10-K
1
f10k2021_freshvine.htm
ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
COMMISSION FILE NUMBER: 001-41147
FRESH VINE WINE, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
505 Highway 169 North, Suite 255
Plymouth, MN 55441
(Address and Zip Code of principal executive offices)
(Registrant’s telephone number, including
area code): (855) 766-9463
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common stock, $0.001 par value VINE NYSE American
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 Section 15(d) of the Act. Yes ☐ No
☒
Indicate by checkmark 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xYes
☐ No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
o
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes ☐ No ☒.
The registrant was not a public company as of June 30, 2021, the last
day of its most recently completed second fiscal quarter, and therefore, cannot calculate the aggregate market value of its common stock
held by non-affiliates as of such date. The registrant’s common stock began trading on the NYSE American on December 14, 2021.
As of March 31, 2022, Fresh Vine Wine, Inc. had 12,451,864 shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
PART I 1
ITEM 1. Business 1
ITEM 1A. Risk factors 11
ITEM 1B. Unresolved staff comments 30
ITEM 2. Properties 30
ITEM 3. Legal proceedings 30
ITEM 4. Mine safety disclosures 30
ITEM 6. [RESERVED] 33
ITEM 7A. Quantitative and qualitative disclosures about market risk 41
ITEM 8. Financial statements and supplementary data 41
ITEM 9A. Controls and procedures 42
ITEM 9B. Other information 43
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 43
PART III 44
ITEM 10. Directors, executive officers and corporate governance 44
ITEM 11. Executive compensation 44
ITEM 14. Principal accounting fees and services 45
ITEM 15. Exhibits, financial statement schedules 46
SIGNATURES 47
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Cautionary Statement Concerning Forward-Looking
Statements
We make forward-looking statements in this
Annual Report on Form 10-K. In some cases, you can identify these statements by forward-looking words such as “may,”
“might,” “should,” “would,” “could,” “expect,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential” or “continue,”
and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and
unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth
strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections
about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to
differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements.
In particular, you should consider the numerous risks and uncertainties described in this report under the caption “Risk Factors.”
While we believe we have identified material risks,
these risks and uncertainties are not exhaustive. New risks and uncertainties emerge from time to time, and it is not possible to predict
all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements in this report
represent our views as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements
whether as a result of new information, future developments or otherwise, and we do not intend to do so.
Forward-looking statements include, but are
not limited to, statements about:
● our ability to continue as a going concern;
● our reliance on our brand name, reputation and product quality;
● our reliance on celebrities to endorse our wines and market our brand;
● fluctuations in consumer demand for wine;
● quarterly and seasonal fluctuations in our operating results;
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● our ability to operate, update or implement our IT systems;
● our potential ability to obtain additional financing when and if needed;
● Nechio & Novak, LLC’s significant influence over us;
● the potential liquidity and trading of our securities; and
This Annual Report on Form 10-K includes market
data and forecasts with respect to the wine industry. We have obtained this market data and certain industry forecasts from various independent
third-party sources, including industry publications, reports by market research firms, surveys and other independent sources. Some data
and information is based on management’s estimates and calculations, which are derived from our review and interpretation of internal
company research and data, surveys and independent sources. We believe the data regarding the industry in which we compete and our market
position and market share within this industry generally indicate size, position and market share within this industry; however, this
data is inherently imprecise and is subject to significant business, economic and competitive uncertainties and risks due to a variety
of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ
materially from our assumptions and estimates.
In addition, statements that “we believe”
and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to
us as of the date of this report. Although we believe that information provides a reasonable basis for these statements, that information
may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review
of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
Risk Factor Summary
An investment in our common stock involves a high
degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business
strategy. You should carefully consider all of the information set forth in this report, and, in particular, you should evaluate the specific
factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Among these important risks are
the following:
● We need to hire additional personnel.
● The success of our business depends heavily on the strength of our wine brand.
iii
iv
PART I
ITEM 1. BUSINESS.
Overview
We are a producer of low carb, low calorie premium
wines in the United States. Founded in 2019, our wines have rapidly gained visibility, credibility, and a loyal national customer
base. We craft and bottle all of our wines in Napa Valley, which makes us a premier premium option in the rapidly growing “better
for you” category of wines. Offering bold, crisp, and creamy wines that embody health, warmth, and a deeper connection to wellness
and an active lifestyle, we offer a unique and innovative collection of today’s most popular varietals. Our varietals currently
include our Cabernet Sauvignon, Chardonnay, Pinot Noir, and Rosé, as well as a limited Reserve Napa Cabernet Sauvignon. We intend
to further expand our portfolio of product offerings in the future. Our wines are strategically priced between $15 and $22 per bottle — price
points that support a premium product strategy, appeal to mass markets, and allow us to offer significant value across all consumer distribution
channels. Nina Dobrev and Julianne Hough are two of our co-founders.
