ITEM 1A. RISK FACTORS.
Our company and 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 the proposed Merger transaction
The Exchange Ratio
will not change or otherwise be adjusted based on the market price of our common stock as the exchange ratio depends on, among other things,
the relative valuations ascribed to us and Noted Live upon entry into the Merger Agreement and not the market price of our common stock,
so the merger consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was
signed.
On January 25, 2024, we,
Merger Sub (our wholly-owned subsidiary) and Notes Live entered into the Merger Agreement pursuant to which, among other things, and subject
to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into Notes Live,
with Notes Live continuing as our wholly-owned subsidiary and the surviving corporation in the Merger. Subject to the terms and conditions
of the Merger Agreement, at the closing of the Merger, and among other things, each then outstanding share of Notes Live common stock
will be converted into the right to receive a number of shares of Fresh Vine common stock calculated in accordance with the Merger Agreement
(the “Exchange Ratio”), (ii) each then outstanding warrant to purchase Notes Live common stock will be exchanged (or otherwise
amended) for a warrant exercisable (at an exercise price adjusted to reflect to the Exchange Ratio) to acquire that number of shares of
Fresh Vine common stock equal to the number of warrant shares multiplied by the Exchange Ratio, and (iii) any then outstanding Notes Live
promissory note that is convertible into Notes Live common stock will be exchanged, or otherwise amended, such that it will be convertible
from and after the Merger into shares of Fresh Vine common stock at a per share conversion price adjusted to reflect the Exchange Ratio.
The Merger Agreement has
set the calculation of the Exchange Ratio based on the relative valuations ascribed to us and Noted Live upon entry into the Merger Agreement,
which in turn will be adjusted to reflect the amount of gross proceeds received or to be received by Notes Live in its private offering
of securities conducted by Notes Live as of the date of the Merger Agreement and the Net Cash Surplus, if any, of Fresh Vine on the closing
date of the Merger (as well as the impact of the Reverse Stock Split). The Merger Agreement does not include a price-based termination
right. Therefore, if before the completion of the Merger the market price of our common stock declines from the market price on the date
of the Merger Agreement, then Notes Live’s shareholders could receive merger consideration with substantially lower value than the
value of such merger consideration on the date of the Merger Agreement. Similarly, if before the completion of the Merger the market price
of our common stock increases from the market price of our common stock on the date of the Merger Agreement, then Notes Live’s shareholders
could receive Merger consideration with substantially greater value than the value of such merger consideration on the date of the Merger
Agreement. Because the Exchange Ratio does not adjust as a direct result of changes in the market price of our common stock, changes in
the market price of our common stock will change the value of the total Merger consideration payable to Notes Live’s shareholders.
Stock price changes may result
from a variety of factors, including changes in our or Notes Live’s respective businesses, operations and prospects, market assessments
of the likelihood that the Merger will be completed, the timing of the Merger, and general market, industry and economic conditions.
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Our stockholders
and Notes Live’s shareholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience
in connection with the Merger.
If
the combined company is unable to realize the full strategic and financial benefits currently anticipated from the Merger, our stockholders
and Notes Live’s shareholders will have experienced dilution of their ownership interests in their respective companies without
receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize
only part of the strategic and financial benefits currently anticipated from the Merger.
Failure to complete
the Merger may result in either us or Notes Live paying a termination fee to the other party and could significantly harm the market price
of our common stock and negatively affect the future business and operations of each company.
If
the Merger is not completed and the Merger Agreement is terminated under certain circumstances, we may be required to pay Notes Live a
termination fee of $1.0 million and/or reimburse Notes Live’s expenses up to a maximum of $500,000, and Notes Live may be required
to pay us a termination fee of $1.0 million, reimburse our expenses up to a maximum of $500,000 and/or, at the election of Fresh Vine,
redeem the $500,000 equity investment in Notes Live made by Fresh Vine upon entering into the letter of intent with Note Live for
the Merger transaction at the same price per share as the purchase price paid by Fresh Vine therefor. Even if a termination fee
or reimbursement of expenses of the other party are not payable in connection with a termination of the Merger Agreement, each of us and
Notes Live will have incurred significant fees and expenses, which must be paid whether or not the Merger is completed.
In
addition, if the Merger Agreement is terminated and our board of directors determines to seek another business combination, there can
be no assurance that we will be able to find a partner and close an alternative transaction on terms that are as favorable or more favorable
than the terms set forth in the Merger Agreement.
The issuance of
our common stock to Notes Live’s shareholders pursuant to the Merger Agreement and the resulting change in control from the Merger
must be approved by our stockholders, and the Merger Agreement and transactions contemplated thereby must be approved by Notes Live’s
shareholders. Failure to obtain these approvals would prevent the closing of the Merger.
