. In particular, Tualatin Vineyards have phylloxera. There can be no assurance that the Company’s existing vineyards, or the rootstocks the Company is now using in its planting programs, will not become susceptible to current or new strains of phylloxera or that the phylloxera present at the Tualatin Vineyards will not spread to our other vineyards. Pierce’s Disease is a vine bacterial disease. It kills grapevines and there is no known cure. Small insects called Sharpshooters spread this disease. A new strain of the Sharpshooter was discovered in Southern California and is believed to be migrating north. The Company is actively supporting the efforts of the agricultural industry to control this pest and is making every reasonable effort to prevent an infestation in its own vineyards. The Company cannot, however, guarantee that it will succeed in preventing contamination in its vineyards. Additionally, any future government restrictions created in connection with government attempts to combat phyloxera, GRBV or other pests or viruses may increase vineyard costs and/or reduce production.
 
 
14
 
 
Our operations are susceptible to changing weather patterns
 
Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters, such as hail storms, wildfires and wind, snow and ice storms. Any such extreme weather condition could negatively impact the harvest of grapes at our vineyards and/or the other vineyards that supply us with grapes for our wine. In particular, Oregon’s Willamette Valley has an unpredictable rainfall pattern in particularly in early autumn. If significantly above-average rains occur just prior to the autumn grape harvest, the quality of harvested grapes is often materially diminished, thereby affecting that year’s wine quality.
 
Additionally, long-term changes in weather patterns could adversely affect the Company, especially if such changes impacted the amount or quality of grapes harvested. We cannot anticipate changes in weather patterns/conditions and we cannot predict their impact on our operations if they were to occur.
 
Loss of key employees could harm the Company’s reputation and business
 
The Company’s success depends to some degree upon the continued service of a number of key employees. The loss of the services of one or more of these key employees, including James W. Bernau, our President and Chief Executive Officer, Richard F. Goward Jr., our Chief Financial Officer and Christine Clair, our Winery Director could harm the Company and its reputation and negatively impact its profitability, particularly if one or more of the Company’s key employees resigns to join a competitor or to form a competing company.
 
The Company’s ability to operate requires utilization of the line of credit
 
The Company’s cash flow from operations historically has not been sufficient to provide all funds necessary for the Company’s operations. The Company has entered into a line of credit agreement to provide such funds and entered into term loan arrangements, the proceeds of which were used to acquire the Tualatin Winery and the Tualatin Vineyards, construct and remodel the Hospitality Center and pay down the Company’s revolving line of credit. There is no assurance that the Company will be able to comply with all conditions under its credit facilities in the future or that the amount available under its line of credit facility will be adequate for the Company’s future needs. Failure to comply with all conditions of the credit facilities, or to have sufficient funds for operations could adversely affect the Company’s results of operations and shareholder value.
 
As of December 31, 2017, the Company’s outstanding indebtedness was approximately $7.2 million but did not have any outstanding borrowings under its $2 million line of credit.
 
Costs of being a publicly-held company may put the Company at a competitive disadvantage
 
As a public company, the Company incurs substantial costs that are not incurred by its competitors that are privately-held. These compliance costs may result in the Company’s wines being more expensive than those produced by its competitors and/or may reduce profitability compared to such competitors.
 
The Company faces significant competition which could adversely affect profitability
 
The wine industry is intensely competitive and highly fragmented. The Company’s wines compete in several premium wine market segments with many other premium domestic and foreign wines, with imported wines coming from the Burgundy and Bordeaux regions of France, as well as Italy, Chile, Argentina, South Africa, New Zealand and Australia. The Company’s wines also compete with popular priced generic wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus by the Company’s independent distributors, many of which carry extensive brand portfolios. A result of this intense competition has been and may continue to be upward pressure on the Company’s selling and promotional expenses. In addition, the wine industry has experienced significant consolidation. Many of the Company’s competitors have greater financial, technical, marketing and public relations resources than the Company does. In particular, wine production in the United States is dominated by large California wineries that have significantly greater resources than the Company. Additionally, greater worldwide label recognition and larger production levels give many of the Company’s competitors certain unit cost advantages. Company sales may be harmed to the extent it is not able to compete successfully against such wine or alternative beverage producers’ costs. There can be no assurance that in the future the Company will be able to successfully compete with its current competitors or that it will not face greater competition from other wineries and beverage manufacturers.
 
 
15
 
 
The Company competes for shelf space in retail stores and for marketing focus by its independent distributors, most of whom carry extensive product portfolios
 
Nationwide, the Company sells its products primarily through independent distributors and brokers for resale to retail outlets, restaurants, hotels and private clubs across the United States and in some overseas markets. Sales to distributors are expected to continue to represent a substantial portion of the Company’s net revenue in the future. A change in the relationship with any of the Company’s significant distributors could harm the Company’s business and reduce Company sales. The laws and regulations of several states prohibit changes of distributors, except under certain limited circumstances, making it difficult to terminate a distributor for poor performance without reasonable cause, as defined by applicable statutes. Any difficulty or inability to replace distributors, poor performance of the Company’s major distributors or the Company’s inability to collect accounts receivable from its major distributors could harm the Company’s business. There can be no assurance that the distributors and retailers the Company uses will continue to purchase the Company’s products or provide Company products with adequate levels of promotional support. Consolidation at the retail tier, among club and chain grocery stores in particular, can be expected to heighten competitive pressure to increase marketing and sales spending or constrain or reduce prices.
 
Fluctuations in quantity and quality of grape supply could adversely affect the Company
 
A shortage in the supply of quality grapes may result from a variety of factors that determine the quality and quantity of the Company’s grape supply, including weather conditions, pruning methods, diseases and pests, the ability to buy grapes on long and short term contracts and the number of vines producing grapes. Any shortage in the Company’s grape production could cause a reduction in the amount of wine the Company is able to produce, which could reduce sales and adversely impact the Company’s results from operations. Factors that reduce the quantity of the Company’s grapes may also reduce their quality, which in turn could reduce the quality or amount of wine the Company produces. Deterioration in the quality of the Company’s wines could harm its brand name and could reduce sales and adversely impact the Company’s results of operations.
 
Contamination of the Company’s wines would harm the Company’s business
 
The Company is subject to certain hazards and product liability risks, such as potential contamination, through tampering or otherwise, of ingredients or products. Contamination of any of the Company’s wines could cause it to destroy its wine held in inventory and could cause the need for a product recall, which could significantly damage the Company’s reputation for product quality. The Company maintains insurance against certain of these kinds of risks, and others, under various insurance policies. However, the insurance may not be adequate or may not continue to be available at a price or on terms that are satisfactory to the Company and this insurance may not be adequate to cover any resulting liability.
 
A reduction in consumer demand for premium wines could harm the Company’s business
 
There have been periods in the past in which there were substantial declines in the overall per capita consumption of beverage alcohol products in the United States and other markets in which the Company participates. A limited or general decline in consumption in one or more of the Company’s product categories could occur in the future due to a variety of factors, including: a general decline in economic conditions; increased concern about the health consequences of consuming alcoholic beverage products and about drinking and driving; a trend toward a healthier diet including lighter, lower calorie beverages such as diet soft drinks, juices and water products; the increased activity of anti-alcohol consumer groups; and increased federal, state or foreign excise and other taxes on beverage alcohol products. The competitive position of the Company’s products could also be affected adversely by any failure to achieve consistent, reliable quality in the product or service levels to customers.
 