Our wines are exclusively focused on the affordable
luxury segment, the fastest growing segment of the wine market according to IWSR, addressing the largest wine drinking segment in the
$340 billion world-wide wine market, in which United States consumers spent $53 billion in 2020 for wine produced in the
U.S., with an additional $16 billion spent on imported wines in the U.S. Importantly, our wines stand out in the luxury wine
market because they address our target demographic customer base’s preference for a low-calorie, low-carb, gluten-free product,
while concurrently delivering the quality and taste profile of a premium wine brand. This allows us to position our wines in the rapidly
emerging “better for you” segment that seeks to appeal to consumers’ emphasis on a healthy lifestyle. While we believe
our product offerings have mass appeal among all consumers of affordable luxury wines, we have positioned the Fresh Vine Wine brand as
a complement to the healthy and active lifestyles of younger generation wine consumers.
We do not own or operate any vineyards. Instead
of cultivating our own grapes, we currently use Fior di Sole, a third-party supplier, to source bulk juice made from grapes. This allows
us to leverage our supplier’s broad network of vendor relationships and purchasing power to negotiate favorable cost structures.
Because our supplier procures product inputs on our behalf, including bulk juice, we do not currently engage directly with grape growers
(“growers”) or bulk distributors of juice (“bulk distributors”). As a result, we have limited front-end supply
chain visibility. This is a strategy by design that we believe provides us with access to diversified growers and bulk distributors, which
reduces our reliance upon any single vendor and mitigates our exposure to droughts, wildfires, spoilage, contamination and other supply
side risks common to the wine industry.
Our supplier procures grapes and/or juice for
our existing varietals from California. This juice is then stored in bulk in Napa until time of production, at which point it is made
available for blending and bottling processes at our Napa Valley production and bottling facility. This is significant in that both blending
and bottling must occur within Napa to be considered a Napa wine — a distinctive product attribute that adds significant
value to our brand in the eyes of consumers. However, wine produced by the Company will only be labelled with a Napa Valley appellation
of origin if it is produced from grapes grown in the Napa Valley American Viticultural Area (AVA). The labels for the Company’s
existing wines identify California as the appellation of origin.
Our sales channels include wholesale, retail,
and our direct-to-consumer (DTC) ecommerce channels. We are able to conduct wholesale distribution of our wine in all 50 states and Puerto
Rico and licensed to sell through the DTC channel in 42 states. Our wholesale distribution network includes approximately 20 distributors,
including distribution agreements with Southern Glazer’s Wine and Spirits, Johnson Brothers, and Republic National Distributing
Company (RNDC), which are widely considered to be the world’s preeminent distributors of beverage alcohol. We have placed our wines
directly in-stores of major retailers including: Hy-Vee, Food Lion, Lund’s & Byerly’s, Total Wine, 7-11, and Walgreens,
among others.
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Our direct to consumer (DTC) channel enables us
to sell wine directly to the consumer at full retail prices, currently ranging from approximately $15-$22 per bottle. Although these prices
are consistent with our suggested retail prices (SRPs), we incur two mark-ups of approximately 30% each for our distributor and retail
partners when selling wine through our wholesale distribution channel, therefore directly reducing our revenue and margins. Because the
DTC channel provides significantly higher margins than sales generated through wholesale distributors, we intend to further invest in
DTC capabilities to ensure it remains an integral part of our business. We also believe continued investment in DTC technologies and capabilities
are critical to maintaining an intimate relationship with our customers, which is becoming increasingly digital. While revenue generated
from the sale of wine to United States consumers has been growing at mid-single digit compound annual growth rates over the last
several years, revenue from United States wine sales in the lucrative DTC sales channel grew over 27% by volume in 2020, its
largest increase ever. Within the United States DTC sales channel, shipments of wine priced under $30 per bottle grew by 41.6% in
2020, and approximately $3.7 billion of revenue was generated by the overall DTC market in the United States.
In addition, we are now selling through alternative
DTC sales platforms, such as ecommerce marketplaces, product aggregators and virtual distributors, all of which have experienced significant
recent growth, as well as sales through home delivery services. IWSR reports an 80% increase in the value of ecommerce alcohol sales overall
in 2020 as compared to 2019, and aggregators and virtual distributors, have such as Drizly, Go Puff, and Wine.com, have reported 350%
and 115%, respectively, in 2020 as compared to 2019.
Our Strengths
Differentiated Product Offerings — Premium, Napa
Valley Wines within the “Better For You” Segment
We offer wines that are differentiated from those
sold by other wine producers operating within the better-for-you segment of the affordable luxury category based on our premium quality,
our association with an award winning winemaker and our Napa Valley based production.
Capital-Efficient and Scalable Operational Structure
We have strategically structured our organization
and operations to minimize our capital investment requirements while maintaining flexibility to rapidly scale our production capabilities
to meet consumer demands. We do this by utilizing our internal capabilities while leveraging a network of reputable third-party providers
with industry experience and expertise that we use to perform various functions falling outside our internal core competencies.