Before
the Merger can be completed, our stockholders must approve, among other things, the issuance of our common stock to Note Live’s
shareholders pursuant to the Merger Agreement and the resulting change in control from the Merger, and Note Live’s shareholders
must adopt the Merger Agreement and approve the Merger and the related transactions. Failure to obtain the required stockholder approvals
may result in a material delay in, or the abandonment of, the Merger. Any delay in completing the Merger may materially adversely affect
the timing and benefits that are expected to be achieved from the Merger.
Our stockholders
will have a reduced ownership and voting interest in, and will exercise significantly less influence over the management of, the combined
company following the closing of the Merger as compared to their current ownership and voting interest in our company.
If
the proposed Merger is completed, our current stockholders will own a significantly smaller percentage of the combined company than their
ownership in our company prior to the Merger. On a pro forma basis and without adjustment for gross
proceeds from the Notes Live Financing or any Net Cash Surplus, pre-Merger Notes Live shareholders are expected to own approximately 95.1%
of the outstanding shares of capital stock of the combined company and pre-Merger Fresh Vine stockholders are expected to own approximately
4.9% of the outstanding shares of capital stock of the combined company.
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During the pendency
of the Merger, we may not be able to enter into a business combination with another party on more favorable terms because of restrictions
in the Merger Agreement, which could adversely affect our business prospects.
Covenants
in the Merger Agreement impede our ability to make acquisitions during the pendency of the Merger, subject to specified exceptions. As
a result, if the Merger is not completed, we may be at a disadvantage to our competitors during such period. In addition, while the Merger
Agreement is in effect, we are generally prohibited from soliciting, initiating or knowingly encouraging, inducing or facilitating any
inquiries, indications of interest, proposals or offers that constitute or may reasonably be expected to lead to certain transactions
involving a third party, including a merger, sale of assets or other business combination, subject to specified exceptions. Any such transactions
could be favorable to our stockholders, but we may be unable to pursue them.
Certain provisions
of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior
to the transactions contemplated by the Merger Agreement.
The
terms of the Merger Agreement prohibit us from soliciting alternative takeover proposals or cooperating with persons making unsolicited
takeover proposals, except in limited circumstances when our board of directors determines in good faith that an unsolicited alternative
takeover proposal is or is reasonably likely to result in a superior takeover proposal and that failure to cooperate with the proponent
of the proposal is reasonably likely to be inconsistent with our board’s fiduciary duties. Any such transactions could be favorable
to our stockholders. In addition, if we terminate the Merger Agreement under certain circumstances, including terminating because of a
decision of ours to enter into a definitive agreement with respect to a superior offer, we would be required to pay a termination fee
of $1.0 million to Notes Live and/or reimburse Notes Live’s expenses up to a maximum of $500,000. This termination fee described
above may discourage third parties from submitting alternative takeover proposals to our stockholders, and may cause our board of directors
to be less inclined to recommend an alternative takeover proposal.
Because the lack
of a public market for Notes Live common stock makes it difficult to evaluate the value of Notes Live common stock, the Notes Live shareholders
may receive shares of our common stock in the Merger that have a value that is less than, or greater than, the fair market value of Notes
Live common stock.
The
outstanding common stock of Notes Live is privately held and is not traded in any public market. The lack of a public market makes it
extremely difficult to determine the fair market value of Notes Live. Because the percentage of our common stock to be issued to Notes
Live’s shareholders was determined based on negotiations between the parties, it is possible that the value of our common stock
to be received by Notes Live’s shareholders will be less than the fair market value of Notes Live, or that the value of our common
stock to be received by Notes Live’s shareholders may be more than the aggregate fair market value for Notes Live.
If the conditions
to the Merger are not satisfied or waived, the Merger will not occur.
Even
if the transactions contemplated by the Merger Agreement are approved by our stockholders and Notes Live’s shareholders, several
other specified conditions set forth in the Merger Agreement must be satisfied or waived to complete the Merger, including without limitation
(i) the effectiveness of a registration statement on Form S-4 to register the shares of Fresh Vine
common stock to be issued in connection with the Merger, (ii) NYSE American’s approval of the listing of the shares of Fresh Vine
common stock to be issued in connection with the Merger, and, if applicable, NYSE American’s approval of an initial listing application
for the combined company, (iii) if applicable, the completion of required filings under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and the expiration or termination any waiting period applicable to the consummation of the Merger, (iv) the absence of material
adverse effects impacting Fresh Vine or Notes Live, (v) Fresh Vine having cash, cash equivalent assets or other liquid assets at the closing
of the Merger in an amount that equals or exceeds the Net Cash Target, and having no liabilities on its balance sheet or unpaid or unsatisfied
obligations that will require a cash expenditure by Fresh Vine after the effective time of the Merger, (vi) the absence of dissenting
Notes Live shareholders, and (vii) the entry by Notes Live into lock-up and leak-out arrangements with its shareholders to its satisfaction. We
cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger will
not occur or will be delayed, and we may lose some or all of the intended benefits of the Merger.
