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”. These forward-looking statements
involve risks and uncertainties that are based on current
expectations, estimates and projections about the Company’s
business, and beliefs and assumptions made by management. Words
such as “expects,” “anticipates,”
“intends,” “plans,” “believes,”
“seeks,” “estimates” “intends,”
“plans,” “predicts,”
“potential,” “should,” or
“will” or the negative thereof and variations of such
words and similar expressions are intended to identify such
forward-looking statements. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements due to numerous factors, including, but
not limited to: availability of financing for growth, availability
of adequate supply of high quality grapes, successful performance
of internal operations, impact of competition, changes in wine
broker or distributor relations or performance, impact of possible
adverse weather conditions, impact of reduction in grape quality or
supply due to disease or smoke from forest fires, changes in
consumer spending, the reduction in consumer demand for premium
wines and the impact of the COVID-19 pandemic and the policies of
United States federal, state and local governments in response to
such pandemic. In addition, such statements could be affected by
general industry and market conditions and growth rates, and
general domestic economic conditions. Many of these risks as well
as other risks that may have a material adverse impact on our
operations and business, are identified in 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. The forward-looking
statements in this report are made as of the date hereof, and,
except as otherwise required by law, the Company disclaims any
intention or obligation to update or revise any forward-looking
statements or to update the reasons why the actual results could
differ materially from those projected in the forward-looking
statements, whether as a result of new information, future events
or otherwise.
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, Pambrun, Maison Bleue, Natoma,
Metis 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 include retail sales in our tasting room and remote
sites, wine club sales, online 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 2020, $24 to $100 per bottle;
Chardonnay, $25 to $45 per bottle; Pinot Gris, $17 per bottle;
Pinot Blanc, $24 per bottle; Sauvignon Blanc, $28 per bottle; Gruner
Veltliner, $28 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 in the Pacific
Northwest.
Under
its Tualatin Estate Vineyards label, the Company currently produces
and sells the following type of wine in 750 ml bottles:
Semi-Sparkling Muscat, $20 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, $48 per bottle; Merlot, $45 per bottle; Cabernet
Sauvignon, $48 per bottle; Grenache, $48 per bottle; Cabernet
Franc, $48 per bottle; Tempranillo, $48 per bottle; Malbec, $48 per
bottle; The Griffin (a Bordeaux style blend), $65 per bottle; and
Viognier, $32 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 Pambrun label, the Company produces and sells the following
types of wine in 750 ml bottles: Chrysologue, $65 per bottle;
Merlot, $65 per bottle; and Cabernet Sauvignon, $70 per
bottle.
Under
its Maison Bleue label, the Company produces and sells the
following types of wine in 750 ml bottles: Frontiere Syrah, $75 per
bottle; Graviére Syrah, $65 per bottle; Voyageur Syrah, $50
per bottle; Bourgeois Grenache, $50 per bottle; and Voltigeur
Viognier, $40 per bottle and Lisette Rose, $28 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
(off-dry rosé), $14 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, OREGON’S LANDMARK WINERY, TUALATIN,
GRIFFIN CREEK, GRIFFIN, ELTON, WILLAMETTE, WVV, SIP.SAVE, WHOLE
CLUSTER, MADE IN OREGON CELLARS, OREGON BLOSSOM, INGRAM ESTATE,
IT’S WILLAMETTE, DAMMIT, FULLER, TUALATIN, TUALATIN
ESTATE, MAISON BLEUE WINERY, METIS,
O’BRIEN, WILLAMETTE WINEWORKS, COTE DU BLEUE, PERE
AMI and NATOMA marks. Additionally, the Company has
allowed use on PAMBRUN and 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 2009 to 2020, U.S.
wineries grew in number from 6,357 to 11,053, according to
Statistica, and are one of the fastest growing segments in
agriculture. U.S. wineries increased production in 2017, the most
recent year such data is available, by 7.5% compared to 2016
according to The Wine Institute.
The
United States is the largest wine market in the world in terms of
revenues and volume representing 15% of world consumption in 2017,
the last year in which data is available. Total U.S. wine shipments
reached 409 million cases in 2019 with total US wine sales,
domestic and import, revenue of $72 billion, up nearly 4% from the
previous year according to Wine Analytics Report. U.S. wine sales
have grown for 25 consecutive years and there were 644,647
locations in the United States that sold wine in 2017, the last
year in which such data is available, an increase of more than
100,000 locations over the past 10 years according to
Nielsen.
