ITEM 1A. Risk factors 11
ITEM 1B. Unresolved staff comments 30
ITEM 2. Properties 30
ITEM 3. Legal proceedings 31
ITEM 4. Mine safety disclosures 31
ITEM 6. [RESERVED] 33
ITEM 7A. Quantitative and qualitative disclosures about market risk 43
ITEM 8. Financial statements and supplementary data 43
ITEM 9A. Controls and procedures 43
ITEM 9B. Other information 45
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 45
PART III 46
ITEM 10. Directors, executive officers and corporate governance 46
ITEM 11. Executive compensation 49
ITEM 14. Principal accounting fees and services 61
ITEM 15. Exhibits, financial statement schedules 62
SIGNATURES 63
i
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 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;
ii
● quarterly and seasonal fluctuations in our operating results;
● our ability to operate, update or implement our IT systems;
● 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 are 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:
iii
● We have not generated profits from operations to date.
● We need to hire additional executive officers and other personnel.
● The success of our business depends heavily on the strength of our wine brand.
iv
v
PART
I
ITEM
1. BUSINESS.
Overview
We
are a premier producer of low carb, low calorie, premium wines in the United States. Founded in 2019, Fresh Vine Wine brings an
innovative “better-for-you” solution to the wine market. 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. We currently sell seven proprietary varietals: Cabernet Sauvignon, Pinot Noir, Chardonnay, Sauvignon Blanc, Rosé, Sparkling
Rosé, and a limited Reserve Napa Cabernet Sauvignon. All varietals are produced and bottled in Napa, California.
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 the preferences of our target demographic of consumers with moderate to
affluent income and with a desire to pursue a healthy and active lifestyles 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.
Our
core wine offerings are priced strategically to appeal to mass markets and sell at a list price between $15 and $25 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. Given the Fresh Vine Wine brand’s celebrity backing, “better-for-you” appeal, and overall product quality,
we believe that it presents today’s consumers with a unique value proposition within this price category. We have partnered
with celebrities Nina Dobrev and Julianne Hough to promote our wines and our brand. Additionally, Fresh Vine Wine is one of very few
products available at this price point that includes a renowned Napa Valley winemaker, Jamey Whetstone.
We
conducted an international search to find an accomplished winemaker who shared the Fresh Vine Wine vision and have entered into an agreement
with Mr. Whetstone, an established, award-winning winemaker from Napa Valley, to develop our wines. Consulting with the Fresh Vine
Wine brand compliments Mr. Whetstone’s lifestyle as an active surfer, skier, and all-around outdoorsman. His passion
for winemaking is mirrored by his passion for adventure, and he too wanted to create a better-for-you wine that customers can be
proud to bring to the table for any occasion. We believe it is unique for a high-profile winemaker like Mr. Whetstone to attach
his name and reputation to a brand in the better-for-you wine segment, and we believe that Mr. Whetstone’s association
with our brand increases consumer awareness and speaks to the quality of our varietals.
As
a testament to this quality, in September 2022 we announced that The Tasting Panel Magazine and The Somm Journal, two highly regarded
wine publications, had awarded Fresh Vine Wine’s California Cabernet Sauvignon, 2020 Vintage, a 92 Rating (out of 100). This is
the second of our varietals to receive a 92 Rating during 2022, with our Limited Reserve Napa Cabernet Sauvignon receiving a Rating of
92 from James Suckling, regarded as one of the world’s most influential wine critics, in July. Also, in July 2022, our 2020
California Pinot Noir and California 2021 Rosé varietals were awarded Bronze Medals by TEXSOM. In 2022, Fresh Vine Wine varietals
were recognized by various industry authorities with a total of 16 separate awards.
Our wines are distributed across the
United States and Puerto Rico through wholesale, retail, and direct-to-consumer (DTC) channels. We are able to conduct
wholesale distribution of our wines in all 50 states and Puerto Rico, and we are licensed to sell through DTC channels in 43 states.
