ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related
notes to those statements as included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the
following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. See “Cautionary
Note Regarding Forward-looking Statements” included elsewhere in this Annual Report on Form 10-K. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Part I
“Item 1A. Risk Factors” included in this Annual Report on Form 10-K. Under this “Fresh Vine Management’s Discussion
And Analysis Of Financial Condition And Results Of Operations,” “we,” “us,” “our” “Fresh
Vine Wine,” “Fresh Vine” and the “Company” refer to Fresh Vine.
Overview
Fresh Vine Wine, Inc. is
a producer of low carb, low calorie, premium wines in the United States. Founded in 2019, Fresh Vine brings an innovative “better-for-you”
solution to the wine market. We currently sell seven 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.
Fresh Vine’s wines
are distributed across the United States and Puerto Rico through wholesale, retail, and direct-to-consumer (DTC) channels. Fresh Vine
is able to conduct wholesale distribution of our wines in all 50 states and Puerto Rico, and it is licensed to sell through DTC channels
in 43 states. As of December 31, 2023, Fresh Vine holds active relationships with wholesale distributors in 50 states. Fresh Vine is 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.
Fresh Vine’s core
wine offerings are priced strategically to appeal to mass markets and sell at a list price between $15 and $25 per bottle. Given the
Fresh Vine Wine brand’s “better-for-you” appeal, and overall product quality, Fresh Vine believes that it presents
today’s consumers with a unique value proposition within this price category. Additionally, Fresh Vine Wine is one of very few
products available at this price point that includes a named winemaker, Jamey Whetstone.
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Fresh Vine’s marketing
activities focus primarily on consumers in the 21-to-34-year-old demographic with moderate to affluent income and on those with a desire
to pursue a healthy and active lifestyle.
Fresh Vine’s asset-light
operating model allows it 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 Fresh Vine sources product inputs from multiple
geographically dispersed vendors, it reduces 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.
Key Financial Metrics
We use net revenue, gross
profit (loss) and net income (loss) to evaluate the performance of Fresh Vine. These metrics are useful in helping us to identify trends
in our business, prepare financial forecasts and make capital allocation decisions, and assess the comparable health of our business relative
to our direct competitors.
Year ended December 31,
Components of Results of Operations and Trends That May Impact
Our Results of Operations
Net revenue
Our net revenue consists
primarily of wine sales to distributors and retailers, which together comprise our wholesale channel, and directly to individual consumers
through our DTC channel. Net revenues generally represent wine sales and shipping, when applicable, and to a lesser extent branded merchandise
and wine club memberships. For wine and merchandise sales, revenues are recognized at time of shipment. For Wine Club memberships, revenues
are recognized quarterly at the time of fulfilment.
We
refer to the volume of wine we sell in terms of cases. Each case contains 12 standard bottles, in which each bottle has a volume of 750
milliliters. Cases are sold through Wholesale/Retail or DTC channels.
The
following factors and trends in our business have driven our net revenue results and are expected to be key drivers of our net revenue
for the foreseeable future:
Brand recognition: As
we expand our marketing presence and drive visibility through traditional and modern marketing methods, we expect to build awareness and
name recognition for Fresh Vine Wine in consumers’ minds. Brand awareness will be built substantially through social media channels.
Our brand, and to a large extent our direct-to-consumer sales outlet, has historically been dependent on the image and popularity of,
and affinity towards, Nina Dobrev and Julianne Hough. Ms. Dobrev and Ms. Hough served as celebrity spokespersons and ambassadors of our
company, and actively endorsed our wines on their sizable social media and other outlets pursuant to agreements that granted us licenses
to use their pre-approved name, likeness, image, and other indicia of identity, as well as certain content published on their social media
and other channels, on and in conjunction with the sale and related pre-approved advertising and promotion of our wine. Such license agreements
terminated on September 7, 2023 and, as a result, we will be required to refocus our marketing and brand promotion efforts. See “Item
1A Risk Factors - We have relied heavily on celebrities to endorse our wines and market our brand pursuant to license agreements which
have been terminated.”
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Portfolio
evolution: As a relatively new, high-growth brand, we expect and seek to learn from our consumers. We intend to continuously
evolve and refine our products to meet our consumers’ specific needs and wants, adapting our offering to maximize value for our
consumers and stakeholders.
Distribution
expansion and acceleration: Purchasing by distributors and loyal accounts that continue to feature our wines are key drivers
of net revenue.
Seasonality: In
line with industry norms, we anticipate our net revenue peaking during the quarter spanning from October through December due to increased
consumer demand around the major holidays. This is particularly true in our DTC revenue channel, where marketing programs will often be
aligned with the holiday season and product promotions will be prevalent.