According to Wine Intelligence Ltd., the total wine drinking
population in the U.S. increased to a record high of 118 million,
an increase of 8 million people drinking wine at least once a year
compared with 2015. However, the number of consumers drinking wine
at least once a month declined by 11 million. Wine
Intelligence reports this trend is driven by 21-34 year olds who
are moderating consumption and switching to other beverages yet
finds Millennials who are remaining as regular wine drinkers say
they are “more highly involved, adventurous and higher
spending wine drinkers than more mature consumers”.
According to the Wine Market Council, of U.S. wine consumers
in 2019, 56% were female and 44% male with 33% of consumers
drinking wine more than once a week according to the Wine
Marketing Council. Domestic wine accounted for 66.9% of U.S. sales
in 2019 according to Wines & Vines Analytics Report. The five
most popular wines in 2019 were chardonnay, cabernet sauvignon, red
blends, pinot gris and pinot noir, according to
Nielsen.
In
2018, off-premise sales accounted for roughly 81% of the U.S.
market with an average bottle price of $10 according to Nielsen.
Direct to consumer (DTC) sales continue to be a fast growing
channel in the U.S. market, but still a small percentage of overall
volume representing less than 2% of the U.S. volume in 2018, such
sales increased by 12% in 2018 from 2017 according to Wines &
Vines Analytics.
In a
2018 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, 50% reported they consume wine daily or several
times per week making them “High Frequency Wine
Drinkers” with 17% reporting that they drink wine once per
week and the remaining 33% drinking wine less frequently.
Respondents demonstrated a preference for red wine, with 69%
listing it as one of their favorites, 67% listing white wine as one
of their favorites and 40% listing Rose. Price and brand topped the
list of decision-making reasons when purchasing wine for home
consumption at 80% and 69% respectively. Of those surveyed 32%
listed the most common purchase price being $11 to $15 however 46%
indicated that they had paid $50 to $99 a bottle for a special
occasion.
Rob
McMillan, EVP and founder of Silicon Valley Bank’s Wine
Division, one of the wine industry’s most authoritative
experts on the wine industry in his State of The Wine Industry
Report 2020, explains that the wine consumers who fueled the growth
of super premium wines, Baby Boomers, are moving into retirement,
declining in numbers and per capita consumption. While
younger generations represent a substantial opportunity for wine
producers, winemakers must make dramatic adjustments in their
strategies to reach and appeal to these younger consumer groups
with different values or face declining sales and
profits.
The
Company’s Board of Directors and Management believe the
winery’s focus on integrity in winemaking, small scale,
storied estate vineyards, environmental stewardship, support for
community needs and participatory wine experiences are reflective
of the values of a number of prospective, developing wine
enthusiasts.
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 Oregon Vineyard and Winery Report produced by
University of Oregon’s Institute for Policy Research and
Engagement (UOIPRE) in 2018, the most recent year such data is
available, the overall number of
wineries increased from 769 to 793 with the biggest increases
coming from the Willamette Valley, which added 28. Planted
acres of wine grape vineyards increased by nearly 2,000 acres from
33,996 to 35,972, an increase of 5.8%, 33,283 acres of which were
harvested. Oregon wine grapes produced a 2019 crop with a total
value of $209 million, an increase of 8.7% from 2017 according to
UOIPRE. Pinot Noir leads all varieties accounting for 57% of
planted acreage and 59% of production. According to UOIPRE, Oregon
case sales in 2018 were 4.1 million, up from 3.6 million in 2017, a
15.1% increase. UOIPRE reported case sales in dollars for 2018 to
be approximately $607 million, a 10.3% increase from
2017.
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
18% of domestic wines that garnered a score of 90 points or higher
by Wine Spectator between 2015 and 2019.
Oregon
does have certain disadvantages as a wine-producing region.
Oregon’s wines are lesser 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, Pambrun, Maison Bleue
and Griffin Creek brands.
2019 Oregon harvest – The Oregon Vineyard and Winery
Census Report states that 2019 saw increases in sales for Oregon
wine alongside increased vineyard production. Pinot Noir continued
to lead statewide production representing 59% of planted acreage
and 58% of production in 2019. The overall number of wineries
increased from 793 in 2018 to 908 in 2019 with total tons crushed
in Oregon increasing 6.2% from 79,685 tons in 2018 to 84,950 in
2019.