Changes in consumer spending could have a negative impact on the Company’s financial condition and business results
 
Wine sales depend upon a number of factors related to the level of consumer spending, including the general state of the economy, federal and state income tax rates, deductibility of business entertainment expenses under federal and state tax laws, and consumer confidence in future economic conditions. Changes in consumer spending in these and other regions can affect both the quantity and the price of wines that customers are willing to purchase at restaurants or through retail outlets. Reduced consumer confidence and spending may result in reduced demand for the Company’s products, limitations on the Company’s ability to increase prices and increased levels of selling and promotional expenses. This, in turn, may have a considerable negative impact upon the Company’s sales and profit margins.
 
 
16
 
 
Increased regulation and/or taxation could adversely affect the Company
 
The wine industry is subject to extensive regulation by the Federal Alcohol Tobacco Tax and Trade Bureau (“TTB”) and various foreign agencies, state liquor authorities, such as the Oregon Liquor Control Commission (“OLCC”), and local authorities. These regulations and laws dictate such matters as licensing requirements, trade and pricing practices, permitted distribution channels, permitted and required labeling, and advertising and relations with wholesalers and retailers. Any expansion of the Company’s existing facilities or development of new vineyards or wineries may be limited by present and future zoning ordinances, environmental restrictions and other legal requirements. In addition, new regulations or requirements or increases in excise taxes, income taxes, property and sales taxes or international tariffs, could negatively affect the Company’s financial condition or results of operations. Recently, many states have considered proposals to increase, and some of these states have increased, state alcohol excise taxes. Additionally, many states have revised, or are revising, statutes that broaden the definition of nexus to increase tax revenue from out of state businesses.
 
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (Public Law 115-97), which makes extensive changes to the Internal Revenue Code of 1986 (IRC), including income tax rates and provisions related to alcohol that are administered by TTB. Those changes are effective January 1, 2018 and are applicable to any wine removed or imported during calendar years 2018 and 2019. The impact of the changes on the Company is a reduction in the Federal excise taxes imposed on wines with an alcohol volume between 14-16%, which will be taxed at $1.07 per gallon compared to the prior tax rate in 2017 of $1.57. The new tax law also allows for certain volume production credits that the Company may be eligible to take which will further decrease the Company’s excise tax liability. If the alcohol excise tax provisions contained in the Tax Cuts and Jobs Act are not extended beyond December 31, 2019, the tax rates and credits will revert to where they were before the bill was signed into law.
 
New or revised regulations, or increased licensing fees, requirements or taxes could have a material adverse effect on the Company’s financial condition or results of operations. There can be no assurance that new or revised regulations, taxes or increased licensing fees and requirements will not have a material adverse effect on the Company’s business and its results of operations and its cash flows.
 
The Company’s common stock is thinly traded, and therefore not as liquid as other investments.
 
The trading volume of the Company’s common stock on NASDAQ is consistently “thin,” in that there is not a great deal of trading activity on a daily basis. Because the average active trading volume is thin, there is less opportunity for shareholders to sell their shares of the Company’s common stock on the open market, resulting in the common stock being less liquid than common stock in other publicly traded companies.
 
The Company may face liabilities associated with the offer and sale of our preferred stock. 
 
In August 2015, the Company commenced a public offering of our Series A Redeemable Preferred Stock pursuant to a registration statement filed with the SEC. The Company registered this transaction with the securities authorities of the States of Oregon and Washington and, in November 2015, achieved listing status on NASDAQ under the trading symbol WVVIP. The terms of our Series A Redeemable Preferred Stock are unusual for a company of our size, and we believe the structure of these securities and of the offering are not commonplace among issuers of any type. Federal and state securities laws impose significant liabilities on issuers of securities if the related offering documents contain material misstatements of fact, or if the documents omit to state facts necessary, in light of the circumstances as a whole, to prevent the documents from being misleading. These liabilities can include rescission liability to the purchasers of the securities, as well as potential enforcement liability that could give rise to civil money penalties. Securities litigation can be extraordinarily expensive and protracted, and if we are accused of misstatements or omissions in our offering documents, we may face economic harms and management distractions regardless of the ultimate outcome of any such litigation. Further, if we ultimately are adjudged to have actually made a material misstatement or omission, the Company may be liable for the repayment of the purchase price of the related securities, plus interest from the date of purchase. Any one or more of these events or circumstances would have a material adverse impact upon our business, financial condition or results of operations, and may make it more difficult or more expensive to undertake capital-raising efforts in the future.
 
 
17
 
 
The Company may be unable to pay accumulated dividends on its Series A Redeemable Preferred Stock.
 
The Company’s Series A Redeemable Preferred Stock bears a cumulative 5.3% dividend based upon the original issue price, or $0.22 per share per annum. However, prior to the declaration and payment of dividends our board of directors must determine, among other things, that funds are available out of the surplus of the Company and that the payment would not render us insolvent or compromise our ability to pay our obligations as they come due in the ordinary course of business. Additionally, our existing credit facility limits, and future debt obligations in the future may limit, both our legal and our practical ability to declare and pay dividends. As a result, although the Series A Redeemable Preferred Stock will continue to earn a right to receive dividends, the Company’s ability to pay dividends will depend, among other things, upon our ability to generate excess cash. However, although shares of our Series A Redeemable Preferred Stock will earn cumulative dividends, unpaid dividends will not, themselves, accumulate (as might compounding interest on a debt security, for example).
 
The issuance of additional shares of our preferred stock or common stock in the future could adversely affect holders of common stock.
 
The market price of our common stock may be influenced by any preferred stock we may issue. Our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of our stockholders. This includes the power to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over common stock with respect to the liquidation, dissolution or winding up of the business and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.
 
The provisions in our articles of incorporation, our by-laws and Oregon law could delay or deter tender offers or takeover attempts that may offer a premium for our common stock.
 
Certain provisions in our articles of incorporation, our by-laws and Oregon law could make it more difficult for a third party to acquire control of us, even if that transaction could be beneficial to stockholders. These impediments include, but are not limited to; the classification of our Board of Directors (the “Board”) into three classes serving staggered three-year terms, which makes it more difficult to quickly replace Board members; the ability of our Board, subject to certain limitations under the rules of the NASDAQ Stock Market, to issue shares of preferred stock with rights as it deems appropriate without stockholder approval; a provision that special meetings of our Board may be called only by our chief executive officer or at the request of holders of not less than half of all outstanding shares of our common stock; a provision that any member of the Board, or the entire Board, may be removed from office only for cause; and a provision that our stockholders comply with advance-notice provisions to bring director nominations or other matters before meetings of our stockholders. The Board may implement other changes that further limit the potential for tender offers or takeover attempts.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Vineyards – The Company owns or leases 913 acres of land, of which 596 acres is owned and 317 acres leased. Of the 913 acres of land owned or leased, 330 acres are productive vineyards, 361 acres are pre-productive vineyards or are suitable for future vineyard plantings, and 222 acres are not suitable for vineyard planting or are used or reserved for winery or hospitality purposes. See Item 1 Business - Vineyards, of this Annual Report on Form 10-K for the locations of each of the Company’s vineyards (both owned and leased) and other information pertaining to the production capacity, harvest totals and other important characteristics of each such vineyard.
 