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If the Merger is
not completed, our board of directors may decide to pursue a dissolution of our company. In a dissolution, there can be no assurances
as to the amount or timing of available cash, if any, to distribute to our stockholders after paying our debts and other obligations and
setting aside funds for reserves.
Although
we have entered into the Merger Agreement with Notes Live, the closing of the Merger may be delayed or may not occur at all and there
can be no assurance that the Merger will deliver the anticipated benefits we expect or enhance stockholder value. If the Merger is not
completed and the Merger Agreement is terminated under certain circumstances, we may be required to pay Notes Live a termination fee of
$1.0 million and/or reimburse Notes Live’s expenses up to a maximum of $500,000. Even if a termination fee is not payable in
connection with a termination of the Merger Agreement, we will have incurred significant fees and expenses, which must be paid whether
or not the Merger is completed.
If,
for any reason, the Merger does not close, our board of directors may elect to, among other things, attempt to complete another strategic
transaction like the Merger, attempt to sell or otherwise dispose of the various assets of ours or continue to operate our business, and/or
decide that it is in the best interests of the Fresh Vine stockholders to suspend or cease its operations, seek to dissolve the company
and liquidate its assets, or initiate bankruptcy proceedings. Any of these alternatives would be costly and time-consuming and may require
that we obtain additional funding. We expect that it would be difficult to secure financing in a timely manner, on favorable terms or
at all. We can make no assurances that we would be able to obtain additional financing or find a partner and close an alternative transaction
on terms that are as favorable or more favorable than the terms set forth in the Merger Agreement or that any such alternatives are possible
or would be successful, if pursued. To the extent that we seek and are able to raise additional capital through the sale of equity or
convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect their rights as a common stockholder. Debt financing or preferred equity financing,
if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring
additional debt, making capital expenditures, or declaring dividends. Even if we are able to pursue such alternatives, the failure to
complete the Merger may result in negative publicity and/or a negative impression of us in the investment community, could significantly
harm the market price of our common stock and may affect our relationship with employees and other partners in the business community.
If
the Merger is not completed, our board of directors may decide that it is in the best interests of our stockholders to suspend or cease
its operations, seek to dissolve the company and liquidate its assets, or initiate bankruptcy proceedings. In that event, the amount of
cash available, if any, for distribution to our stockholders would depend heavily on the timing of such decision since the amount of cash
available for distribution continues to decrease as we fund our operations and incur fees and expenses related to the Merger. In addition,
if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution of our company, we would
be required to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior
to making any distributions to our stockholders. As a result of this requirement, a portion of our assets may need to be reserved pending
the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution of our company.
If a dissolution were pursued, our board of directors, in consultation with our advisors, would need to evaluate these matters and make
a determination about a reasonable amount to reserve. Accordingly, our stockholders could lose all or a significant portion of their investment
in the event of a dissolution of our company.
We are substantially
dependent on our remaining employees to facilitate the consummation of the Merger.
As
of December 31, 2023, we had four full-time employees. Our ability to successfully complete the Merger depends in large part on our
ability to retain our remaining personnel. Despite our efforts to retain these employees, one or more may terminate their employment with
us on short notice. The loss of the services of certain employees could potentially harm our ability to consummate the Merger, to run
our day-to-day business operations, as well as to fulfill our reporting obligations as a public company.
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Our
ability to complete the Fresh Vine Legacy Transaction is uncertain, and we cannot predict the terms and conditions of any such Fresh Vine
Legacy Transaction, including the consideration that we may receive.
As a condition to the closing
of the Merger, on or before the closing of the Merger, Fresh Vine shall have engaged in a sale,
license, transfer, disposition, divestiture or other monetization transaction, or winding down of Fresh Vine’s current wine production
business (the “Fresh Vine Legacy Business”), or the sale, license, transfer, disposition, divestiture or other monetization
transaction or other disposition of the assets comprising the Fresh Vine Legacy Business and in connection therewith causing any
and all known obligations or liabilities associated with such assets and the conduct of the Fresh Vine Legacy Business operations to
be satisfied (the “Fresh Vine Legacy Transaction”).
Because completion of the
Fresh Vine Legacy Transaction is a condition to the closing of the Merger, the success of the combined company will be dependent on the
success of the Notes Live business operations following the merger.
Lawsuits may be
filed in the future against us and the members of our board of directors arising out of the proposed Merger, which may delay or prevent
the proposed Merger.
Putative
stockholder complaints, including stockholder class action complaints, and other complaints may be filed against us and our board of directors
in connection with the transactions contemplated by the Merger Agreement. It is common for public reporting companies engaged in merger
transactions to receive letters from purported stockholders demanding amendments to registration statements and/or proxy statements filed
with the SEC to provide additional disclosures that such stockholders allege were improperly omitted, or complaints asserting claims for
allegedly false and misleading statements in such filings. The outcome of demands or complaints that we may receive or any litigation
is uncertain, and we may not be successful in defending against any such claims. Lawsuits that may be filed against us and/or our board
of directors could delay or prevent the Merger, divert the attention of our management team and employees from our day-to-day business
and otherwise adversely affect our business and financial condition.