2020 Oregon harvest – There is no official data
available on the 2020 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.
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, the Tualatin Estate Tasting
Room in Forest Grove, Oregon, the Maison Bleue Tasting Room in
Walla Walla, Washington, the Tasting Room in Folsom, California 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 names Pambrun, Maison Bleue
and Metis. This future winery is expected to produce small
vintages of Cabernet Sauvignon and other Bordeaux-varietals, under
the Pambrun brand, and Syrah and other Rhone-varietals, under the
Maison Bleue brand, to compete in the ultra-premium wine
market. The Company has released wines under the Pambrun
label beginning with the 2015 vintage year and Maison Bleue
label beginning with the 2016 vintage. 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 produces primarily Pinot
Noir and Chardonnay, also for sale in the ultra-premium
space. The Company has released wines under the Elton label
beginning with the 2015 vintage year. In December 2016 the
Company purchased approximately 40 acres in the Dundee, Oregon
area, purchased another 17 acres in January 2017, and through
a lot line adjustment added 3 acres to the property. The
Company is in the process of constructing a new winery and
tasting room, called Bernau Estate, focused on sparkling wines and
biodynamic farming practices at the vineyard. In 2020 the Company
opened a microwinery featuring wine tasting and a custom
blending experience under the name Willamette Wineworks, in
historic Folsom, California, and sell wine under the brand name
Natoma as well as its other brands.
Vineyards
The
Company owns and leases approximately 1,018 acres of land, of which
798 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 81% of the grapes needed to meet the winery’s
current production capacity, of 524,000 gallons (220,000 cases), at
its Estate Winery.
The
following table summarizes the Company’s
acreage:
|
|
|
|
Vineyard
Name
|
Total
|
|
|
|
|
|
|
|
|
Owned
Vineyards
|
|
|
|
|
|
|
|
|
|
WVV
Estate
|
107
|
67
|
1
|
-
|
39
|
|
187
|
|
285
|
Tualatin
Estate Vineyard
|
107
|
58
|
2
|
-
|
47
|
|
146
|
|
199
|
Ingram
Vineyard
|
86
|
63
|
-
|
-
|
23
|
|
112
|
|
162
|
Pambrun
Vineyard
|
87
|
20
|
-
|
30
|
37
|
|
33
|
|
28
|
Loeza
Vineyard
|
62
|
18
|
17
|
23
|
4
|
|
-
|
|
-
|
Louisa
Vineyard
|
53
|
-
|
-
|
25
|
28
|
|
-
|
|
-
|
Maison
Bleue Vineyard
|
37
|
5
|
10
|
19
|
3
|
|
13
|
|
-
|
Bernau
Estate
|
20
|
13
|
-
|
-
|
7
|
|
24
|
|
36
|
Dayton
Vineyard
|
40
|
-
|
-
|
34
|
6
|
|
-
|
|
-
|
Lafayette
Vineyard
|
36
|
-
|
-
|
36
|
-
|
|
-
|
|
-
|
|
68
|
-
|
-
|
64
|
4
|
|
-
|
|
-
|
|
703
|
244
|
30
|
231
|
198
|
|
515
|
|
710
|
|
|
|
|
|
|
|
|
|
|
Leased
Vineyards
|
|
|
|
|
|
|
|
|
|
|
79
|
69
|
-
|
-
|
10
|
|
174
|
|
350
|
|
49
|
49
|
-
|
-
|
-
|
|
141
|
|
236
|
|
59
|
54
|
-
|
2
|
3
|
|
121
|
|
215
|
|
110
|
74
|
19
|
17
|
-
|
|
80
|
|
61
|
|
18
|
-
|
7
|
2
|
9
|
|
-
|
|
-
|
Sub-Total
|
315
|
246
|
26
|
21
|
22
|
|
516
|
|
862
|
|
|
|
|
|
|
|
|
|
|
Contracted
Vineyards*
|
|
|
|
|
|
|
|
|
|
Various
|
368
|
368
|
-
|
-
|
-
|
|
1,470
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
Total
|
1,386
|
858
|
56
|
252
|
220
|
|
2,501
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
*
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.
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.