 
 
18
 
 
Wine production facility – We believe the Company’s Estate Winery and production facilities are capable of efficiently producing up to 186,000 cases (442,000 gallons) of wine per year, depending on the type of wine produced. In 2017, the Winery produced approximately 151,332 cases (359,900 gallons) from its 2015 and 2016 harvest. The Winery is 12,784 square feet in size and contains areas for processing, fermenting, aging and bottling wine, as well as an underground wine cellar, meeting rooms, and administrative offices. There is a 12,500 square foot outside production area for harvesting, pressing and fermenting wine grapes, and a 4,500 square foot insulated storage facility with a capacity of 30,000 cases of wine. The Company also has a 23,000 square foot storage building to store its inventory of bottled product. The production area is equipped with a settling tank and sprinkler system for disposing of wastewater from the production process in compliance with environmental regulations. The Hospitality Center located as the Company’s Estate Winery is a large 35,642 square foot tasting and hospitality facility. The Hospitality Center sits above the underground barrel cellar and tunnel that connects with the Winery. The facility includes a basement cellar, tunnel and barrel room of 11,090 square feet used to store up to 1,800 barrels of wine for aging in the proper environment.
 
The Company owned Tualatin Winery has 20,000 square feet of production capacity. This adds approximately 25,000 cases (59,000 gallons) of wine production capacity to the Company. The production capacity at the Tualatin Winery is not currently used but is available to the Company to meet future production needs. The storage capacity at the Tualatin Winery is periodically used to store excess bulk wine. Additionally, the Company operates a small retail store and tasting room at the Tualatin Winery.
 
The Company carries Property and Liability insurance coverage in amounts deemed adequate by Management.
 
See additional discussion of vineyard and wine production facility under Item 1. Business.
 
ITEM 3. LEGAL PROCEEDINGS
 
Although the Company from time to time may be involved with disputes, claims and litigation related to the conduct of its business, there are no material legal proceedings pending to which the Company is a party or to which any of its property is subject, and the Company’s management does not know of any such action being contemplated.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
 
 
 
 
19
 
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “WVVI.”
 
The following table below sets forth for the quarters indicated the high and low sales prices for the Company’s common stock as reported on the NASDAQ Capital Market:
 
Quarters ended 2017
 
12/31/2017
 
 
9/30/2017
 
 
6/30/2017
 
 
3/31/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 $8.86 
 $8.16 
 $8.16 
 $8.23 
Low
 $7.86 
 $7.81 
 $7.62 
 $7.35 
 
Quarters ended 2016
 
12/31/2016
 
 
9/30/2016
 
 
6/30/2016
 
 
3/31/2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 $8.36 
 $8.75 
 $9.00 
 $7.19 
Low
 $7.80 
 $7.62 
 $6.90 
 $6.55 
 
Holders
 
As of March 22, 2018, the Company had approximately 2,251 common stock shareholders of record. As some of our shares of common stock are held in “street name” by brokers on behalf of shareholders, we are unable to estimate the total number of beneficial holders of our common stock represented by these record holders.
 
Dividends
 
The Company has not paid any dividends on its Common Stock, and the Company does not anticipate paying any dividends in the foreseeable future. The Company intends to use its earnings to expand its vineyards, winemaking and customer service facilities.
 
The Company has paid a prorated annual dividend on its Preferred Stock. On December 30, 2017 the Company paid $.22 per share to Preferred Stock shareholders of record as of December 8, 2017. Shares issued by the Company after January 1, 2017 received a prorated dividend based upon their original issue date. The Company offers a program that allows Preferred Stock shareholders to use their dividends as credits for wine purchases at additional discounts. Total dividends paid, in cash and wine credits, were $704,049 and the payment satisfied all accrued dividend liabilities through December 31, 2017. The Company anticipates paying Preferred Stock dividends annually in December of each year.
 
Equity Compensation Plans
 
The Company had no equity compensation plan pursuant to which equity awards could be granted and no outstanding options or other equity awards as of December 31, 2017.
 
Recent Sales of Unregistered Securities
 
None.
 
 
 
 
 
 
 
 
 
20
 
 
Issuer Purchases of Equity Securities
 
Issuer purchases of equity securities not disclosed in previous submissions are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Maximum Number
 
 
 
 
 
 
 
 
 
Total Number of
 
 
(or Approximate
 
 
 
 
 
 
 
 
 
Shares Purchased
 
 
Dollar Value) of Shares
 
 
 
Total Number
 
 

 
 
as Part of Publicly
 
 
that May Yet be
 
 
 
of Shares
 
 
Average Price
 
 
Announced Plans
 
 
Purchased Under the
 
Period
 
Purchased
 
 
Paid per Share
 
 
or Programs
 
 
Plans or Programs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2017
  190 
  8.22 
  190 
 $28,554 
November 2017
  - 
  - 
  - 
  28,554 
December 2017
  - 
  - 
  - 
  28,554 
 
    
    
    
    
Total
  190 
  8.22 
  190 
 $28,554 
 
In January 2012 the Company began its first program to repurchase common stock and has approved two subsequent programs. As of December 31, 2017, the Company has repurchased 241,648 shares of common stock since the inception of the original program.
 
In November of 2015 the Company’s Board of Directors (the “Board”) approved a program to repurchase common stock of the Company. Under the November 2015 Board action, the Company funded a plan to repurchase up to $250,000 of our common stock through the open market. Subsequently, the Board added a total of $600,000 in funds to this plan in 2016. On February 2, 2017, the Board approved adding an additional $250,000 to the repurchase plan. On September 16, 2017, the Board approved adding an additional $50,000 to the repurchase plan. This plan is intended to remain in place until all funding for the plan is depleted or the plan is expanded or terminated by the Board. As of December 31, 2017, $28,554 remained unspent under this plan.
 
ITEM 6. SELECTED FINANCIAL DATA
 
Not required.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s financial statements and related notes. Some statements and information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements, and of important factors that could cause results to differ materially from the forward-looking statements contained in this report, see Item 1 of Part I, “Business – Forward-Looking Statements.”
 
Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses Willamette Valley Vineyards’ financial statements, which have been prepared in accordance with generally accepted accounting principles. As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based upon the information available. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, bad debts, inventories, investments, income taxes, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 
21
 
 
Revenue - The Company’s principal sources of revenue are derived from sales and distribution of wine. Distributor sales are recognized from wine sales at the time of shipment and passage of title. The Company’s payment arrangements with customers provide primarily 30-day terms and, to a limited extent, 45-day, 60-day or longer terms for some international customers. Direct sales from items sold through the Company’s retail locations are recognized at the time of sale.
 
Inventory - The Company values inventories at the lower of actual cost to produce the inventory or net realizable value. The Company regularly reviews inventory quantities on hand and adjusts its production requirements for the next twelve months based on estimated forecasts of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In the future, if the Company’s inventory cost is determined to be greater than the net realizable value of the inventory upon sale, the Company would be required to recognize such excess costs in its cost of goods sold at the time of such determination. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the ultimate selling price and cases sold and, therefore, the carrying value of the Company’s inventory and its reported operating results.
 
Additionally, the Company regularly evaluates inventory for obsolescence and marketability and if it determines that the inventory is obsolete, or no longer suitable for use or marketable, the cost of that inventory is recognized in its cost of sales at the time of such determination.
 