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Production and Bottling on an Alternating Proprietorship
Basis
We contract with Fior di Sole, an industry leading
packaging innovation and wine production company based in Napa Valley, California, to serve as a “host winery” and to
occupy a portion of its production and warehouse facility and utilize its production equipment on an alternating proprietorship basis.
Under this arrangement, we use capacity at Fior di Sole’s production facility at times mutually convenient to us and Fior di Sole
to produce and bottle our wines for an initial set-up fee and a recurring monthly fee. Fior di Sole is responsible for keeping its production
equipment in good operating order. When the alternating Premises is operated by or used on behalf of our Company, it is operated pursuant
to our federal basic permit and California winegrower’s license. Under the agreement, we are solely responsible for managing and
conducting our own winemaking activities and we make all production decisions relating to our wines. However, we may request use of Fior
di Sole’s personnel to perform crush, fermentation, blending, cellar, warehousing, barrel topping and/or bottling services for additional
fees. This arrangement has allowed us to commence our operations and build the Fresh Vine Wine brand without having to incur the considerable
overhead costs involved with the purchase or full time lease of a production facility. The term of the agreement commenced in July 2019,
had an initial term of one year and automatically renews for additional one-year terms unless either party provides 90 days written notice
to the other of its intent to terminate at the end of the then current term. Either party may terminate the agreement upon 30 days written
notice if the other party is in violation of any law or regulation that renders it impossible to perform its obligations under the agreement
for a period of greater than 30 days, makes an assignment for the benefit of creditors or files for bankruptcy protection, or is in material
breach of its obligations under the agreement and such failure to perform is not cured within 30 days of written notice from the other
party. We believe we have sufficient capacity under our current agreement or with alternative suppliers to increase production to meet
increased consumers’ demand for our wines.
Fior di Sole also provides us with bulk juice and
blends, finishes, bottles, stops, labels and packages our wine, which reduces our internal overhead expenses and allows us to benefit
from that company’s increased purchasing power. Fior di Sole provides these services on a purchase order basis, which purchase orders
are subject to the parties’ mutual agreement and governed by a Custom Winemaking and Bottling Agreement. This agreement outlines
the schedule for placing orders, the responsibility and schedule for delivery of production materials, procedures for establishing the
wine bottling date and delivery date. We are required to remit 20% of the amount due for wine produced, bottled and packaged pursuant
to this agreement upon our submission of a purchase order. The payment advance is used by Fior Di Sole to reserve or procure materials
on our behalf with additional vendors for bottles, boxes, corks, labels, juice, and other inputs. We, or our winemaker on our behalf,
oversees the production at the winery approves all components and aspects of the production process. The balance of the amount due for
wine produced, bottled and packaged (the remaining 80%) is due following our quality review and acceptance of the finished product.
The ability and willingness of Fior di Sole to supply
and provide services to us pursuant to purchase orders delivered under the Custom Winemaking and Bottling Agreement may be affected by
competing orders placed by other companies, the demands of those companies or other factors. If Fior di Sole becomes unable or unwilling
to supply and provide services to us, we believe we can obtain comparable supplies and services from alternative suppliers. However, there
can be no assurance that alternative suppliers will be available when required on terms that are acceptable to us, or at all, or that
alternative suppliers will allocate sufficient capacity to us in order to meet our requirements.
Licensing, Tax and Regulatory Compliance
We have contracted with a third-party to manage
our regulatory licensing and compliance activities. We and maintain licenses that enable us to distribute our wine to all 50 states, and
to sell direct-to-consumer from our e-commerce website in 42 states. We currently utilize software tools available to the industry and
work with our license compliance service provider to navigate and manage the complex state-by-state tax and other regulations that apply
to our operations in the beverage alcohol industry. This has enabled us to expand our operations and grow our revenue while reducing the
administrative burden of tax compliance, reporting and product registration.
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Through selective recruiting and hiring, we have
also built these capabilities internally; we increasingly perform these activities in-house. This allows us to operate with greater control
and responsiveness over regulatory licensing and compliance requirements, ensuring that our brand and each of its underlying varietals
is properly licensed across state and federal levels.
We believe that leveraging our network of supply
chain and compliance partners, consultants and service providers enables us to avoid potential costly and lengthy delays on nearly every
aspect of our business, from grapes to packaging materials, and will accelerate our return on capital due to our limited need to procure
expensive equipment, real estate, and other capital intensive resources. We believe we are well-positioned to add to or adjust the composition
of our provider network as required to serve the needs of our business.
Sales and Marketing Strategy
We believe we bring a unique sales and marketing
approach that will increase the visibility of our brand and product offerings to our target consumers.