Ingram Estate and Elton Vineyard – In 2008, 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. The Ingram
site is also adjacent to Elton Vineyards, where the Company leases
54 acres of established vineyards.
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 sold under the Pambrun
label.
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 and Pinot Noir.
The site is close to Tualatin Vineyards which allows the Company to
leverage existing crews for vineyard development and
operations.
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.
Maison Bleue Vineyard – The Company purchased
approximately 37 acres in the new Rocks District of
Milton-Freewater appellation near Milton-Freewater, Oregon in
2016. The Company planted 10 acres in 2019. Grapes from
this vineyard will go to the Maison Bleue
label.
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 added 3 acres through a lot line adjustment to add to the
parcel. The Company leases 18 adjoining acres. The
Company planted 3 acres in 2019.
Dayton Vineyard – The Company purchased 40 acres in
Dayton, Oregon in December 2016.
Lafayette Vineyard – The Company purchased 36 acres in
January 2018.
Jory Claim Vineyard – The Company purchased 68 acres
south of Salem, Oregon in 2019.
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.
In
2020, crop yields were well below the 7-year average and the
Company’s producing acres in the Estate Vineyard and Tualatin
Estate yielded approximately 187 tons and 146 tons of grapes,
respectively. Leased Vineyards produced an aggregate of 516 tons of
grapes in 2020. Ingram Estate produced 112 tons of grapes in 2020.
Bernau Estate produced 24 tons of grapes in 2020. Pambrun Vineyard
produced 33 tons of grapes in 2020.
The
Company fulfills its remaining grape needs by purchasing grapes
from other nearby vineyards at competitive prices. In 2020, the
Company purchased an additional 1,470 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 plant more acres and purchase
properties for future vineyards.
Management
believes that 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. 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.
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. The Company has water rights at the
Pambrun Vineyard and Maison Bleue Vineyards and has no water rights
at Dayton Vineyard, Lafayette Vineyard and Jory Claim
Vineyard.
Susceptibility of vineyards to disease – The Tualatin
Estate 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 Estate
Winery and production facilities are capable of efficiently
producing up to 220,000 cases (524,000 gallons) of wine per year,
depending on the type of wine produced. In 2020, the Winery
produced approximately 175,357 cases (416,920 gallons) from its
2018 and 2019 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, 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 28,000 cases (66,000 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.
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 and
Owners, 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 is the Pinot Room
and Founders’ Room, which can accommodate 40 persons and 111
persons, respectively, 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 $5,984,272 at December 31, 2020.
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:
|
|
|
|
|
|
|
Harvest
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
2018
|
1,501
|
1,063
|
2,564
|
800
|
2018
|
164,590
|
2019
|
1,572
|
1,046
|
2,618
|
-
|
2019
|
172,869
|
2020
|
1,031
|
1,470
|
2,501
|
13,173
|
2020
|
175,357
|
Cases
produced per ton harvested often vary between years mainly due to
the timing of when the cases are produced.
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). We believe 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 one of the largest wine club memberships in Oregon and
features a Members-only Club Room at the Estate
Winery.
In 2014, the Company launched daily food pairings to accompany its
wines. Led by the Winery Chef, the menu highlights Pacific
Northwest inspired dishes paired with the Company’s wines.
The culinary offering has now expanded to include “Pairings
Wine Dinners,” community-style wine dinners hosted
regularly throughout each month. In 2019, the Company added a new
experience offered throughout the week called Small Bites Pairings
that features four wines paired with four small bites to educate
guests on food and wine pairing.
The Winery has developed a 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 four additional tasting rooms; one in
historic downtown McMinnville, in the heart of Oregon Wine Country,
one at its Tualatin Vineyard (located 30 minutes west of Portland)
one in downtown Walla Walla, Washington, and one in Folsom,
California.
The
Company usually holds six 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 can 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 2020 and 2019, direct sales contributed
approximately 38.6% and 38.2% 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 3 non-domestic (export) customers. For 2020 and 2019, sales to
distributors and wine brokers contributed approximately 61.4% and
61.8% of the Company’s revenue from operations,
respectively.
Tourists – Oregon wineries are a popular tourist
destination with many bed & breakfasts, motels and fine dining
restaurants available. The Willamette Valley, Oregon’s
leading wine region has approximately 69% of the state’s
wineries and vineyards, is home to approximately 564 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 minute to a two-hour
drive.