Vineyard Development - The Company capitalizes internal vineyard development costs prior to the vineyard land becoming fully productive. These costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. Amortization of such costs as annual crop costs is done on a straight-line basis for the estimated economic useful life of the vineyard, which is estimated to be 30 years. The Company regularly evaluates the recoverability of capitalized costs. Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold.
 
Depletions - The Company pays depletion allowances to the Company’s distributors based on their sales to their customers. The Company sets these allowances on a monthly basis and the Company’s distributors bill them back on a monthly basis. All depletion expenses associated with a given month are recognized in that month as a reduction of revenues. The Company also reimburses for samples used by distributors up to 1.5% of product sold to the distributors. Sample expenses are recognized at the time the Company is billed by the distributor as a selling, general and administrative expense.
 
Shipping - Amounts paid by customers to the Company for shipping and handling expenses are included in the net revenue. Expenses incurred for outbound shipping and handling charges are included in selling, general and administrative expense. The Company’s gross margins may not be comparable to other companies in the same industry as other companies may include shipping and handling expenses as a cost of goods sold.
 
Income TaxesThe Company accounts for income taxes using the asset and liability approach. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and the tax basis of assets and liabilities at the applicable tax rates. The Company evaluates deferred tax assets, and records a valuation allowance against those assets, if available evidence suggests that some of those assets will not be realized.
 
The effect of uncertain tax positions would be recorded in the financial statements only after determining a more likely than not probability that the uncertain tax positions would withstand an examination by tax authorities based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As facts and circumstances change, management reassesses these probabilities and would record any changes in the financial statements as appropriate.
 
 
 
 
22
 
 
Overview
 
The Company generates revenue from the sales of wine to wholesalers and direct to consumers. The Company is experiencing increased levels of competition in traditional wholesale to retail grocery distribution from large California based wineries that are acquiring, producing and marketing Oregon branded wines. Direct to consumer sales primarily include sales through the Company’s tasting rooms and wine club. Direct to consumer sales are more profitable to the Company due to prices received being closer to retail than those prices paid by wholesalers. The Company continues to emphasize growth in direct to consumer sales through use of the Hospitality Center and growth in wine club membership. The Company had 7,050 wine club memberships for the year ended December 31, 2017, a net increase of 336 when compared to 2016. Additionally, the Company has made significant investment in developing alternative wine brands, products, direct sales methods and venues.
 
Periodically, the Company will sell grapes or bulk wine, which primarily consists of inventory that does not meet Company standards or is in excess to production targets. However, this activity is not a significant part of the Company’s activities.
 
The Company sold approximately 134,600 and 134,700 cases of produced wine during the years ended December 31, 2017 and 2016, respectively, a decrease of 100 cases, or 0.1% in the current year over the prior year.  The decrease in case sales was primarily the result of decreased shipments to distributors mostly offset by increased direct to consumer sales in 2017.
 
Cost of Sales includes grape costs, whether purchased or grown at Company vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs associated with purchased production materials. For grapes grown at Company vineyards, costs include farming expenditures and amortization of vineyard development costs. The Company expects cost of sales to decrease, as a percentage of net sales, over the next several years, as higher yield vintages are released.
 
At December 31, 2017, wine inventory includes approximately 84,800 cases of bottled wine and 533,200 gallons of bulk wine in various stages of the aging process. Case wine is expected to be sold over the next 12 to 24 months and generally before the release date of the next vintage. The winery bottled approximately 151,332 cases during the year ended December 31, 2017.
 
Results of Operations
 
The Company had net sales of $20,853,527 and $19,425,412 for the years December 31, 2017 and 2016, respectively, an increase of $1,428,115 or 7.4%, for the year ended December 31, 2017 over the prior year period. The reasons for this increase include increased sales in all categories; retail sales (17.5%), in-state sales (2.7%), out-of-state sales (0.4%) and sales of bulk products (43.1%).
 
Gross profit was $12,881,851 and $12,220,528 for the years ended December 31, 2017 and 2016, respectively, an increase of $661,323, or 5.4%, for the year ended December 31, 2017 over the prior year period. This increase was generally driven by an increase in sales partially offset by a higher cost of sales percentage.
 
The gross margin percentage was 61.8% and 62.9% for the years ended December 31, 2017 and 2016, respectively, a decrease of 1.8%, for the year ended December 31, 2017 over the prior year period. This decrease in the gross profit percentage was primarily the result of an overall decrease in per case margins due to the release of wines from vintages produced from lower grape harvest yields as well as the write down of obsolete inventory. Margins on sales through distributors were also reduced as a result of large retailers purchasing and warehousing a higher percentage of wine that is promotionally discounted.
 
Selling, general and administrative expenses were $9,245,807 and $8,053,127 for the years ended December 31, 2017 and 2016, respectively, an increase of $1,192,680, or 14.8%, for the year ended December 31, 2017 over the prior year period. This increase was mainly the result of both increased selling expenses and increased general and administrative costs associated with efforts to increase sales and accommodate and develop retail growth and new operations.
 
 
23
 
 
Income from operations was $3,636,044 and $4,167,401 for the years ended December 31, 2017 and 2016, respectively, a decrease of $531,357, or 12.8%, for the year ended December 31, 3017 over the prior year period. The primary reason for this decrease was increased selling expenses and administrative expense including labor and shipping. Additionally, the Company recognized a $110,000 lawsuit recovery in 2016, as an offset to administrative expenses, that did not recur in 2017.
 
Provision for income taxes was $452,726 and $1,478,310 for the years ended December 31, 2017 and 2016, respectively, a decrease of $1,025,584, or 69.4%, for the year ended December 31, 2017 over the prior year period. This decrease in income taxes in 2017 compared to 2016 were primarily the result of lower income from operations and the cumulative effect of the “Tax Cuts and Jobs Act” enacted by the U.S. government in December 2017.
 
Net income was $2,993,779 and $2,628,975, for the years ended December 31, 2017 and 2016, respectively, an increase of $364,804, or 13.9%, for the year ended December 31, 2017 over the prior year period. The primary reason for this increase was a lower income before taxes being more than offset a reduced income tax provision.
 
Net income applicable to common shareholders was $2,289,730 and $2,166,446, for the years ended December 31, 2017 and 2016, respectively, an increase of $123,284, or 5.7%, for the year ended December 31, 2017 over the prior year period. This increase was primarily driven by increased net income partially offset by increased preferred stock dividends in 2017 compared to 2016.
 
Diluted income per common share after preferred dividends was $0.46 and $0.43 for the years ended December 31, 2017 and 2016, respectively, an increase of $0.03, or 7.0%, for the year ended December 31, 2017 over the prior year period. The primary reason for this increase is an increase in net income in 2017 compared to 2016.
 
The Company has three primary sales channels: direct-to-consumer sales, in-state sales to distributors, and out-of-state sales to distributors. These three sales channels represent 39.7%, 18.3% and 42.0%, of net sales for the year ended December 31, 2017, respectively. This compares to 36.0%, 19.1% and 44.9% of net sales for the year ended December 31, 2016, respectively. Miscellaneous and grape sales are included in direct-to-consumer sales.
 
The Company had cash balances of $13,776,257, at December 31, 2017, and $5,706,351 at December 31, 2016. The Company had no outstanding line of credit balance at December 31, 2017 or 2016.
 
EBITDA
 
In 2017, the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) decreased 5.0% to $5,439,591 from $5,724,058 in 2016, primarily as a result of an increase in net income more than offset by a reduction in income tax expense.
 