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 we have a 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 approximately $1.8 million and $2.9 million during fiscal 2023 and fiscal 2022, respectively. We have incurred net losses of $10.6
million and $15.2 million during fiscal 2023 and 2022, respectively. We had an accumulated deficit of $26.5 million and $15.8 million
at December 31, 2023 and 2022, respectively. 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, 2023 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 $10.6 million and $15.2 million during fiscal 2023 and 2022, respectively. Our cash and restricted
cash balance at December 31, 2023 was approximately $336,000. Our ability to continue as a going concern, including during the pendency
of the Merger transaction, 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.
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We need to hire additional executive officers
and other personnel.
Our executive management
is currently comprised of a Chief Executive Officer and a Chief Financial Officer, both of whom are serving in interim positions. If
the Merger transaction is not completed, the future success of our existing wine production business will be dependent in part 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.
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.
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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.
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 demand on our management and operational resources. In order to manage growth effectively, we must implement and
improve our operational systems, procedures and controls on a timely basis. Our key personnel have limited experience managing this type
of business. If we cannot manage our business effectively, our business could suffer.
Our advertising and promotional investments
may affect our financial results but not be effective.
Consumer awareness is of
great importance to the success of businesses operating in the wine industry. We have incurred, and expect to continue to incur, significant
advertising and promotional expenditures to enhance our wine brand and raise consumer awareness, which we believe is vital to the long-term
success of our operations. These expenditures may adversely affect our results of operations in a particular quarter or even a full fiscal
year and may not result in increased sales. Variations in the levels of advertising and promotional expenditures have in the past caused,
and are expected in the future to continue to cause, variability in our quarterly results of operations. While we strive to invest only
in effective advertising and promotional activities in both the digital and traditional segments, it is difficult to correlate such investments
with sales results, and there is no guarantee that our expenditures will be effective in building brand strength or growing long term
sales.
We have relied heavily on celebrities to
endorse our wines and market our brand pursuant to license agreements which have been terminated.
Our
brand, and to a large extent our direct-to-consumer sales outlet, has been heavily dependent on the positive image and public popularity
of, and affinity towards, Nina Dobrev and Julianne Hough. Ms. Dobrev and Ms. Hough have served as celebrity spokespersons and ambassadors
of our company, have actively endorsed our wines on their sizable social media and other outlets, and are considered by many to be the
face of our brand. Under our license agreements with Ms. Dobrev and Jaybird Investments, LLC (an entity managed by Ms. Hough), each of
Ms. Dobrev and Ms. Hough 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 and other channels, on and in conjunction with the sale and related pre-approved
advertising and promotion of our wine.
On
August 8, 2023, the Company received written letters from each of Ms. Dobrev and Jaybird Investments, LLC, notifying the Company that
it was in default of their respective license agreements based on failure to pay license fees and providing 30 day notice of termination
of their respective license agreements. Effective September 7, 2023, each license agreement terminated. Upon such termination, the rights
and licenses granted to us under such agreements were revoked and were required to cease the marketing and sale of products that feature
their name, likeness, image, and other indicia of identity after a 90 day run-off period. As a result, we will be required to refocus
our marketing and brand promotion efforts, which may adversely affect our business and results of operations.
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We rely heavily on third-party suppliers
and service providers, and they may not continue to produce products or provide services that are consistent with our standards or applicable
regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers and
service providers.
We have strategically structured
our organization and operations with a view towards minimizing our capital investment requirements. We do this by leveraging a network
of third-party providers with industry experience and expertise that we use to perform various functions on our behalf. Specifically,
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 permit us to occupy a portion of its production and warehouse facility and its production
equipment on an alternating proprietorship basis. Under this arrangement, we are able to 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. Fior di Sole is responsible for keeping
its production equipment in good operating order. Although we are solely responsible for managing and conducting our own winemaking activities,
we may request use of the Fior di Sole’s personnel to perform crush, fermentation, blending, cellar, warehousing, barrel topping
and/or bottling services for additional fees. Under a separate agreement, Fior di Sole provides us with bulk juice and blends, finishes,
bottles, stops, labels, and packages our wine. Fior di Sole provides these services on a purchase order basis, which purchase orders
are subject to the parties’ mutual agreement. This agreement was terminated in December 2023.
The Company relies heavily
on the third parties to manage the sales and distribution of our wine and manage our DTC marketing initiatives. We also utilize third
parties to help manage all of our regulatory licensing and compliance activities, and we utilize additional software tools available to
the industry to navigate and manage the complex state-by-state regulations that apply to our operations in the beverage alcohol industry.