Multi-Channel Marketing Approach
Today’s consumers interact with brands through
many channels, from traditional media to social media and other digital channels, and through various in-person and online purchasing
methods. In order to build the visibility of our brand and create a grassroots consumer following to support our DTC distribution channel,
we have employed a strategic multichannel marketing approach that we believe allows us to engage with our target consumers on their terms
to expand and deepen their recognition of our brand. In addition to other mass market promotional activities, our marketing strategy also
utilizes modern techniques, efficiency measures, and channels not commonly seen in the wine industry, including a combination of social
media lifestyle and wine influencer activities, through which brand ambassadors or “influencers” may conduct promotional activities
through the Company’s or their own social media channels including, but not limited to, Twitter, Facebook, Instagram, Snapchat,
YouTube and Pinterest, among others.
Celebrity-based Affinity
Recent years have seen a rise in the creation
of celebrity owned and/or endorsed alcoholic beverage brands, which utilizes fans’ affinity towards celebrities to promote their
product offerings ad drive sales. We are positioned to take advantage of this trend based on the popularity of Nina Dobrev and Julianne
Hough, two of our co-founders, each of whom served on our board of directors prior to our initial public offering.
In March 2021, we entered into five-year license
agreements with Ms. Dobrev and Ms. Hough, who have a collective following of approximately 30 million people on their Instagram social
media platforms alone, pursuant to which they actively promote our business and varietals of wine. Under these license agreements, each
has also granted us a license to use her pre-approved name, likeness, image, and other indicia of identity, as well as certain content
published by her on her social media or other channels, on and in conjunction with the sale and related pre-approved advertising and promotion
of our varietals of wine and marketing materials. Ms. Dobrev and Ms. Hough have agreed, subject to certain exceptions, not to grant any
similar license or render services of any sort on behalf of or in connection with any party in the wine category anywhere in the world
during the term of her agreement, other than with respect to Company. The license agreements are scheduled to expire in March 2026. However,
the license agreements to provide that each of Ms. Dobrev and Ms. Hough will have the right to terminate her agreement if as of the end
of calendar year 2023, we have not achieved at least $5.0 million in EBITDA in either fiscal 2022 or fiscal 2023. See “Certain Relationships
and Related Party Transactions — License Agreements with Nina Dobrev and Julianne Hough.”
We also enjoy support from several other celebrity
influencers who have supported our brand without any agreement or obligation to do so. Together with celebrity brand ambassadors, our
marketing efforts have produced highly visible content, including multiple billboards on the Sunset Strip in Los Angeles, promotions in
connection with the opening of Resort World Casino in Las Vegas, product placements in major sports venues and coverage in various print
and television media.
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Professional Sports Sponsorships
We have entered into sponsorship agreements with
professional sports organizations and venues spanning all four major United States professional sports leagues, which support our
commitment and outreach to consumers focused on active and healthy lifestyles, including agreements with the following organizations and/or
their affiliates:
● Washington Capitals (NHL) and Washington Wizards (NBA)
● Tampa Bay Rays (MLB)
● Washington Commanders (NFL)
● Los Angeles Chargers (NFL)
These sponsorship arrangements generally provide
us with advertising placements at the stadiums and arenas during sporting and concert events, as well as specified media and other advertising
and promotional benefits, in exchange for our payment of annual sponsorship fees, including at the following venues:
● Tropicana Field in Tampa, Florida (home of the Tampa Bay Rays)
● Charlotte Sports Park (the Tampa Bay Rays Spring Training facility)
Although in-venue sponsorship opportunities were
limited during 2020 and 2021 due to the COVID-19 pandemic, we believe these sponsorships will increase our brand awareness and demand
for our wines going forward by reaching mass in-person audiences attending sporting events. In addition, several of our sponsor venues
include our wines in their stadium concession offerings; however they are not required to do so under the terms of our sponsorship agreements.
As part of our strategic marketing efforts, we intend to pursue additional sponsorship opportunities with other sports organizations and
venues.
Labelling and Innovative Packaging Initiatives
We believe wine labelling can have a big impact
on consumers’ purchasing practices. We conduct market research to validate the consistency of our wine labels with our brand narrative.
Packaging also continues to be a key driver of brand perception, and we are exploring “active lifestyle packaging” alternatives
to traditional bottling that provides an opportunity for our customers to enjoy Fresh Vine Wines in non-traditional settings now and for
future years, including bottles with screw-off caps, aluminium cans, and smaller size bottles and cans that can be taken on-the-go and
are ideal for in-store point of purchase sales.
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Food and Beverage Industry Experience
Our executive team operates with a focus on human
capital management with a firm belief that quality people, with proven track records can produce quality results. Our leadership team
is made up of five multi-disciplinary executives with a proven track record of successfully launching, growing, and operating companies
of all sizes and across industries. Supporting this leadership team are deeply skilled individuals in key disciplines.