Revenue Channels
Our
sales and distribution platform is built upon a highly developed network of distributor accounts. Within this network, we have signed
agreements in place with several of the nation’s largest distributors including Southern Glazer’s Wine & Spirits
and RNDC, among others. While we are actively working with these distributors in certain markets, they operate across the United States,
and we intend to grow our geographic/market presence through these relationships. The development of these relationships and impacts to
our related product mix will impact on our financial results as our channel mix shifts.
Wholesale
channel sales made on credit terms generally require payment within 30 days of delivery; however our credit terms with Southern Glazer’s
Wine & Spirits requires payment within 60 days of delivery. During periods in which our net revenue channel mix reflects a greater
concentration of wholesale sales, we typically experience an increase in accounts receivable for the period to reflect the change in sales
mix; payment collections in the subsequent period generally reduce our accounts receivable balance and have a positive impact on cash
flows.
While
we seek to increase revenue across all channels, we expect the majority of our future revenue to be driven through the wholesale channel.
We intend to maintain and expand relationships with existing distributors and form relationships with new distributors as we work to grow
the Company. With multiple varietals within the Fresh Vine Wine portfolio, we consider ourselves to be a ‘one-stop shop’ for
better-for-you wines. We continue to innovate with new products at competitive price points and strive to enhance the experience as we
increase revenue with new and existing consumers.
In
the DTC channel, our comprehensive approach to consumer engagement in both online and traditional forums is supported by an integrated
e-commerce platform. Our marketing efforts target consumers who have an interest in healthy and active lifestyles. We attempt to motivate
consumers toward a simple and easy purchasing decision using a combination of defined marketing programs and a modernized technology stack.
Increasing
customer engagement is a key driver of our business and results of operations. We continue to invest in our DTC channel and in performance
marketing to drive customer engagement. In addition to developing new product offerings and cross-selling wines in our product portfolio,
we focus on increasing customer conversion and retention. As we continue to invest in our DTC channel, we expect to increase customer
engagement and subsequently deliver greater satisfaction. We also distribute our wines via other wine e-commerce sites such as Wine.com
and Vivino.com and plan to continue to add affiliate retail websites.
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Net Revenue Percentage by Channel
We calculate net revenue
percentage by channel as net revenue made through our wholesale channel to distributors, through our wholesale channel directly to retail
accounts, and through our DTC channel, respectively, as a percentage of our total net revenue. We monitor net revenue percentage across
revenue channels to understand the effectiveness of our distribution model and to ensure we are employing resources effectively as we
engage customers.
Year ended December 31,
Direct to consumer 27 % 32 %
Related party service - % 10 %
Cost of Revenues
Cost of revenues is comprised of all direct product costs such as juice, bottles, caps, corks, labels,
and capsules. Additionally, we also categorize boxes and quality assurance testing within our cost of revenues. Fresh Vine expects that
cost of revenues will increase as net revenue increases. As the volume of the product inputs increases, Fresh Vine intends to work to
renegotiate vendor contracts with key suppliers to reduce overall product input costs as a percentage of net revenue. Based on a proposed
sale of inventory at a price below the Company’s cost, the Company completed an evaluation of the net realizable value of our inventory
during the year ended December 31, 2023. As a result of this evaluation, the Company recorded a $1.7 million inventory write down
to reflect it at its net realizable value at June 30, 2023 and an additional approximately $100,000 was written down by December 31, 2023.
This is recorded in cost of revenue in the financial statements. The inventory reserve balance at December 31, 2023 is approximately $112,000.
Additionally, the Company
includes shipping fees in all DTC revenues. These fees are paid by end consumers at time of order and subsequently itemized within the
cost of each individual sale.
As a commodity product, the
cost of wine fluctuates due to annual harvest yields and the availability of juice. This macroeconomic consideration is not unique to
Fresh Vine Wine, although we are conscious of its potential impact to our product cost structure.
Gross Profit (Loss)
Gross profit (loss) is equal
to our net revenue less cost of revenues.
Selling, General, and Administrative Expenses
Selling, general, and administrative
expenses consist of selling expenses, marketing expenses, and general and administrative expenses. Selling expenses consist primarily
of direct selling expenses in our wholesale and DTC channels, including payroll and related costs, product samples, processing fees, and
other outside service fees or consulting fees. Marketing expenses consist primarily of advertising costs to promote brand awareness, contract
fees incurred as a result of significant sports marketing agreements, customer retention costs, payroll, and related costs. General and
administrative expenses consist primarily of payroll and related costs.
Equity-Based Compensation
Equity-based compensation
consists of the accounting expense resulting from our issuance of equity or equity-based grants issued in exchange for employee or non-employee
services. We measure equity-based compensation cost at the grant date based on the fair value of the award and recognize the compensation
expense over the requisite service period, which is generally the vesting period. We recognize any forfeitures as they occur.