We engage many of our third-party
suppliers and service providers on a purchase order basis or pursuant to agreements that are generally one year or less in duration. The
ability and willingness of these third parties to supply and provide services to us may be affected by competing orders placed by other
companies, the demands of those companies or other factors. If we experience significant increases in demand or need to replace a significant
third party supplier or service provider, there can be no assurance that alternative third party vendors will be available when required
on terms that are acceptable to us, or at all, or that any such vendor will allocate sufficient capacity to us in order to meet our requirements.
If we fail to replace a supplier or servicer provider in a timely manner or on commercially reasonable terms, we could incur product disruptions
and our operating results and financial condition could be materially harmed. Switching or adding additional vendors, particularly our
alternating proprietorship host winery, would also involve additional costs and require management time and focus.
Except for remedies that
may be available to us under our agreements with our third-party vendors, we cannot control whether or not they devote sufficient time
and resources to supporting our business operations. These third parties may also have relationships with other commercial entities, including
our competitors, for whom they may also be providing services, which could affect their performance on our behalf. If these third parties
do not successfully carry out their contractual duties or obligations or meet expected deadlines or need to be replaced for other reasons,
it could adversely impact our ability to meet consumers’ demands for our products or comply with regulatory requirements and subject
us to potential liability, any of which may harm the reputation of our company and our products.
Although we carefully manage
our relationships with our network of third-party vendors, there can be no assurance that we will not encounter challenges or delays in
the future or that these challenges or delays will not have a material adverse impact on our business, financial condition and prospects.
We face significant competition with an
increasing number of products and market participants that could materially and adversely affect our business, results of operations and
financial results.
Our industry is intensely
competitive and highly fragmented. Our wines compete with many other domestic and foreign wines. Our wines compete with popularly priced
generic wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for drinker acceptance and loyalty, shelf space
and prominence in retail stores, presence, and prominence on restaurant wine lists and for marketing focus by the Company’s distributors,
many of which carry extensive portfolios of wines and other alcoholic beverages. This competition is driven by established companies as
well as new entrants in our markets and categories. In the United States, wine sales are relatively concentrated among a limited number
of large suppliers, including E&J Gallo, Constellation, Duckhorn, Trinchero, Jackson Family Wines, Ste. Michelle and The Wine Group,
and these and our other competitors may have more robust financial, technical, marketing and distribution networks and public relations
resources than we have. As a result of this intense competition, combined with our growth goals, we have experienced and may continue
to face upward pressure on our selling, marketing and promotional efforts and expenses. There can be no assurance that in the future we
will be able to successfully compete with our competitors or that we will not face greater competition from other wineries and beverage
manufacturers.
If we are unable to successfully
compete with existing or new market participants, or if we do not effectively respond to competitive pressures, we could experience reductions
in market share and margins that could have a material and adverse effect on our business, results of operations and financial results.
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Consolidation of the distributors of our
wines, as well as the consolidation of retailers, may increase competition in an already crowded space and may have a material adverse
effect on our business, results of operations and financial results.
Other than sales made directly
to our consumers, the majority of our wine sales are made through distributors for resale to retail outlets, restaurants and hotels across
the United States. We expect sales to distributors to represent an increasingly substantial portion of our future net sales as we continue
to grow our network of wholesale distributors. Consolidation among wine producers, distributors, wholesalers, suppliers and retailers
could create a more challenging competitive landscape for our wines. In addition, we believe that the increased growth and popularity
of the retail e-commerce environment across the consumer product goods market, which accelerated during the COVID-19 pandemic and the
resulting quarantines, “stay at home” orders, travel restrictions, retail store closures, social distancing requirements and
other government action, has and is likely to continue to change the competitive landscape for our wines. Consolidation at any level could
hinder the distribution and sale of our wines as a result of reduced attention and resources allocated to our winery brands both during
and after transition periods, because our winery brands might represent a smaller portion of the new business portfolio. Furthermore,
consolidation of distributors may lead to the erosion of margins as newly consolidated distributors take down prices or demand more margin
from existing suppliers. Changes in distributors’ strategies, including a reduction in the number of brands they carry or the allocation
of resources for our competitors’ brands or private label products, may adversely affect our growth, business, financial results
and market share. Distributors of our wines offer products that compete directly with our wines for inventory and retail shelf space,
promotional and marketing support and consumer purchases. Expansion into new product categories by other suppliers or innovation by new
entrants into the market could increase competition in our product categories.
An increasingly large percentage
of our net sales is concentrated within a small number of wholesale customers. The purchasing power of large retailers is significant,
and they have the ability to command concessions. There can be no assurance that the distributors and retailers will purchase our wines
or provide our wines with adequate levels of promotional and merchandising support. The failure to bring on major accounts or the need
to make significant concessions to retain one or more such accounts could have a material and adverse effect on our business, results
of operations and financial position.
A reduction in consumer demand for wine,
which may result from a variety of factors, including demographic shifts and decreases in discretionary spending, could materially and
adversely affect our business, results of operations and financial results.