EBITDA does not reflect the impact of a number of items that affect our net income, including financing costs. EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America, referred to as “GAAP”, and should not be considered as an alternative to net income or income from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity. We use EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider it to be a meaningful supplement to operating income as a performance measure primarily because depreciation and amortization expense are not actual cash costs, and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities.
 
EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our GAAP results as reported. Because of these limitations, EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein.
 
 
24
 
 
The following table provides a reconciliation of net income (the most comparable GAAP measure) to EBITDA for the periods indicated:
 
 
 
Year Ended December 31,
 
 
 
2017
 
 
2016
 
Net Income
 $2,993,779 
 $2,628,975 
Depreciation and amortization expense
  1,544,735 
  1,335,254 
Interest Expense
  473,608 
  291,370 
Interest Income
  (25,257)
  (9,851)
Income tax expense
  452,726 
  1,478,310 
EBITDA
 $5,439,591 
 $5,724,058 
 
Sales
 
Wine case sales for the years ended December 31, 2017 and 2016 and ending inventory amounts for the year ended December 31, 2017, are shown on the following table, as well as planned production quantities for the year ending December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Planned Bottling
 
 
 
Cases Sold
 
 
Cases Sold
 
 
Cases On-Hand
 
 
Production
 
Varietal/Product
 
2017
 
 
2016
 
 
December 31, 2017
 
 
 (Cases) 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pinot Noir/Estate
  13,100 
  13,900 
  18,900 
  2,500 
Pinot Noir/Barrel Select
  9,800 
  10,800 
  100 
  15,000 
Pinot Noir/Founders Reserve
  5,200 
  3,400 
  4,300 
  5,000 
Pinot Noir/Special Designates
  5,300 
  4,100 
  8,800 
  7,900 
Pinot Noir/Whole Cluster
  39,300 
  38,000 
  5,500 
  41,500 
Pinot Gris
  23,800 
  24,500 
  13,500 
  30,000 
Riesling
  19,700 
  22,000 
  7,400 
  24,300 
Chardonnay
  2,300 
  2,600 
  6,300 
  2,500 
Table Wine
  11,400 
  10,300 
  8,500 
  21,200 
Other
  4,700 
  5,100 
  11,500 
  3,400 
 
    
    
    
    
Total
  134,600 
  134,700 
  84,800 
  153,300 
 
Approximately 54% of the Company’s case sales during 2017 were of the Company’s flagship varietal, Pinot Noir. Case sales of Pinot Gris and Riesling follow with approximately 18% and 15% of case sales each, respectively. The Company sold approximately 134,600 and 134,700 cases of Company-produced wine during the years ended December 31, 2017 and 2016, respectively. This represents a decrease of approximately 100 cases, or 0.1% in 2017 compared to 2016. This decrease in case sales in 2017 compared to 2016 was primarily the result of a reduction in shipments through distributors.
 
Wine Inventory
 
The Company had approximately 84,800 cases of bottled wine on-hand at the end of 2017. Management believes sufficient bulk wine inventory is on-hand to bottle approximately 153,300 cases of wine in 2018 and that sufficient stock is on hand to meet current demand levels until the 2018 vintage becomes available.
 
 
25
 
 
Production Capacity
 
Current production volumes are within the current production capacity constraints of the Winery when including storage capacity at the Tualatin Winery and utilization of temporary storage when appropriate. In 2017, approximately 151,332 cases were produced, and Management anticipates bottling approximately 153,300 cases in 2018. The Winery has capacity to store and process about 186,000 cases of wine per year at the Estate Winery but can expand that capacity by utilizing storage at the Tualatin Winery as well as temporary storage. Management continues to invest in new production technologies to increase the efficiency and quality of wine production. During 2017, the Company did not choose to utilize the wine production facilities at the Tualatin Winery but did utilize it for wine storage. The Tualatin Winery has capacity to produce approximately 25,000 cases of wine. The facility is maintained in good condition and is occasionally used by other local wineries. Management intends to fully utilize the production capacity at the Estate Winery before expanding into the Tualatin Winery.
 
Grape Supply
 
For the 2017 and 2016 vintages, the Company grew approximately 50% and 47% of all grapes harvested, respectively. The remaining grapes harvested were purchased from other growers. In 2017 and 2016, 45% and 32% of grapes harvested were purchased under short-term contracts, and 5% and 21% of grapes harvested were purchased under long-term contracts, respectively. The Company considers short-term contracts to be for single vintage years and long-term contracts to cover multiple vintage years.
 
Grapes are typically harvested and received in October of the vintage year. Upon receipt, the grapes are weighed, and a quality analysis is performed to ensure the grapes meet the standards set forth in the purchase contract. Based on the quantity of qualifying grapes received, the full amount payable to the grower is recorded to the grapes payable liability account. Approximately 50% of the grapes payable amount is due in November of the vintage year. The remaining amount is due in March of the following year. The grapes are processed into wine, which is typically bottled and available for sale between five months and two years from date of harvest.
 
The Company received $1,126,326 and $525,118 worth of grapes from long-term contracts during the years ended December 31, 2017 and 2016, respectively. The Company received $2,047,616 and $1,258,642 worth of grapes from short-term contracts during the years ended December 31, 2017 and 2016, respectively. The increase in grape purchases contracts was primarily the result of purchases made to increase the stock of bulk wine available for anticipated bottling needs. Total grapes payable were $1,455,569 and $693,666 as of December 31, 2017 and 2016, respectively. Grapes payable includes $205,475 and $225,118 of grapes payable from long-term contracts as of December 31, 2017 and 2016, respectively.
 
The Company plans to address long-term grape supply needs by developing new vineyards on properties currently owned or secured by lease. The Company has approximately 178 acres of vineyards that have been planted but are in the pre-productive stage. We anticipate that these vineyards will begin bearing fruit in the next one to three years. The Company has approximately 168 acres of land that is suitable for future vineyard development. Management currently has plans to plant approximately 42 acres and 10 acres in the years 2018 and 2019, which we anticipate will begin bearing fruit in years 2022 and 2023, respectively. Additionally, the Company intends to seek out opportunities to acquire land for future grape plantings in order to continue to increase available quantities, maintain control over farming practices, more effectively manage grape costs and mitigate uncertainty associated with long-term contracts.
 
Wine Quality
 
Continued awareness of the Willamette Valley Vineyards brand and the quality of its wines, was enhanced by national and regional media coverage throughout 2017.
 
Wine Spectator Magazine rated the Company's 2015 Estate Pinot Noir a 91 point score and included it in an article titled, "12 Polished Oregon Pinot Noirs." They also rated the Company’s inaugural 2014 vintage of the Brut Méthode Champenoise sparkling wine a 92 point score, 2015 Tualatin Estate Pinot Noir a 92 point score, 2015 Bernau Block Pinot Noir a 91 point score, 2015 Ribbon Ridge AVA Series Pinot Noir a 91 point score, and 2015 Chehalem Mountains AVA Series Pinot Noir a 91 point score. 
 
 
26
 
 
Wine Enthusiast Magazine rated the Company's 2015 Bernau Block Chardonnay with a 92 point score, 2015 Estate Chardonnay a 91 point score, 2014 Hannah Pinot Noir a 91 point score, 2014 Bernau Block Pinot Noir a 91 point score, and 2014 Tualatin Estate Pinot Noir a 90 point score. They also rated Company's 2015 Vintage 42 Chardonnay a 92 point score and featured it in an article titled, "The Old Vines of Oregon Wine." 
 