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Results of Operations
Year ended
December 31,
Comparison of the Fiscal Years ended December 31, 2023
and 2022
Net Revenue, Cost of Revenues and Gross Profit
Year ended December 31, Change
We had net revenue in fiscal
2023 of $1,826,190. Net revenue in fiscal 2022 was $2,860,001. The decrease in net revenue was attributable to decreasing sales and marketing
spending, the termination of related party sales agreements and increased billbacks. We generated net revenue of $1,328,382 during fiscal
2023 from our wholesale distribution channel and $497,808 of net revenue from our direct-to-consumer sales channel. This revenue distribution
represents 73% and 27%, respectively, of our net revenue during the period.
Selling, general and administrative expenses
Year ended December 31, Change
For the year ended December
31, 2023, selling, general and administrative expenses decreased 45%, compared to the period ended December 31, 2022. Selling, general
and administrative expense decreases were largely driven by certain one-time charges associated with the leadership transition in 2022,
as well as decreases in general and administrative expenses due to lower staffing headcount and related salaries and less consulting,
legal and financial expenses as operational activity decreased from 2022 to 2023. The year-over-year decrease in marketing expenses primarily
resulted from decreased advertising, social media marketing, tastings, and other promotion materials and events as selling and marketing
expenses are directly related to sale trends.
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Cash Flows
Year ended
December 31,
Cash provided by (used in):
Investing activities (500,000 ) -
Net cash used in operating
activities was ($4,809,009) and ($13,528,251) for the years ended December 31, 2023 and December 31, 2022, respectively. Cash used in
operating activities decreased in the period ended December 31, 2023 primarily because of one-time selling, general and administrative
expenses in 2022 driven by charges associated with the leadership transition, as well as decreases in general and administrative expenses
due to lower staffing headcount and related salaries and less consulting, legal and financial expenses as operational activity decreased
from 2022 to 2023. The decrease is also due to the fact that no inventory purchases were made in 2023 to maintain our inventory levels
to meet demand and reductions in costs for staffing and marketing activities.
Net cash used in investing
activities was $500,000 and $0 for the years ended December 31, 2023 and December 31, 2022, respectively. Cash used in investing activities
in the 2023 period was from the investment made to Notes Live, Inc, see Note 5.
Net cash provided by (used
in) financing activities was $3,565,014 and $(455,355) for the years ended December 31, 2023 and December 31, 2022, respectively. The
difference is due to the Rights Offering of $2,615,014 and the issuance of preferred stock for a net of $950,000 during the year ended
December 31, 2023.
Liquidity and Capital Resources
Our primary cash needs are
for working capital purposes, such as producing or purchasing inventory and funding operating expenses. We have funded our operations
through equity and debt financings, as described under the caption “Financing Transactions” below.
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We have incurred losses and negative cash flows from operations since
our inception in May 2019, including net losses of approximately ($10.6) million and ($15.2) million during the years ended
December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of approximately $26.5 million and
a total stockholders’ deficit of approximately $830,000. We expect to incur losses in future periods as we continue to operate our
business and incur expenses associated with being a public company.
As
of December 31, 2023, we had $336,340 in cash and restricted cash, accounts receivable of $172,101, inventory of $337,873, and prepaid
expenses of $42,943. On December 31, 2023, current assets amounted to approximately $889,000 and current liabilities were $2.1 million
resulting in a working capital deficit (with working capital defined as current assets minus current liabilities) of approximately $1.3
million.
Since
the commencement of its operations, the Company’s operating and other expenses have significantly exceeded its revenues. The Company
put in place cash preservation initiatives in the second half of 2022, including a strategic restructuring plan aimed at cash resources
while continuing to focus on accelerating sales growth. That plan resulted in the termination of members of the Company’s internal
sales team, the engagement of a third party vendor positioned to more efficiently and effectively facilitate sales, and the engagement
of a third party vendor to manage marketing initiatives and drive growth within the Direct-to-Consumer sales channel.
During
the second quarter of 2023, the Company undertook a review of the Company’s operations and strategic plans, and took measures aimed
at improving the Company’s operational efficiency, curtailing operating expenses and further preserving cash resources. During the
year ended December 31, 2023, the Company continued to work to reduce its operating expenses, including reducing its warehousing costs,
while continuing to provide customers the opportunity to experience its wine and supporting its current retail customers and those purchasing
via the Company’s wine club or from its website.
Commencing in June 2023, the Company has worked aggressively to identify
prospective new sources of capital, while working with advisors to assess and improve its liquidity position, including from the sale
of existing inventory. Early in the third quarter, the Company entered into purchase orders for the sale of up to 45,000 cases of the
Company’s wine to Grocery Outlet, a discount retailer, with sales occurring through the last part of 2023. The Company had sales
related to this agreement totaling approximately $829,000 for the year ended December 31, 2023.