Consulting Agreement with Whetstone Consulting
On June 12, 2019, we entered into a consulting
agreement with Whetstone Consulting, through which our winemaker, Jamey Whetstone, does business, which agreement was subsequently amended
on May 15, 2020 and amended and restated on March 16, 2021. As amended and restated, the agreement provides the Company with
ownership and intellectual property protections for Inventions (as defined therein) conceived, made or reduced to practice by Whetstone
Consulting that relate to the services provided to the Company. In addition, Whetstone Consulting has agreed, for a period of one year
following termination of the agreement, not to directly or indirectly engage or invest in, be employed by, lend credit to, receive compensation
from or render services or advice to any person engaged in a Competing Business located within a twelve-mile radius of a specified Napa,
California address. For such purposes, a “Competing Business” means any business relating to the development, manufacture,
marketing and distribution of any product that competes with any low calorie and/or low sulphite wine products sold or substantially under
development by the Company during the one-year restricted period. The agreement does not restrict the acquisition, operation, management,
consulting, or other commercial activity by Whetstone Consulting, directly or indirectly in or with a winery, brewery, spirits, or other
alcoholic beverage industry business not concerning “low calorie” or “low sulphite” products or services. The
agreement also contains non-solicitation restrictions applicable to clients, customers, suppliers, licensors, and employees for a period
of one year follow the agreement’s termination, subject to certain exceptions.
As partial compensation for Whetstone Consulting’s
services to us under the original agreement, we issued Whetstone Consulting 100,000 units representing membership interests in Fresh
Grapes, LLC, which represent 619,343 shares on a post-LLC Conversion basis. In addition, under the amended and restated agreement, we
pay Whetstone Consulting $5,000 per month. Such monthly compensation will be offset by any distributions made to Whetstone Consulting
on account of its equity interest in the Company, of which there have been none to date.
The amended and restated agreement had an initial one-year term which
expired March 16, 2022, and renews automatically for successive one-year periods unless either party provides advance notice of non-renewal
to the other. Whetstone Consulting may terminate the agreement at any time by giving us written notice at least 30 days prior to
the termination date. We may terminate the agreement at any time. If we terminate the agreement for “Cause,” as such term
is defined in the agreement, Whetstone Consulting is obligated to transfer back to us all of the equity interests in our Company that
he received under the original agreement.
Related party services
In October 2021, we entered into a service agreement
with a related party in the wine industry to provide representation and distribution services. Under this agreement, we receive a management
fee of $50,000 per month plus a tiered fee ranging between $5.00 and $6.50 per case of the related party’s product sold. The term
of the agreement is one year and will automatically renew for additional one-year periods until terminated by either party with thirty
days prior written notice.
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Our Strategy for Growth
We expect to deliver meaningful increases in stockholder
value by executing the following strategies to gain brand and product visibility and increase sales and market share:
● Pursuing distribution of our wines internationally.
With over 500,000 licensed retail accounts (according
to Neilson) in the United States, there remains ample opportunity to continue broadening distribution of our wines as well as increasing
the volume of wine sold to existing accounts.
Competition
The wine industry and alcohol markets generally
are intensely competitive. Our wines compete domestically and internationally with other premium or higher quality wines produced in Europe,
South America, South Africa, Australia and New Zealand, as well as North America. Our wines compete on the basis of quality, price, brand
recognition and distribution capability. The ultimate consumer has many choices of products from both domestic and international producers.
Our wines may be considered to compete with all alcoholic and non-alcoholic beverages.
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At any given time, there are more than 400,000 wine
choices available to consumers, differing with one another based on vintage, variety or blend, location and other factors. Accordingly,
we experience competition from nearly every segment of the wine industry. Additionally, some of our competitors have greater financial,
technical, marketing and other resources, offer a wider range of products, and have greater name recognition, which may give them greater
negotiating leverage with distributors and allow them to offer their products in more locations and/or on better terms than us. Nevertheless,
we believe that our brand offerings, scalable infrastructure and relationships with the one of the largest domestic distributors will
allow us to continue growing our business.
IT Systems
We rely on various IT systems, owned by us and third
parties, to effectively manage our sales and marketing, accounting, financial, legal and compliance functions. Our website is hosted by
a third party, and we rely on third-party vendors for regulatory compliance for order processing, shipments and e-commerce functionality.
We believe these systems are scalable to support our growth plans. We recognize the value of enhancing and extending the uses of information
technology in our business.
Regulatory Matters
Regulatory framework
We, along with our contract growers, producers,
manufacturers, distributors, retail accounts and ingredients and packaging suppliers, are subject to extensive regulation in the United States
by federal, state and local government authorities with respect to registration, production processes, product attributes, packaging,
labelling, storage and distribution of wine and other products we make.
We are also subject to state and local tax requirements
in all states where our wine is sold. We monitor the requirements of relevant jurisdictions to maintain compliance with all tax liability
and reporting matters. In California, we are subject to a number of governmental authorities, and are also subject to city and county
building, land use, licensing and other codes and regulations.