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, an 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 2020, sales to one distributor represented
approximately 24.0% of total Company revenue. In 2019, sales to one
distributor represented approximately 14.1% of total Company
revenue.
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 aggregate production capacity of 590,000 gallons
(248,000 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 publicly 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.
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 with wines containing higher alcohol levels being
taxed at $1.57 per gallon. 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 were effective January 2020
and have since been made permanent.
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, 2020, the Company had approximately 144 full-time
employees and 69 part-time or seasonal 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 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 of the reports we file with the SEC are available from this
website. All websites referred to herein are inactive textual
references only, meaning that the information contained in such
websites is not incorporated by reference herein.
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 Estate
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 phylloxera, GRBV or other pests or viruses may
increase vineyard costs and/or reduce production.
Our operations are susceptible to changing weather patterns and
other environmental factors
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 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.
As
weather patterns evolve, the Company’s vineyards, and
contracted vineyards, have become susceptible to potential smoke
damage as a result of wildfires within the region. In extreme
events, smoke can produce effects on grapes that make them unusable
in the production of wine. The Company can not predict smoke events
or their potential impact were they to occur.
We may not be able to economically insure certain
risks
The
Company maintains insurance policies to cover certain risks.
However not all risks can be insured, or insured economically, and
there may be gaps in coverage that could expose the Company to
liability should an event occur. Additionally, we cannot be certain
that coverage levels are adequate or that all of our insurers will
be financially viable if we make a claim.
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, John Ferry, 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 adequate
funding
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 or capital
raises 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, 2020, the Company’s outstanding long-term debt
was approximately $6.0 million but it did not have any outstanding
borrowings under its lines of credit. Additionally, the Company had
notes payable to private parties of approximately $1.4 million as
of December 31, 2020.
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.
The Willamette Valley American Viticultural Area
(“AVA”) value may be eroded by out of state competition
who use it inappropriately or as fanciful marketing
Wine
grape growing regions in the United States are divided into
American Viticultural Areas (AVAs) by the Alcohol and Tobacco Tax
and Trade Bureau (“TTB”), of the United States
Department of the Treasury, based on distinguishable geographic
features. The Oregon wine industry has historically embraced higher
standards for wine production than those established by the federal
government and other states. As a result, wines from Oregon
AVA’s, and specifically the Willamette Valley AVA, have
achieved recognition for their quality against other wines in their
class. As a result, these wines are often sold at a higher price
point than wines not produced in Oregon. Because of this
recognition, out of state competitors have used Oregon AVAs on
bottles and packaging claiming its use as fanciful marketing. Such
use, inappropriate or otherwise, could have a dilutive effect on
the prestige of Oregon AVAs and ultimately the prices that can be
charged for wines from Oregon AVAs as a result of reduced
competitor quality and/or pricing.
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.
Loss of the “Willamette Valley Vineyards” and
“Willamette” trademarks could adversely affect the
Company’s distinction within the AVA
The
Company has long held the federal trademarks “Willamette
Valley Vineyards” and “Willamette” as used in its
wine brands. While it is lawful for wine producers meeting
the federal and state requirements to list the American
Viticultural Area “Willamette Valley” source of their
wine grapes and wine on their labels, packaging and advertising
materials, the Company has enforced its trademarks on any
unauthorized use as a wine brand. These trademarks have been
challenged and, should the Company lose this challenge or future
challenges, the Company could lose a competitive
advantage.
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.
Increased regulation and/or taxation could adversely affect the
Company
The
wine industry is subject to extensive regulation by the Federal
Alcohol and 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.
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.
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).
As the
Company’s sales revenues are dependent in part upon the
purchases made by and continued goodwill with its holders of
Preferred Stock, any failure to pay dividends timely could
adversely effect the Company’s sales. Additionally, as
the Company focuses its issuance of Preferred Stock to wine
enthusiasts likely to purchase the Company’s wines, any
failure by the Management to successfully target its stock sales
could diminish the opportunity to maximize earnings and offset the
administrative, regulatory and legal costs of this form of capital
formation through Preferred Stockholder wine
purchases.
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.
Failures or security breaches of our information technology systems
could disrupt our operations and negatively impact our
business.