On
August 2, 2023, the Company entered into a Securities Purchase Agreement with two accredited investors (the “Purchasers”)
pursuant to which the Company agreed to issue and sell in a private placement shares of a newly created series of preferred stock designated
as Series A Convertible Preferred Stock (the “Series A Stock”). Pursuant to the Securities Purchase Agreement, the Purchasers
collectively purchased 10,000 shares of Series A Stock at a per share purchase price equal to $100.00, for total gross proceeds of $1.0
million. See “Financing Transactions” below for a description of the Company’s offering of Series A Stock.
In
August 2023, Fresh Vine announced that it had initiated an exploration of strategic opportunities by way of merger, acquisition, or any
accretive strategic transaction to enhance stockholder value, which is a focus of the Company’s plan to increase its stockholders’
equity and regain compliance with the NYSE American’s continued listing standards. On January 25, 2024, Fresh Vine entered into
the Merger Agreement. See Part I, “Item 1 Business - Recent Developments – Anticipated Merger with Notes Live, Inc.” included
elsewhere in this report.
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. 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. 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 continued 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.
At the current reduced pace of incurring expenses and without receipt
of additional financing, the Company projects that the existing cash balance will be sufficient to fund current operations into the first
quarter of 2024. The Company requires additional debt or equity financing to satisfy its existing obligations, sustain existing operations,
pay expenses associated with its pending business combination transaction and to satisfy financial related conditions to the closing of
such transaction. See “Current Strategy - The Merger” below. Additional financing may not be available on favorable terms
or at all. If additional financing is available, it may be highly dilutive to existing stockholders and may otherwise include burdensome
or onerous terms. The Company’s inability to raise additional working capital in a timely manner will negatively impact the ability
to fund operations, generate revenues, maintain or grow the business and otherwise execute the Company’s business plan, including
its pursuit of its pending business combination transaction, leading to the reduction or suspension of operations and ultimately potentially
ceasing operations altogether and initiating bankruptcy proceedings. Should this occur, the value of any investment in the Company’s
securities would be adversely affected.
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These factors raise substantial doubt about the
Company’s ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
Our ability to continue as
a going concern in the future will be determined by our ability to generate sufficient cash flow to sustain our operations, raise additional
capital in the form of debt or equity financing and/or complete a successful combination transaction with a suitable target company. Our
forecast of cash resources is forward-looking information that involves risks and uncertainties, and the actual amount of our expenses
could vary materially as a result of a number of factors. We have based our estimates on assumptions that may prove to be wrong, and our
revenue could prove to be less and our expenses higher than we currently anticipate. Management does not know whether additional financing
will be on terms favorable or acceptable to us when needed, if at all. If we are unable to generate sufficient cash flow to fund our operations
and adequate additional funds are not available when required, management may need to curtail its sales and marketing efforts, which would
adversely affect our business prospects, or we may be unable to continue operations.
Current Strategy
The Merger
In August 2023, Fresh Vine
announced that it had initiated an exploration of strategic opportunities by way of merger, acquisition, or any accretive strategic transaction
to enhance stockholder value, which is a focus of the Company’s plan to increase its stockholders’ equity and regain compliance
with the NYSE American’s continued listing standards. On January 25, 2024, Fresh Vine entered into the Merger Agreement. See Part
I, “Item 1 Business - Recent Developments – Anticipated Merger with Notes Live, Inc.” included elsewhere in
this report.
Although Fresh Vine has entered into the Merger Agreement and intends
to consummate the Merger, there is no assurance that it will be able to successfully consummate the Merger on a timely basis, or at all.
Among other conditions to the closing of the Merger, Fresh Vine is required to have 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.
See “Item 1 – Business - Recent Developments – Anticipated Merger with Notes Live, Inc.” If, for any reason, the
Merger does not close, the Fresh Vine 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 Fresh Vine, continue to operate the business of Fresh Vine
or dissolve and liquidate its assets.
If the Merger is not completed,
the Fresh Vine board of directors may 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. In that event, the amount of cash available
for distribution to the Fresh Vine stockholders would depend heavily on the timing of such decision and, ultimately, such liquidation,
since the amount of cash available for distribution continues to decrease as Fresh Vine funds its operations and incurs fees and expenses
related to the Merger. In addition, if the Fresh Vine board of directors were to approve and recommend, and the Fresh Vine stockholders
were to approve, a dissolution of Fresh Vine, it would be required under Nevada corporate law to pay its outstanding obligations, as well
as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to the Fresh
Vine stockholders. As a result of this requirement, a portion or all of Fresh Vine’s assets may need to be reserved pending the
resolution of such obligations. In addition, Fresh Vine may be subject to litigation or other claims related to a liquidation and dissolution
of the company. If a liquidation and dissolution were pursued, the Fresh Vine board of directors, in consultation with its advisors, would
need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, the Fresh Vine stockholders
could lose all or a significant portion of their investment in the event of a liquidation and dissolution of Fresh Vine.
Financing Transactions
We have funded our operations
through a combination of debt and equity financings.