Alcohol-related regulation
We are subject to extensive regulation in the
United States by federal, state and local laws regulating the production, distribution and sale of consumable food items, and specifically
alcoholic beverages, including by the TTB and the FDA. The TTB is primarily responsible for overseeing alcohol production records
supporting tax obligations, issuing wine labelling guidelines, including grape source and bottle fill requirements, as well as reviewing
and issuing certificates of label approval, which are required for the sale of wine through interstate commerce. We carefully monitor
compliance with TTB rules and regulations, as well the state law of each state in which we sell our wines. In California, where most of
our wines are made, we are subject to alcohol-related licensing and regulations by many authorities, including the ABC. ABC agents
and representatives investigate applications for licenses to sell alcoholic beverages, report on the moral character and fitness of alcohol
license applicants and the suitability of premises where sales are to be conducted and enforce California alcoholic beverages laws. We
are subject to municipal authorities with respect to aspects of our operations, including the terms of our use permits. These regulations
may limit the production of wine and control the sale of wine, among other elements.
Employee and occupational safety regulation
We are subject to certain state and federal employee
safety and employment practices regulations, including regulations issued pursuant to the U.S. Occupational Safety and Health Act
(“OSHA”), and regulations governing prohibited workplace discriminatory practices and conditions, including those regulations
relating to COVID-19 virus transmission mitigation practices. These regulations require us to comply with manufacturing safety standards,
including protecting our employees from accidents, providing our employees with a safe and non-hostile work environment and being an equal
opportunity employer. In California, we are also subject to employment and safety regulations issued by state and local authorities.
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Environmental regulation
As a result of our wine production activities,
we and certain third parties with which we work are subject to federal, state and local environmental laws and regulations. Federal regulations
govern, among other things, air emissions, wastewater and stormwater discharges, and the treatment, handling and storage and disposal
of materials and wastes. State environmental regulations and authorities intended to address and oversee environmental issues are largely
state-level analogues to federal regulations and authorities intended to perform the similar purposes. In California, we are also subject
to state-specific rules, such as those contained in the California Environmental Quality Act, California Air Resources Act, Porter-Cologne
Water Quality Control Act, California Water Code sections 13300-13999 and Title 23 of the California Administrative Code and various
sections of the Health and Safety Code. We are subject to local environmental regulations that address a number of elements of our wine
production process, including air quality, the handling of hazardous waste, recycling, water use and discharge, emissions and traffic
impacts.
Labelling regulation
Many of our wines are identified by their appellation
of origin, which are among the most highly regarded wine growing regions in the world. An appellation may be present on a wine label only
if it meets the requirements of applicable state and federal regulations that seek to ensure the consistency and quality of wines from
a specific terroir. These appellations designate the specific geographic origin of most or all (depending on the appellation) of the wine’s
grapes, and can be a political subdivision (e.g., a country, state or county) or a designated viticultural area. The rules for vineyard
designation are similar. Although we expect that most of our labels will maintain the same appellation of origin from year to year, we
may choose to change the appellation of one or more of our wines from time to time to take advantage of high-quality grapes in other areas
or to change the profile of a wine.
Privacy and security regulation
We collect personal information from individuals.
Accordingly, we are subject to several data privacy and security related regulations, including but not limited to: U.S. state privacy,
security and breach notification laws; the GDPR; and other European privacy laws as well as privacy laws being adopted in other regions
around the world. In addition, the FTC and many state attorneys general are interpreting existing federal and state consumer protection
laws to impose evolving standards for the online collection, use, dissemination and security of information about individuals. Certain
states have also adopted robust data privacy and security laws and regulations. For example, the CCPA, which took effect in 2020, imposes
obligations and restrictions on businesses regarding their collection, use, and sharing of personal information and provides new and enhanced
data privacy rights to California residents, such as affording them the right to access and delete their personal information and to opt
out of certain sharing of personal information. In response to the data privacy laws and regulations discussed above and those in other
countries in which we do business, we have implemented several technological safeguards, processes, contractual third-parties provisions,
and employee trainings to help ensure that we handle information about our employees and customers in a compliant manner. We maintain
a global privacy policy and related procedures, and train our workforce to understand and comply with applicable privacy laws.
Intellectual Property
We strive to protect the reputation of our wine
brand. We establish, protect and defend our intellectual property in a number of ways, including through employee and third-party nondisclosure
agreements, copyright laws, domestic and foreign trademark protections, intellectual property licenses and social media and information
security policies for employees. We have been granted three (3) trademark registrations in the United States for FRESH VINE®,
FRESH VINE (Stylized)®, and our FV Logo®, and numerous trademark registrations in other countries for the
FRESH VINE mark, and we have filed, and expect to continue to file, trademark applications seeking to protect any newly-developed wine
brands. We have also been granted a copyright registration in the first version of our website located at www.freshvine.com. Information
contained on or accessible through our website is not incorporated by reference in or otherwise a part of this report. As a copyright
exists in a work of art once it is fixed in tangible medium, we intend to continue to file copyright applications to protect newly-developed
works of art that are important to our business.