We rely on consumers’
demand for our wine. Consumer preferences may shift due to a variety of factors, including changes in demographic or social trends, changes
in discretionary income, public health policies and perceptions and changes in leisure, dining and beverage consumption patterns. Our
success will require us to anticipate and respond effectively to shifts in consumer behavior and drinking tastes. If consumer preferences
were to move away from our wine brand, our results of operations would be materially and adversely affected.
A limited or general decline
in consumer demand could occur in the future due to a variety of factors, including:
● a general decline in economic or geopolitical conditions;
● increased activity of anti-alcohol groups;
Demand for premium wine brands,
like ours, may be particularly susceptible to changing economic conditions and consumer tastes, preferences and spending habits, which
may reduce our sales of these products and adversely affect our profitability. An unanticipated decline or change in consumer demand or
preference could also materially impact our ability to forecast for future production requirements, which could, in turn, impair our ability
to effectively adapt to changing consumer preferences. Any reduction in the demand for our wines would materially and adversely affect
our business, results of operations and financial results.
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Due to the three-tier alcohol beverage distribution
system in the United States, we are heavily reliant on our distributors that resell alcoholic beverages in all states in which we do business.
A significant reduction in distributor demand for our wines would materially and adversely affect our sales and profitability.
Due to regulatory requirements
in the United States, we sell a significant portion of our wines to wholesalers for resale to retail accounts. A change in the relationship
with any of our significant distributors could harm our business and reduce our sales. The laws and regulations of several states prohibit
changes of distributors, except under certain limited circumstances, making it difficult to terminate or otherwise cease working with
a distributor for poor performance without reasonable justification, as defined by applicable statutes. Any difficulty or inability to
replace distributors, poor performance of our major distributors or our inability to collect accounts receivable from our major distributors
could harm our business. In addition, an expansion of the laws and regulations limiting the sale of our wine would materially and adversely
affect our business, results of operations and financial results. There can be no assurance that the distributors and accounts to which
we sell our wines will continue to purchase our wines or provide our wines with adequate levels of promotional support, which could increase
competitive pressure to increase sales and marketing spending and could materially and adversely affect our business, results of operations
and financial results.
Our marketing strategy involves continued
expansion into the direct-to-consumer channel, which may present risks and challenges for which we are not adequately prepared and which
could negatively affect our sales in these channels and our profitability.
A portion of our operating
strategy is to expand our sales of wine through this direct-to-consumer channel. However, the direct-to-consumer marketplace is highly
competitive and in recent years has seen the entrance of new competitors and products targeting similar customer groups as our business.
To be competitive and forge new connections with customers, we are continuing investment in the expansion of our direct-to-consumer channel.
Such expansion may require significant investment in e-commerce platforms, marketing, fulfilment, information technology (“IT”)
infrastructure and other known and unknown costs. The success of our direct-to-consumer sales channel depends on our ability to maintain
the efficient and uninterrupted operation of online order-processing and fulfilment and delivery operations. As such, we are heavily dependent
on the performance of our shipping and technology partners. Any system interruptions or delays could prevent potential customers from
purchasing our wines directly.
Our ability to ship wines
directly to our customers is the result of court rulings, including the U.S. Supreme Court ruling in Granholm v. Heald, which allow, in
certain circumstances, shipments to customers of wines from out-of-state wineries. Any changes to the judicial, legal, or regulatory framework
that reduce our ability to sell wines in most states using our direct-to-consumer sales channel could have a materially adverse effect
on our business, results of operations and financial results.
We may be unable to adequately
adapt to shifts in consumer preferences for points of purchase, such as an increase in at-home delivery during the COVID-19 pandemic,
and our competitors may react more rapidly or with improved customer experiences. A failure to react quickly to these and other changes
in consumer preferences, or to create infrastructure to support new or expanding sales channels may materially and adversely affect our
business, results of operations and financial results.
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A failure to adequately prepare for adverse
events that could cause disruption to elements of our business, including the availability of bulk grapes, and the blending, inventory
aging or distribution of our wines could materially and adversely affect our business, results of operations and financial results.
Disruptions to our operations
caused by adverse weather, natural disasters, public health emergencies, including the COVID-19 pandemic, or unforeseen circumstances
may cause delays to or interruptions in our operations. Concerns regarding the availability of water for production is particular to companies
that produce and bottle wines in California. A consequence of any of these or supply or supply chain disruptions, including the temporary
inability to produce our wines due to the closure of our production sites, could prevent us from meeting consumer demand in the near term
or long term for our aged wines. For example, as result of the COVID-19 pandemic, our industry has experienced temporary supply chain
disruptions for certain processed materials, cardboard packaging, and glass, as well as increased strain on logistics networks and shipping
partners. The occurrence of any such disruptions during a peak time of demand for such processed materials could increase the magnitude
of the effect on our distribution network and sales. Failure to adequately prepare for and address any such disruptions could materially
and adversely affect our business, results of operations and financial results.