Since the Company’s
inception in May 2019 and prior to its December 2021 initial public offering, Damian Novak, co-founder, and affiliates of Mr. Novak incurred
expenses on our behalf or advanced funds to us from time to time as needed to satisfy our working capital requirements and expenses. The
reimbursable expenses and advances were reflected as related party payables on our balance sheet and were not evidenced promissory notes
or other written documentation. On December 17, 2021, we used a portion of the proceeds from our initial public offering to repay $2.0
million, representing the outstanding amount of these related party payables, net of related party receivables that Mr. Novak and his
affiliates owed to us at that time.
In September 2021, the Company
entered into an agreement with an unrelated party to pledge certain eligible accounts receivable for a cash advance at a percentage of
the outstanding amount, with the remaining balance due upon collection from the customer. The agreement had an initial term of one year
which automatically renews for successive one year terms unless the Company provides a notice of termination at least 60 days prior to
the termination date. The receivables are pledged with full recourse, which means we bear the risk of non-payment. The amounts advanced
to the Company were classified as a secured loan on our balance sheet and any fees computed on the outstanding amounts are treated as
interest expense on our statement of operations. The Company terminated this arrangement effective October 1, 2022.
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During the first quarter
of 2023, the Company distributed, at no charge to holders of the Company’s common stock, non-transferable subscription rights to
purchase up to an aggregate of 6,366,129 Units. Each Unit consisted of one share of our common stock and a Warrant to purchase one share
of our common stock. The Warrants were exercisable immediately, expire five years from the date of issuance and have an exercise price
of $1.25 per share. For each share of common stock held by a stockholder of the Company on February 22, 2023, the record date of the Rights
Offering, such stockholder received 0.5 subscription rights. Each whole subscription right allowed the holder thereof to subscribe to
purchase one Unit, which we refer to as the basic subscription right, at a subscription price of $1.00 per Unit. In addition, any holder
of subscription rights exercising his, her or its basic subscription right in full was eligible to subscribe to purchase additional Units
that remained unsubscribed in the Rights Offering at the same subscription price per Unit that applied to the basic subscription right,
subject to proration among participants exercising their over-subscription privilege, which we refer to as the over-subscription privilege.
The subscription rights period expired on March 9, 2023, and resulted in stockholders subscribing for 3,143,969 Units. Upon the closing
of the Rights Offering, which occurred on March 14, 2023, we issued 3,143,969 shares of common stock and 3,143,969 Warrants and received
aggregate gross cash proceeds of approximately $3.14 million. After deducting dealer-manager fees and other fees and expenses related
to the Rights Offering, we received net proceeds of approximately $2.7 million. If exercised, additional gross proceeds of up to approximately
$3.93 million may be received through the exercise of Warrants issued in the Rights Offering. The Rights Offering was made pursuant to
a registration statement on Form S-1 (Registration No. 333-269082), which was declared effective by the U.S. Securities and Exchange Commission
on February 14, 2023, and the prospectus dated February 22, 2023.
On August 2, 2023, the Company
entered into a Securities Purchase Agreement with two accredited investors (the “Purchasers”) pursuant to which the Company
agreed to issue and sell in a private placement (the “Series A Offering”) shares of a newly created series of preferred stock
designated as Series A Convertible Preferred Stock (the “Series A Stock”). The rights and preferences of the Series A Stock
were described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2023.
Pursuant to the Securities Purchase Agreement, the Purchasers collectively agreed to purchase up to 10,000 shares of Series A Stock at
a per share purchase price equal to $100.00, for total gross proceeds of up to $1.0 million. The Purchasers purchased 4,000 shares of
Series A Stock for an aggregate purchase price of $400,000 at an initial closing (the “Initial Closing”) that occurred on
August 4, 2023, purchased an additional 4,000 shares of Series A Stock for an aggregate purchase price of $400,000 at a second closing
(the “Second Closing”) that occurred on September 7, 2023, and purchased an additional 2,000 shares of Series A Stock for
an aggregate purchase price of $200,000 at a third closing (the “Third Closing”) that occurred on December 1, 2023. The Company
previously engaged The Oak Ridge Financial Services Group, Inc. (“Oak Ridge”) to serve as a financial adviser to the Company
in connection with the capital raising activities. The Company paid Oak Ridge a $10,000 cash advisory fee upon commencement of the engagement
and, in connection with the Series A Offering, the Company has agreed to pay the Oak Ridge a cash fee equal to 5.0% of the gross proceeds
received by the Company in the Series A Offering, in addition to reimbursing Oak Ridge for its out-of-pocket expenses.
Critical Accounting Policies and Estimates
Management uses estimates
and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States
of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
While all significant accounting
policies are more fully described in Note 1 (Summary of Significant Accounting Policies) to our audited financial statements, we
believe that the following accounting policies and estimates are critical to our business operations and understanding of our financial
results.