We also rely on, and carefully protect, proprietary
knowledge and expertise, including the sources of certain supplies, formulations, production processes, innovation regarding product development
and other trade secrets necessary to maintain and enhance our competitive position.
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Seasonality
There is a degree of seasonality in the growing
cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenue and
net income, with lower sales and net income during the quarter spanning January through March and higher sales and net income during the
quarter spanning from October through December due to the usual timing of seasonal holiday buying. As our operations expand, we expect
that we will be impacted by the seasonality experienced in the wine industry generally.
Employees
As of March 31, 2022, we had approximately 16 full-time
employees. All of our employees are employed in the United States. None of our employees are represented by a labor union or covered by
a collective bargaining agreement. We consider our relationship with our employees to be good.
Legal Proceedings
We may be subject to legal disputes and subject
to claims that arise in the ordinary course of business. We are not a party or subject to any pending legal proceedings the resolution
of which is expected to have a material adverse effect on our business, operating results, cash flows or financial condition.
Corporate History
We were initially organized on May 8, 2019 as a
Texas limited liability company under the name “Fresh Grapes, LLC.” In connection with our initial public offering, on December
8, 2021, we converted from a Texas limited liability company into a Nevada corporation and changed our name from Fresh Grapes, LLC to
Fresh Vine Wine, Inc., which we refer to herein as the “LLC Conversion.” In conjunction with the LLC Conversion, all of our
outstanding units were converted into shares of our common stock based on the relative ownership interests of our pre-IPO equity holders.
While operating as a limited liability company, our outstanding equity was referred to as “units.” In this report for ease
of comparison, we may refer to such units as our common stock for periods prior to the LLC Conversion, unless otherwise indicated in this
report. Similarly, unless otherwise indicated, we may refer to members’ equity in this report as stockholders’ equity. Further,
while operating as a limited liability company, our governing body was referred to as our Board of Managers, with the members thereof
being referred to as “Managers.” We may refer to such governing body throughout this report as our board of directors and
such individuals as our directors.
Company Website Access and SEC Filings
We
make available on the Investor Relations section of our website, free of charge, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, Proxy Statements, and Forms 3, 4 and 5, and amendments to those reports as soon as reasonably
practicable after filing such documents with, or furnishing such documents to, the SEC. The SEC maintains a website (www.sec.gov) that
contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Our
website is www.freshvinewine.com. We have included our website address in this report as an inactive textual reference only. Information
contained on or accessible through our website is not incorporated by reference in or otherwise a part of this report.
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ITEM 1A. RISK FACTORS.
Our business involves a number of challenges and
risks. In addition to the other information in this report, you should consider carefully the following risk factors in evaluating us
and our business. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we
currently deem immaterial may also affect our business, financial condition, operating results, or prospects. In assessing these risks,
you should also refer to the other information contained in this report, including our financial statements and related notes.
Risks related to our company and our business
We have a limited operating history and have generated limited
revenue to date.
Our company was recently founded, and to date we
have engaged primarily in finalizing our business plan and establishing the corporation and other formalities necessary to begin operations.
Accordingly, we have a very limited operating history on which to base an evaluation of our business and prospects. Our prospects must
be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development,
particularly companies in new and evolving markets such as ours. The risks include, but are not limited to, an evolving business model
and the management of growth and product development. To address these risks, we must, among other things, implement and successfully
execute our business strategy and other business systems, respond to competitive developments, and attract, retain and motivate qualified
personnel. We cannot assure you that we will be successful in addressing the risks we may encounter, and our failure to do so could have
a material adverse effect on our business, prospects, financial condition and results of operations.
We have generated very limited revenues to date, including revenues
of $1,700,207 and $217,074 during fiscal 2021 and fiscal 2020, respectively. No revenue was generated for the fiscal year ended December 31,
2019. We have incurred net losses of $9.97 million, $1.29 million and $0.43 million during fiscal 2021, 2020 and 2019, respectively.
We had an accumulated deficit of $617,351 and total stockholders’ equity of $17.1 million at December 31, 2021. We may never
generate material revenues or achieve profitability.
We have not generated profits from operations to date. The success
and longevity of our company will depend on our ability to generate profits from future operations or obtain sufficient capital through
financing transactions to meet our business obligations.