As of December 31, 2022, we hold active relationships with wholesale distributors in 48 states, unchanged from September 30, 2022,
and currently have additional states in which licensing is pending. We are actively working with leading distributors, including
Southern Glazer’s Wine & Spirits (SGWS), Johnson Brothers, and Republic National Distributing Company (RNDC), to
expand our presence across the contiguous United States.
1
Our
DTC channel enables us to sell wine directly to the consumer at full retail prices. 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. In addition, we also sell 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.
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 grapes with the help of our winemaker. 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 large 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 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 produced and bottled in Napa — a
distinctive product attribute that adds significant production 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 core wines identify California as the appellation of origin.
Our
asset-light operating model allows us to utilize third-party assets, including land and production facilities. This approach
helps us mitigate many of the risks associated with agribusiness, such as isolated droughts or fires. Because we source product inputs
from multiple geographically dispersed vendors, we reduce reliance on any one vendor and benefit from broad availability/optionality
of product inputs. This is particularly important as a California-based wine producer where droughts or fires can have an extremely
detrimental impact to a company’s supply chain if not diversified.
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 state of
the art production.
2
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.
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 the 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 capacity 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.
3
Licensing,
Tax and Regulatory Compliance
We
have contracted with a third-party to manage our regulatory licensing and compliance activities. We 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 48 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.
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
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.
Omni-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 omnichannel 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 utilize fans’ affinity towards
celebrities to promote their product offerings and 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.
4
In
March 2021, we entered into five-year license agreements with Ms. Dobrev and Ms. Hough, who have a collective following of
approximately 31 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.
Professional
Sports Sponsorships
We
have previously 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.
We
completed our sponsorship agreement with the Los Angeles Chargers in the fourth quarter of 2022, intend to reduce or cancel the remaining
sponsorships and do not anticipate pursuing new professional sports sponsorships as part of our marketing and brand awareness initiatives
going forward since our brand has reached national retail distribution.
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, aluminum cans, and smaller
size bottles and cans that can be taken on-the-go and are ideal for in-store point of purchase sales.
Engagement
with Industry Experienced Third Party Vendors
In
October 2022, we executed a strategy that is aimed at amplifying cash preservation initiatives while continuing to focus on accelerating
sales growth. The plan resulted in the termination of ten employees on the Company’s internal sales team and the engagement by
the Company of a third party sales and distribution management company positioned to more efficiently and effectively facilitate current
and future product sales. In addition, the Company engaged a reputable third party vendor to manage marketing initiatives and drive growth
primarily within the Company’s Direct-to-Consumer sales channel.
5
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, amended and restated on March 16, 2021 and further amended
and restated on April 13, 2022 (the “Consulting Agreement”).
As
amended and restated, the Consulting 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 Consulting 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 sulfite wine products sold or substantially under development by the Company during the
one-year restricted period. The Consulting 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 sulfite” products or services. The Consulting 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.
Under
the Consulting Agreement, we pay Whetstone Consulting a base consulting fee of $5,000 per month. In addition, the Company has agreed
to pay Whetstone Consulting additional commission-based compensation subject to satisfaction of identified milestones. Specifically,
the Company will pay Whetstone Consulting a $5,000 commission for each non-overlapping 30-day period in which the Company sells
Fresh Vine Wine Products to a minimum threshold number of separate True Food Kitchen locations for sale to customers from their menus.
For such purposes, “Fresh Vine Wine Products” means Client’s wine products developed with the assistance of Whetstone
Consulting pursuant to the Services. Whetstone Consulting will also be entitled to receive a one-time $100,000 commission upon the
Company selling certain volumes of Fresh Vine Wine Products within any given non-overlapping 30-day period to at least a minimum
threshold number of locations of a single fast casual dining restaurant chain, and a one-time $40,000 commission upon the Company
selling certain volumes of Fresh Vine Wine Products within any given non-overlapping 30-day period to at least a minimum threshold
number of separate fine dining establishments.