Allowance for Doubtful Accounts
Accounts receivable consists
of amounts owed to us for sales of our products on credit and are reported at net realizable value. Credit terms are extended to customers
in the normal course of business. We perform ongoing credit evaluations of our customers’ financial conditions. We estimate allowances
for future returns and doubtful accounts based upon historical experience and its evaluation of the current status of receivables. Accounts
considered uncollectible are written off against the allowance. As of December 31, 2023 and 2022 we had $0 in the allowance for doubtful
accounts.
Allowance for Inventory Reserve
Inventories primarily include
bottled wine which is carried at the lower of cost (calculated using the first-in-first-out (“FIFO”) method) or net realizable
value. We reduce the carrying value of inventories that are obsolete or for which market conditions indicate cost will not be recovered
to estimated net realizable value. Our estimate of net realizable value is based on analysis and assumptions including, but not limited
to, historical experience, future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost
of revenues. As of December 31, 2023 and 2022 there was $111,710 and $0 inventory reserve related to estimated net realizable value,
respectively.
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Equity-Based Compensation
We measure equity-based compensation
cost at the grant date based on the fair value of the award and recognize the compensation expense over the requisite service period,
which is generally the vesting period. We recognize any forfeitures as they occur.
We measure equity-based compensation
when the service date precedes the grant date based on the fair value of the award as an accrual of equity-based compensation and adjusts
the cost to fair value at each reporting date prior to the grant date. In the period in which the grant occurs, the cumulative compensation
cost is adjusted to the fair value at the date of the grant.
Off-Balance Sheet Arrangements
We have not engaged in any
off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Accounting Standards and Recent Accounting Pronouncements
See Note 1 (Summary
of Significant Accounting Policies) to our audited financial statement for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
Pursuant to the JOBS Act,
a company constituting an “emerging growth company” is, among other things, entitled to rely upon certain reduced reporting
requirements and is eligible to take advantage of an extended transition period to comply with new or revised accounting standards applicable
to public companies. We are an emerging growth company and have elected to use this extended transition period for complying with new
or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we
(i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided
in the JOBS Act. Our financial statements may, therefore, not be comparable to those of other public companies that comply with such new
or revised accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements
and supplementary data are included beginning on pages F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act), defines the term “disclosure controls and procedures” as those
controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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Management, with the participation
of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2023. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) were not effective as of December 31, 2023 due to the material weakness in internal control over
financial reporting as described below.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing
and maintaining adequate internal control over financial reporting. As defined in the securities laws, internal control over financial
reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected
by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes
those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
acquisitions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation
of the effectiveness of our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act
of 1934) as of December 31, 2023 based on the criteria in “Internal Control - Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based upon this evaluation, we concluded
that our internal control over financial reporting was not effective as of December 31, 2023 due to the following material weaknesses.
Material Weaknesses in Internal Control Over Financial Reporting;
Remediation Activities
Management had previously determined that there were material weaknesses
in our internal control over financial reporting resulting from (i) a lack of segregation of incompatible duties based on the limited
number of employees responsible for the Company’s accounting and reporting functions and (ii) the lack of properly designed controls
to prepare complete and accurate financial statements and footnotes in accordance with US GAAP in a timely manner. In an effort to remediate
the material weakness in our internal control over financial reporting described above, we intend to take the actions to implement the
processes described below.
Lack
of segregation of duties. To ensure timely and accurate financial reporting, management is designing processes to keep authorization,
recordkeeping, custody of assets, and reconciliation duties separate, and intends to reevaluate its overall staffing levels within the
accounting, finance and information technology departments and may hire additional staff to enable segregation of duties.
Inability
to prepare complete and accurate financial statements and footnotes. To ensure timely and accurate financial reporting, management
intends to hire experienced staff to remedy this material weakness.
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Once the above actions and
processes have been in operation for a sufficient period of time for our management to conclude that the material weaknesses have been
fully remediated and our internal controls over financial reporting are effective, we will consider these material weaknesses fully addressed.
This annual report does not
include an attestation report of Wipfli, LLP, our independent registered public accounting firm, regarding internal control over financial
reporting. Our management report was not subject to attestation by our independent registered public accounting firm pursuant to the Dodd-Frank
Wall Street Reform and Consumer Protection Act, which exempts nonaccelerated filers from the independent registered public accounting
firm attestation requirement.
Changes in Internal Control Over Financial Reporting
There were no changes in
our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fiscal
year ended December 31, 2023 that has materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS.
Not Applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE.
Executive Officers and Directors
Below is a list of the names,
ages, positions and a brief account of the business experience of the individuals who served as our executive officers and directors as
of March 8, 2024.