A catastrophic event causing
physical damage, disruption or failure at our production facility could adversely affect our business. Although our wines currently available
for sale do not require substantial aging, we expect that certain of our wines, including the Reserve Cabernet Sauvignon, require aging
for some period of time. As a result, we expect to maintain inventory of aged and maturing wines in warehouses. The loss of a substantial
amount of aged inventory through fire, accident, earthquake, other natural or man-made disaster, contamination or otherwise could significantly
reduce the supply of the affected wine or wines, including our aged wines, which are typically the highest priced and limited production
wines.
Any disruptions that cause
forced closure or evacuation could materially harm our business, results of operations and financial results. Additionally, should multiple
closings occur, we may lose guest confidence resulting in a reduction in direct sales, which could materially and adversely affect our
business, results of operations and financial results. If we expand our future operations to include tasting rooms, such closings would
also negatively impact visitation.
Inclement weather, drought, pests, plant
diseases and other factors could reduce the amount or quality of the grapes available to produce our wines, which could materially and
adversely affect our business, results of operations and financial results.
A shortage in the supply
of quality grapes may result from the occurrence of any number of factors that determine the quality and quantity of grape supply, including
adverse weather conditions (including heatwaves, frosts, drought and excessive rainfall), and various diseases, pests, fungi and viruses.
We cannot anticipate changes in weather patterns and conditions, and we cannot predict their impact on our operations if they were to
occur. Any shortage could cause an increase in the price of some or all of the grape varietals required for our wine production or a reduction
in the amount of wine we are able to produce, which could materially and adversely affect our business, results of operations and financial
results.
Factors that reduce the quantity
of grapes the growers with which we contract grow may also reduce their quality. Deterioration in the quality of our wines could harm
our winery brand strength, and a decrease in our production could reduce our sales and increase our expenses, both of which could materially
and adversely affect our business, results of operations and financial results.
If we are unable to obtain adequate supplies
of premium juice from third-party juice suppliers, the quantity or quality of our annual production of wine could be adversely affected,
causing a negative impact on our business, results of operations and financial condition.
The production of our wines
and the ability to fulfill the demand for our wines is restricted by the availability of premium grapes and juice from third-party growers.
If we are unable to source grapes and juice of the requisite quality, varietal and geography, among other factors, our ability to produce
wines to the standards, quantity and quality demanded by our customers could be impaired.
Factors including climate
change, agricultural risks, competition for quality, water availability, land use, wildfires, floods, disease, and pests could impact
the quality and quantity of grapes and bulk juice available to our company. Furthermore, these potential disruptions in production may
drive up demand for grapes and bulk juice creating higher input costs or the inability to purchase these materials. Following the 2020
wildfires in Northern California, the price of bulk juice increased substantially in a very short period of time, leading to some wine
producers reducing lot sizes of certain wines. As a result, our financial results could be materially and adversely affected both in the
year of the harvest and future periods.
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If we are unable to identify and obtain
adequate supplies of quality agricultural, raw and processed materials, including corks, glass bottles, barrels, winemaking additives
and agents, water and other supplies, or if there is an increase in the cost of the commodities or products, our profitability, production
and distribution capabilities could be negatively impacted, which would materially and adversely affect our business, results of operations
and financial condition.
We use grapes and other raw
materials to produce and package our wine, including corks, barrels, winemaking additives, and water, as well as large amounts of packaging
materials, including metal, cork, glass and cardboard. We purchase raw materials and packaging materials under contracts of varying maturities
from domestic and international suppliers.
Glass bottle costs are one
of our largest packaging components of cost of goods sold. In North America, glass bottles have only a small number of producers. The
inability of any of our glass bottle suppliers to satisfy our requirements could materially and adversely affect our business. In addition,
costs and programs related to mandatory recycling and recyclable materials deposits could be adopted in states of manufacture, imposing
additional and unknown costs to manufacture products utilizing glass bottles. The amount of water available for use is important to the
supply of our grapes and winemaking, other agricultural raw materials, and our ability to operate our business. If climate patterns change
and droughts become more severe, there may be a scarcity of water or poor water quality, which may affect our production costs, consistency
of yields or impose capacity constraints. We depend on sufficient amounts of quality water for operation of our wineries, as well as to
conduct our other operations. The suppliers of the grapes and other agricultural raw materials we purchase also depend upon sufficient
supplies of quality water for their vineyards and fields. Prolonged or severe drought conditions in the western United States or restrictions
imposed on irrigation options by governmental authorities could have an adverse effect on our operations in the region. If water available
to our operations or the operations of our suppliers becomes scarcer, restrictions are placed on our usage of water or the quality of
that water deteriorates, we may incur increased production costs or face manufacturing constraints which could negatively affect our production.
Even if quality water is widely available to us, water purification and waste treatment infrastructure limitations could increase our
costs or constrain operation of our production facilities. Any of these factors could materially and adversely affect our business, results
of operations and financial results.