The
Consulting Agreement has an initial one year term expiring April 13, 2023, but renews automatically for successive one year periods
unless either party provides advance notice of non-renewal to the other. Whetstone Consulting may terminate the Consulting Agreement
at any time by giving us written notice at least 30 days prior to the termination date. We may terminate the Consulting Agreement
at any time.
As
partial compensation for Whetstone Consulting’s services to the Company pursuant to the Company’s original consulting agreement
with Whetstone Consulting, the Company issued to Whetstone Consulting 619,343 shares of the Company’s common stock (the “Whetstone
Shares”). If the Company terminates the Consulting Agreement for “cause,” as such term is defined therein, and such
cause arises or relates to an act or acts directly related to Whetstone Consulting’s ownership interest in the Company, the Company
may elect to purchase all Whetstone Shares then held by Whetstone Consulting at their fair market value.
6
Related
party services
In
October 2021, the Company entered into a service agreement with Appellation Brands, LLC, a related party in the wine industry due to
common ownership, to provide representation and distribution services. As of June 15, 2022, the original agreement was terminated. Prior
to termination, the Company provided access to new markets and retail and wholesale customers to the related party. In exchange for these
services, the Company received a management fee of $50,000 per month plus a tiered fee ranging between $5.00 and $6.50 per
case of the products sold. For the year ended December 31, 2022, the Company recognized $297,224 in service revenue related to this
agreement. In September 2022, the Company entered into a new distribution agreement with Appellation Brands, LLC to purchase approximately
$195,000 of wine inventory and sell directly to our customers. Sales associated with the new agreement are recorded within wholesale
revenue beginning September 1, 2022. Total sales for the year ended December 31, 2022 associated with the new agreement was $25,863. After
our sales of the Appellation Brands, LLC wine inventory has been completed, our affiliation with Appellation Brands, LLC is expected
to cease altogether.
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.
7
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.
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 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 as 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.
8
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.
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 territory. 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-party 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 we train our workforce
to understand and comply with applicable privacy laws.
9
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.
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 December 31, 2022, we had approximately eight 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. Except as disclosed in “Item
3 – Legal Proceedings,” 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.
10
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 $2,860,001 and $1,700,207 during fiscal 2022 and fiscal 2021, respectively.
We have incurred net losses of $15.20 million and $9.97 million during fiscal 2022 and 2021, respectively. We had an accumulated deficit
of $15.82 million and total stockholders’ equity of $5.61 million at December 31, 2022. 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 year ended December 31, 2022 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.
We incurred net losses of $15.1 million and $9.97 million during fiscal 2022 and 2021, respectively. Our cash balance at December 31,
2022 was $2.1 million. On March 14, 2023, we completed a subscription rights offering of common stock and warrants to purchase common
stock in which we received aggregate gross proceeds of approximately $3.14 million, before deducting dealer-manager fees and offering
expenses. 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.
11
We
need to hire additional executive officers and other personnel.
Our
executive management is currently comprised of an Chief Executive Officer and a Chief Financial Officer, both of whom are serving in
interim positions. Also, pursuant to the Settlement Agreement, Damian Novak, Executive Chairman and a member of our board of directors,
resigned as Executive Chairman and removed himself from his management duties with the Company effective February 20, 2023, and resigned
from our board of directors effective March 14, 2023. Rick Nechio, our interim Chief Executive Officer and a member of our board of directors,
resigned from our board of directors effective February 20, 2023 and we continue to search for a permanent chief executive officer to
replace Mr. Nechio. Our future success will be dependent upon us locating and retaining qualified individuals who will serve as executive
officers on a permanent basis and lead our Company and our business operations, and on us locating additional members to serve on our
board of directors to help oversee and guide our company. We cannot predict with certainty when we will be able locate such individuals.
Following our appointment of a new chief executive officer, Mr. Nechio may aid in the transition of his management duties, we cannot
assure that such transition will be seamless or that it won’t adversely impact our business operations.
In
addition, our future success depends on our ability to identify, attract, hire, train, retain and motivate highly skilled executive and
technical personnel. 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.
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