Name Age Position
Michael Pruitt 63 Interim Chief Executive Officer and Director
Keith Johnson 66 Interim Chief Financial Officer and Secretary
Rick Nechio 45 President and Head of Sales
Eric Doan 44 Director
Brad Yacullo 60 Director
David Yacullo 57 Director
Michael Pruitt joined
the Company’s Board of Directors on December 13, 2021, which was the effective date of the registration statement for the Company’s
initial public offering. Mr. Pruitt founded Avenel Financial Group, a boutique financial services firm concentrating on emerging technology
company investments in 1999. In 2001, he formed Avenel Ventures, a technology investment and private venture capital firm. In February
2005, Mr. Pruitt formed Chanticleer Holdings, Inc., then a public holding company (now known as Sonnet BioTherapeutics Holdings, Inc.),
and he served as Chairman of the Board of Directors and Chief Executive Officer until April 1, 2020, at which time the restaurant operations
of Chanticleer Holdings were spun out into a new public entity, Amergent Hospitality Group, Inc., where Mr. Pruitt continues to serve
as its Chairman and Chief Executive Officer. Mr. Pruitt has been a member of the Board of Directors of IMAC Holdings, Inc. (Nasdaq- IMAC)
since October 2020 and currently serves on its Compensation Committee and as Chair of its Audit Committee. Mr. Pruitt also served as a
director on the board of Hooters of America, LLC from 2011 to 2019. Mr. Pruitt received a B.A. degree from Costal Carolina University.
He currently sits on the Board of Visitors of the E. Craig Wall Sr. College of Business Administration, the Coastal Education Foundation
Board, and the Athletic Committee of the Board.
Keith Johnson is
an accomplished senior executive and corporate officer with experience in business and technology management, accounting systems, financial
controls, business development and management intelligence. Most recently, Mr. Johnson served as Chief Financial Officer of Watertech
Equipment & Sales until 2020. Previously, Mr. Johnson served as the Manager of Business Development for Hudson Technologies
from November 2012 through September 2013. From August 2010 through November 2012, Mr. Johnson was President
of Efficiency Technologies, Inc., the wholly owned operating subsidiary of Efftec International, Inc. He was the President and Chief Executive
Officer of YRT2 (Your Residential Technology Team) in Charlotte, North Carolina since 2004. Mr. Johnson has a BS in Accounting
from Fairfield University in Fairfield, Connecticut. Mr. Johnson serves on the board of directors of Amergent Hospitality Group Inc.
and as chairman of its audit committee and a member of its compensation committee. Mr. Johnson previously served on the board of
directors of Chanticleer from April 2007 through March 31, 2020 and also served as the chairman of its audit committee and a
member of its compensation committee.
Rick Nechio is
a co-founder of the Company who served as Chief Marketing Officer from its inception through July 2021, has served as its President since
August 2021 and served as interim Chief Executive Officer from June 2022 until April 25, 2023. Mr. Nechio currently serves as President
and Head of Sales. Mr. Nechio also served as a director of the Company until February 20, 2023. Mr. Nechio was also a Founding Partner
of Appellation Brands LLC and served as a Founding Partner of Nechio & Novak, LLC, and has served as Chairman of Nechio Network, a
brand accelerator formed in 2016. Prior the Company’s inception, Mr. Nechio served as Vice President Business Development for FitVine
Wine from February 2017 to February 2019, and held various positions at Anheuser-Busch InBev, including North American Zone Director Transit
from January 2015 to January 2017, Director Retail Development, Trade Relations and Trade Communications from October 2011 to December
2014, and Director, National Retail Sales from May 2010 to October 2011. Mr. From 2007 to 2010, Mr. Nechio piloted an Anheuser-Busch USA
High End chain selling program for the Stella Artois brand. Mr. Nechio was also part of the team that developed the Michelob Ultra disruptive
brand strategy. Mr. Nechio holds a Bachelor of Science, Business Administration degree from University Veiga de Almeida and has completed
an Executive Education Program, Driving Profitability Growth offered by Harvard Business School.
Eric Doan joined
the Company’s board of directors on December 13, 2021, which was the effective date of the registration statement for the Company’s
initial public offering. Mr. Doan serves as Chief Financial Officer of Orchard Software Corporation, a position he has held since
April 2020. Before joining Orchard Software, Mr. Doan previously held Chief Financial Officer and Chief Operating Officer positions
in private equity-backed companies, most recently as Chief Financial Officer of Edmentum Inc. from July 2018 through March 2020,
Chief Financial Officer of myON by Renaissance from May 2017 to July 2018, and Chief Operating Officer of Jump Technologies,
Inc. from September 2016 to May 2017. Mr. Doan holds bachelor’s degrees in Zoology and Classical Humanities and a
Master of Business Administration (MBA) from Miami University.
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Brad Yacullo joined
the Company’s Board of Directors on December 13, 2021, which was the effective date of the registration statement for the Company’s
initial public offering. Mr. Yacullo co-founded Agra Energy in March 2017 and serves as its Chief Operating Officer. Agra Energy is a
company that converts dairy manure into a renewable sulfur free synthetic fuel. Mr. Yacullo joined ACE Outdoor, a boutique outdoor media
company, in 2007 and served as a partner until the company was sold in September 2021.. Previously, Mr. Yacullo served as Sales Executive
at Cisco Systems from January 1995 until January 2003. Mr. Yacullo began his career in January 1991 at Platinum Technology, where he sold
enterprise level software to many industries. Mr. Yacullo holds a Bachelor of Science degree in Business Administration, with a major
in information systems, from Drake University.