Robert Parker's Wine Advocate rated the Company's 2015 Vintage 42 Chardonnay with a 92 point score, 2015 Bernau Block Chardonnay with a 90+ point score, and 2015 Estate Chardonnay with a 90 point score.
 
Wine & Spirits Magazine rate the Company's 2014 Brut Methode Champenoise sparkling wine a 93 point score. 
 
Vinous rated the Company’s 2015 Hannah Pinot Noir with a 92 point score, 2015 Bernau Block Pinot Noir with a 92 point score, 2015 Vintage 42 Pinot Noir a 92 point score, and 2015 Tualatin Estate Pinot Noir with a 91 point score. The inaugural 2015 vintage of the Elton Pinot Noir received a 94 point score from Vinous.
 
The Company's 2015 Estate Pinot Noir earned a Double Gold Medal and 95 point score and 2016 Whole Cluster Rose of Pinot Noir earned a Gold Medal and 91 point score at the San Francisco Chronicle Wine Competition, the largest wine competition in North America. 
 
The Company was selected as a 2016 Impact Hot Prospect Brand by M. Shanken Communications, Inc., the parent company of Wine Spectator Magazine. The criteria for this prestigious award are depletions between 50,000 and 200,000 cases in 2016 and at least 15% growth in 2016 and consistent growth in 2015 and 2014. The Company's award was featured in the September 1st and 15th issues of Global Impact Newsletter and in the October issue of Market Watch. 
 
The Company’s relief efforts offering harvest cellar jobs to workers displaced by the California wildfires were covered multiple news outlets including Oregon Public Broadcasting, The Statesman Journal, Fox News Channel 12, ABC News 10 and Wines & Vines.
 
Capital Press wrote an article, "Queen of the Vine: Betty O'Brien," about Elton Vineyard owner and member of the Company's Board of Directors. The article featured her contribution to the Oregon wine industry and information about the release of the Company's new Elton wines made from her vineyard.
 
The Company's Winery Director Christine Collier was selected by Portland Business Journal as a Top 40 Under 40 award winner. The publication featured a profile of her and hosted an awards banquet in June. 
 
The Company’s inaugural Méthode Champenoise sparkling wine was featured in the San Francisco Chronicle in an article titled, “Suddenly, West Coast is sparkling: Here’s the best of the new bubbly.”
 
The Company was featured in two Wines & Vines articles called, "Look Up in Walla Walla," and "Willamette Valley Vintners Expands in Walla Walla," discussing the Company’s expansion into the Walla Walla Valley for the new Pambrun winery. 
 
The East Oregonian featured the Company in an article called, “Oregon’s newest AVA attracting development,” about the recent purchase of 36 acres in the Rocks District of Milton-Freewater AVA for a future estate vineyard.
 
The Company’s purchase of Maison Bleue Winery in Walla Walla was covered by Wine Spectator in an online article titled, “Willamette Valley Vineyards Buys Maison Bleue,” and by Great Northwest Wine in an article titled, “Willamette Valley Vineyards Buys Maison Bleue, Plans Vineyard.”
 
The Company’s announcement of the expansion into Folsom, CA with Willamette Wineworks was reported on by the Sacramento Business Journal in an article called, “New Tenant Announced for Anticipated Project.” The Sacramento Public Radio station aired the story.
 
The Company participated in the second annual Willamette Pinot Noir Auction trade auction with two auction lots that helped the event raise $472,000.
 
 
27
 
 
The Company participated in the Seattle Food & Wine Experience, Pebble Beach Food & Wine Classic, Nashville Wine Auction, Oregon Chardonnay Symposium, Wine & Dine for the Arts, Wine & Wishes, Sunset Magazine Celebration Weekend, Five Star Sensation, and San Diego Wine Classic.
 
Seasonal and Quarterly Results
 
The Company has historically experienced and expects to continue experiencing seasonal fluctuations in its revenue and net income. Typically, first quarter sales are the lowest of any given year, and sales volumes increase progressively through the fourth quarter mostly because of consumer buying habits.
 
The following table sets forth certain information regarding the Company’s revenue, excluding excise taxes, from the Winery’s operations for the three and twelve months ended December 31, 2017 and 2016:
 
 
 
  Three months ended
 
 
  Twelve months ended
 
 
 
December 31,
 
 
December 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail sales
 $2,479,423 
 $1,957,154 
 $8,145,291 
 $6,932,424 
In-state sales
  1,142,460 
  1,345,089 
  3,914,662 
  3,810,841 
Out-of-state sales
  2,323,058 
  2,616,886 
  8,975,313 
  8,937,097 
Bulk wine/miscellaneous sales
  156,228 
  100,565 
  350,640 
  245,097 
 
    
    
    
    
Total revenue
  6,101,169 
  6,019,694 
  21,385,906 
  19,925,459 
 
    
    
    
    
Less excise taxes
  (155,559)
  (158,790)
  (532,379)
  (500,047)
 
    
    
    
    
Sales, net
 $5,945,610 
 $5,860,904 
 $20,853,527 
 $19,425,412 
 
2017 Compared to 2016
 
Retail sales for the years ended December 31, 2017 and 2016 were $8,145,291 and $6,932,424, respectively, an increase of $1,212,867, or 17.5%, for the year ended December 31, 2017 over the prior year period. This increase was primarily driven broad based growth in each major retail category.
 
Bulk Wine/miscellaneous sales for the years ended December 31, 2017 and 2016 were $350,640 and $245,097, respectively, an increase of $105,543 in 2017 compared to 2016. This increase was primarily the result of normal fluctuations in production needs when compared to bulk wine supplies.
 
In-state sales for the years ended December 31, 2017 and 2016 were $3,914,662 and $3,810,841, respectively, an increase of $103,821, or 2.7%, for the year ended December 31, 2017 over the prior year period. Management believes this increase is primarily due to increased visibility of our products in the Oregon market.
 
Out-of-state sales for the years ended December 31, 2017 and 2016 were $8,975,313 and $8,937,097, respectively, an increase of $38,216, or 0.4%. Management believes this increase is not related to a single factor.
 
The Company pays alcohol excise taxes to both the OLCC and to the TTB. These taxes are based on product sales volumes. The Company is liable for the taxes upon the removal of product from the Company’s warehouse on a per gallon basis. The Company also pays taxes on the grape harvest on a per ton basis to the OLCC for the Oregon Wine Board. The Company’s excise taxes for the years ended December 31, 2017 and 2016 were $532,379 and $500,047, an increase of $32,332, or 6.5%, for the year ended December 31, 2017 over the prior year period. This increase was due primarily to increased wine sales in 2017.
 
Cost of Sales was $7,971,676 and $7,204,884 for the years ended December 31, 2017 and 2016, respectively, an increase of $766,792, or 10.6%, for the year ended December 31, 2017 over the prior year period. The increase in cost of sales can be attributed mainly to higher per case product cost as a result of selling vintages from lower harvest years.
 
 
 
28
 
 
As a percentage of net sales revenue, gross profit was 61.8% and 62.9% in the years ended December 31, 2017 and 2016, respectively, a decrease of 1.8%, for the year ended December 31, 2017 over the prior year period. This decrease in the gross profit percentage is primarily a result of the release of lower margin vintages in 2017 and the write-off of obsolete inventory. Margins on sales through distributors were also reduced as a result of large retailers purchasing and warehousing a higher percentage of wine that is promotionally discounted.
 