The report of our independent registered public
accounting firm on our financial statements for the fiscal years ended December 31, 2020 and 2019, included in the prospectus
for our initial public offering, included an explanatory paragraph indicating that there is substantial doubt as to our ability to continue
as a going concern for twelve months from the financial statement issuance date, citing a net loss and net cash used in operations
of $1.3 million and $0.2 million, respectively, for the year ended December 31, 2020, and a stockholders’ deficit
and working capital deficit of $1.5 million and $1.5 million, respectively, as of December 31, 2020. This report was dated
August 31, 2021 and did not take into account the net proceeds of approximately $19.2 million (after deducting underwriting discounts
and commissions and estimated offering expenses) that we received in our December 2021 initial public offering. Our ability to continue
as a going concern will be determined by our ability to generate sufficient cash flow to sustain our operations and/or raise additional
capital in the form of debt or equity financing.
Since completing our initial public offering and
receiving net proceeds of approximately $19.2 million, our auditors have declared that we now have sufficient capital to continue business
operations without a need for additional capital. As a result, we no longer have a ‘going concern’ and have received necessary
funding to sustain operations in pursuit our its various growth strategies.
We need to hire additional personnel.
Our future success depends on our ability to identify,
attract, hire, train, retain and motivate highly skilled executive and technical personnel. We intend to hire or engage as contractors
a significant number of these personnel during the next year. Competition for qualified personnel is intense, particularly in the wine
industry in which there exists a limited number of qualified individuals with expertise in launching, managing and expanding wine brands.
If we fail to successfully attract, assimilate and retain a sufficient number of qualified personnel, our business could suffer.
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The success of our business depends heavily on the strength of
our wine brand.
Obtaining, maintaining and expanding our reputation
as a producer of premium wine among our customers and the premium wine market generally is critical to the success of our business and
our growth strategy. The premium wine market is driven by a relatively small number of active and well-regarded wine critics within the
industry who have outsized influence over the perceived quality and value of wines. If we are unable to maintain the actual or perceived
quality of our wines, including as a result of contamination or tampering, environmental or other factors impacting the quality of our
grapes or other raw materials, or if our wines otherwise do not meet the subjective expectations or tastes of one or more of a relatively
small number of wine critics, the actual or perceived quality and value of one or more of our wines could be harmed, which could negatively
impact not only the value of that wine, but also the value of the vintage, the particular brand or our broader portfolio. The winemaking
process is a long and labor-intensive process that is built around yearly vintages, which means that once a vintage has been released
we are not able to make further adjustments to satisfy wine critics or consumers. As a result, we are dependent on our winemakers and
tasting panels to ensure that every wine we release meets our exacting quality standards.
With the advent of social media, word within the
premium wine market spreads quickly, which can accentuate both the positive and the negative reviews of our wines and of wine vintages
generally. Public perception of our brands could be negatively affected by adverse publicity or negative commentary on social media outlets,
particularly negative commentary on social media outlets that goes “viral,” or our responses relating to, among other things:
If we do not produce wines that are well-regarded
by the relatively small wine critic community, the wine market will quickly become aware and our reputation, wine brand, business and
financial results of our operations could be materially and adversely affected. In addition, if our wine receives negative publicity or
consumer reaction, whether as a result of our wines or wines of other producers, our wines in the same vintage could be adversely affected.
Unfavorable publicity, whether accurate or not, related to our industry, us, our winery brands, marketing, personnel, operations, business
performance or prospects could also unfavorably affect our corporate reputation, company value, ability to attract high-quality talent
or the performance of our business.
Any contamination or other quality control issue
could have an adverse effect on sales of the impacted wine or our broader portfolio of wines. If any of our wines become unsafe or unfit
for consumption, cause injury or are otherwise improperly packaged or labelled, we may have to engage in a product recall and/or be subject
to liability and incur additional costs. A widespread recall, multiple recalls, or a significant product liability judgment against us
could cause our wines to be unavailable for a period of time, depressing demand and our brand equity. Even if a product liability claim
is unsuccessful or is not fully pursued, any resulting negative publicity could adversely affect our reputation with existing and potential
customers and accounts, as well as our corporate and individual winery brands image in such a way that current and future sales could
be diminished. In addition, should a competitor experience a recall or contamination event, we could face decreased consumer confidence
by association as a producer of similar products.
Additionally, third parties may sell wines or inferior
brands that imitate our wine brand or that are counterfeit versions of our labels, and customers could be duped into thinking that these
imitation labels are our authentic wines. For example, there could be instances of potential counterfeiting. A negative consumer experience
with such a wine could cause them to refrain from purchasing our brands in the future and damage our brand integrity. Any failure to maintain
the actual or perceived quality of our wines could materially and adversely affect our business, results of operations and financial results.
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Damage to our reputation or loss of consumer confidence
in our wines for any of these or other reasons could result in decreased demand for our wines and could have a material adverse effect
on our business, operational results and financial results, as well as require additional resources to rebuild our reputation, competitive
position and winery brand strength.
If our business grows, it will place increased demands on our
management, operational and production capabilities that we may not be able to adequately address. If we are unable to meet these increased
demands, our business will be harmed.
Unless we manage our growth effectively, we may
make mistakes in operating our business, such as inaccurate forecasting. The anticipated growth of our operations will place significant