David Yacullo joined
the Company’s Board of Directors on December 13, 2021, which was the effective date of the registration statement for the Company’s
initial public offering. Mr. Yacullo currently serves as Owner/Chairman of Outdoor Solutions, LLC since 2018. Prior to that, Mr. Yacullo
served as Chief Revenue Officer of Van Wagner Outdoor, a position he held from 2019 through 2022, until the company was sold to Outfront
Media. From 2016 until 2018, Mr. Yacullo served as Chief Revenue Officer of Holt Media Companies, Inc. Prior to that, Mr. Yacullo founded
Outdoor Media Group (OMG) in 2001 and served as its Chief Executive Officer from 2003 until 2016. Mr. Yacullo began his career working
for Outdoor Services Inc. (OSI) from 1989 through 2001, where he served in various positions, including as its President.
Family Relationships
Messrs. Brad and David Yacullo,
two of our directors, are brothers. There are no other family relationships between any of the other directors or executive officers.
Board Composition and Director Independence
Our business and affairs
are managed under the direction of our board of directors. Our bylaws provide that our board of directors shall consist of one or more
members and that the number of directors may be fixed from time to time by a majority vote of the directors then in office. Our board
of directors is currently comprised of the four individuals identified above.
When considering whether
directors have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities
effectively in light of our business and structure, our Board of Directors focuses primarily on the information discussed in each of the
directors’ individual biographies set forth above.
Our Board of Directors periodically
reviews relationships that directors have with our Company to determine whether our directors are “independent directors”
as such term is defined in Section 803 of the NYSE American LLC Company Guide. Our Board of Directors has determined that each of Eric
Doan, Brad Yacullo and David Yacullo is an independent director. In making this determination, the Board of Directors considered the relationships
that such individuals have with our Company and other facts and circumstances that the Board of Directors deemed relevant in determining
their independence, including ownership interests in us. Under Section 803A of the NYSE American Company Guide, employment by a director
as an executive officer on an interim basis does not disqualify that director from being considered independent following such employment,
provided the interim employment does not last longer than one year; however a director is not considered independent while serving as
an interim officer. As a result, the Board of Directors has determined that Michael Pruitt is not independent while serving as interim
Chief Executive Officer.
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Board Leadership Structure and Risk Oversight
Damian Novak, one of our
founders, served as Executive Chair of our Board of Directors from our December 2021 initial public offering until February 20,
2023. Effective February 20, 2023, our Board of Directors appointed Michael Pruitt to serve as Non-Executive Chair of the Board
of Directors. At the time, we believed that having a chair separate from the Chief Executive Officer created an environment that is more
conducive to objective evaluation and oversight of management’s performance, increasing management accountability and improving
the ability of the Board to monitor whether management’s actions are in the best interests of the Company and our stockholders.
On July 19, 2023, the Board of Directors appointed Michael Pruitt to serve as our interim Chief Executive Officer following the termination
of employment of our prior Chief Executive Officer. Given the current streamlined composition of the Company’s executive management
and the Board of Directors, we believe that having Mr. Pruitt serve in such capacities provides for efficiency in pursuing the Company’s
objectives, while being subject to oversight by the full Board of Directors, which monitors whether management’s actions are in
the best interests of the Company and our stockholders.
Board Committees
Our Board of Directors
has a standing audit committee, compensation committee nominating and corporate governance committee. Each committee operates under its
own written charter adopted by the Board of Directors, which are available on our website at ir.freshvinewine.com/info/.
Audit Committee
The audit committee
is responsible for overseeing financial reporting and related internal controls, risk, and ethics and compliance, including but not limited
to review of filings and earnings releases, selection and oversight of the independent registered public accounting firm, oversight of
internal audit, interactions with management and the board, and communications with external stakeholders. During 2023, our audit committee
was composed of Eric Doan and Michael D. Pruitt, with Mr. Doan serving as Chair of the committee. Upon his appointment as interim
Chief Executive Officer in July 2023, Mr. Pruitt ceased serving on the audit committee and was replaced by David Yacullo. Our
Board of Directors has determined that each of Messrs. Doan and David Yacullo meet the definition of “independent director”
under the rules of the NYSE American and under Rule 10A-3 under the Exchange Act and that each is an “audit committee
financial expert” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Exchange Act.
Compensation Committee
The compensation committee
is responsible for establishing the compensation philosophy and ensuring that elements of our compensation program encourage high levels
of performance among the executive officers and positions the Company for growth. The compensation committee ensures our compensation