Selling, general and administrative expenses were $9,245,807 and $8,053,127 for the years ended December 31, 2017 and 2016, respectively, an increase of $1,192,680, or 14.8%, for the year ended December 31, 2017 over the prior year period. This increase was the primarily the result of increased sales efforts and operating costs associated with retail and administrative operations in addition to the receipt of a legal settlement of $110,000 in 2016 that did not recur in 2017.
 
Interest income was $25,257 and $9,851 for the years ended December 31, 2017 and 2016, respectively, an increase of $15,406 or 156.4%. The increase in interest income is primarily due to increased balances of cash on hand in the Company’s accounts as a result of the proceeds received from sale of Preferred Stock and cash received from refinancing Company debt in 2017. Interest expense was $473,608 and $291,370 for the years ended December 31, 2017 and 2016, respectively, an increase of $182,238, or 62.5%, for the year ended December 31, 2017 over the prior year period. The increase in interest expense was mainly due to the increased balances on Company loans including a note payable in 2017 that did not exist in 2016.
 
Other income, net, was $258,812 and $221,403 for the years ended December 31, 2017 and 2016, respectively, an increase of $37,409, or 16.9%, for the year ended December 31, 2017 over the prior year period. The increase in other income in 2017 compared to 2016 was primarily the result of rents received from dwellings located on properties purchased by the Company in 2017.
 
The provision for income taxes and the Company’s effective tax rate was $452,726 and 13.1%, respectively in the year ended December 31, 2017. The provision for income taxes and the Company’s effective tax rate was $1,478,310 and 36.0%, respectively in the year ended December 31, 2016. This decrease in tax rate is primarily related to the cumulative effects of the enactment of the “Tax Cuts and Jobs Act” by the U.S. government in December 2017.
 
As a result of the above factors, net income was $2,993,779 and $2,628,975 for the years ended December 31, 2017 and 2016, respectively, an increase of $364,804, or 13.9%, for the year ended December 31, 2017 over the prior year period. The increase in net income was primarily the result of deceased income before income taxes more than offset by a reduced income tax provision as described above. Diluted income per common share after preferred dividends was $0.46 and $0.43 for the years ended December 31, 2017 and 2016, respectively, an increase of $0.03 or 7.0% in 2017 compared to 2016. The increase in earnings per share is primarily a result of increased income applicable to common shareholders.
 
Liquidity and Capital Resources
 
At December 31, 2017, the Company had a working capital balance of $24.0 million and a current ratio of 4.73:1. The Company had cash balances of $13,776,257, at December 31, 2017.
 
Total cash provided from operating activities for the years ended December 31, 2017 was $2,509,899. These results were primarily due to income from operations, increased by non-cash operating expenses, such as depreciation, and decreased by an increase in inventory.
 
Total cash used in investing activities for the years ended December 31, 2017 was $3,915,412. These results were primarily due to additions to property and equipment and general vineyard development.
 
Total cash provided from financing activities for the years ended December 31, 2017 was $9,475,419. These results were primarily due to cash received in connection with the issuance of Preferred Stock and the refinancing of debt, partially offset by the repurchase of common stock and payment of a preferred stock dividend.
 
At December 31, 2017, the Company had no outstanding borrowings under its $2,000,000 line of credit. The current line of credit loan agreement with Umpqua Bank is due to expire in July 2018.
 
 
29
 
 
As of December 31, 2017, the Company had a long-term debt balance of $7,202,727 owed to NW Farm Credit Services. The debt with NW Farm Credit Services was used to finance the Hospitality Center and subsequent remodels, invest in winery equipment to increase the Company’s winemaking capacity, complete the storage facility, and acquire new vineyard land for future development. Additionally, the Company had a long-term debt balance of $35,381 owed to Toyota Credit Corporation for the purchase of a vehicle.
 
As of December 31, 2017, the Company had an installment note payable of $275,333, due in payments of $137,667 on March 15, 2018 and 2019, associated with the purchase of 45 acres of farmland in the Walla Walla AVA.
 
As of December 31, 2017, the Company had a 15 year installment note payable of $1,621,986, due in quarterly payments of $42,534, associated with the purchase of property in the Dundee Hills AVA.
 
The Company believes that cash flow from operations and funds available under its existing credit facilities will be sufficient to meet the Company’s foreseeable short and long-term operating needs.
 
The Company’s contractual obligations as of December 31, 2017 including long-term debt, note payable, grape payables and commitments for future payments under non-cancelable lease arrangements are summarized below:
 
 
 Payments Due by Period       
 
 
 
Total
 
 
Less than 1
Year
 
 
1 - 3
Years
 
 
3 - 5
Years
 
 
After 5
Years
 
Long-term debt
 $7,238,108 
 $397,251 
 $855,668 
 $922,454 
 $5,062,735 
Notes payable
  1,897,319 
  212,138 
  300,600 
  183,543 
  1,201,038 
Grape payables
  1,455,569 
  1,455,569 
  - 
  - 
  - 
Operating leases
  3,203,752 
  425,348 
  672,866 
  509,794 
  1,595,744 
 
    
    
    
    
    
Total contractual obligations
 $13,794,748 
 $2,490,306 
 $1,829,134 
 $1,615,791 
 $7,859,517 
 
Inflation
 
The Company’s management does not believe inflation has had a material impact on the Company’s revenues or income during 2017 or 2016.
 
Off Balance Sheet Arrangements
 
At December 31, 2017 and 2016, the Company had no off-balance sheet arrangements.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not required.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO FINANCIAL STATEMENTS
 
 
 
PAGE
 
 
 
Report of Independent Registered Public Accounting Firm
31
Financial Statements  
 
 
Balance Sheets
32
 
Statements of Income
33
 
Statements of Shareholders’ Equity
34
 
Statements of Cash Flows
35
 
Notes to Financial Statements
36-47
 
 
 
 
30
 
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Willamette Valley Vineyards, Inc.
 
Opinion on the Financial Statements
 
We have audited the accompanying balance sheets of Willamette Valley Vineyards, Inc. (the “Company”) as of December 31, 2017 and 2016, the related statements of income, shareholders’ equity, and cash flows for the years then ended. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
 
/s/ Moss Adams LLP
 
Portland, Oregon
March 22, 2018
 
We have served as the Company’s auditor since 2004.
 