We use
information technologies to manage our operations and various
business functions. We rely on various technologies to process,
store and report on our business and to communicate electronically
between our facilities, personnel, customers and suppliers as well
as for administrative functions and many of such technology systems
are independent on one another for their functionality. We also use
information technologies to process financial information and
results of operations for internal reporting purposes and to comply
with regulatory, legal and tax requirements. We rely on third party
providers for some of these information technologies and support.
Our ability to effectively manage our business and coordinate the
production, distribution and sale of our products is highly
dependent on our technology systems. Despite our security design
and controls and other operational safeguards, and those of our
third party providers, our information technology systems may be
vulnerable to a variety of interruptions, including during the
process of upgrading or replacing hardware, software, databases or
components thereof, natural disasters, terrorist attacks,
telecommunications failures, computer viruses, cyber-attacks,
hackers, unauthorized access attempts and other security issues or
may be breached due to employee error, malfeasance or other
disruptions. Any such interruption or breach could result in
operational disruptions or the misappropriation of sensitive data
that could subject us to civil and criminal penalties, litigation
or have a negative impact on our reputation. There can be no
assurance that such disruptions or misappropriations and the
resulting repercussions will not negatively impact our cash flows
and materially affect our results of operations or financial
condition.
In
addition, many of our information technology systems, such as those
we use for administrative functions, including human resources,
payroll, accounting and internal and external communications, as
well as the information technology systems of our third-party
business partners and service providers, whether cloud-based or
hosted in proprietary servers, contain personal, financial or other
information that is entrusted to us by our customers and personnel.
Many of our information technology systems also contain proprietary
and other confidential information related to our business, such as
business plans and research and development initiatives. To the
extent we or a third party were to experience a material breach of
our or such third party’s information technology systems that
result in the unauthorized access, theft, use, destruction or other
compromises of our customers’ or personnel’s data or
confidential information stored in such systems, including through
cyber-attacks or other external or internal methods could result in
a violation of applicable privacy and other laws, and subject us to
litigation and governmental investigations and proceedings, any of
which could result in our exposure to material
liability.
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.
The COVID-19 pandemic could adversely affect our financial results,
operations and outlook for an extended period of time.
The COVID-19 pandemic and restrictions imposed by federal, state,
and local governments in response to the outbreak have disrupted
and will continue to disrupt our business. In the State of Oregon
where we operate the Winery and most of our vineyards, individuals
are being encouraged to practice social distancing, are restricted
from gathering in groups and, in some areas, have previously been
mandated to stay home except for essential activities. In response
to the COVID-19 pandemic and government restrictions, we have at
various times closed our tasting rooms and have launched
curbside pick-ups and complimentary shipping specials with minimum
purchase. We believe the ongoing
restrictions and the sudden increase in unemployment caused by the
closure of businesses in response to the COVID-19 pandemic may
adversely affect our sales revenues, which would adversely impact
our liquidity, financial condition, and results of operations. Even
after any stay-at-home orders are loosened or lifted, the impact of
lost wages due to COVID-19 related unemployment may dampen consumer
spending for some time in the future.
Our operations could be further disrupted if a significant number
of our employees are unable or unwilling to work, whether because
of illness, quarantine, restrictions on travel or fear of
contracting COVID-19, which could further materially adversely
affect our liquidity, financial position and results of operations.
To support our employees and protect the health and safety of our
employees and our customers, we may offer enhanced health and
welfare benefits, provide bonuses to our employees, and purchase
additional sanitation supplies and personal protective materials.
These measures will likely increase our operating costs and
adversely affect our liquidity.
The COVID-19 pandemic may also adversely affect the ability of our
grape suppliers to fulfill their obligations to us, which may
negatively affect our operations. If our suppliers are unable to
fulfill their obligation to us, we could face shortages of grapes,
and our operations and sales could be adversely
impacted.
We have also modified our plans for expanding our operations due to
the COVID-19 pandemic. To preserve our liquidity, we have delayed
some planned capital expenditures. These changes may adversely
affect our ability to grow our business, particularly if these
projects are delayed for a significant amount of time.
We cannot predict how long the COVID-19 pandemic will last or if it
will recur, if new government restrictions and mandates will be
imposed or how long they will be effective, or how quickly, if at
all, our customers will return to their pre-COVID-19 purchasing
behaviors, so we cannot predict how long our results of operations
and financial performance may be adversely impacted.