Our production and shipping
activities also use energy in their operations, including electricity, propane and natural gas. Energy costs could rise in the future,
which would result in higher transportation, freight and other operating costs, such as ageing and bottling expenses. Our freight cost
and the timely delivery of our wines could be adversely affected by a number of factors that could reduce the profitability of our operations,
including driver shortages, higher fuel costs, weather conditions, traffic congestion, increased government regulation, and other matters.
In addition, increased labor costs or insufficient labor supply could increase our production costs.
Our supply and the price
of raw materials, packaging materials and energy and the cost of energy, freight and labor used in our productions and distribution activities
could be affected by a number of factors beyond our control, including market demand, global geopolitical events (especially their impact
on energy prices), economic factors affecting growth decisions, exchange rate fluctuations and inflation. To the extent any of these factors,
including supply of goods and energy, affect the prices of ingredients or packaging, or we do not effectively or completely hedge changes
in commodity price risks, or are unable to recoup costs through increases in the price of our finished wines, our business, results of
operations and financial results could be materially and adversely affected.
In addition to litigation that may arise
from time to time in the ordinary course of business, we have been engaged in litigation with our former Chief Operating Officer.
As disclosed under Item 3 - Legal Proceedings, the Company has been
a defendant in a lawsuit styled Timothy Michaels v. Fresh Vine Wine, Inc. filed May 27, 2022 in the Fourth Judicial District
Court, Hennepin County, Minnesota. The lawsuit relates to a complaint filed by Mr. Michaels resulting from the Company including
a restricted “lock-up” legend on shares of the Company’s common stock issued to Mr. Michaels pursuant to a settlement
agreement that the Company entered into with Mr. Michaels following termination of his employment and for not removing or directing the
Company’s transfer agent to remove such legend. A jury trial commenced on January 23, 2024. During trial, on January 24, 2024, the
Company filed a motion for judgement in favor of the Company as a matter of law, which was denied by the Court. On January 25, 2024, the
jury in the lawsuit rendered a verdict against the Company awarding damages to Mr. Michaels in the amount of $585,976.25. The damages
awarded to Mr. Michaels by the trial court are not covered by the Company’s insurance policies.
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The Company is assessing the options available to it, including the
possibility of appealing the verdict. Although the Company believes it has legal grounds to appeal the verdict, continued litigation and
related actions may be expensive, the outcome of any litigation (including any appeal) is difficult to predict, and the existence of litigation
may impact the ability of management to focus on other business matters. Furthermore, the Company will be required to post an appeals
bond in order to stay execution of the money judgment pending any appeal. Given the Company’s current financial position, the cost
of such an appeals bond is uncertain and may be higher than the typical cost of such a bond or require the Company to provide cash or
other collateral. In addition, adverse judgments may result in an increase in future insurance premiums, and any judgments for which the
Company is not fully insured may result in a significant financial loss and may materially and adversely affect the Company’s business,
results of operations and financial results..
The impact of U.S. and worldwide economic
trends and financial market conditions could materially and adversely affect our business, liquidity, financial condition and results
of operations.
We are subject to risks associated
with adverse economic conditions in the United States and globally, including economic slowdown, inflation, and the disruption, volatility
and tightening of credit and capital markets. Unfavorable global or regional economic conditions could materially and adversely impact
our business, liquidity, financial condition and results of operations. In general, positive conditions in the broader economy promote
customer spending on wine, while economic weakness, which generally results in a reduction of customer spending, may have a more pronounced
negative effect on spending on wine. Unemployment, tax increases, governmental spending cuts or a return of high levels of inflation could
affect consumer spending patterns and purchases of our wines and other alcoholic beverage products. Reduced consumer discretionary spending
and reduced consumer confidence could negatively affect the trend towards consuming premium wines and could result in a reduction of wine
and beverage alcohol consumption in the United States generally. In particular, extended periods of high unemployment, lower consumer
discretionary spending and low consumer confidence could result in lower sales of premium wine brands, including our wine, in favor of
wine brands which have a lower average sales price and generally have lower gross profit margins and lower overall sales, which could
negatively impact our business and results of operations. These conditions could also create or worsen credit issues, cash flow issues,
access to credit facilities and other financial hardships for us and our suppliers, distributors, accounts and consumers. An inability
of our suppliers, distributors and retailers to access liquidity could impact our ability to produce and distribute our wines.
If we are unable to secure and protect our
intellectual property in domestic and foreign markets, including trademarks for our wine brands and wines, the value of our wine brands
and intellectual property could decline, which could have a material and adverse effect on our business, results of operations and financial
results.
Our future success depends
on our ability to protect our current and future wine brands and wines and to enforce and defend our trademarks and other intellectual
property rights. We rely on a combination of trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual
restrictions, to secure and protect our intellectual property rights. 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 may continue to file, trademark applications seeking to protect newly-developed wine brands.
We have also been granted a copyright registration in the first version of our website located at www.freshvine.com. While a copyright