 
31
 
 
WILLAMETTE VALLEY VINEYARDS, INC.
 BALANCE SHEETS
 
 
ASSETS          
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
December 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $13,776,257 
 $5,706,351 
Accounts receivable, net
  1,760,039 
  1,871,450 
Inventories (Note 3)
  14,793,594 
  11,970,656 
Prepaid expenses and other current assets
  108,102 
  399,740 
Total current assets
  30,437,992 
  19,948,197 
 
    
    
Other assets
  49,153 
  59,186 
Vineyard development costs, net
  6,006,250 
  4,666,794 
Property and equipment, net (Note 4)
  23,201,876 
  20,196,945 
 
    
    
TOTAL ASSETS
 $59,695,271 
 $44,871,122 
 
    
    
 
LIABILITIES AND SHAREHOLDERS’ EQUITY      
 
 
    
    
CURRENT LIABILITIES
    
    
Accounts payable
 $993,598 
 $505,085 
Accrued expenses
  871,427 
  995,405 
Investor deposits for preferred stock
  430,305 
  - 
Current portion of note payable
  1,759,652 
  245,417 
Current portion of long-term debt
  397,251 
  380,471 
Income taxes payable
  125,297 
  389,798 
Current portion of deferred revenue-distribution agreement
  95,220 
  142,857 
Unearned revenue
  306,564 
  213,612 
Grapes payable
  1,455,569 
  693,666 
Total current liabilities
  6,434,883 
  3,566,311 
 
    
    
Note payable, net of current portion
  137,667 
  - 
Long-term debt, net of current portion and debt issuance costs
  6,655,384 
  4,443,685 
Deferred rent liability
  82,024 
  113,567 
Deferred revenue-distribution agreement, net of current portion
  - 
  95,223 
Deferred gain
  57,077 
  89,172 
Deferred income taxes
  1,587,227 
  1,931,000 
Total liabilities
  14,954,262 
  10,238,958 
 
    
    
COMMITMENTS AND CONTINGENCIES (Note 12)
    
    
 
    
    
SHAREHOLDERS’ EQUITY
    
    
 
Redeemable preferred stock, no par value, 10,000,000 shares authorized,
 
    
4,427,991 shares, liquidation preference $18,375,831, issued and
 
    
outstanding at December 31, 2017 and 2,396,954 shares, liquidation
 
    
preference $9,947,359, issued and outstanding at December 31, 2016,
 
    
respectively.
  17,339,508 
  9,061,307 
 
Common stock, no par value, 10,000,000 shares authorized, 4,964,529 and
 
    
5,016,685 shares issued and outstanding at December 31, 2017 and
 
    
December 31, 2016, respectively.
  8,512,489 
  8,971,575 
Retained earnings
  18,889,012 
  16,599,282 
Total shareholders' equity
  44,741,009 
  34,632,164 
 
    
    
LIABILITIES AND SHAREHOLDERS’ EQUITY
 $59,695,271 
 $44,871,122 
 
The accompanying notes are an integral part of the financial statements.
 
 
32
 
 
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF INCOME
 
 
 
Twelve months ended
 
 
 
December 31,    
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
SALES, NET
 $20,853,527 
 $19,425,412 
COST OF SALES
  7,971,676 
  7,204,884 
 
    
    
GROSS PROFIT
  12,881,851 
  12,220,528 
 
    
    
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
  9,245,807 
  8,053,127 
 
    
    
INCOME FROM OPERATIONS
  3,636,044 
  4,167,401 
 
    
    
OTHER INCOME (EXPENSE)
    
    
Interest income
  25,257 
  9,851 
Interest expense
  (473,608)
  (291,370)
Other income, net
  258,812 
  221,403 
 
    
    
INCOME BEFORE INCOME TAXES
  3,446,505 
  4,107,285 
 
    
    
INCOME TAX PROVISION
  (452,726)
  (1,478,310)
 
    
    
NET INCOME
  2,993,779 
  2,628,975 
 
    
    
Preferred stock dividends
  (704,049)
  (462,529)
 
    
    
INCOME APPLICABLE TO COMMON SHAREHOLDERS
 $2,289,730 
 $2,166,446 
 
    
    
Basic income per common share after preferred dividends
 $0.46 
 $0.43 
 
    
    
Diluted income per common share after preferred dividends
 $0.46 
 $0.43 
 
    
    
Weighted average number of basic common shares outstanding
  4,985,219 
  4,991,065 
 
    
    
Weighted average number of diluted common shares outstanding
  4,985,219 
  4,995,343 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
 
 
 
 
 
33
 
 
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 
 
Redeemable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
 Retained
 
 
 
 
 
 
Shares
 
 
Dollars
 
 
Shares
 
 
Dollars
 
 
 Earnings
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
  1,074,338 
 $3,735,437 
  4,989,216 
 $8,998,760 
 $14,432,836 
 $27,167,033 
 
    
    
    
    
    
    
Issuance of preferred stock, net
  1,322,616 
  5,325,870 
  - 
  - 
  - 
  5,325,870 
 
    
    
    
    
    
    
Preferred stock dividends declared
  - 
  - 
  - 
  - 
  (462,529)
  (462,529)
 
    
    
    
    
    
    
Stock based compensation expense
  - 
  - 
  - 
  748 
  - 
  748 
 
    
    
    
    
    
    
Stock issued and options exercised
  - 
  - 
  97,500 
  498,927 
  - 
  498,927 
 
    
    
    
    
    
    
Stock repurchased
  - 
  - 
  (70,031)
  (526,860)
  - 
  (526,860)
 
    
    
    
    
    
    
Net income
  - 
  - 
  - 
  - 
  2,628,975 
  2,628,975 
 
    
    
    
    
    
    
Balance at December 31, 2016
  2,396,954 
  9,061,307 
  5,016,685 
  8,971,575 
  16,599,282 
  34,632,164 
 
    
    
    
    
    
    
Issuance of preferred stock, net
  2,030,957 
  8,278,201 
  - 
  - 
  - 
  8,278,201 
 
    
    
    
    
    
    
Preferred stock dividends declared
  - 
  - 
  - 
  - 
  (704,049)
  (704,049)
 
    
    
    
    
    
    
Stock issued and options exercised
  - 
  - 
  7,000 
  21,630 
  - 
  21,630 
 
    
    
    
    
    
    
Stock repurchased
  - 
  - 
  (59,156)
  (480,716)
  - 
  (480,716)
 
    
    
    
    
    
    
Net income
  - 
  - 
  - 
  - 
  2,993,779 
  2,993,779 
 
    
    
    
    
    
    
Balance at December 31, 2017
  4,427,911 
 $17,339,508 
  4,964,529 
 $8,512,489 
 $18,889,012 
 $44,741,009 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
34
 
 
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
 
 
 
Year ended December 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 $2,993,779 
 $2,628,975 
Adjustments to reconcile net income to net cash from operating activities:
    
    
Depreciation and amortization
  1,544,735 
  1,335,254 
Gain on disposition of property & equipment
  (3,269)
  (2,500)
Stock based compensation expense
  - 
  748 
Non-cash loss from other assets
  10,033 
  814 
Deferred rent liability
  (31,543)
  (27,189)
Deferred income taxes
  (343,773)
  83,000 
Deferred gain
  (32,095)
  (32,095)
Change in operating assets and liabilities:
    
    
Accounts receivable, net
  111,411 
  (186,948)
Inventories
  (2,822,938)
  (1,338,194)
Prepaid expenses and other current assets
  291,638 
  (268,567)
Income taxes receivable
  - 
  204,513 
Income taxes payable
  (264,501)
  389,798 
Unearned revenue
  92,952 
  140,412 
Deferred revenue-distribution agreement
  (142,860)
  (142,860)
Grapes payable
  761,903 
  (123,213)
Accounts payable
  468,405 
  35,140 
Accrued expenses
  (123,978)
  390,825 
Net cash from operating activities
  2,509,899 
  3,087,913 
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES
    
    
Additions to vineyard development
  (1,186,046)
  (1,003,115)
Additions to property and equipment
  (2,782,366)
  (4,327,804)
Proceeds from sale of property and equipment
  53,000 
  2,500 
Net cash from investing activities
  (3,915,412)
  (5,328,419)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES
    
    
Proceeds from long-term debt
  2,672,659 
  - 
Proceeds from investor deposits held as restricted cash